-----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, OhC+JBscuLTc+Tm1Nog3XvxsAqScatMKGJBoQzlAgXqvNluoz4fWF9lRgqRCp+uP xHDLxLNE/9QYQzebdGE+UQ== 0000950124-97-001651.txt : 19970327 0000950124-97-001651.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950124-97-001651 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 DATE AS OF CHANGE: 19970326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITOL BANCORP LTD CENTRAL INDEX KEY: 0000840264 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 382761672 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-24728-C FILM NUMBER: 97560753 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 10KSB 1 FORM 10KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1996 or ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 33-24728C CAPITOL BANCORP LTD. (Name of Small Business Issuer 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) Issuer's telephone number, including area code: (517) 487-6555 Securities registered pursuant to Section 12(b) of the Exchange Act: NONE Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, NO PAR VALUE 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_____ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. ( ) State issuer's revenues for its most recent fiscal year: $38,184,161 As of February 17, 1997, 4,522,066 shares of the Registrant's Common Stock, no par value, were outstanding. Based upon the published closing price for the Registrant's common stock on February 17, 1997, the aggregate market value of the Registrant's common stock held by nonaffiliates on that day was $51,718,990. Transitional Small Business Disclosure Format (Check One) YES_____; NO X DOCUMENTS INCORPORATED BY REFERENCE See Cross-Reference Sheet 2 CAPITOL BANCORP LTD Form 10-KSB Fiscal Year Ended: December 31, 1996 CROSS REFERENCE SHEET ITEM OF FORM 10-KSB INCORPORATION BY REFERENCE FROM: - - ------------------- ---------------------------------- Part I ------ Item 1, Description of Business Pages 18-19, 25, 27, 32-33 and 35, Annual Report Item 2, Description of Property Pages 15-17 and 28, Annual Report Part II ------- Item 5, Market for Common Equity and Pages 11-12, 28-30 and 36, Annual Related Stockholder Matters Report Item 6, Management's Discussion Pages 13-19, Annual Report and Analysis of Financial Condition and Results of Operations Item 7, Financial Statements Pages 20-35, Annual Report Part III -------- Item 9, Directors, Executive Pages 2-5, Proxy Statement, Officers, Promoters and and Page 36, Annual Report Control Persons; Compliance with Section 16(a) of the Exchange Act Item 10, Executive Compensation Pages 7-9, Proxy Statement Item 11, Security Ownership of Pages 1-5 and Page 7, Proxy Certain Beneficial Statment Owners and Management Item 12, Certain Relationships Pages 7-9, Proxy Statement and Related Transactions Item 13, Exhibits and Reports on Pages 20-35, Annual Report Form 8-K - Index to Financial Statements and Schedules KEY: "Annual Report" means the 1996 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 to be filed pursuant to Rule 14a-101. It is expected that the Proxy Statement will be filed within 120 days after the end of the fiscal year covered by this Form 10-KSB. Note: The page number references herin 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. 1996 FORM 10-KSB ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I ITEM 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ITEM 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 16 PART II ITEM 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 17 ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 17 ITEM 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 17 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 18 ITEM 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 13. Exhibits and Reports on Form 8-K - Index to Financial Statements and Schedules . . . . . . . . . 19
-3- 4 PART I Item 1, Description of Business. A. Business Development: Incorporated by reference from Page 25, Annual Report, under the caption "Note A--Significant Accounting Policies" and the subcaption thereunder, "Nature of Operations, Basis of Presentation and Principles of Consolidation" and Page 27, Annual Report under the caption "Note B--Changes in Consolidated Group". B. Business of Issuer: Incorporated by reference from Page 25, Annual Report, under the caption "Note A--Significant Accounting Policies" and the subcaption thereunder, "Nature of Operations, Basis of Presentation and Principles of Consolidation" and Page 27, Annual Report, under the caption "Note B--Changes in Consolidated Group" and Pages 18 and 19, Annual Report, under the caption "Trends Affecting Operations". The Corporation and its subsidiaries are engaged in a single business activity--banking. Certain agencies have, however, suggested that bank holding companies engaged in certain related activities, such as mortgage banking, are engaged in more than one business "segment" for financial reporting purposes, even though such activities are deemed by other regulatory agencies as being not a separate or distinct segment. Financial information regarding the Corporation's activities is incorporated herein by reference from Page 35, Annual Report, under the caption "Note P--Composition of Business Activities". At December 31, 1996, the Corporation and its subsidiaries employed 137 full time equivalent employees. C. Incorporated by reference from Pages 32 and 33, Annual Report, under the caption "Note N -- Dividend Limitations of Subsidiaries and Other Capital Requirements". D. The following tables (Tables A to H, 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, 1996, 1995 and 1994.
Year Ended December 31 1996 1995 -------------------------------------- ---------------------------------- 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 $39,549 $2,234 5.65% $35,136 $2,016 5.74% States and political subdivisions (2) 207 18 8.70% 271 10 3.69% Other 2,510 372 14.82% 2,752 208 7.56% Interest-bearing deposits with banks 474 42 8.86% 339 10 2.95% Federal funds sold 32,318 1,541 4.77% 24,758 1,453 5.87% Loans held for resale 10,737 818 7.62% 4,605 300 6.51% Portfolio loans (3) 318,491 31,454 9.88% 264,919 25,916 9.78% --------- --------- ------ -------- ------- ------ Total Interest-Earning Assets/Interest Income 404,286 36,479 9.02% 332,780 29,913 8.99% Allowance for loan losses (deduct) (4,095) (3,441) Cash and due from banks 14,149 10,960 Mortgage servicing rights, net 459 Premises and equipment, net 3,188 2,500 Other assets 12,734 10,290 --------- -------- Total Assets $430,262 $353,548 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings deposits $35,288 $1,384 3.92% $32,684 $1,248 3.82% Time deposits under $100,000 160,502 9,555 5.95% 129,698 7,700 5.94% Time deposits of $100,000 or more 66,106 3,935 5.95% 54,096 3,316 6.13% Other interest-bearing deposits 69,818 2,418 3.46% 60,649 2,297 3.79% Debt obligations 8,625 496 5.75% 7,193 492 6.84% Other 12 26 --------- --------- ------ -------- ------- ------ Total Interest-Bearing Liabilities/Interest Expense 340,339 17,800 5.23% 284,320 15,079 5.30% Noninterest-bearing demand deposits 44,727 36,868 Accrued interest on deposits and other liabilities 4,166 2,969 Minority interest in consolidated subsidiaries 2,439 261 Stockholders' equity 38,591 29,130 --------- -------- Total Liabilities and Stockholders' Equity $430,262 $353,548 ========= --------- ======== ------- Net Interest Income $18,679 $14,834 ========= ======= Interest Rate Spread (4) 3.79% 3.69% ====== ====== Net Yield on Interest-Earning Assets (5) 4.62% 4.46% ====== ====== Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities 1.19 X 1.17 X ========== ========== Year Ended December 31 1994 ------------------------------------- Interest (1) Average Income/ Average Balance Expense Yield/Cost ----------- ---------- ------------- ASSETS Investment securities: U.S. Treasury and government agencies $23,426 $1,278 5.46% States and political subdivisions (2) 275 10 3.64% Other 3,322 246 7.41% Interest-bearing deposits with banks 469 22 4.69% Federal funds sold 16,059 679 4.23% Loans held for resale 9,183 358 3.90% Portfolio loans (3) 203,924 18,887 9.26% ---------- --------- ------- Total Interest-Earning Assets/Interest Income 256,658 21,480 8.37% Allowance for loan losses (deduct) (2,859) Cash and due from banks 9,727 Mortgage servicing rights, net 3,220 Premises and equipment, net 2,265 Other assets 7,940 ---------- Total Assets $276,951 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings deposits $33,876 $1,090 3.22% Time deposits under $100,000 90,079 4,443 4.93% Time deposits of $100,000 or more 28,745 1,372 4.77% Other interest-bearing deposits 58,517 1,880 3.21% Debt obligations 6,965 517 7.42% Other 95 ---------- --------- ------- Total Interest-Bearing Liabilities/Interest Expense 218,182 9,397 4.31% Noninterest-bearing demand deposits 33,228 Accrued interest on deposits and other liabilities 3,578 Minority interest in consolidated subsidiaries Stockholders' equity 21,963 -------- Total Liabilities and Stockholders' Equity $276,951 ======== -------- Net Interest Income $12,083 ======== Interest Rate Spread (4) 4.06% ====== Net Yield on Interest-Earning Assets (5) 4.71% ====== Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities 1.18 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 ------------------------------------------------------------ 1996 compared to 1995 1995 compared to 1994 ---------------------------- --------------------------- Volume Rate Net Total Volume Rate Net Total ------ ------ --------- ------ ---- ---------- Increase (Decrease) In Interest Income: Investment securities: U.S. Treasury and government agencies $253 ($35) $218 $640 $98 $738 States and political subdivisions (2) 10 8 Other (18) 182 164 (42) 4 (38) Interest-bearing deposits with banks 4 28 32 (6) (6) (12) Federal funds sold 444 (356) 88 368 406 774 Loans held for resale 399 119 518 (178) 120 (58) Portfolio loans 5,239 299 5,538 5,651 1,378 7,029 ------- ----- ------ ------ ------ ------ Total 6,319 247 6,566 6,433 2,000 8,433 Increase (Decrease) In Interest Expense On Deposits: Savings 99 37 136 (38) 196 158 Time deposits under $100,000 1,830 25 1,855 1,948 1,309 3,257 Time deposits of $100,000 or more 736 (117) 619 1,209 735 1,944 Other interest-bearing deposits 348 (227) 121 66 351 417 Debt obligations 98 (94) 4 17 (42) (25) Other (14) (14) (69) (69) ------- ----- ------ ------ ------ ------ Total 3,097 (376) 2,721 3,133 2,549 5,682 ======= ===== ====== ====== ====== ====== Increase (Decrease) in Net Interest Income $3,222 $623 $3,845 $3,300 ($549) $2,751 ====== ==== ====== ====== ==== ====== Year Ended December 31 ---------------------------- 1994 compared to 1993 ---------------------------- Volume Rate Net Total ------ ------ --------- Increase (Decrease) In Interest Income: Investment securities: U.S. Treasury and government agencies $537 $2 $539 States and political subdivisions 1 1 Other (78) 55 (23) Interest-bearing deposits with banks (17) 2 (15) Federal funds sold 9 201 210 Loans held for resale (883) (308) (1,191) Portfolio loans 3,542 688 4,230 ------ ----- ------- Total 3,111 640 3,751 Increase (Decrease) In Interest Expense On Deposits: Savings 88 27 115 Time deposits under $100,000 307 (115) 192 Time deposits of $100,000 or more 312 98 410 Other interest-bearing deposits 481 35 516 Debt obligations 126 116 242 Other (149) (149) ------ ----- ------- Total 1,165 161 1,326 ====== ===== ======= Increase (Decrease) in Net Interest Income $1,946 $479 $2,425 ====== ===== =======
-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, 1996, 1995 and 1994 (in thousands):
December 31 -------------------------------------------------------------------- 1996 1995 ------------------------------ ------------------------------ Amortized Market Amortized Market Cost Value Cost Value ----------- ----------- ----------- ----------- U.S. Treasury and government agencies $46,162 $46,221 $32,846 $33,559 States and political subdivisions 100 100 250 250 Other: Corporate bonds 301 300 739 737 Federal Reserve Bank stock 116 116 116 116 Federal Home Loan Bank Stock 984 984 664 664 Corporate stock (1) 1,003 1,003 1,003 1,003 --------- ---------- --------- --------- Total Other Securities 2,404 2,403 2,522 2,520 --------- ---------- --------- --------- Total Investments $48,666 $48,724 $35,618 $36,329 ========= ========== ========= ========= 1994 ------------------------ Amortized Market Cost Value ----------- ---------- U.S. Treasury and government agencies $31,787 $30,691 States and political subdivisions 275 268 Other: Corporate bonds 1,182 1,156 Federal Reserve Bank stock 116 116 Federal Home Loan Bank Stock 664 664 Corporate stock (1) 907 907 -------- -------- Total Other Securities 2,869 2,843 -------- -------- Total Investments $34,931 $33,802 ======== ========
(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, 1996 (in thousands):
U.S. Treasury and States and Political Other Government Agencies Subdivisions Securities -------------------------- --------------------------- ------------------------ 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 $14,598 6.78% $100 3.75% $301 5.73% $14,999 Due after one year but within five years 27,085 6.10% 27,085 Due after five years but within ten years 4,365 6.57% 4,365 Due after ten years 114 7.23% 114 Without stated maturities 2,103 * 2,103 ------- ------ ------- ------- Total $46,162 $100 $2,404 $48,666 ======= ====== ======= =======
* 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 average maturities of investment securities (exclusive of securities without stated maturities) at December 31, 1996: U.S. Treasury securities 1 year 5 months U.S. Agencies 2 years 7 months States and Political subdivisions 10 months Other 1 month
-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 ----------------------------------------------------------------------- 1996 1995 1994 ---------------------- -------------------- ----------------------- Commercial - real estate $180,310 50.42% $140,462 49.55% $99,330 41.12% Commercial - other 103,151 28.84% 81,699 28.82% 83,391 34.52% --------- ------- -------- ------- -------- ------- Total Commercial Loans 283,461 79.26% 222,161 78.37% 182,721 75.63% Real estate mortgage 53,712 15.02% 48,954 17.27% 47,260 19.56% Installment 20,450 5.72% 12,356 4.36% 11,602 4.80% --------- ------- -------- ------- -------- ------- Total Portfolio Loans $357,623 100.00% $283,471 100.00% $241,583 100.00% ========= ======= ======== ======= ======== ======= December 31 -------------------------------------------- 1993 1992 -------------------- -------------------- Commercial - real estate $74,142 43.23% $54,992 34.70% Commercial - other 51,513 30.03% 50,137 31.64% -------- ------ -------- ------- Total Commercial Loans 125,655 73.26% 105,129 66.34% Real estate mortgage 34,743 20.26% 41,552 26.22% Installment 11,116 6.48% 11,788 7.44% -------- ------ -------- ------- Total Portfolio Loans $171,514 100.00% $158,469 100.00% ======== ====== ======== =======
The following table presents (in thousands) the remaining maturity of portfolio loans outstanding at December 31, 1996 according to scheduled repayments of principal. The amounts due after one year are classified according to sensitivity to changes in interest rates. Aggregate maturities of portfolio loan balances which are due:
Fixed Variable Rate Rate Total --------- --------- --------- In one year or less $82,439 $138,238 $220,677 After one year but within five years 127,620 4,008 131,628 After five years 2,227 2,034 4,261 Non-accrual loans (all of which are classified as variable rate) 1,057 1,057 --------- --------- --------- Total $212,286 $145,337 $357,623 ========= ========= =========
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, 1996, approximately 25% 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. The aggregate amount of non-performing portfolio loans is set forth in the following table. Non-performing loans comprise (a) loans accounted for on a non-accrual basis, and (b) loans contractually past due 90 days or more as to principal and interest payments (but not included in non-accrual loans in (a) above) and consist primarily of commercial real estate loans. Non-performing portfolio loans include all loans for which, based on the Corporation's loan rating system, management has concerns. Loans are placed in non-accrual 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 non-accrual status. Generally, loans are placed in non-accrual 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 $112,000 would have been recorded in 1996. Interest income recognized on loans in non-accrual status in 1996 operations approximated $39,000. At December 31, 1996, there were no material amounts of loans which were restructured or otherwise renegotiated as a concession to troubled borrowers. -8- 9 TABLE D, CONTINUED CAPITOL BANCORP LTD.
December 31 ---------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- -------- ------------ -------- ---------- (in thousands) Non-performing Loans: Non-accrual loans: Commercial $928 $438 $1,121 $628 $3,286 Real estate 107 115 156 1,442 Installment 22 28 43 8 25 ------- ------ ------- ------ -------- Total Non-accrual Loans 1,057 581 1,320 2,078 3,311 Past due loans: Commercial 1,009 379 146 447 437 Real estate 549 299 424 68 44 Installment 84 82 40 104 71 ------- ------ ------- ------ -------- Total Past Due Loans 1,642 760 610 619 552 ------- ------ ------- ------ -------- Total Non-performing Loans $2,699 $1,341 $1,930 $2,697 $3,863 ======= ====== ======= ====== ======= Nonperforming Loans as a Percentage of Total Portfolio Loans 0.75% 0.47% 0.80% 1.57% 2.44% ======= ====== ======= ====== ======= Nonperforming Loans as a Percentage of Total Assets 0.55% 0.35% 0.61% 1.06% 1.72% ======= ====== ======= ====== ======= Allowance for Loan Losses as a Percentage of Non-performing Loans 169.62% 274.94% 166.84% 92.70% 60.03% ======= ====== ======= ====== =======
Nonperforming assets increased substantially in 1992 related to certain commercial loans which had been made by United Savings Bank prior to its conversion to become Oakland Commerce Bank. In subsequent periods, such nonperforming loans were reduced as such loans were resolved. 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 ---------------------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------- ------- ------- Other real estate owned at January 1 $972 $1,255 $1,364 $1,159 $0 Other real estate owned of acquired bank 897 Properties acquired in restructure of loans or in lieu of foreclosure 1,635 1,658 712 1,362 Properties sold (520) (1,714) (1,455) (290) (1,037) Payments received from borrowers or tenants, credited to carrying amount (47) (300) (164) (63) Other changes, net (92) (204) (12) (53) ---- ------ ------ ------ ------ Other Real Estate Owned at December 31 $313 $972 $1,255 $1,364 $1,159 ==== ====== ====== ====== ====== Reserve for Other Real Estate Owned at January 1 $0 $64 $0 $0 $0 Net Charge-offs 64 64 ---- ------ ------ ------ ------ Reserve for Other Real Estate Owned at December 31 $0 $0 $64 $0 $0 ==== ====== ====== ====== ======
Other real estate owned is valued at the lower of fair value or 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 possible loan losses arising from loans charged-off and recoveries on loans previously charged-off, by loan category, and additions to the allowance for possible loan losses through provisions charged to expense, as of the end of each period.
Year Ended December 31 ----------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (in thousands) Allowance for loan losses at January 1 $3,687 $3,220 $2,500 $2,319 $1,254 Allowance of acquired bank 515 800 Loans charged-off: Commercial 308 547 339 369 247 Real estate 35 9 24 Installment 94 47 36 122 103 -------- -------- -------- -------- -------- Total Charge-offs 437 594 384 515 350 Recoveries: Commercial 119 178 106 73 47 Real estate 8 3 3 2 Installment 5 41 7 23 15 -------- -------- -------- -------- -------- Total Recoveries 132 222 116 98 62 -------- -------- -------- -------- -------- Net Charge-offs 305 372 268 417 288 Additions to allowance charged to expense 1,196 839 473 598 553 -------- -------- -------- -------- -------- Allowance for Loan Losses at December 31 $4,578 $3,687 $3,220 $2,500 $2,319 ======== ======== ======== ======== ======== Total Portfolio Loans Outstanding at December 31 $357,623 $283,471 $241,583 $171,514 $158,469 ======== ======== ======== ======== ======== Ratio of Allowance for Loan Losses to Portfolio Loans Outstanding 1.28% 1.30% 1.33% 1.46% 1.46% ======== ======== ======== ======== ======== Average Total Portfolio Loans For the Year $318,491 $264,919 $203,924 $164,229 $134,247 ======== ======== ======== ======== ======== Ratio of Net Charge-offs to Average Portfolio Loans Outstanding 0.10% 0.14% 0.13% 0.25% 0.21% ======== ======== ======== ======== ========
-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 -------------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- -------- ------- --------- (in thousands) Commercial $2,281 $1,726 $1,831 $1,260 $1,350 Real estate mortgage 67 67 55 92 84 Installment 100 57 61 76 68 Unallocated 2,130 1,837 1,273 1,072 817 -------- -------- -------- -------- -------- Total Allowance for Loan Losses $4,578 $3,687 $3,220 $2,500 $2,319 ======== ======== ======== ======== ======== Total Portfolio Loans Outstanding $357,623 $283,471 $241,583 $171,514 $158,469 ======== ======== ======== ======== ======== Percent of Allowance to Portfolio Loans Outstanding 1.28% 1.30% 1.33% 1.46% 1.46% ======== ======== ======== ======== ========
In addition to the Corporation's allowance for loan losses, certain commercial loans participate in a loan program sponsored by State of Michigan. Under that program, the governmental unit shares loss exposure on such loans by funding reserves which are as deposits at the banks. Loans participating in this program and related reserves approximated $13,901,000 and $1,551,000, respectively at December 31, 1996. 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, 1996, 1995 and 1994:
December 31 ------------------------------------------------------------------- 1996 1995 1994 --------------------- ---------------------- ------------------- Average Average Average Balance Rate Balance Rate Balance Rate ------- ------- ------- ------- ------- ------- Noninterest-bearing demand deposits $ 44,727 $ 36,868 $ 33,228 Savings deposits 35,288 3.92% 32,684 3.82% 33,876 3.22% Time deposits under $100,000 160,502 5.95% 129,698 5.94% 90,079 4.93% Time deposits of $100,000 or more 66,106 5.95% 54,096 6.13% 28,745 4.77% Other interest-bearing deposits 69,818 3.46% 60,649 3.79% 58,517 3.21% -------- -------- -------- Total Deposits $376,441 $313,995 $244,445 ======== ======== ========
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, 1996 (in thousands): Three months or less $34,225 Three months to twelve months 33,092 Over 12 months 10,249 ------- $77,566 =======
-12- 13 INTEREST RATE SENSITIVITY (TABLE G) CAPITOL BANCORP LTD. The following table sets forth (in thousands, based on contractual maturities) the interest rate sensitivity of the Corporation's interest-earning assets and interest-bearing liabilities based both upon variable rate assets and liabilities that reprice in relation to changes in interest rates, and upon fixed rate assets and liabilities that mature within the specified period. The amount by which interest sensitive assets exceed interest sensitive liabilities at a particular point in time is referred to as a "gap". The gap is based on a specific point in time and, accordingly, changes daily based on activity.
December 31, 1996 ------------------------------------------------------------------------ Interest Interest Interest Interest Sensitivity Sensitivity Sensitivity Sensitivity 0 to 3 months 4 to 12 months 1 to 5 Years Over 5 Years Total ------------- -------------- ------------ ------------ --------- ASSETS Federal funds sold $ 42,350 $ 42,350 Interest bearing bank deposits 55 55 Investment securities 8,110 $ 6,896 $ 27,175 $ 6,544 48,725 Portfolio loans: Commercial 151,134 31,619 99,864 844 283,461 Real estate mortgage 10,493 18,373 22,627 2,219 53,712 Installment 2,226 7,622 9,404 1,198 20,450 Loans held for resale 6,749 6,749 Notes Receivable - Amera Mortgage Corp. 2,831 2,831 Non-earning assets 33,930 -------- -------- -------- ------- -------- Total Assets $221,117 $ 64,510 $161,901 $10,805 $492,263 ======== ======== ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Time deposits over $100,000 $ 34,225 $ 33,092 $ 10,249 $ 77,566 Time deposits under $100,000 41,414 96,947 38,221 $ 156 176,738 All other interest-bearing deposits 119,096 119,096 -------- -------- -------- ------- -------- Total Interest-bearing Deposits 194,735 130,039 48,470 156 373,400 Debt obligations 3,000 3,500 6,500 Noninterest-bearing liabilities 67,473 Minority interest in consolidated subsidiaries 4,731 Stockholders' equity 40,159 -------- -------- -------- ------- -------- Total Liabilities and Stockholders' Equity $194,735 $133,039 $ 51,970 $ 156 $492,263 ======== ======== ======== ======= ======== Interest rate sensitive period gap $ 26,382 ($68,529) $109,931 $10,649 ======== ======== ======== ======= Interest rate sensitive cumulative gap $ 26,382 ($42,147) $ 67,784 $78,433 ======== ======== ======== ======= Period rate sensitive assets/period rate sensitive liabilities 1.14 0.48 3.12 69.26 Cumulative rate sensitive assets/cumulative rate sensitive liabilities 1.14 0.87 1.18 1.21 Cumulative gap to total assets 5.36 % (8.56)% 13.77 % 15.93 %
-13- 14 FINANCIAL RATIOS (TABLE H) 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, 1996, 1995 and 1994:
Year Ended December 31 --------------------------------- 1996 1995 1994 ------ ------ ------ Net Income as a percent of: Average stockholders' equity 12.01% 10.55% 9.45% Average total assets 1.08% 0.87% 0.75% Average stockholders' equity as a percent of average total assets 8.97% 8.24% 7.93% Dividend payout ratio (cash dividends per share as a percentage of net income per share) (1): Primary 30.28% 31.65% 39.06% Fully diluted 31.73% 32.47% 39.06%
(1) As adjusted to reflect the Corporation's 1996 stock dividend as if it had occurred at the beginning of periods presented. -14- 15 Item 2, Description of Property. A. Office Locations: The principal offices of Capitol Bancorp Ltd. (the "Corporation") and Capitol National Bank ("Capitol National") are located at One Business & Trade Center, 200 Washington Square North, Lansing, Michigan 48933. The Corporation and Capitol National lease approximately 17,500 square feet under operating leases which expire in 1998 and 2003, portions of which are renewable for an additional 2 1/2 years. The building is owned by a partnership which includes certain principals of the Corporation. Management believes the terms of the leases are substantially similar to those otherwise available in the community (see Item 12, "Certain Relationships and Related Transactions"). Capitol National has a branch at 4972 Marsh Road, Okemos, Michigan 48864 which is leased under an operating lease which expires in 1998 and includes approximately 3,000 square feet. In addition, Capitol National has the option to extend the branch facility lease for two consecutive three year periods. Portage Commerce Bank's sole banking office is located at 6772 S. Westnedge, Portage, Michigan (mailing address P.O. Box 727, Portage, Michigan 49081-0727). Its premises (approximately 6,711 square feet) are leased under an operating lease which expires in 1998 and provides for three consecutive five-year renewal periods. Ann Arbor Commerce Bank's main banking office is located at 2930 State Street South, Ann Arbor, Michigan 48104. Its premises (approximately 5,300 square feet) were purchased in 1992. The Bank operates a processing center located nearby at 3711 Plaza Drive, Ann Arbor, where certain transactions from both Ann Arbor Commerce Bank and Oakland Commerce Bank are processed. The processing facility (approximately 1,600 square feet) is leased under an operating lease which expires in 1997 and provides for a one-year renewal period. Oakland Commerce Bank's office (approximately 4,000 square feet) is located at 31731 Northwestern Highway, Farmington Hills, Michigan 48334 and is rented under an operating lease agreement which expires in 1997 and management currently anticipates negotiating an additional renewal of this lease. Paragon Bank & Trust's banking office (approximately 9,400 square feet) is located at 301 Hoover Boulevard (P.O. Box 1529), Holland, Michigan 49423. Its bank building (approximately 13,300 square feet) were purchased in 1996. Portions of the building not occupied by the Bank are leased to unaffiliated tenants. Grand Haven Bank's office is located at 15 South Second Street, Grand Haven, Michigan 49417. Its premises (approximately 1,700 square feet) are owned by the Bank. Bank of Tucson's office is located at 4400 E. Broadway, Tucson, Arizona (mailing address P.O. Box 12766, Tucson, Arizona 85732). Its premises (approximately 6,500 square feet) are leased under an operating lease which expires in 2006 and provides for two consecutive five-year renewal periods. Macomb Community Bank's premises are located at 16000 Hall Road, Clinton Township, Michigan 48038. The Bank leases approximately 6,500 square feet under an operating lease agreement which expires in 2001 and provides for two consecutive five-year renewal periods. -15- 16 Management believes the Corporation's offices and the offices of its subsidiaries to be in good and adequate condition and adequately covered by insurance. B. Investment Policies: The Corporation, as a bank holding company, and its banking subsidiaries are subject to a wide array of rules, regulations and policies promulgated by governmental agencies in addition to internal policies as to loans and investments. The following information is incorporated by reference hereunder regarding the Corporation's consolidated assets: Tables A-E, inclusive, as set forth in Item I of this Form 10-KSB. Pages 15-16, Annual Report, under the caption "Asset Quality". Pages 16-17, Annual Report, under the caption "Liquidity, Capital Resources and Capital Adequacy". Page 28, Annual Report, under the caption "Note C--Investment Securities". Page 28, Annual Report, under the caption "Note D--Loans". Item 3, Legal Proceedings. There are no material pending legal proceedings to which the Corporation or its subsidiaries is a party or to which any of its property is 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 1996, no matters were submitted to a vote by security holders. -16- 17 PART II Item 5, Market for Common Equity and Related Stockholder Matters. A. Market Information: Incorporated by reference from Page 12, Annual Report, under the caption "Information Regarding the Corporation's Common Stock", Page 29, Annual Report, under the caption "Note I--Common Stock, Warrants and Stock Options" and page 36, Annual Report, under the caption "Shareholder Information". B. Holders: Incorporated by reference from first sentence of second paragraph on Page 12, Annual Report, under the caption "Information Regarding the Corporation's Common Stock". C. Dividends: Incorporated by reference from Page 11, Annual Report, under the caption "Quarterly Results of Operations" and subcaption "Cash dividends paid per share", Pages 28 and 29, Annual Report, under the caption "Note N -- Dividend Limitations of Subsidiaries and Other Capital Requirements" and the second full paragraph commencing on Page 30, Annual Report, under the caption "Note K--Debt Obligations". Item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference from Pages 13-19, Annual Report. Item 7, Financial Statements. See Item 13 (under subcaption "A. Exhibits") of this Form 10-KSB for specific description of financial statements incorporated by reference from Annual Report. Item 8, Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. -17- 18 PART III Item 9, Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Incorporated by reference from Pages 2-5, Proxy Statement, under the caption "Election of Directors" and Page 36, Annual Report, under the caption "Officers of the Corporation". Item 10, Executive Compensation. Incorporated by reference from Pages 6-9, Proxy Statement, under the caption "Executive Compensation" and "Certain Relationships and Related Transactions". Item 11, Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference from Page 1, Proxy Statement, under the caption "Voting Securities and Principal Holders Thereof", Pages 2-5, Proxy Statement, under the caption "Election of Directors" and Page 7, Proxy Statement, under the caption "Employee Stock Ownership Plan". Item 12, Certain Relationships and Related Transactions. Incorporated by reference from Pages 7-9, Proxy Statement, under the caption "Certain Relationships and Related Transactions". -18- 19 Item 13, Exhibits 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 20-35 of the Annual Report of the registrant to its stockholders for the year ended December 31, 1996, are incorporated by reference in Item 7: Independent auditors' report. Consolidated balance sheets--December 31, 1996 and 1995. Consolidated statements of income--Years ended December 31, 1996, 1995 and 1994. Consolidated statements of changes in stockholders' equity--Years ended December 31, 1996, 1995 and 1994. Consolidated statements of cash flows--Years ended December 31, 1996, 1995 and 1994. 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 1996, no reports on Form 8-K were filed by the Registrant. -19- 20 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, 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 Vice President and Chief Executive Officer Chief Financial Officer (Principal Financial and Accounting Officer) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant as Directors of the Corporation on February 4, 1997. \s\ Joseph D. Reid \s\ Robert C. Carr - - ---------------------------------------- ------------------------------------------- Joseph D. Reid, Chairman, President Robert C. Carr, Executive Vice President Chief Executive Officer and Director Treasurer and Director \s\ David O'Leary \s\ Louis G. Allen - - ---------------------------------------- ------------------------------------------- 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 \s\Joel I Ferguson - - ---------------------------------------- ------------------------------------------- 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 - - ---------------------------------------- ------------------------------------------- James R. Kaye, Director Lyle W. Miller, Director - - ---------------------------------------- Leonard Maas, Director
- 20- 21 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 (common stock certificate) (1) 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) (c) Lease Agreement with Business & Trade Center, Ltd. (11) (d) Employee Stock Ownership Plan (as amended and restated February 10, 1994) (12) (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) (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)
-21- 22
PAGE NUMBER OR INCORPORATED BY EXHIBIT NO. DESCRIPTION REFERENCE FROM: - - ----------- ----------- -------------- 10 Material Contracts--continued: (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) 11 Statement Re: Computation of Per Share Earnings 13 Annual Report to Security Holders 21 Subsidiaries of the Registrant 23 Consent of Independent Certified Public Accountants 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. (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. -22- EX-11 2 EARNINGS 1 EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS CAPITOL BANCORP LTD.
Year ended December 31 -------------------------------------- 1996 1995 1994 ----------- ---------- ---------- Primary Net Income Per Share:(A) Weighted average number of common shares outstanding 4,148,872 3,667,276 3,030,537 Net effect of dilutive stock options and warrants -- based on the treasury stock method or modified treasury stock method, as applicable 91,679 550,524 366,498 ----------- ---------- ---------- Total 4,240,551 4,217,800 3,397,035 =========== ========== ========== Net income for the period $4,635,620 $3,072,559 $2,075,681 Adjustment for modified treasury stock method 0 239,244 108,407 ----------- ---------- ---------- Adjusted earnings for purposes of computation of per share earnings $4,635,620 $3,311,803 $2,184,088 =========== ========== ========== Primary net income per share: $1.09 $.79 $.64 =========== ========== ========== Fully Diluted Net Income Per Share: (A) Weighted average number of common shares outstanding 4,148,872 3,667,276 3,030,537 Net effect of dilutive stock options and warrants -- based on the treasury stock method or modified treasury stock method, as applicable 295,946 676,552 366,498 ----------- ---------- ---------- Total 4,444,818 4,343,828 3,397,035 =========== ========== ========== Net income for the period $4,635,620 $3,072,559 $2,075,681 Adjustment for modified treasury stock method 0 254,244 108,407 ----------- ---------- ---------- Adjusted earnings for purposes of computation of per share earnings $4,635,620 $3,326,803 $2,184,088 =========== ========== ========== Fully diluted net income per share $1.04 $.77 $.64 =========== ========== ==========
(A) As adjusted to reflect the Corporation's 1996 10% stock dividend as if it had occurred at the beginning of the periods presented. EX-13 3 ANNUAL REPORT 1 EXHIBIT 13 EARNINGS PERFORMANCE For the third consecutive year, the consolidated earnings of the Corporation increased by 50% from the previous year. Net income for 1996 was $4.6 million in contrast to $3.1 million reported in 1995. Net income per share (primary) amounted to $1.09 compared to $.79 in 1995. Over the past five years we have enjoyed an increase in net income in excess of a 25% compound rate for each year. Consolidated assets grew 28% from the preceding year. Similar to net income growth, assets have increased at an annualized 25% compound growth rate over the past five years. WE ARE A GROWTH COMPANY The Corporation can easily be divided into two separate businesses. First, we are a bank development business. Second, we are owner-operators of our start-up banking businesses. In 1996, we opened Bank of Tucson in Tucson, Arizona. Additionally, we opened Macomb Community Bank in Clinton Township, Michigan. The Corporation owns 51% of each of these two de novo banks. Our current strategic plan calls for the formation of four additional de novo banks in calendar year 1997. The first of these, Brighton Commerce Bank, opened in Brighton, Michigan in January of this year. Next, we expect to open Valley First Community Bank in Scottsdale, Arizona. In the latter part of the year, we plan the opening of both Kent Commerce Bank in Grand Rapids, Michigan and Muskegon Commerce Bank in Muskegon, Michigan. Each bank, as is our practice, will open with a strong local identity. The directors of each bank will be recruited from the community in which the bank serves. Our bank directors have authority to determine matters such as marketing plans, pricing and extensions of credit. The success of each of our banks is driven by the strength of our bank directorship. Our ambitious growth plan for 1997 is in keeping with our desire to maintain the asset and income growth rates which have benefitted us in the past. Our officers and directors over the years have developed vast experience in the business of bank development. This experience has helped us in minimizing pre-incorporation expenses and limiting early stage operating losses. We believe that this experience is a significant, intangible off-balance-sheet asset of Capitol Bancorp Ltd. and we intend to utilize it. Our growth will continue to be focused both in Michigan and in the state of Arizona. While we will consider opportunities for bank development elsewhere, in their absence, we will follow our current plan. We are a growth corporation. We intend to leverage our shareholder equity in order to maximize performance, consistent with prudent banking practice. In our current environment, the ability to obtain additional capital in order to satisfy growth is realistic. Although mindful of the potential for significant changes in the marketplace, we intend to maximize our ability to grow in this currently optimistic marketplace. 1 2 Our plan is flexible and can be modified at any time as market circumstances dictate. Unlike merger and acquisition activity as a vehicle for growth, de novo banking avoids cultural integration issues and post-merger surprises. RELATIONSHIP BANKING Each of our banks is focused on the importance of relationship banking. Not relationship banking by self-proclamation, as we see among many of our competitors; rather, relationship banking based upon genuine involvement of our senior bank officers with their clients. We eschew branch banking. Our delivery system is focused on the premise that a bank president occupies each bank building which serves our clients. A branch bank tends to subvert relationship banking. We do recognize the need for convenience. Each of our banks has developed a courier service. We have also successfully implemented telephone banking at the election of our clients. Unlike large financial institutions which mine their data processing systems in an effort to identify their customers' needs and avail themselves of opportunities for product marketing, we know our customers and their needs firsthand. While we can boast a strong relationship orientation with our customer base, it comes at a price. We cannot allow any of our banks to become too big. Each bank must avoid outgrowing its market niche. Genuine relationship banking is based upon genuine relationships. The larger the institution, the more difficult it is for the senior officers to: - Know their customers - Service their customers - Maintain appropriate relationships Our significant growth will continue through new banks rather than pressure to grow individual banks to a point where they no longer reflect the characteristics of their emergence. Although we need to continue to remind ourselves who we are, ie., each bank being a small, branchless community-based bank, we do not take a back seat to anyone in terms of growth. Our growth comes primarily through the addition of community banks, not through expansion of existing community banks. TECHNOLOGICAL SUPERIORITY Although each of our banks is small, we can boast the greatest advances in technological superiority available to larger institutions. This is because we are able to pool our resources. In 1996 we successfully completed a major data processing conversion. Later this year we will significantly enhance our ability to service our customers with the following products: - Account statements and checks in an enhanced image format - More rapid response to customer information inquiries - Additional electronic banking services - Enhanced notifications and reports designed to better serve our borrowing customers 2 3 Our growth is not focused exclusively on asset size. To succeed in the 21st century we must maintain a stance near the cutting edge of technological change. Our new systems and our website on the Internet are designed to make sure that we continue to maintain a strong competitive presence. SAFETY AND SOUNDNESS We are not unmindful of the attractiveness of the marketplace to the entire banking industry. It is in these good times that we must prepare for a less receptive marketplace. We have recently increased our internal audit staff and added a new position in "risk management". Additionally, deliberative efforts are underway in order to continue to assure that each of our banks maintain prudent credit quality standards. It is our objective to be a performer even in difficult economic times. We believe that our optimism for the future is appropriately cautious. THE FUTURE Tenacious adherence to the characteristics of community banking including size, management and decision-making can be married to the competitive environment of electronic banking so long as our community banks continue to pool the strengths of their affiliation while preserving the uniqueness of each bank's personality in each community. If conditions permit, we will continue to develop new banks which adhere to the characteristics mentioned. Our current plan calls for growing to sixteen banking institutions within the next few years. We have strategized this growth so as not to unduly overburden the operating performance of Capitol Bancorp Ltd. during this growth era. We appreciate your investment in Capitol Bancorp Ltd. We hope that you share our enthusiasm for the future. Sincerely, \s\ Joseph D. Reid - - --------------------------------- Joseph D. Reid Chairman, President and Chief Executive Officer 3 4
BOARD OF DIRECTORS ------------------ ROBERT C. CARR CAPITOL NATIONAL BANK President and CEO Capitol National Bank This past year has been another exciting one for Capitol National Bank, with a record $1.57 million in net income and total assets exceeding $104 million. We were NAN ELIZABETH CASEY able to attain this with a 12% increase in our net interest margin while maintaining Attorney at Law operating expenses at less than 1% growth from the previous year. Casey & Boog, P.C. We continue to be pleased with our performance and your acceptance of our community CHARLES J. CLARK bank because this would not be possible without you, our customers. We are special President as shown by our personal approach to individual and business needs along with Clark Construction Company offering the flexibility of meeting those needs with local decision-making. JAMES C. EPOLITO Capitol National Bank staff members and directors are leaders in this area and President and CEO dedicate themselves to our becoming a more competitive force by capitalizing on the The Accident Fund Company inherent advantage of community banking with personalized service. PATRICK F. HAYES As we look into the future we have never had more opportunity for growth or better President resources with which to serve you. We appreciate your continued trust and support. F.D. Hayes Electric \s\ Robert C. Carr RICHARD A. HENDERSON - - ---------------------------- President Robert C. Carr Henderson, Miller & Robbins, President and CEO 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 Vice President and Treasurer Spartan Oil Corporation CHARLES J. MCDONALD Vice President and Cashier Capitol National Bank JOHN O'LEARY Personnel Manager O'Leary Paint Company JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. JOHN C. SMYTHE Executive Vice President Capitol National Bank OFFICERS -------- JOSEPH D. REID Chairman of the Board MARK A. LATTERMAN Vice Chairman ROBERT C. CARR President and CEO DAVID O'LEARY Secretary JOHN C. SMYTHE Executive Vice President CHARLES J. MCDONALD Vice President and Cashier JOHN FARQUHAR Vice President Capitol National Bank One Business and Trade Center 200 Washington Square North Lansing, Michigan 48933 (517) 484-5080
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BOARD OF DIRECTORS ------------------ PORTAGE COMMERCE BANK PAUL R. BALLARD President and CEO Portage Commerce Bank continued to grow and prosper in 1996. Total assets, at over Portage Commerce Bank $73 million, were 15% higher than last year end. Net profits increased 20% and surpassed the $1 million mark for the first time in the Bank's history. This level DAVID L. BECKER of earnings represents a 22% return on average equity and a 1.58% return on average President assets. These results compare very favorably with all banks in our peer group. Becker Insurance Agency, P.C. Through an agreement with our affiliate in Holland, the Bank began offering trust THOMAS R. BERGLUND services at our location. These new trust services will benefit both our personal Physician and business customers. Professional Medical Center, P.C. The bank is planning to move to a new location nearby which will offer better access and service to our customers. Construction is already underway for this new ROBERT C. CARR building which will provide additional drive-in banking capabilities and a larger, President and CEO more efficient facility. Plans for this move have been well received by the Capitol National Bank community. PATRICIA E. DOLAN We look forward to 1997 and the opportunity to further serve our community. We Community Volunteer appreciate the support of our stockholders and customers. ALAN A. HALPERN \s\ Paul R. Ballard Physician - - ----------------------------- Michigan Orthopedic Surgery Paul R. Ballard President and CEO ROBERT L. JOHNSON Vice President Medallion Management, Inc. MICHAEL L. KASTEN Managing Partner Kasten Investments, LLC PAUL M. LANE, PHD Haworth College of Business Western Michigan University WILLIAM J. LONGJOHN Vice President Midwest Business Exchange JOHN W. MARTENS Certified Public Accountant Yeo & Yeo, P.C. JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. OFFICERS -------- JOSEPH D. REID Chairman of the Board WILLIAM J. LONGJOHN Vice Chairman and Secretary PAUL R. BALLARD President and CEO JAMES V. LUNARDE Vice President GARY T. ADAMS Vice President MARK K. MACLELLAN Vice President ALLAN T. REIFF Vice President Portage Commerce Bank 6772 South Westnedge Portage, Michigan 49002 (616) 323-2200
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BOARD OF DIRECTORS ------------------ ANN ARBOR COMMERCE BANK ROBERT C. CARR President and CEO 1996 was a very good year for Ann Arbor Commerce Bank. Total assets for the first Capitol National Bank time in our six year history exceeded one hundred million dollars, up over 39% from year-end 1995. Net income exceeded $1,175,000. This is almost 40% more than earned MICHAEL J. DEVINE in 1995. Our loan loss reserve was increased from 1.30% to 1.37% during a year in Attorney at Law which our net charge-offs were less than $3,000. RICHARD G. DORNER These results occurred during a year in which two new community banks entered the President and CEO Ann Arbor market. Combining a dynamic market with a great deal of concentrated Ann Arbor Commerce Bank effort on the part of our directors, officers and staff continues to position us as a driving force in community banking. 1997 will bring new opportunities and JAMES A. FAJEN challenges to us. With the enhancement of Capitol Bancorp's operations and Attorney at Law technological efforts we are ready and able to meet these challenges. Davis & Fajen, P.C. Thanks to everyone, especially our customers, for helping make 1996 a very good JAMES W. FINN year. Chairman and CEO Finn's - JM&J Insurance \s\ Richard G. Dorner - - ------------------------------- Richard G. Dorner H. NICHOLAS GENOVA President and CEO Chairman and CEO Washtenaw News Co., Inc. RICHARD M. GREENE Consultant, Mortgage Banking Richard Greene Point Training MARILYN D. KATZ-PEK Director ACUMED DAVID W. LUTTON President/Owner Charles Reinhart Company Realtors TIMOTHY P. NORTON Senior Vice President McDonald & Company JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. FRITZ SEYFERTH Senior Associate Athletic Director University of Michigan Athletic Dept. CARL VAN APPLEDORN, M.D. Urological Surgery Associates, P.C. WARREN E. WRIGHT Chairman Renosol Corporation OFFICERS -------- JOSEPH D. REID Chairman of the Board JAMES A. FAJEN Vice Chair WARREN E. WRIGHT Secretary RICHARD G. DORNER President and CEO BRIAN F. PICKNELL Vice President RICHARD G. TICE Vice President Ann Arbor Commerce Bank 2930 State Street South Ann Arbor, Michigan 48104 (313) 995-3130
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BOARD OF DIRECTORS ------------------ OAKLAND COMMERCE BANK DONALD A. BOSCO President During 1996 Oakland Commerce Bank continued its mission to deliver prudent growth, Bosco Building, Inc. control operating expenses and ensure the highest level of customer satisfaction. ROBERT C. CARR We ended the year with $71 million in total assets which was a 16% increase for the President and CEO year. This increase was primarily fueled by a 39% growth in our commercial loan Capitol National Bank portfolio. MARK B. CHURELLA A significant event occurred during 1996 which negatively impacted our operating President and CEO performance. At the close of the third quarter, federal legislation was passed to FDI Group replenish the SAIF (Savings Association Insurance Fund) of which, by charter, Oakland was a part. The Bank's one time assessment charge was $328,000. LEON S. COHAN Counsel to the Firm Without this expense, net income for 1996 would have been about $220,000 higher and Barris, Scott, Denn & Driker record performance. The one-time charge to all SAIF-insured banks will benefit future periods through substantially lower deposit insurance premiums. MICHAEL J. DEVINE Attorney at Law The staff of Oakland Commerce Bank is pleased to be a significant contributor to overall profitability and growth of the Corporation and looks forward to meeting the JAMES R. KAYE challenges 1997 will bring. President and CEO Oakland Commerce Bank \s\ James R. Kaye - - --------------------------- James R. Kaye DAVID F. LAU, J.D. CLU President and CEO Chartered Financial Consultant Lau & Lau Associates JULIUS L. PALLONE President J.L. Pallone Associates JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. OFFICERS -------- JOSEPH D. REID Chairman of the Board MICHAEL J. DEVINE Vice Chair JAMES R. KAYE President and CEO IKE J. KUCZER Vice President Oakland Commerce Bank 31731 Northwestern Hwy Farmington Hills, Michigan 48116 (810) 855-0550
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BOARD OF DIRECTORS ------------------ PARAGON BANK & TRUST PAUL R. BALLARD President and CEO Paragon Bank & Trust enjoyed the most successful year in its six year history. Portage Commerce Bank Total assets of the bank grew 14%, ending the year at $63.7 million. This growth is attributable to the referrals of our existing clients and the involvement of our DR. ROBERT J. BATES board of directors and advisory board. Net income of $623,000 was a 49% improvement Physician over prior year results. Western Mich. Urological Assoc., P.C. While we continue to believe that the Holland market is very competitive, the focus of Paragon Bank & Trust to provide excellence in service to small businesses, JACK DEWITT professionals and senior citizens has been successful. The team of employees at President Paragon is dedicated to providing the best service to its clients through the use of Request Foods, Inc. improved technology and local decision-making. Our trust business has also continued to grow with the addition of a trust officer at Portage Commerce Bank and SCOTT DIEPENHORST has realized a 30% growth in assets overall. Principal SD & Associates Paragon Bank & Trust looks forward to 1997 with continued growth expectations. With the help of our clients, employees and directors, we will be able to meet and exceed PAUL ELZINGA those expectations. Director of Business Development \s\Scott G. Kling Elzinga & Volkers, Inc. - - --------------------------- Scott G. Kling President and CEO CRAIG T. HALL President Lee Shore Enterprises Ltd. SUSAN K. HUTCHINSON Owner Hutchinson's Stores for Children GEORGE P. JULIUS, JR. President and COO Beverage America, Inc. LAWRENCE D. KERKSTRA President and CEO Kerkstra Precast, Inc. SCOTT G. KLING President and CEO Paragon Bank & Trust LEONARD MAAS President Gillisse Construction Company RICHARD L. MOLENHOUSE Private Investor MITCHELL PADNOS Executive Vice President Louis Padnos Iron & Metal Company JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. RICHARD H. RUCH Vice Chairman Herman Miller, Inc. RICHARD G. SWANEY Attorney at Law Swaney, Thomas & Moritz, P.C. ROBERT J. TRAMERI Vice Chairman Paragon Bank & Trust OFFICERS -------- JOSEPH D. REID Chairman of the Board ROBERT J. TRAMERI Vice Chair SCOTT G. KLING President and CEO CHRISTOPHER J. HUGAR Senior Vice President ERIC J. HOOGSTRA Vice President Paragon Bank & Trust 301 Hoover Boulevard Holland, Michigan 49423 (616) 394-9600
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BOARD OF DIRECTORS ------------------ GRAND HAVEN BANK PAUL R. BALLARD Grand Haven Bank completed its first full year of operation in 1996 with total President and CEO assets growing by 56% to over $32 million. The growth is the result of existing Portage Commerce Bank customer referrals as well as our local directors letting others know of our competitive products and friendly banking atmosphere. STANLEY L. BOELKINS Owner/Appraiser The focus of our Bank is, and will continue to be, on lending to small businesses. Boelkins & Associates Our responsiveness combined with local, flexible decision-making has made us an attractive option for local business as well as personal financing. Our board of PETER E. BOLLINE directors was instrumental in the review and approval of over $10 million in loans Private Investor made during the year in our local market. BRAD J. FORTENBACHER We are proud of the positive impact we have made in the Tri-Cities area and look President forward to our building, technology and staffing expansion plans in 1997 that will Tri-Cast help ensure a continued high level of customer service. JOHN D. GROOTHUIS \s\ John D. Groothuis President and CEO - - ------------------------------- Grand Haven Bank John D. Groothuis President and CEO BARI STANTON JOHNSON President The Stanton Group MARK A. KLEIST Attorney at Law Scholten and Fant, P.C. STEVEN L. MAAS Vice President Gillisse Construction Company CALVIN D. MEEUSEN Certified Public Accountant ARNOLD W. REDEKER, JR. President Redeker Ford, Inc. JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. DENNIS W. SWARTOUT President Duncan Consulting Services ROBERT J. TRAMERI Vice Chairman Paragon Bank & Trust JOHN P. VAN EENENAAM Attorney at Law Van Eenenaam & White GERALD A. WITHERELL President Oakes Agency OFFICERS -------- JOSEPH D. REID Chairman of the Board JOHN P. VAN EENENAAM Vice Chairman ARNOLD W. REDEKER Secretary JOHN D. GROOTHUIS President and CEO Grand Haven Bank 15 South Second Street Grand Haven, Michigan 49417 (616) 846-1930
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BOARD OF DIRECTORS ------------------ BANK OF TUCSON MICHAEL J. DEVINE Attorney at Law Bank of Tucson completed an encouraging first six months of operation--three months in temporary quarters, and the most recent three months at our permanent location, SLIVY EDMONDS COTTON the Bank of Tucson Financial Center. Managing Director Edmonds Group Our year end financial results exceeded our expectations. Assets have grown to $17,276,000, with $12,021,000 in deposits, $4,850,000 in outstanding loans and WILLIAM A. ESTES, JR. $3,577,000 in loan commitments. Bank earnings for the year were predictably President negative ($164,000), but performance exceeded original projections. We expect Estes Home Builders positive income in the second quarter of 1997, ahead of initial expectations. RICHARD N. FLYNN Commercial lending is the main segment of our growth. Small business and SBA loans Corporate Consultant have also grown steadily and have exceeded our original projections. As of December Tax Appeals 1996, we established a full service real estate department that provides permanent as well as construction loans directed toward Tucson's custom home builders. MICHAEL F. HANNLEY President We continue to focus on our "Community Bank" identity. The board of directors has Bank of Tucson been instrumental in business development and guidance toward our objectives. It is important to acknowledge our fine employees who have worked tirelessly in creating a MICHAEL J. HARRIS financial institution that would rival any de novo bank in the country. The Tucson Realty and Trust dedication and professionalism they have exhibited will be realized for years to Company come and will be the platform for our future success. RICHARD IMWALLE \s\ Michael F. Hannley Executive Vice President - - -------------------------------- University of Arizona Michael F. Hannley Foundation President MICHAEL L. KASTEN Managing Partner Kasten Investments, LLC BURT KINERK Attorney at Law Haralson, Kinerk & Morey HUMBERTO LOPEZ Certified Public Accountant HSL Properties LYN PAPANIKOLAS Historian Arizona Historical Society JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. OFFICERS -------- JOSEPH D. REID Chairman and CEO RICHARD N. FLYNN Secretary MICHAEL F. HANNLEY President DAVID C. FOUST Executive Vice President & Chief Credit Officer RANDY F. HOTCHKISS Vice President KATHERINE P. WAIT Vice President and Controller CHARLENE F. SCHUMAKER Vice President Bank of Tucson 4400 E Broadway Tucson, Arizona 85711 (520) 321-4500
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BOARD OF DIRECTORS ------------------ MACOMB COMMUNITY BANK CHARLES B. BEER Assistant Vice President Macomb Community Bank opened for business on September 18, 1996. Local community First of Michigan response and support for our new Bank has been exceptional. I am pleased to report that Macomb Community Bank exceeded its initial growth expectations for 1996. Total ROBERT C. CARR assets reached $15,123,000 and deposits rose to $11,487,000. Loan demand continues President and CEO to increase dramatically, which reflects the Bank's phenomenal market area and Capitol National Bank overall customer confidence in our experienced group of banking professionals. Macomb County's own economic fortunes and resources are well ahead of the national CHRISTINA D'ALESSANDRO and state economies, thus creating a healthy banking environment conducive to a Vice President/Owner successful year in 1997. Villa Custom Homes, Inc. Macomb Community Bank's team of dedicated employees and active local Board members RONALD G. FORSTER are determined to consistently deliver highly personalized banking services and Owner competitive technologies to all of our customers. We are committed to a philosophy Arkay Manufacturing, Inc. of excellence, trust and community service which is proudly presented in our slogan, "We put the community back in banking". WILLIAM HACKEL Sheriff As a community bank, our unique qualities provide the competitive advantage Macomb County Sheriff's necessary to compete successfully in today's challenging financial markets. Department \s\ Stephen C. Tarczy PHILLIP T. HERNANDEZ - - ------------------------------- CEO Stephen C. Tarczy Efficient Sanitation President and CEO JOHN H. JOHNSON President Johnson Consulting Group DELIA RENDEN-MARTIN Co-Owner Martin Enterprises DAVID A. MCKINNON President David A. McKinnon, P.C. VITO MUNACO Owner/Operator WEMCO JAMES A. PATRONA President/Owner Universal Press & Machinery, Inc. ROBERT R. PELEMAN Head of Anesthesiology Department Macomb Anesthesia, P.C. JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. STEPHEN C. TARCZY President and CEO Macomb Community Bank OFFICERS -------- JOSEPH D. REID Chairman of the Board DAVID A. MCKINNON Vice Chairman STEPHEN C. TARCZY President and CEO SAM A. LOCRICCHIO Vice President Macomb Community Bank 16000 Hall Road, Suite 102 Clinton Township, Michigan 48038 (810) 228-1600
11 12 CAPITOL BANCORP LTD. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
As of and for the Year Ended December 31 ------------------------------------------------------------ 1996(1) 1995(2) 1994(3) 1993 1992(4) ------------------------------------------------------------ For the year Interest income $ 36,479 $ 29,914 $ 21,480 $ 17,729 $ 15,263 Interest expense 17,800 15,079 9,397 8,071 7,356 Net interest income 18,679 14,835 12,083 9,658 7,907 Provision for loan losses 1,196 839 473 598 553 Noninterest income 1,705 1,272 2,189 1,070 953 Noninterest expense 12,307 10,460 10,563 8,643 5,972 Net income 4,636 3,073 2,076 1,055 1,600 Net income per share:(5) Primary 1.09 .79 .64 .40 .64 Fully diluted 1.04 .77 .64 .40 .64 Cash dividends paid per share(5) .33 .25 .25 .19 .18 At end of year Total assets $492,263 $384,070 $316,312 $253,683 $225,024 Total earning assets 455,502 357,446 292,817 237,927 209,709 Portfolio loans 357,623 283,471 241,583 171,514 158,469 Deposits 436,166 340,287 279,650 220,513 201,762 Debt obligations 6,500 8,712 7,924 11,023 3,839 Stockholders' equity 40,159 30,865 25,714 18,337 16,545 Quarterly Results of Operations ---------------------------------------------------------------------- First Second Third Fourth Total for Quarter Quarter Quarter Quarter the year ---------------------------------------------------------------------- Year ended December 31, 1996(1) - - ------------------------------- Interest income $ 8,488 $ 8,772 $ 9,271 $ 9,948 $ 36,479 Interest expense 4,194 4,254 4,548 4,804 17,800 Net interest income 4,294 4,518 4,723 5,144 18,679 Provision for loan losses 217 260 274 445 1,196 Income before income taxes 1,622 1,782 1,740 1,737 6,881 Net income 1,101 1,148 1,178 1,209 4,636 Net income per share:(5) Primary .26 .28 .26 .26 1.09 Fully diluted .26 .28 .26 .26 1.04 Cash dividends paid per share(5) .0825 .0825 .0825 .0825 .33 Year ended December 31, 1995(2) - - ---------------------------- Interest income $ 6,692 $ 7,369 $ 7,720 $ 8,133 $ 29,914 Interest expense 3,191 3,770 4,007 4,111 15,079 Net interest income 3,501 3,599 3,713 4,022 14,835 Provision for loan losses 139 301 219 180 839 Income before income taxes 873 1,058 1,323 1,554 4,808 Net income 537 664 848 1,024 3,073 Net income per share:(5) Primary .15 .18 .21 .25 .79 Fully diluted .15 .18 .21 .25 .77 Cash dividends paid per share(5) .0625 .0625 .0625 .0625 .25
(1) Includes Bank of Tucson and Macomb Community Bank, effective June 27, 1996 and September 18, 1996, respectively, both of which are 51% owned by the Corporation. (2) 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 -- see Note 3). Effective March 31, 1995, the Corporation sold a majority interest in Amera Mortgage Corporation (formerly Mortgage Connection, Inc., acquired in 1992 -- see Note 4); for periods after March 31, 1995, the Corporation's remaining investment has been accounted for under the equity method. (3) Includes Paragon Bank & Trust for periods after the date of merger (June 30, 1994), which has been accounted for as a purchase. (4) Includes Oakland Commerce Bank and Mortgage Connection, Inc. for periods after the date of acquisition (July 6, 1992 and November 1, 1992, respectively), which have been accounted for as purchases. (5) As adjusted to reflect the Corporation's 1996 10% stock dividend as if it had occurred at the beginning of the periods presented. 12 13 INFORMATION REGARDING THE CORPORATION'S COMMON STOCK The Corporation's common stock is traded on the National Market tier of The Nasdaq Stock MarketSM under the symbol "CBCL". Market quotations regarding the range of high and low sales prices of the Corporation's common stock (without adjustment for the Corporation's 1996 10% stock dividend), which reflect inter-dealer prices without retail mark-up, mark-down or commissions, were as follows:
1996 1995 ------------------------------ ----------------------------- Low High Low High ------------------------------ ----------------------------- Quarter Ended: March 31 $ 10.25 $ 11.00 $ 7.75 $ 9.25 June 30 9.75 11.00 8.00 9.50 September 30 9.75 12.75 8.42 11.00 December 31 11.63 17.25 9.50 11.00
As of February 17, 1997, there were approximately 2,100 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, 4,522,066 shares of common stock were outstanding. In addition to common stock, there were 143,375 warrants outstanding. Each warrant enables the warrant-holder to purchase one share of the Corporation's common stock at an exercise price of $8.17272 and expires on June 30, 1997. 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. AVAILABILITY OF FORM 10-K A copy of the Corporation's 1996 report on Form 10-KSB, without exhibits, is available to stockholders without charge upon written request. Form 10-KSB includes certain statistical and other information regarding the Corporation and its business. Requests to obtain Form 10-KSB should be addressed to Linda D. Pavona, Vice President, Capitol Bancorp Ltd., One Business & Trade Center, 200 Washington Square North, Lansing, Michigan 48933. 13 14 CAPITOL BANCORP LTD. Management's Discussion and Analysis of Financial Condition and Results of Operations This section of the Annual Report discusses the Corporation's results of operations and financial condition and should be read in conjunction with the consolidated financial statements appearing elsewhere herein. This discussion also includes certain supplementary statistical and other data which are described more fully in the Corporation's report on Form 10-KSB, copies of which are available upon request, as indicated on page 12. OVERVIEW During 1996, the Corporation continued significant growth in earnings, assets and the number of entities comprising the consolidated group. Net income for 1996 amounted to $4.6 million, about 50% more than 1995 earnings. Similar percentage growth in earnings was realized in 1995 with net income of $3.1 million compared to $2.1 million in 1994. Net income per share (primary) amounted to $1.09 for 1996 compared to $.79 in 1995 and $.64 in 1994. These amounts have been restated to give effect to the Corporation's year-end 1996 10% stock dividend. The percentage increase in per-share earnings in 1996 (38%) differs from the increase in net income because of a larger number of shares outstanding, coupled with the impact of the significantly increased market value of the Corporation's common stock during the year. On a fully diluted basis, net income per share for 1996 amounted to $1.04, compared with $.77 in 1995. Consolidated total assets approximated $492 million at December 31, 1996. Asset growth for the year, nearly $110 million or more than 25%, was significant and another record. Total assets approximated $384 million at year-end 1995. The Corporation began 1996 with six bank subsidiaries. Two de novo banks were added during the year and the Corporation's ninth bank commenced operations in January 1997. The remainder of this section of the Annual Report discusses, in greater detail, the Corporation's results of operations and changes in financial position and other related matters. CONSOLIDATED RESULTS OF OPERATIONS Total interest income for 1996 approximated $36.5 million compared with $29.9 million in 1995 and $21.5 million in 1994. Total interest income increased 21.9% in 1996 versus 39.3% in 1995. The 1996 growth in interest income principally correlates with the 26% increase in the Corporation's consolidated loan portfolio. The growth in interest income in 1995 was largely due to higher rates and fees on loans as well as portfolio growth. The ratio of net interest income to total interest income increased during 1996. This ratio approximated 51.2% in 1996 as compared with 49.6% in 1995 and 56.3% in 1994. This ratio improved in 1996 after decreasing significantly in 1995. The percentage relationship between net interest income and total interest income decreased in 1995 due to compression occurring from changes in interest rates, which decreased during 1995. In 1996, interest rates were more stable. The Corporation's provision for loan losses approximated $1.2 million in 1996 compared with $839,000 in 1995 and $473,000 in 1994. Generally, the size of the provision for loan losses 14 15 is determined by various factors considered by management in determining the level of the allowance for loan losses, which are discussed in the "Asset Quality" section of this portion of the Annual Report. The increases in the provision for loan losses during 1995 and 1996, as compared with the 1994 level, are primarily due to the larger size of the consolidated loan portfolio. Noninterest income increased in 1996 to $1.7 million versus $1.3 million in 1995 and $2.2 million in 1994. The 1996 increase was mainly due to higher levels of service charges on deposit accounts and trust fee income coupled with other income sources, offset by the reduction in mortgage banking net revenues. The mortgage banking revenue decrease, representing the major reason for the overall reduction in noninterest income from 1994 to 1995, is due to the sale of a majority interest in the Corporation's mortgage banking unit effective March 31, 1995. Total noninterest expense increased 17.7% in 1996 to $12.3 million, as compared with approximately $10.5 million in both 1995 and 1994. The increase in 1996 is primarily due to the larger size of the Corporation in terms of number of employees, number of banks and larger amount of total assets under management. Federal income tax expense approximated 33% of income before federal income taxes in 1996 versus 36% in 1995 and 1994. The statutory federal income tax rate applicable to the Corporation is 34%, which approximates the recorded expense. CHANGES IN CONSOLIDATED FINANCIAL POSITION Total assets increased approximately 28% during 1996. Asset growth in 1995 approximated $68 million, or 21%. About one third of the Corporation's 1996 asset growth came from the addition of two de novo banking units which commenced operations during the year. Bank of Tucson commenced operations in June in Tucson, Arizona and Macomb Community Bank, located near metropolitan Detroit, commenced operations in September. These two de novo banks are majority-owned by the Corporation through its 51% ownership of those banks' common stock. The minority interests in those banks ($4.7 million at December 31, 1996) is classified in the consolidated balance sheet between liabilities and stockholders' equity. 15 16 The remainder of asset growth in 1996 came from the Corporation's more mature banks. The following table summarizes, comparatively, the total assets, net income and related rates of return for each of the banks and on a consolidated basis (dollar amounts in thousands):
Total Assets Return On Return on At December 31 Net Income Beginning Equity (1) Average Assets (1) ------------------ ----------------------- ------------------------ ----------------------- 1996 1995 1996 1995 1994 1996 1995 1994 1996 1995 1994 ------- ------ ------ ------ ----- -------- ------ ----- ------ ----- ------ Ann Arbor Commerce Bank $105,651 $ 75,954 $1,177 $ 841 $ 579 23.94% 20.52% 15.19% 1.36% 1.29% 1.16% Bank of Tucson (2) 17,276 n/a (164) n/a n/a N/A n/a n/a N/A n/a n/a Capitol National Bank 104,254 97,622 1,573 1,230 1,068 21.75 19.10 17.77 1.61 1.32 1.28 Grand Haven Bank (3) 32,731 20,930 220 71 n/a 8.31 4.26 n/a .83 .58 n/a Macomb Community Bank (4) 15,123 n/a (120) n/a n/a N/A n/a n/a N/A n/a n/a Oakland Commerce Bank 71,095 61,469 637 600 684 12.26 10.87 13.47 .91 1.04 1.17 Paragon Bank & Trust (5) 63,752 56,064 623 418 237 12.30 10.26 11.60 1.12 .80 .91 Portage Commerce Bank 73,769 64,019 1,091 905 751 23.08 22.31 19.44 1.58 1.52 1.48 -------- -------- ------ ------ ------ ------ ------ ----- ------ ----- ---- Total Banks 483,651 376,058 5,037 4,065 3,319 16.91 15.37 15.54 1.19 1.22 1.24 Mortgage banking (6) 2,831 3,077 (131) (229) (566) N/A n/a n/a N/A n/a n/a Other, net 5,781 4,935 (270) (763) (677) N/A n/a n/a N/A n/a n/a -------- -------- ------ ------ ------ ------ ------ ----- ------ ----- ---- Consolidated $492,263 $384,070 $4,636 $3,073 $2,076 15.02% 11.95% 11.32% 1.08% .87% .75% ======== ======== ====== ====== ====== ====== ===== ===== ====== ===== ====
(1) Annualized, as applicable, to give effect to mergers, acquisitions and formation of de novo banks. (2) Bank of Tucson was formed and commenced operations in June 1996 and is 51% owned by the Corporation. (3) Grand Haven Bank (formerly a branch of Paragon Bank & Trust, acquired June 30, 1994) commenced operations effective May 1, 1995. (4) Macomb Community Bank was formed and commenced operations in September 1996 and is 51% owned by the Corporation. (5) Acquired effective June 30, 1994. (6) 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. n/a--Not applicable. Of the consolidated growth in total assets in 1996, approximately $75 million was deployed into loans. The Corporation's banks emphasize commercial lending activities in their respective communities and commercial loans were approximately 80% of total loans at year-end 1996 and 1995. The emphasis on commercial lending is consistent with the banks' focus on meeting the financial needs of entrepreneurs, professionals and other high net-worth individuals. As a means to diversify the loan portfolio and to meet other customer needs, residential real estate loans and other installment loans to individuals are also made, which approximated about 20% of total portfolio loans. A substantial portion of the Corporation's asset growth in 1996 and 1995 was achieved through larger levels of bank deposits made by customers. The banks offer a full range of depository services and have typically attracted interest-bearing time deposits through maintaining a slight competitive pricing advantage relative to peer. Interest-bearing deposits increased $76.9 million in 1996 and $56.2 million in 1995. Noninterest-bearing deposits, as a percentage of total deposits, increased to 14.4% in 1996, compared with 12.9% at year-end 1995. The ratio of noninterest-bearing deposits to total deposits is important inasmuch as a higher ratio has the beneficial effect of reducing the Corporation's consolidated cost of funds. The ability to maintain higher levels of noninterest-bearing accounts varies in the banks' respective markets. ASSET QUALITY Asset quality has been maintained at a strong level in 1996 and 1995. Nonperforming loans have remained relatively low and at a manageable level during these recent periods. Nonperforming loans are defined as loans which are 90 days or more past due and loans on non-accrual status. Although nonperforming loans increased in 1996, most of the increase related to a small number of loans at Oakland Commerce Bank of which $400,000 was resolved in January 1997. 16 17 The following table summarizes total portfolio loans, the allowance for loan losses and nonperforming loans for each of the Corporation's banks (dollar amounts in thousands):
Allowance as a Percentage of Total Allowance for Nonperforming Total Portfolio Loans Loan Losses Loans Portfolio Loans ---------------------- -------------------- ---------------------- ---------------------- 1996 1995 1996 1995 1996 1995 1996 1995 ---------- --------- ---------- -------- --------- -------- --------- -------- Ann Arbor Commerce Bank $ 79,463 $ 58,869 $ 1,088 $ 765 $ 304 $ 147 1.37% 1.30% Bank of Tucson 4,850 n/a 49 n/a --- n/a 1.01 n/a Capitol National Bank 80,749 75,468 1,076 1,058 797 396 1.33 1.40 Grand Haven Bank 26,162 14,630 303 155 --- --- 1.16 1.06 Macomb Community Bank 5,821 n/a 59 n/a --- n/a 1.01 n/a Oakland Commerce Bank 54,569 46,146 655 552 1,227 448 1.20 1.20 Paragon Bank & Trust 46,680 41,288 563 494 44 --- 1.21 1.20 Portage Commerce Bank 58,177 45,870 785 663 327 350 1.35 1.45 Other, net 1,152 1,200 --- --- --- --- --- --- --------- --------- -------- ------- -------- ------- ------ ------ Consolidated $ 357,623 $ 283,471 $ 4,578 $ 3,687 $ 2,699 $ 1,341 1.28% 1.30% ========= ========= ======== ======= ======== ======= ====== ====== n/a - Not applicable
The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the Corporation's 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. Although provisions for loan losses have increased during each of the recent periods, such increases are attributable to the larger size of the related loan portfolios, coupled with the length of time the individual banks have been in operation. Generally, de novo banks will not experience loan loss activity until their portfolios have aged and, accordingly, their allowance for loan losses as a percentage of total portfolio loans tends to be less in their earlier years of operation. For the periods presented, impaired loans (as defined by Financial Accounting Standards Board Statement No. 114) were not material. LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY Cash and cash equivalents approximated 13% of total assets at year-end 1996, a slight increase over the 12% level at December 31, 1995. This level of liquidity varies daily based on customers' transactions and, accordingly, amounts of cash and federal funds sold can vary widely at any particular point in time. In order to balance asset deployment with liquidity requirements, funds are deployed into other liquid assets consisting of marketable investment securities. The Corporation has not engaged in securities trading activities, derivatives or other speculative investments. Most of the investment securities are classified as "available for sale", are generally of short-term duration (typically, maturity of two years or less) and are carried at current market value in the consolidated balance sheet. The market value adjustment is reflected as an adjustment to stockholders' equity, for balance sheet purposes, net of the related tax effect. While management has no plans or intentions to sell those investments, the amount of such investments represents a significant source of liquidity, when needed, to meet additional loan demand or depositors' needs. One of the Corporation's banks purchases loan participations on a temporary basis from the 49% owned mortgage affiliate until those loans are delivered into the secondary market. Such loans held for resale approximated $6.7 million at December 31, 1996 ($7 million at December 31, 17 18 1995). During 1996, purchases and sales of loans held for resale approximated $193 million, significantly higher than the approximate $82 million level in 1995. The 1996 volume increase was due to higher levels of loan origination activity at the mortgage affiliate. Sometimes financial institutions are compared by the ratio of loans to deposits. The Corporation has typically maintained a relatively high ratio of loans to deposits as a means of maximizing higher-yielding loans and related interest margins. This ratio excludes loans held for resale. Optimally, management seeks to maintain a loan to deposit ratio of 80% or more. At December 31, 1996, the ratio of loans to deposits approximated 82%, a slight decrease from the 83% level at year-end 1995 and a decrease from the year-end 1994 level of 86%. The change in the ratio in 1995 and 1996 is the result of management's efforts to maintain that ratio more closely to the 80% level. Most of the banks' various funding needs are met through obtaining customer deposits. The banks emphasize time certificates of deposit and other interest-bearing accounts. Because of the typical customer profile (professionals, entrepreneurs and other high net-worth individuals) as well as other sources of time deposits, the banks have consistently maintained relatively large amounts of time deposits in denominations of $100,000 or more. Such time deposits aggregated $77.6 million at December 31, 1996 and $60.2 million at December 31, 1995 or 17.8% and 15.9% of total deposits, respectively. Most of those deposits mature within a one-year time frame. The banks' experience is that, generally, time deposits are renewed at market rates and do not present a liquidity concern. Management believes the Corporation's and the banks' liquidity to be adequate to meet loan demand and depositor needs. The Corporation and two of its bank subsidiaries have certain secured lines of credit with unaffiliated entities. At December 31, 1996, amounts outstanding under those credit facilities approximated $6.5 million and $20.1 million was available for future borrowings. The credit facilities are reviewed periodically for continuance. During the periods of 1994 through 1996 several transactions have significantly increased the Corporation's capital and stockholders' equity. In 1994, the Corporation consummated a merger transaction (acquisition of Paragon Bank & Trust) involving the issuance of common stock and warrants for the purchase of common stock. The value ascribed to common stock with respect to that 1994 acquisition approximated $6.7 million, relating to the approximately 743,000 shares of common stock issued. In conjunction with that transaction, an equal number of warrants for the future purchase of the Corporation's common stock were also issued, of which three fourths were scheduled to expire by June 30, 1996 and the remainder on June 30, 1997. During 1996, approximately 505,000 warrants were exercised, generating proceeds to the Corporation of approximately $4.5 million and issuance of approximately 505,000 shares of additional common stock. At December 31, 1996, approximately 162,000 warrants relating to the 1994 merger transaction remain outstanding. If all such warrants are exercised, the Corporation would potentially receive approximately $1.3 million in additional capital and issue approximately 162,000 additional shares of common stock; however, there is no assurance such warrants will be exercised. The Corporation received proceeds from the exercise of stock options which amounted to approximately $1.5 million in 1996 and $1.2 million in 1995. At year-end 1996, a total of 504,000 stock options were outstanding which have varying expiration dates through 2003 and, if exercised, would generate proceeds approximating $5 million; however, there is no assurance such options will be exercised. 18 19 On December 31, 1996 the Corporation issued a 10% stock dividend. All per-share information included in the financial statements has been restated to give effect to the 1996 stock dividend as if it had occurred at the beginning of the periods presented. In 1996, 1995 and 1994, the Corporation paid quarterly cash dividends. A quarterly cash dividend of $.09 per share was paid in 1996, or an annual payout rate of $0.36 per share. Restated for the recent stock dividend, the 1996 payout rate would have been $0.33 per share. The Corporation recently announced a quarterly dividend of $0.10 per share payable in the first quarter of 1997. At December 31, 1996, the Corporation's book value of common stock amounted to $8.91 per share as compared to a level of $8.26 per share at the beginning of the year, as restated to give effect to the aforementioned stock dividend. The Corporation and its banks are subject to a number of complex regulatory requirements which require maintaining certain capital ratios. Additionally, such capital ratio measurements and related requirements are used by regulatory agencies to determine the level of regulatory intervention and enforcement applied to financial institutions. Failure to comply with the regulatory capital requirements can result in severe regulatory action and other adverse consequences. The Corporation and each of its banks are in compliance with the regulatory capital requirements and management expects to maintain such compliance in the foreseeable future. Those regulatory capital requirements are also used to classify institutions into certain categories which are used to determine the level of regulatory involvement and rates of deposit insurance premiums. All of the Corporation's banks are classified as "well capitalized" under the current regulatory capital framework. A more detailed presentation of the various capital ratios for each bank and on a consolidated basis is set forth in Note N to the consolidated financial statements appearing on page 32 of this Annual Report. The Corporation's stockholders' equity approximated 8.16% of total assets at December 31, 1996, a slight increase from the level of 8.04% at December 31, 1995. Management considers an approximate 8% ratio of shareholder equity to total assets to be adequate to facilitate growth. As discussed previously, the Corporation's 1996 de novo bank additions are majority-owned with the Corporation making a 51% investment in the common stock of those banks. Inasmuch as those banks are not wholly-owned by the Corporation, the related minority interests, which approximated $4.7 million at December 31, 1996, are classified in the consolidated balance sheet between liabilities and stockholders' equity. On a combined basis, stockholders' equity and minority interest in consolidated subsidiaries approximated $44.9 million at December 31, 1996, or 9.1% of total assets. This last ratio of total capital to total consolidated assets measures the total extent to which all capital funds deployed are leveraged. As discussed more fully elsewhere herein, the Corporation has additional expansion plans which involve formation of and investment in de novo banks. Management's strategy is to form de novo banks with initially minimal capitalization funded via a majority ownership from the Corporation, with remaining capital invested by individuals and other entities within the de novo bank's community. The Corporation's future investments in de novo banks is expected to be funded from a combination of internally generated capital resources, proceeds from exercise of warrants and stock options and borrowings. Management believes the Corporation's capital levels to be adequate and that capital resources are adequate to facilitate growth. 19 20 TRENDS AFFECTING OPERATIONS Trends in interest rates have a significant impact on results of operations. Rapid changes in interest rates, either up or down, can have either a positive or negative impact on net interest income, depending upon the direction and timing of such changes. Management endeavors to maintain a balanced position of interest rate-sensitive assets and liabilities. In these most recent periods of lower interest rates, the banks strive to 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, since loan demand will 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 recent periods, economic conditions nationally and in the banks' local environment, have been 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 1996 and 1995, the generally positive economic environment has contributed favorably to earnings and asset quality. Future economic conditions, and their effect on asset quality and earnings, are difficult to predict. 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. More specifically, the consolidation of the banking industry, coupled with the closure of branch locations by larger institutions, has had the effect of displacing customer relationships. For retail customers, banking services have become a commodity in an environment that is dominated by larger "mass merchandising" megabanks. For the professional, entrepreneur and other customers seeking a more service-oriented, customized banking relationship, the Corporation's 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 banks are located, the banks focus on service delivery and keeping the banks' size at an appropriate level; only a modest market share of deposits and loan activity is necessary in order to achieve profitability and reasonable earnings performance. The banking consolidation environment further presents opportunities for expansion of de novo banking activities in numerous markets. Plans are currently underway for expansion into additional banking markets in 1997, which include formation of new banks in Grand Rapids and Muskegon, Michigan and Scottsdale, Arizona (a de novo bank was opened in Brighton, Michigan in early January 1997). Other markets are under study and evaluation for formation of new banks which could either accelerate or slow the current plan, depending upon opportunities and other matters. Future expansion is dependent on opportunities and circumstances at the time, all of which are always in motion and subject to change. During 1996, the Corporation implemented the concept of forming "partnership de novo banks" in which newly formed banks would be co-owned by the Corporation and local investors within the community of the new bank. The Corporation currently intends to pursue that concept further with its near-term de novo banking expansion into new markets. In early January 1997, an additional majority-owned de novo bank, Brighton Commerce Bank, was added in Brighton, Michigan based on this concept. De novo banks generally incur operating losses during their early periods of operation. In 1996, net operating losses of the new banking units added in June and September approximated 20 21 $284,000. On a consolidated basis, however, such operating losses reduced net income by the pro rata share of the Corporation's percentage ownership of those banks (51%). Those banks are expected to become profitable in 1997 and, accordingly, their earnings will be similarly included in consolidated net income to the extent of the Corporation's ownership percentage in them. The formation of additional de novo banks is expected to similarly impact future operating results. Financial institutions are 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 cost 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 maintaining compliance and developing systems for compliance with those rules and regulations as well as the costs of examinations, audits and other compliance activities. Premiums for insurance of deposits by the Federal Deposit Insurance Corporation (FDIC) are also significant costs of doing business as financial institutions. Costs of those insurance premiums during 1994 through 1996 on a consolidated basis have aggregated between $400,000 and $540,000 annually. The 1996 expense of $425,000 is significantly higher than what would have been incurred based on legislation in effect for periods prior to September 30, 1996. On September 30, 1996, legislation was signed into law recapitalizing the Savings Association Insurance Fund (SAIF), the FDIC fund covering insured deposits of savings institutions. One of the Corporation's banks (Oakland Commerce Bank, which was a federally chartered savings bank prior to its 1992 acquisition by the Corporation) has SAIF-insured deposits and, accordingly, was charged a one-time assessment in the amount of approximately $330,000 for resolution of the SAIF Fund. Without this assessment net income for 1996 would have been approximately $220,000 higher than reported. The SAIF assessment and other related aspects of that legislation are intended to reduce insurance premiums paid by SAIF-insured banks and to bring those premium rates more in line with rates that are charged to other banks. For 1995 and 1996, the Corporation's other banks have enjoyed relatively low FDIC insurance premiums, largely because of the health of the FDIC's bank insurance fund and because the banks thus far have been classified into the so-called "well capitalized" category under which the lowest cost FDIC insurance premiums are assessed. Other recent legislative changes to FDIC insurance will have the impact of increasing deposit insurance premiums for all commercial banks in the future, although the amount of premiums will depend on several factors (such as the health of the banking industry and the economy in general) and are difficult to predict. The future of financial institution regulation, including FDIC insurance premiums and other aspects and costs of regulation, is uncertain and difficult to predict. NEW ACCOUNTING STANDARDS Certain new accounting standards became applicable to the Corporation during 1996. A new accounting standard governing the accounting and reporting for stock-based compensation was implemented. This new accounting standard provides alternative accounting treatment for stock options. Inasmuch as the Corporation elected to implement the additional disclosure requirements of that accounting standard, as opposed to the expense recognition alternative, implementation of that standard had no impact on the Corporation's results of operations for 1996. The additional disclosure requirements of the new accounting standard are set forth in the notes to the financial statements. 21 22 A recently issued accounting standard regarding "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" will become effective for the Corporation in 1997. Based on management's preliminary analysis of the new accounting standard, it is not expected to have a significant impact on the Corporation's financial position or results of operations. Numerous other potential changes in accounting standards are under study by the accounting standard-setting entities, regulatory agencies and others at any point in time. Because of the fluid state of those potential accounting standard changes, it is difficult to predict what impact they might have on the Corporation's consolidated financial statements. 22 23 Capitol Bancorp Ltd. 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 management's authorization and recorded properly to permit the preparation of financial statements 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. 23 24 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. \s\ BDO Seidman, LLP - - ---------------------------- Grand Rapids, Michigan January 31, 1997 24 25 CONSOLIDATED BALANCE SHEETS CAPITOL BANCORP LTD. AND SUBSIDIARIES
December 31 1996 1995 ------------------ ----------------- ASSETS Cash and due from banks $ 20,928,051 $ 14,714,534 Interest-bearing deposits with banks 55,267 16,294 Federal funds sold 42,350,000 30,600,000 --------------- --------------- Cash and cash equivalents 63,333,318 45,330,828 Loans held for resale 6,748,776 7,029,622 Investment securities--Note C: Available for sale, carried at market value 46,621,416 34,545,812 Held for long-term investment, carried at amortized cost which approximates market value 2,103,264 1,783,164 --------------- --------------- Total investment securities 48,724,680 36,328,976 Portfolio loans--Note D: Commercial 283,460,601 222,161,206 Real estate mortgage 53,712,381 48,953,782 Installment 20,450,216 12,356,383 --------------- --------------- Total portfolio loans 357,623,198 283,471,371 Less allowance for loan losses (4,578,000) (3,687,000) --------------- --------------- Net portfolio loans 353,045,198 279,784,371 Investment in and advances to Amera Mortgage Corporation--Note B 2,830,761 3,076,984 Premises and equipment--Note E 5,421,308 2,437,719 Accrued interest income 3,107,496 2,634,417 Excess of cost over net assets of acquired subsidiaries 2,347,256 2,540,163 Other assets 6,704,551 4,906,645 --------------- --------------- TOTAL ASSETS $ 492,263,344 $ 384,069,725 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 62,765,786 $ 43,797,199 Interest-bearing--Note H 373,400,277 296,490,261 --------------- --------------- Total deposits 436,166,063 340,287,460 Debt obligations--Note K 6,500,000 8,711,877 Accrued interest on deposits and other liabilities 4,708,188 3,813,689 --------------- --------------- Total liabilities 447,374,251 352,813,026 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES--Note B 4,730,553 391,372 STOCKHOLDERS' EQUITY--Notes B, I, J and N: Common stock, no par value, 10,000,000 shares authorized; issued and outstanding: 1996--4,504,911 shares 1995--3,395,288 shares 34,971,523 22,149,593 Retained earnings 5,150,066 8,414,189 Market value adjustment (net of tax effect) for investment securities available for sale 36,951 413,422 --------------- --------------- 40,158,540 30,977,204 Less note payable by ESOP--Note K (111,877) --------------- --------------- Total stockholders' equity 40,158,540 30,865,327 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 492,263,344 $ 384,069,725 =============== ===============
See notes to consolidated financial statements. 25 26 CONSOLIDATED STATEMENTS OF INCOME CAPITOL BANCORP LTD. AND SUBSIDIARIES
Year Ended December 31 1996 1995 1994 -------------- -------------- -------------- Interest income: Portfolio loans (including fees) $31,454,120 $25,915,949 $18,887,230 Loans held for resale 818,344 300,032 357,754 Taxable investment securities 2,262,341 2,084,624 1,384,960 Federal funds sold 1,540,920 1,452,849 679,349 Interest-bearing deposits with banks and other 60,137 10,415 35,297 Dividends on investment securities 343,143 149,669 135,318 ------------ ------------ ------------- Total interest income 36,479,005 29,913,538 21,479,908 Interest expense: Demand deposits 2,417,599 2,297,240 1,880,409 Savings deposits 1,384,479 1,247,865 1,089,652 Time deposits 13,489,577 11,016,206 5,813,961 Debt obligations 495,679 492,271 517,043 Other 12,487 25,505 95,537 ------------ ------------ ------------- Total interest expense 17,799,821 15,079,087 9,396,602 ------------ ------------ ------------- Net interest income 18,679,184 14,834,451 12,083,306 Provision for loan losses--Note D 1,195,757 838,830 473,383 ------------ ------------ ------------- Net interest income after provision for loan losses 17,483,427 13,995,621 11,609,923 Noninterest income: Service charges on deposit accounts 746,108 569,240 429,526 Trust fee income 262,043 207,000 46,496 Realized gain (loss) on sale of loans 11,739 (137,638) Realized gain (loss) on sale of investment securities available for sale 82,171 1,574 (723) Mortgage banking net revenues--Note B 299,520 1,434,203 Other 614,834 182,648 417,220 ------------ ------------ ------------- Total noninterest income 1,705,156 1,271,721 2,189,084 Noninterest expense: Salaries and employee benefits 6,387,715 5,104,244 5,037,137 Occupancy 923,771 868,234 816,801 Equipment rent, depreciation and maintenance 1,010,975 817,054 756,542 Deposit insurance premiums 425,115 401,014 538,761 Other 3,560,387 3,269,237 3,414,085 ------------ ------------ ------------ Total noninterest expense 12,307,963 10,459,783 10,563,326 ------------ ------------ ------------ Income before federal income taxes 6,880,620 4,807,559 3,235,681 Federal income taxes--Note F 2,245,000 1,735,000 1,160,000 ------------ ------------- ------------ NET INCOME $ 4,635,620 $ 3,072,559 $ 2,075,681 ============ ============ ============ NET INCOME PER SHARE: Primary $ 1.09 $ 0.79 $ 0.64 ============ ============ ============ Fully diluted $ 1.04 $ 0.77 $ 0.64 ============ ============ ============
See notes to consolidated financial statements. 26 27 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CAPITOL BANCORP LTD. AND SUBSIDIARIES
Market Value Adjustment for Investment Common Retained Securities Stock Earnings Available for Sale -------------- ------------- ------------------ Balances at January 1, 1994 $ 13,500,780 $ 4,970,276 $ 94,626 Issuance of 742,980 shares of common stock in conjunction with acquisition of Financial Center Corporation--Note B 6,679,390 Issuance of 33,080 shares of common stock upon exercise of stock options 228,392 Purchase of 10,000 shares of common stock by ESOP, financed by long-term debt Principal payment on note payable by ESOP Cash dividends paid ($.25 per share) (771,058) Market value adjustment for investment securities available for sale (net of tax effect) (840,020) Net income for 1994 2,075,681 ------------ ----------- ---------- BALANCES AT DECEMBER 31, 1994 20,408,562 6,274,899 (745,394) Issuance of 58,922 shares of common stock upon exercise of warrants 529,709 Issuance of 173,693 shares of common stock upon exercise of stock options 1,157,825 Issuance of 5,095 shares of common stock pursuant to Shareholder Investment Plan 53,497 Principal payment on note payable by ESOP Cash dividends paid ($.25 per share) (933,269) Market value adjustment for investment securities available for sale (net of tax effect) 1,158,816 Net income for 1995 3,072,559 ------------ ----------- ---------- BALANCES AT DECEMBER 31, 1995 22,149,593 8,414,189 413,422 Issuance of 505,372 shares of common stock upon exercise of warrants 4,543,294 Issuance of 177,881 shares of common stock upon exercise of stock options 1,548,937 Issuance of 16,967 shares of common stock pursuant to Shareholder Investment Plan 179,251 Issuance of 409,403 shares of common stock upon payment of 10% stock dividend 6,550,448 (6,552,961) Principal payment on note payable by ESOP Cash dividends paid ($.33 per share) (1,346,782) Market value adjustment for investment securities available for sale (net of tax effect) (376,471) Net income for 1996 4,635,620 ------------ ----------- ---------- BALANCES AT DECEMBER 31, 1996 $ 34,971,523 $ 5,150,066 $ 36,951 ============ =========== ========== Note Payable by ESOP Total ------------- ------------- Balances at January 1, 1994 $ (228,654) $ 18,337,028 Issuance of 742,980 shares of common stock in conjunction with acquisition of Financial Center Corporation--Note B 6,679,390 Issuance of 33,080 shares of common stock upon exercise of stock options 228,392 Purchase of 10,000 shares of common stock by ESOP, financed by long-term debt (92,504) (92,504) Principal payment on note payable by ESOP 97,403 97,403 Cash dividends paid ($.25 per share) (771,058) Market value adjustment for investment securities available for sale (net of tax effect) (840,020) Net income for 1994 2,075,681 ------------- ------------- BALANCES AT DECEMBER 31, 1994 (223,755) 25,714,312 Issuance of 58,922 shares of common stock upon exercise of warrants 529,709 Issuance of 173,693 shares of common stock upon exercise of stock options 1,157,825 Issuance of 5,095 shares of common stock pursuant to Shareholder Investment Plan 53,497 Principal payment on note payable by ESOP 111,878 111,878 Cash dividends paid ($.25 per share) (933,269) Market value adjustment for investment securities available for sale (net of tax effect) 1,158,816 Net income for 1995 3,072,559 ------------- ------------- BALANCES AT DECEMBER 31, 1995 (111,877) 30,865,327 Issuance of 505,372 shares of common stock upon exercise of warrants 4,543,294 Issuance of 177,881 shares of common stock upon exercise of stock options 1,548,937 Issuance of 16,967 shares of common stock pursuant to Shareholder Investment Plan 179,251 Issuance of 409,403 shares of common stock upon payment of 10% stock dividend (2,513) Principal payment on note payable by ESOP 111,877 111,877 Cash dividends paid ($.33 per share) (1,346,782) Market value adjustment for investment securities available for sale (net of tax effect) (376,471) Net income for 1996 4,635,620 ------------- ------------- BALANCES AT DECEMBER 31, 1996 $ 0 $ 40,158,540 ============= =============
See notes to consolidated financial statements. 27 28 CONSOLIDATED STATEMENTS OF CASH FLOWS CAPITOL BANCORP LTD. AND SUBSIDIARIES
Year Ended December 31 1996 1995 ---------------- -------------- OPERATING ACTIVITIES Net income $ 4,635,620 $ 3,072,559 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 1,195,757 838,830 Depreciation of premises and equipment 652,703 520,963 Amortization of mortgage servicing rights 100,905 Amortization of excess of cost over net assets of acquired subsidiaries 192,907 251,596 Net amortization of investment security premiums (accretion of discount) (266,610) 9,240 Gain (loss) on sale of premises and equipment 7,394 (12,130) Deferred income taxes (550,000) (240,000) Originations and purchases of loans held for resale (192,642,846) (84,430,817) Proceeds from sales of loans held for resale 192,923,692 81,069,303 Increase in accrued interest income and other assets (1,301,151) (171,994) Increase (decrease) in accrued interest on deposits and other liabilities 503,127 789,785 -------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,350,593 1,798,240 INVESTING ACTIVITIES Cash and cash equivalents of acquired subsidiaries Proceeds from sale of 51% interest in Amera Mortgage Corporation 250,000 Proceeds from sales of investment securities available for sale 4,460,571 251,400 Proceeds from maturities of investment securities available for sale 39,742,019 14,207,785 Purchases of investment securities available for sale (56,881,766) (15,239,503) Net increase in portfolio loans (74,456,584) (42,259,737) Proceeds from sales of premises and equipment 12,757 33,481 Purchases of premises and equipment (3,656,443) (657,565) ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES (90,779,446) (43,414,139) FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts 43,901,957 387,423 Net increase in certificates of deposit 51,976,646 60,249,566 Net proceeds from (payments on) debt obligations (2,100,000) 900,000 Resources provided by minority interest 4,730,553 391,372 Net proceeds from issuance of common stock 6,271,482 1,741,031 Cash dividends paid and payments in lieu of fractional shares (1,349,295) (933,269) -------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 103,431,343 62,736,123 ------------- ------------ INCREASE IN CASH AND CASH EQUIVALENTS 18,002,490 21,120,224 Cash and cash equivalents at beginning of year 45,330,828 24,210,604 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 63,333,318 $ 45,330,828 ============= ============ Year Ended December 31 1994 ------------- OPERATING ACTIVITIES Net income $ 2,075,681 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 473,383 Depreciation of premises and equipment 519,322 Amortization of mortgage servicing rights 399,289 Amortization of excess of cost over net assets of acquired subsidiaries 243,443 Net amortization of investment security premiums (accretion of discount) 89,439 Gain (loss) on sale of premises and equipment (9,337) Deferred income taxes (178,000) Originations and purchases of loans held for resale (91,138,172) Proceeds from sales of loans held for resale 119,311,816 Increase in accrued interest income and other assets (967,749) Increase (decrease) in accrued interest on deposits and other liabilities (945,944) ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 29,873,171 INVESTING ACTIVITIES Cash and cash equivalents of acquired subsidiaries 1,027,266 Proceeds from sale of 51% interest in Amera Mortgage Corporation Proceeds from sales of investment securities available for sale 48,398 Proceeds from maturities of investment securities available for sale 9,978,763 Purchases of investment securities available for sale (13,505,475) Net increase in portfolio loans (33,568,525) Proceeds from sales of premises and equipment 14,708 Purchases of premises and equipment (369,342) ------------- NET CASH USED BY INVESTING ACTIVITIES (36,374,207) FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts (6,197,695) Net increase in certificates of deposit 19,645,361 Net proceeds from (payments on) debt obligations (3,093,981) Resources provided by minority interest Net proceeds from issuance of common stock 228,392 Cash dividends paid and payments in lieu of fractional shares (771,058) ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 9,811,019 ------------- INCREASE IN CASH AND CASH EQUIVALENTS 3,309,983 Cash and cash equivalents at beginning of year 20,900,621 ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,210,604 =============
See notes to consolidated financial statements. 28 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE A--SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION: Capitol Bancorp Ltd. (the "Corporation") is a multibank holding company. Consolidated banking subsidiaries consist of the following:
Percentage Year Formed Bank Location Owned or Acquired ----------------------- -------------------------- ---------- ----------- Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990 Bank of Tucson Tucson, Arizona 51% 1996 Capitol National Bank Lansing, Michigan 100% 1982 Grand Haven Bank Grand Haven, Michigan 85% 1995 Macomb Community Bank Clinton Township, Michigan 51% 1996 Oakland Commerce Bank Farmington Hills, Michigan 100% 1992 Paragon Bank & Trust Holland, Michigan 100% 1994 Portage Commerce Bank Portage, Michigan 100% 1990
. . . . . . . . . . . . . . The banks provide a full range of banking services to individuals, businesses and other customers located in their respective communities. Each of the banks generally operates from a single location and focuses its 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 banking units, mortgage banking activities are offered through Amera Mortgage Corporation, a 49% owned affiliate (effective March 31, 1995--see Note B), previously a wholly-owned subsidiary (formerly Mortgage Connection, Inc.). 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 interest. Banks formed or otherwise acquired during 1994, 1995 and 1996 are included in the consolidated financial statements for periods after joining the consolidated group (see Note B). Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. 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. 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 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. 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. 29 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED 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 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. INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon the principal balance of loans outstanding. Fees from origination of 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, which relates primarily to acquisitions in 1994 and 1992, 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, 1996 and 1995 approximated $313,000 and $972,000, 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 Opinion 25. Pro forma disclosure of alternative accounting recognition is made elsewhere herein. 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. 30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE A--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. NET INCOME PER SHARE: Primary net income per share is based on the weighted average number of common shares outstanding and common stock equivalents (4,240,551 in 1996, 4,217,800 in 1995 and 3,397,035 in 1994, as restated for the Corporation's 1996 10% stock dividend--see Note I), using the treasury stock or modified treasury stock method, as applicable. Fully diluted net income per share for 1996 and 1995 is similarly based on the weighted average income of common shares and common stock equivalents, as adjusted for the additional dilutive effect of applying the closing share price at year end, if higher than the average for the year (fully diluted share base was 4,444,818 in 1996 and 4,343,828 in 1995). NOTE B--CHANGES IN CONSOLIDATED GROUP During 1996, two de novo banks became majority-owned subsidiaries of the Corporation. Bank of Tucson commenced operations on June 27, 1996 with total capitalization of $5.4 million, of which $2.7 million was invested by the Corporation. Macomb Community Bank commenced operations on September 18, 1996 with total capitalization of $4 million, of which $2 million was invested by the Corporation. Effective May 1, 1995, the Corporation formed Grand Haven Bank, an 85% owned de novo subsidiary engaged in commercial banking in Grand Haven, Michigan. The Bank was previously operated as a branch of Paragon Bank & Trust. Grand Haven Bank was capitalized with $2.5 million. On June 30, 1994, the Corporation completed a merger transaction with Financial Center Corporation ("FCC"), based in Holland, Michigan. Under the terms of the merger agreement, FCC became a wholly-owned subsidiary of Capitol Bancorp Ltd. in an exchange of Capitol Bancorp common stock and warrants for all of the outstanding common stock of FCC. FCC's principal operating unit consisted of Paragon Bank & Trust, a community bank also based in Holland, with a branch location in neighboring Grand Haven. Total assets of FCC approximated $50 million at the merger date. The FCC merger transaction has been accounted for under the purchase method of accounting. Accordingly, its operations are included in the Corporation's consolidated financial statements for periods after the effective date of the merger. 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 for a combination of cash ($250,000) and notes approximating $1,200,000. The amount of the notes due from the purchaser is in addition to the Corporation's investment in and advances to the mortgage unit ($2,831,000 at December 31, 1996). Under the terms of the sale transaction, the majority owner of the mortgage unit (subsequently its President and CEO) appoints a majority of its board of directors. Under certain circumstances, the majority owner and the Corporation each have the right to purchase the other party's interest in the mortgage company. MCI subsequently changed its name to Amera Mortgage Corporation. For periods after March 31, 1995, the Corporation's remaining investment in Amera Mortgage Corporation (49%) is accounted for under the equity method for the pro rata share of the mortgage company's net income or loss. 31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE C--INVESTMENT SECURITIES Investment securities consisted of the following:
December 31 1996 1995 ----------------------------- --------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ----------------------------- --------------------------- Available for sale: United States Treasury securities $18,370,254 $18,472,498 $17,527,687 $17,876,320 United States government agency securities 27,791,852 27,748,332 15,317,683 15,682,563 States and political subdivisions 100,000 100,118 250,000 249,896 Corporate bonds 300,543 300,468 739,075 737,033 ----------- ----------- ----------- ----------- 46,562,649 46,621,416 33,834,445 34,545,812 Held for long-term investment: Federal Reserve Bank stock 115,900 115,900 115,900 115,900 Federal Home Loan Bank stock 984,100 984,000 664,000 664,000 Corporate stock 1,003,264 1,003,000 1,003,264 1,003,000 ----------- ----------- ----------- ----------- 2,103,264 2,102,900 1,783,164 1,782,900 ----------- ----------- ----------- ----------- $48,665,913 $48,724,316 $35,617,609 $36,328,712 =========== =========== =========== ===========
At December 31, 1996, securities with a market value approximating $5,004,000 were pledged to secure public and trust deposits and for other purposes as required by law. Gross unrealized gains and losses of investment securities available for sale were as follows:
December 31 1996 1995 ------------------------- ----------------------- Gains Losses Gains Losses ---------- ---------- ---------- --------- United States Treasury securities $ 125,666 $ 23,422 $ 353,937 $ 5,304 United States government agency securities 60,062 103,582 411,339 46,459 States and political subdivisions 118 94 198 Corporate bonds and other 75 973 3,015 --------- --------- --------- --------- $ 185,846 $ 127,079 $ 766,343 $ 54,976 ========= ========= ========= =========
Gross realized gains and losses from sales and maturities of investment securities were insignificant for each of the periods presented. 32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE C--INVESTMENT SECURITIES--CONTINUED Scheduled maturities of investment securities held as of December 31, 1996 were as follows:
Estimated Amortized Market Cost Value ------------ ------------ Due in one year or less $ 14,998,724 $ 15,006,297 After one year, through five years 27,085,270 27,175,028 After five years, through ten years 4,365,189 4,330,781 After ten years 113,466 109,310 Securities held for long-term investment, without stated maturities 2,103,264 2,102,900 ------------ ------------ $ 48,665,913 $ 48,724,316 ============ ============
NOTE D--LOANS Transactions in the allowance for loan losses are summarized below:
1996 1995 1994 ----------- ----------- ----------- Balance at January 1 $ 3,687,000 $ 3,220,000 $ 2,500,000 Allowance of acquired bank 515,000 Provision charged to operations 1,195,757 838,830 473,383 Loans charged off (deduction) (437,648) (594,073) (384,783) Recoveries 132,891 222,243 116,400 ----------- ----------- ----------- Balance at December 31 $ 4,578,000 $ 3,687,000 $ 3,220,000 =========== =========== ===========
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 $13,901,000 and $1,551,000, respectively, at December 31, 1996 ($11,891,000 and $1,153,000, respectively, at December 31, 1995). Such reserve amounts are separate and excluded from the allowance for loan losses. At December 31, 1996 and 1995, 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. 33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE E--PREMISES AND EQUIPMENT Major classes of premises and equipment consisted of the following:
December 31 1996 1995 ----------- ----------- Land, buildings and improvements $ 2,596,775 $ 1,094,409 Leasehold improvements 1,051,938 514,529 Equipment and furniture 4,569,380 3,113,143 ----------- ----------- 8,218,093 4,722,081 Less accumulated depreciation (2,796,785) (2,284,362) ----------- ----------- $ 5,421,308 $ 2,437,719 =========== ===========
The Corporation and certain subsidiaries rent office space under operating leases. Rent expense (net of sublease income) under these lease agreements approximated $614,000, $559,000 and $590,000 (including rent expense of $222,000, $209,000 and $272,000 under leases with related parties) for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1996 aggregate $2,504,000 due as follows: $564,000 in 1997, $375,000 in 1998, $289,000 in 1999, $297,000 in 2000, $236,000 in 2001 and $743,000 thereafter. NOTE F--INCOME TAXES Federal income taxes consist of the following components:
1996 1995 1994 ---------- ---------- ---------- Current $2,795,000 $1,975,000 $1,338,000 Deferred credit (550,000) (240,000) (178,000) ---------- ---------- ---------- $2,245,000 $1,735,000 $1,160,000 ========== ========== ==========
Federal income taxes paid during 1996, 1995 and 1994 approximated $2,451,000, $1,831,000 and $902,000, respectively. Differences between federal income tax expense recorded and amounts computed using the statutory tax rate are reconciled below:
1996 1995 1994 ------------ ------------ ------------- Federal income tax computed at statutory rate of 34% $ 2,339,000 $ 1,635,000 $ 1,100,000 Tax effect of: Amortization of goodwill 66,000 86,000 83,000 Other (160,000) 14,000 (23,000) ------------ ----------- ----------- $ 2,245,000 $ 1,735,000 $ 1,160,000 ============ =========== ===========
34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE F--INCOME TAXES--CONTINUED Net deferred income tax assets consisted of the following:
December 31 1996 1995 ---------- ---------- Allowance for loan losses $1,374,000 $1,001,000 Deferred compensation 274,000 207,000 Market value adjustment for investment securities available for sale (20,000) (242,000) Other, net 158,000 76,000 ---------- ---------- $1,786,000 $1,042,000 ========== ==========
NOTE G--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, 1996 and 1995, total loans to these persons approximated $14,727,000 and $9,932,000, respectively. During 1996, $10,725,000 of new loans were made to these persons and repayments totalled $5,930,000. 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 H--DEPOSITS The aggregate amount of time deposits of $100,000 or more approximated $77,566,000, and $60,196,000 as of December 31, 1996 and 1995, respectively. At December 31, 1996, the scheduled maturities of such time deposits were as follows: 1997 $67,317,000 1998 6,569,000 1999 2,444,000 2000 547,000 2001 and thereafter 689,000 ----------- Total $77,566,000 ===========
Interest paid approximates amounts charged to operations on an accrual basis for the periods presented. NOTE I--COMMON STOCK, WARRANTS AND STOCK OPTIONS On December 31, 1996, the Corporation issued a 10% stock dividend. All per-share data has been restated to reflect the stock dividend as if it had occurred at the beginning of the periods presented. At December 31, 1996, 162,244 warrants were outstanding which were issued in conjunction with a 1994 merger transaction (see Note B). Each warrant enables the holder thereof to purchase one share of common stock at $8.17272 per share (as adjusted for the 1996 stock dividend) and expires on June 30, 1997. 35 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE I--COMMON STOCK, WARRANTS AND STOCK OPTIONS--CONTINUED Stock options have been granted to three executive 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:
Number of Options Weighted Average Outstanding Exercise Price Range Exercise Price -------------- ----------------------- ------------------- Outstanding at January 1, 1995 615,731 $ .36 to $ 9.50 $ 7.07 Granted in 1995 41,941 8.25 to 10.50 9.68 Exercised in 1995 (173,693) .36 to 7.14 5.27 ------------ Outstanding at December 31, 1995 483,979 6.28 to 10.50 7.91 Granted in 1996 198,251 10.19 to 16.25 13.01 Exercised in 1996 (177,881) 6.28 to 7.27 6.87 Expired in 1996 (280) 7.14 7.14 ------------ Outstanding at December 31, 1996 504,069 6.49 to 16.25 10.28 ============
As of December 31, 1996, stock options outstanding had a weighted average remaining contractual life of 4.9 years. Statement of Financial Accounting Standards (SFAS) 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 SFAS No. 123, the Corporation has elected to continue to account for its stock options under the earlier accounting standard, and therefore, has not recognized compensation expense. By electing this alternative, certain pro forma disclosures of the expense recognition provisions are required. Under the fair value method of accounting, 1996 net income and fully diluted earnings per share would have been $4.1 million and $.92, respectively. The fair value of the options was estimated at the grant dates using an option pricing model with the following weighted average assumptions: risk-free interest rate of 6.4%, dividend yield of 3.0%, stock price volatility of .32 and an expected option life of 7 years. The pro forma effect of applying the fair value method was not material to 1995 reported results. NOTE J--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 80% or more owned subsidiaries over age 21. The Plan provides for contributions by the Corporation in amounts determined annually by the board of directors. Eligible employees may also make voluntary contributions to the Plan. Contributions to the Plan charged to expense for the years ended December 31, 1996, 1995 and 1994 were $88,000, $84,000 and $33,500, respectively. The Corporation also has a defined contribution employee stock ownership plan ("ESOP") which covers substantially all employees 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE J--EMPLOYEE RETIREMENT PLANS-- CONTINUED of the Corporation and 80% or more owned subsidiaries. Common stock purchases by the ESOP were financed by long-term debt (debt retired in 1996). ESOP contributions charged to expense in 1996, 1995 and 1994 approximated $131,000, $130,000 and $116,000 (including ESOP note payable interest of $8,400, $19,000 and $19,000), respectively. NOTE K--DEBT OBLIGATIONS Debt obligations consisted of the following:
December 31 1996 1995 ---------- ---------- Short-term borrowings from Federal Home Loan Bank $3,000,000 $3,000,000 Notes payable to unaffiliated bank 3,500,000 5,600,000 ESOP note payable to unaffiliated bank 111,877 ---------- ---------- $6,500,000 $8,711,877 ========== ==========
Short-term borrowings from Federal Home Loan Bank represent advances secured by certain portfolio residential real estate mortgage loans. These borrowings bear interest at various rates (5.84% at December 31, 1996) and are due at varying dates in 1997. Notes payable to unaffiliated bank represent borrowings under lines of credit aggregating up to $10 million. Under the terms of these credit facilities, up to $8 million is convertible into a term loan due in quarterly principal installments based on an eight-year amortization (plus interest at 7.5%). The remaining $2 million facility is a one-year revolving credit agreement which bears interest at prime rate (8.25% at December 31, 1996), payable quarterly. These credit facilities require the Corporation, among other things, to maintain certain minimum levels of capital, rates of return on assets and other ratios or requirements and are secured by the common stock of certain bank subsidiaries. Interest paid under these credit facilities approximated $342,000 in 1996, $474,000 in 1995 and $376,000 in 1994. 37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE L--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values and estimated fair values of financial instruments were as follows (in thousands):
December 31 1996 1995 -------------------------- ------------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ----------- ---------- ---------- ---------- Financial Assets: Cash and cash equivalents $ 63,333 $ 63,333 $ 45,331 $ 45,331 Loans held for resale 6,749 6,749 7,030 7,030 Investment securities: Available for sale 46,622 46,622 34,546 34,546 Held for long-term investment 2,103 2,103 1,783 1,783 ---------- ---------- ---------- ---------- 48,725 48,725 36,329 36,329 Portfolio loans: Fixed rate 212,286 212,341 152,301 152,702 Variable rate 145,337 145,330 131,170 132,908 --------- --------- ---------- --------- Total portfolio loans 357,623 357,671 283,471 285,610 Less allowance for loan losses (4,578) (4,578) (3,687) (3,687) ---------- ---------- ----------- ---------- Net portfolio loans 353,045 353,093 279,784 281,923 Financial liabilities: Deposits: Noninterest-bearing deposits 62,766 62,766 43,797 43,797 Interest-bearing deposits: Demand accounts 119,096 119,415 93,780 94,291 Time certificates of deposit less than $100,000 176,738 176,733 142,514 143,827 Time certificates of deposit of $100,000 or more 77,566 77,579 60,196 60,471 --------- --------- --------- --------- Total interest-bearing deposits 373,400 373,727 296,490 298,589 --------- --------- --------- --------- Total deposits 436,166 436,493 340,287 342,386 Debt obligations 6,500 6,500 8,712 8,712
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. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE M--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, consumer and mortgage loans. Stand-by letters of credit, when issued, commit the bank to make payments on behalf of customers when certain specified future events occur and are used infrequently by the banks ($6,338,000 and $3,493,000 outstanding at December 31, 1996 and 1995, respectively). Other loan commitments outstanding consist of unused lines of credit and approved, but unfunded, specific loan commitments ($83,565,000 and $59,646,000 at December 31, 1996 and 1995, 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, 1996 and 1995 were $1,463,000 and $1,044,000, respectively. NOTE N--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 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 of December 31, 1996, 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, 1996, 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 individual banks' and consolidated regulatory capital position as of December 31, 1996 and 1995: 39 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE N--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS--CONTINUED
Ann Arbor Bank Capitol Grand Macomb Oakland Paragon Commerce of National Haven Community Commerce Bank & Bank Tucson Bank Bank Bank Bank Trust ---------- --------- -------- -------- ---------- ----------- -------- December 31, 1996 - - ----------------- Total Capital to Total Assets: Actual Amount $ 6,655 $5,189 $ 8,020 $2,809 $3,587 $5,434 $4,484 Ratio 6.30% 30.04% 7.69% 8.58% 23.73% 7.64% 7.03% Minimum Required Amount >$ 4,226 >$1,382 > $ 4,170 >$2,618 > $1,210 >$2,844 >$2,550 - - - - - - - Ratio(1) > 4.00% > 8.00% > 4.00% > 8.00% > 8.00% > 4.00% > 4.00% - - - - - - - Tier I Capital to Risk-Weighted Assets: Actual Amount $ 6,657 $5,199 $8,035 $2,638 $3,588 $5,438 $4,414 Ratio 8.79% 67.12% 10.37% 11.82% 49.73% 10.10% 8.88% Minimum Required Amount >$ 3,028 >$ 310 > $3,100 >$ 893 > $ 289 >$2,154 >$1,988 - - - - - - - Ratio > 4.00% > 4.00% > 4.00% > 4.00% > 4.00% > 4.00% > 4.00% - - - - - - - Combined Tier I and Tier II Capital To Risk-Weighted Assets: Actual Amount $ 7,605 $5,248 $9,005 $2,940 $3,647 $6,093 $4,977 Ratio 10.05% 67.76% 11.62% 13.18% 50.55% 11.32% 10.01% Minimum Required Amount >$ 6,057 >$ 620 > $6,200 >$1,785 > $ 577 >$4,308 >$3,977 - - - - - - - Ratio > 8.00% > 8.00% > 8.00% > 8.00% > 8.00% > 8.00% > 8.00% - - - - - - - Amount Required to Meet "Well-Capitalized" Category >$ 7,571 >$ 775 > $7,751 >$2,231 $ 722 >$5,384 >$4,971 - - - - - - Ratio > 10.00% > 10.00% > 10.00% > 10.00% > 10.00% > 10.00% > 10.00% - - - - - - - Portage Capitol Commerce Bancorp Bank Ltd. Consolidated ---------- ---------- ------------ December 31, 1996 - - ----------------- Total Capital to Total Assets: Actual Amount $ 5,248 $40,159 $40,159 Ratio 7.11% 87.98% 8.16% Minimum Required Amount >$ 2,951 >$1,826 >$19,691 - - - Ratio(1) > 4.00% > 4.00% > 4.00% - - - Tier I Capital to Risk-Weighted Assets: Actual Amount $ 5,265 $37,775 $42,506 Ratio 9.56% 90.15% 11.91% Minimum Required Amount >$ 2,204 >$1,676 >$14,178 - - - Ratio > 4.00% > 4.00% > 4.00% - - - Combined Tier I and Tier II Capital To Risk-Weighted Assets: Actual Amount $ 5,955 $36,715 $45,645 Ratio 10.81% 87.62% 12.88% Minimum Required Amount >$ 4,407 >$3,352 $28,356 - - Ratio > 8.00% > 8.00% > 8.00% - - - Amount Required to Meet "Well-Capitalized" Category >$ 5,509 > n/a >$35,446 - - - Ratio > 10.00% > n/a > 10.00% - - - Ann Arbor Bank Capitol Grand Macomb Oakland Paragon Commerce of National Haven Community Commerce Bank & Bank Tucson Bank Bank Bank Bank Trust ---------- --------- -------- -------- ---------- ---------- -------- December 31, 1995 - - ----------------- Total Capital to Total Assets: Actual Amount $ 4,981 n/a $7,234 $2,647 n/a $5,192 $5,068 Ratio 6.46% n/a 7.39% 11.59% n/a 8.46% 9.11% Minimum Required Amount >$ 3,038 n/a > $3,905 >$1,674 n/a >$2,459 >$2,243 - - - - - Ratio(1) > 4.00% n/a > 4.00% > 8.00% n/a > 4.00% > 4.00% - - - - - Tier I Capital to Risk-Weighted Assets: Actual Amount $ 4,905 n/a $7,212 $2,426 n/a $5,201 $5,110 Ratio 8.78% n/a 10.11% 16.69% n/a 11.48% 12.00% Minimum Required Amount >$ 2,234 n/a > $2,854 >$ 582 n/a >$1,812 >$1,703 - - - - - Ratio > 4.00% n/a > 4.00% > 4.00% n/a > 4.00% > 4.00% - - - - - Combined Tier I and Tier II Capital To Risk-Weighted Assets: Actual Amount $ 5,603 n/a $8,270 $2,581 n/a $5,753 $5,604 Ratio 10.03% n/a 11.59% 17.75% n/a 12.70% 13.16% Minimum Required Amount >$ 4,469 n/a > $5,707 >$1,163 n/a >$3,624 >$3,406 - - - - - Ratio > 8.00% n/a > 8.00% > 8.00% n/a > 8.00% > 8.00% - - - - - Amount Required to Meet "Well-Capitalized" Category >$ 5,586 n/a > $7,134 >$1,454 n/a >$4,530 >$4,257 - - - - - Ratio > 10.00% n/a > 10.00% > 10.00% n/a > 10.00% > 10.00% - - - - - Portage Capitol Commerce Bancorp Bank Ltd. Consolidated ---------- ---------- ------------ December 31, 1995 - - ----------------- Total Capital to Total Assets: Actual Amount $ 4,729 $30,865 $30,865 Ratio 7.38% 72.27% 7.16% Minimum Required Amount >$ 2,561 >$ 1,522 >$15,363 - - - Ratio(1) > 4.00% > 4.00% > 4.00% - - - Tier I Capital to Risk-Weighted Assets: Actual Amount $ 4,723 $27,492 $27,492 Ratio 10.20% 80.02% 9.80% Minimum Required Amount >$ 1,853 >$ 1,374 >$11,224 - - - Ratio > 4.00% > 4.00% > 4.00% - - - Combined Tier I and Tier II Capital To Risk-Weighted Assets: Actual Amount $ 5,302 $27,071 $30,607 Ratio 11.45% 78.79% 10.91% Minimum Required Amount >$ 3,706 >$ 2,749 >$22,448 - - - Ratio > 8.00% > 8.00% > 8.00% - - - Amount Required to Meet "Well-Capitalized" Category >$ 4,632 > n/a >$28,060 - - - Ratio > 10.00% > n/a > 10.00% - - -
(1) As a condition of charter approval, certain de novo banks (Bank of Tucson, Grand Haven Bank and Macomb Community Bank) are required to maintain a ratio of capital to total assets of not less than 8% for the first three years of operations. 40 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE O--PARENT COMPANY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS
December 31 1996 1995 ------------- ------------- ASSETS Cash on deposit with subsidiary banks $ 8,980 $ 70,249 Money market funds on deposit with subsidiary banks 323,178 167,460 Investment securities held for long-term investment 293,264 293,264 Investment in subsidiaries 36,641,909 29,337,602 Notes receivable 1,152,500 1,200,000 Investment in and advances to Amera Mortgage Corporation 2,830,761 3,076,984 Equipment and furniture, net 138,317 123,500 Excess of cost over net assets of acquired subsidiaries 2,347,256 2,540,163 Other assets 1,911,447 1,230,345 ------------- ------------- TOTAL ASSETS $ 45,647,612 $ 38,039,567 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities $ 1,989,072 $ 1,462,363 Debt obligations payable to unaffiliated entities 3,500,000 5,711,877 Total liabilities ------------ ------------ 5,489,072 7,174,240 Stockholders' equity 40,158,540 30,865,327 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,647,612 $ 38,039,567 ============ ============
CONDENSED STATEMENTS OF INCOME
Year Ended December 31 1996 1995 1994 -------------- -------------- ------------- Income: Dividends from subsidiaries $ 2,690,000 $ 2,375,000 $ 1,175,000 Intercompany fees 2,045,901 1,415,760 1,184,100 Interest 182,127 173,460 73,812 Other 312,197 (91,419) 19,297 ------------- ------------ ------------- Total income 5,230,225 3,872,801 2,452,209 Expenses: Interest 386,145 485,865 431,885 Salaries and employee benefits 1,546,195 1,005,238 987,230 Occupancy 109,469 97,809 100,985 Amortization, equipment rent and depreciation 707,779 525,204 382,267 Other 653,273 485,801 372,173 ------------- ------------ ------------ Total expenses 3,402,861 2,599,917 2,274,540 ------------- ------------ ------------ 1,827,364 1,272,884 177,669 Equity in undistributed net earnings of consolidated subsidiaries 2,479,256 1,503,675 1,558,012 Federal income taxes (credit) (329,000) (296,000) (340,000) ------------- ------------ ------------ NET INCOME $ 4,635,620 $ 3,072,559 $ 2,075,681 ============= ============ ============
41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE O--PARENT COMPANY FINANCIAL INFORMATION--CONTINUED STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995 1994 ------------- ------------- -------------- OPERATING ACTIVITIES Net income $4,635,620 $ 3,072,559 $ 2,075,681 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed net earnings of subsidiaries (2,479,256) (1,503,675) (1,558,012) Depreciation and amortization 255,202 280,967 188,923 Loss (gain) on sale of equipment and furniture 168 (8,394) Decrease (increase) in notes and accounts receivable due from subsidiaries 2,500,175 (152,947) Decrease (increase) in other assets (681,101) (2,915,387) 194,379 Increase (decrease) in accounts payable, accrued expenses and other liabilities 526,709 884,980 (785,664) ------------ ----------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,257,342 2,311,225 (37,640) INVESTING ACTIVITIES Net cash investment in subsidiaries (5,201,523) (2,369,784) (1,575,439) Proceeds from sale of 51% interest in Amera Mortgage Corporation 250,000 Net decrease in note receivable due from Amera Mortgage Corporation 293,723 Purchases of investment securities (96,600) Proceeds from sales of equipment and furniture 3,952 14,226 960 Purchases of equipment and furniture (81,232) (38,040) (21,879) ------------ ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (4,985,080) (2,240,198) (1,596,358) FINANCING ACTIVITIES Net proceeds from (payments on) debt obligations (2,100,000) (1,100,000) 2,049,734 Net proceeds from issuance of common stock 6,271,482 1,741,031 228,392 Cash dividends paid and payments in lieu of fractional shares (1,349,295) (933,269) (771,058) ------------ ----------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,822,187 (292,238) 1,507,068 ------------ ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 94,449 (221,211) (126,930) Cash and cash equivalents at beginning of year 237,709 458,920 585,850 ------------ ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 332,158 $ 237,709 $ 458,920 ============ =========== ===========
42 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. AND SUBSIDIARIES NOTE P--COMPOSITION OF BUSINESS ACTIVITIES The Corporation and its subsidiaries are engaged in a single business--banking. Certain agencies have, however, suggested that bank holding companies engaged in certain related activities, such as mortgage banking, are engaged in more than one business "segment" for financial reporting purposes, even though such activities are deemed by other regulatory agencies as being not a separate or distinct "segment". Selected financial data regarding the composition of the Corporation's business activities are as follows:
Business Activity --------------------------------------------- Commercial Mortgage Corporate Banking Banking(a) and Other Consolidated --------------- --------------- ------------ -------------- Revenues--Interest and noninterest income: 1996 $ 37,869,240 $ (131,223) $ 446,144 $ 38,184,161 1995 31,052,123 466,351 (232,310) 31,286,164 1994 21,934,971 2,223,297 (89,987) 24,068,281 Operating income (loss) before amortization: 1996 7,601,377 (131,223) (396,627) 7,073,527 1995 6,226,453 (16,314) (1,050,079) 5,160,060 1994 5,047,395 (282,595) (886,387) 3,878,413 Income (loss) before income taxes: 1996 7,601,377 (131,223) (589,534) 6,880,620 1995 6,226,453 (145,371) (1,273,523) 4,807,559 1994 5,047,395 (794,492) (1,017,222) 3,235,681 Identifiable assets at December 31: 1996 483,651,036 2,830,761 5,781,547 492,263,344 1995 376,058,079 3,076,984 4,934,662 384,069,725 1994 309,513,210 5,479,016 1,320,216 316,312,442 Depreciation and amortization: 1996 590,408 255,202 845,610 1995 442,200 150,061 281,203 873,464 1994 375,442 596,273 190,339 1,162,054 Capital expenditures: 1996 3,575,211 81,232 3,656,443 1995 618,985 540 38,040 657,565 1994 329,224 19,199 20,919 369,342
(a) 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 (see Note B). 43 44 CAPITOL BANCORP LTD. BOARD OF DIRECTORS OFFICERS OF THE CORPORATION LOUIS G. ALLEN Private Banker JOSEPH D. REID LEE W. HENDRICKSON Bank of Bloomfield Hills Chairman, President and CEO Vice President and Chief Financial Officer PAUL R. BALLARD DAVID O'LEARY President and CEO Secretary CHARLES J. MCDONALD Portage Commerce Bank Vice President ROBERT C. CARR DAVID L. BECKER Executive Vice President LINDA D. PAVONA President and Treasurer Vice President Becker Insurance Agency, P.C. PAUL R. BALLARD MARIE D. WALKER ROBERT C. CARR Executive Vice President Vice President and Controller President and CEO Capitol National Bank DAVID K. POWERS FREDRICK H. WISSER Senior Vice President Vice President DOUGLAS E. CRIST President JOHN C. SMYTHE Developers of SW Florida, Inc. Senior Vice President RICHARD G. DORNER President and CEO SHAREHOLDER INFORMATION Ann Arbor Commerce Bank CORPORATE OFFICE One Business & Trade Center GARY A. FALKENBERG, D.O. 200 Washington Square North Physician Lansing, Michigan 48933 (517) 487-6555 JOEL I. FERGUSON President ANNUAL MEETING WLAJ TV 53, Inc. The 1997 Annual Meeting of Capitol Bancorp Ltd. will be held on Thursday, May 1, 1997 at 4:00 p.m. at the Lansing Center, 333 E. Michigan Avenue, Lansing, Michigan. KATHLEEN A. GASKIN Associate Broker/State Appraiser Tomie Raines, Inc. Realtors 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 H. NICHOLAS GENOVA reinvestment of dividends in additional common stock, direct deposit of Chairman and CEO dividends, ability to purchase as little as $50 in common stock as Washtenaw News Co., Inc. 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. LEWIS D. JOHNS Participation in the Program is voluntary, and all shareholders are President eligible. Purchases under the Program are not currently subject to any Mid-Michigan Investment Company brokerage fees or commissions. For further information regarding the Capitol Bancorp Ltd. Shareholder Investment Program or a copy of the Program MICHAEL L. KASTEN prospectus, informational brochure and enrollment materials contact UMB Managing Partner Bank, n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555. Kasten Investments, L.L.C. JAMES R. KAYE President and CEO STOCK TRADING INFORMATION Oakland Commerce Bank Common stock of Capitol Bancorp Ltd. trades on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the trading symbol "CBCL". LEONARD MAAS President The following brokerage firms make a market in the common stock of Capitol Gillisse Construction Company Bancorp Ltd.: LYLE W. MILLER Robert W. Baird & Co., Inc. Howe Barnes Investments, Inc. President Milwaukee, Wisconsin Chicago, Illinois Servco, Inc. EVEREN Securities, Inc. McDonald & Company Securities, Inc. DAVID O'LEARY Chicago, Illinois Cleveland, Ohio Chairman O'Leary Paint Company First of Michigan Corporation Roney & Co. Inc. Detroit, Michigan Detroit, Michigan JOSEPH D. REID Chairman, President and CEO Herzog, Heine, Geduld, Inc. Stifel, Nicolaus & Company, Inc. Capitol Bancorp Ltd. Detroit, Michigan St. Louis, Missouri TRANSFER AGENT UMB Bank, n.a. 928 Grand Avenue P.O. Box 410064 Kansas City, Missouri 64141-0064 (800) 884-4225 LEGAL COUNSEL Strobl and Borda, P.C. Reid and Reid Bloomfield Hills, Michigan Lansing, Michigan INDEPENDENT AUDITORS BDO Seidman, LLP Grand Rapids, Michigan
44 EX-21 4 SUBSIDIARIES 1 EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT CAPITOL BANCORP LTD. DECEMBER 31, 1996
STATE OR OTHER JURISDICTION NAME OF SUBSIDIARY OF INCORPORATION - - ------------------ ---------------- Consolidated Subsidiaries: - - -------------------------- Capitol National Bank United States (national bank) Portage Commerce Bank Michigan Ann Arbor Commerce Bank Michigan Oakland Commerce Bank Michigan Grand Haven Bank (85% owned) Michigan Paragon Bank & Trust Michigan Bank of Tucson (51% owned) Arizona Macomb Community Bank (51% owned) Michigan 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
The following summarizes regulatory agencies of the registrant and its subsidiaries: The Corporation's state-chartered banks located in Michigan (Portage Commerce Bank, Ann Arbor Commerce Bank, Oakland Commerce Bank, Paragon Bank & Trust, Grand Haven Bank and Macomb Community Bank) 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 of Tucson is regulated by the Arizona Corporation Division. Each of the Corporation's 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. In addition to the bank regulatory agencies, the registrant and its subsidiaries are subject to regulation by other state and federal agencies. EX-23 5 CONSENT 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 31, 1997, which appears on page 20 of Capitol Bancorp Ltd.'s Annual Report to shareholders for the year ended December 31, 1996, 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 15, 1997 Grand Rapids, Michigan EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 20,928 55 42,350 0 48,725 0 0 364,372 4,578 492,263 436,166 3,000 9,438 3,500 0 0 34,972 5,187 492,263 32,272 2,606 1,601 36,479 17,292 17,800 18,679 1,196 82 12,307 6,881 4,636 0 0 4,636 1.09 1.04 9.02 1,057 1,642 0 0 3,687 437 132 4,578 4,578 0 2,130
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