-----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, Eifxwbs3mVAkyFsW6ryYVAPXDxdWdK5ZSOBQXYdOEhLrQKufY3OOADvMzfP1umhl eUhYlTb/SbcPLqA8P0vzUg== 0000950124-99-004484.txt : 19990809 0000950124-99-004484.hdr.sgml : 19990809 ACCESSION NUMBER: 0000950124-99-004484 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITOL BANCORP LTD CENTRAL INDEX KEY: 0000840264 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 382761672 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18461 FILM NUMBER: 99680038 BUSINESS ADDRESS: STREET 1: ONE BUSINESS & TRADE CNTR STREET 2: 200 WASHINGTON SQ N CITY: LANSING STATE: MI ZIP: 48933 BUSINESS PHONE: 5174876555 MAIL ADDRESS: STREET 1: ONE BUSINESS & TRADE CENTER STREET 2: 200 WASHINGTON SQUARE NORTH CITY: LANSING STATE: MI ZIP: 48933 10-Q 1 QUARTERLY REPORT DATED 6/30/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to ----- Commission file number 33-24728C CAPITOL BANCORP LTD. (Exact name of registrant as specified in its charter) MICHIGAN 38-2761672 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) Number) 200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN (Address of principal executive offices) 48933 (Zip Code) (517) 487-6555 (Registrant's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, No par value: 6,344,886 shares outstanding as of July 31, 1999. Page 1 of 22 2 INDEX PART I. FINANCIAL INFORMATION FORWARD-LOOKING STATEMENTS Certain of the statements contained in this document, including the Corporation's consolidated financial statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and in documents incorporated into this document by reference that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of the Corporation and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements. The words "intend", "expect", "project", "estimate", "predict", "anticipate", "should", "believe", and similar expressions also are intended to identify forward-looking statements. Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of the Corporation's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting the Corporation's banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of the Corporation's banks and the Corporation's ability to respond to such actions, (ix) the cost of the Corporation's capital, which may depend in part on the Corporation's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, (xi) "Year 2000" computer, imbedded chip and data processing issues, and (xii) other risks detailed in the Corporation's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written or oral forward-looking statements attributable to the Corporation or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors. Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements. The Corporation undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events. Item 1. Financial Statements: Consolidated balance sheets - June 30, 1999 and December 31, 1998. Consolidated statements of income - Three months and six months ended June 30, 1999 and 1998. Consolidated statements of changes in stockholders' equity - Six months ended June 30, 1999 and 1998. Consolidated statements of cash flows - Six months ended June 30, 1999 and 1998. Notes to consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults Upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. SIGNATURES Page 2 of 22 3 PART I, ITEM I CAPITOL BANCORP LTD. Consolidated Balance Sheets As of June 30, 1999 and December 31, 1998
June 30 December 31 1999 1998 ----------------- ----------------- (in thousands) ASSETS Cash and due from banks $ 42,600 $ 45,263 Interest-bearing deposits with banks 9,632 1,732 Federal funds sold 80,370 104,050 ------------ ------------ Total cash and cash equivalents 132,602 151,045 Loans held for resale 19,777 36,789 Investment securities: Available for sale, carried at market value 67,994 83,597 Held for long-term investment, carried at amortized cost which approximates market value 3,718 2,867 ------------ ------------ Total investment securities 71,712 86,464 Portfolio loans: Commercial 713,658 590,351 Real estate mortgage 83,341 80,808 Installment 66,580 53,121 ------------ ------------ Total portfolio loans 863,579 724,280 Less allowance for loan losses (10,417) (8,817) ------------ ------------ Net portfolio loans 853,162 715,463 Premises and equipment, net 12,659 11,646 Accrued interest income 5,782 5,100 Excess of cost over net assets of acquired subsidiaries, net 2,051 2,626 Other assets 16,420 15,311 ------------ ------------ TOTAL ASSETS $ 1,114,165 $ 1,024,444 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 139,258 $ 120,986 Interest-bearing 830,551 769,904 ------------ ------------ Total deposits 969,809 890,890 Debt obligations -- Note F 25,200 23,600 Accrued interest on deposits and other liabilities 8,865 8,831 ------------ ------------ Total liabilities 1,003,874 923,321 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,273 24,255 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 35,875 27,576 STOCKHOLDERS' EQUITY Common stock, no par value: 25,000,000 shares authorized; 6,344,886 shares issued and outstanding 51,868 51,868 Retained earnings (516) (2,019) Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) (484) 168 ------------ ------------ 50,868 50,017 Less unallocated ESOP shares (725) (725) ------------ ------------ Total stockholders' equity 50,143 49,292 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,114,165 $ 1,024,444 ============ ============
Page 3 of 22 4 CAPITOL BANCORP LTD. Consolidated Statements of Income For the Three Months and Six Months Ended June 30, 1999 and 1998 (in thousands, except per share data)
Three Months Ended Six Months Ended June 30 June 30 ----------------------------------- -------------------------------- 1999 1998 1999 1998 -------------- --------------- --------------- -------------- Interest income: Portfolio loans (including fees) $ 19,312 $ 14,226 $ 36,915 $ 26,968 Loans held for resale 471 429 942 635 Taxable investment securities 1,006 963 1,971 1,883 Federal funds sold 982 1,080 2,349 2,184 Interest-bearing deposits with banks and other 147 58 232 102 -------------- --------------- --------------- -------------- Total interest income 21,918 16,756 42,409 31,772 Interest expense: Demand deposits 2,613 1,657 4,981 2,990 Savings deposits 365 360 722 732 Time deposits 6,982 6,106 14,031 11,678 Debt obligations and other 890 644 1,717 1,237 -------------- --------------- --------------- -------------- Total interest expense 10,850 8,767 21,451 16,637 -------------- --------------- --------------- -------------- Net interest income 11,068 7,989 20,958 15,135 Provision for loan losses 901 833 1,710 1,658 -------------- --------------- --------------- -------------- Net interest income after provision for loan losses 10,167 7,156 19,248 13,477 Noninterest income: Service charges on deposit accounts 403 290 726 545 Trust fee income 195 111 312 203 Fees from origination of non-portfolio residential mortgage loans 369 318 704 570 Realized gains (loss) on sale of investment securities available for sale (4) 2 17 2 Other 159 176 404 270 -------------- --------------- --------------- -------------- Total noninterest income 1,122 897 2,163 1,590 Noninterest expense: Salaries and employee benefits 4,853 3,037 9,476 5,893 Occupancy 819 493 1,602 1,026 Equipment rent, depreciation and maintenance 1,026 690 1,884 1,335 Deposit insurance premiums 47 27 76 57 Other 2,470 1,662 4,447 3,651 -------------- --------------- --------------- -------------- Total noninterest expense 9,215 5,909 17,485 11,962 -------------- --------------- --------------- -------------- Income before federal income taxes, minority interest and cumulative effect of change in accounting principle 2,074 2,144 3,926 3,105 Federal income taxes 930 795 1,695 1,193 -------------- --------------- --------------- -------------- Income before minority interest and cumulative effect of change in accounting principle 1,144 1,349 2,231 1,912 Credit resulting from minority interest in net losses of consolidated subsidiaries 359 35 611 105 -------------- --------------- --------------- -------------- NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 1,503 1,384 2,842 2,017 Change in accounting principle -- Note B (197) -------------- --------------- --------------- -------------- NET INCOME $ 1,503 $ 1,384 $ 2,645 $ 2,017 ============== =============== =============== ============== NET INCOME PER SHARE -- Note C
Page 4 of 22 5 CAPITOL BANCORP LTD. Consolidated Statements of Changes in Stockholders' Equity For the Six Months Ended June 30, 1999 and 1998 (in thousands)
Accumulated Other Unallocated Common Retained Comprehensive ESOP Stock Earnings Income Shares Total -------- ----------- ------------ ----------- ------ Six Months Ended June 30, 1998 - ------------------------------------------------------- Balances at January 1, 1998 $ 50,312 $ (4,553) $ 143 $ (870) $ 45,032 Cash dividends paid (1,043) (1,043) Net proceeds from issuance of common stock 81 81 Issuance of 33,205 shares of common stock in exchange for minority interest in majority-owned subsidiary 745 745 Components of comprehensive income: Net income for the period 2,017 2,017 Market value adjustment for investment securities available for sale (net of tax effect) (57) (57) -------- Comprehensive income for the period 1,960 -------- -------- -------- -------- -------- BALANCES AT JUNE 30, 1998 $ 51,138 $ (3,579) $ 86 $ (870) $ 46,775 ======== ======== ======== ======== ======== Six Months Ended June 30, 1999 - ------------------------------------------------------- Balances at January 1, 1999 $ 51,868 $ (2,019) $ 168 $ (725) $ 49,292 Cash dividends paid (1,142) (1,142) Components of comprehensive income: Net income for the period 2,645 2,645 Market value adjustment for investment securities available for sale (net of tax effect) (652) (652) -------- Comprehensive income for the period 1,993 -------- -------- -------- -------- -------- BALANCES AT JUNE 30, 1999 $ 51,868 $ (516) $ (484) $ (725) $ 50,143 ======== ======== ======== ======== ========
Page 5 of 22 6 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1999 and 1998
1999 1998 ------------ ---------- (in thousands) OPERATING ACTIVITIES Net income $ 2,645 $ 2,017 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 1,710 1,658 Depreciation of premises and equipment 1,362 828 Amortization of goodwill and other intangibles 575 216 Net accretion of investment security discounts (127) (55) Loss (gain) on sale of premises and equipment (2) 4 Minority interest in net losses of consolidated subsidiaries (611) (105) Cumulative effect of change in accounting principle 197 Originations and purchases of loans held for resale (197,678) (141,570) Proceeds from sales of loans held for resale 214,690 137,741 Increase in accrued interest income and other assets (1,634) (2,958) Increase in accrued interest and other liabilities 34 319 --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 21,161 (1,905) INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 2,500 500 Proceeds from maturities of investment securities available for sale 59,617 22,342 Purchases of investment securities available for sale (48,226) (25,133) Net increase in portfolio loans (139,408) (104,382) Proceeds from sales of premises and equipment 38 86 Purchases of premises and equipment (2,411) (1,417) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (127,890) (108,004) FINANCING ACTIVITIES Net proceeds from debt obligations 1,600 3,000 Resources provided by minority interests 8,910 7,479 Net proceeds from issuance of common stock 81 Cash dividends paid (1,142) (1,043) Net increase in demand deposits, NOW accounts and savings accounts 61,598 56,336 Net increase in certificates of deposit 17,320 87,783 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 88,286 153,636 --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,443) 43,727 Cash and cash equivalents at beginning of period 151,045 92,770 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 132,602 $ 136,497 ========= =========
Page 6 of 22 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CAPITOL BANCORP LTD. Note A - Basis of Presentation The accompanying condensed consolidated financial statements of Capitol Bancorp Ltd. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The statements do, however, include all adjustments of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Capitol considers necessary for a fair presentation of the interim periods. The results of operations for the six-month period ended June 30, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. The consolidated balance sheet as of December 31, 1998 was derived from audited consolidated financial statements as of that date. Certain 1998 amounts have been reclassified to conform to the 1999 presentation. Note B - Implementation of New Accounting Standards AICPA Statement of Position 98-5, Reporting on the Costs of Start-Up Activities, requires start-up, preopening and organizational costs to be charged to expense when incurred. The initial application of this statement, which became effective January 1, 1999, also requires the write-off of any such costs previously capitalized. Implementation of this new statement is shown as a cumulative effect adjustment in the first quarter of 1999. [The remainder of this page intentionally left blank] Page 7 of 22 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CAPITOL BANCORP LTD. - CONTINUED Note C - Net Income Per Share The computations of basic and diluted earnings per share were as follows:
Three Months Ended June 30 Six Months Ended June 30 ------------------------------- ----------------------------- 1999 1998 1999 1998 -------------- -------------- ----------- -------------- Numerator--net income for the period $ 1,502,912 $ 1,384,042 $ 2,645,057 $ 2,017,245 ============= ============= ============= ============= Denominator: Weighted average number of common shares outstanding (denominator for basic earnings per share) 6,344,886 6,267,211 6,344,886 6,253,999 Effect of dilutive securities--stock options 151,699 218,787 117,535 220,678 ------------- ------------- ------------- ------------- Denominator for dilutive net income per share-- Weighted average number of common shares and potential dilution 6,496,585 6,485,998 6,462,421 6,474,677 ============= ============= ============= ============= Net income per share: Before cumulative effect of change in accounting principle: Basic $ 0.24 $ 0.22 $ 0.45 $ 0.32 ============= ============= ============= ============= Diluted $ 0.23 $ 0.21 $ 0.44 $ 0.31 ============= ============= ============= ============= After cumulative effect of change in accounting principle: Basic $ 0.24 $ 0.22 $ 0.42 $ 0.32 ============= ============= ============= ============= Diluted $ 0.23 $ 0.21 $ 0.41 $ 0.31 ============= ============= ============= =============
Note D - New Bank and Pending Bank Applications East Valley Community Bank, located in Chandler, Arizona, opened on June 30, 1999. It is majority owned by Sun Community Bancorp Limited (Sun), Capitol's 51% owned subsidiary. As of June 30, 1999, applications were pending for two new banks, one in Nevada and one in Indiana. These entities are anticipated to open in the third calendar quarter of 1999. Note E - Prospective Impact of New Accounting Standards Not Yet Adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities requires all derivatives to be recognized in financial statements and to be measured at fair value. Gains and losses resulting from changes in fair value would be included in income, or in comprehensive income, depending on whether the instrument qualifies for hedge accounting and the type of hedging instrument involved. This new standard will become effective in 2001 and, because Capitol and its banks have not typically entered into derivative contracts either to hedge existing risks or for speculative purposes, is not expected to have a material effect on its financial statements. Page 8 of 22 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CAPITOL BANCORP LTD. - CONTINUED Note E - Prospective Impact of New Accounting Standards Not Yet Adopted - Continued A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to Capitol's financial statements. Note F - Subsequent Event In early July 1999, Sun completed an initial public offering of 1,650,000 shares of its common stock at $16.00 per share. In that offering, Capitol purchased 850,000 shares, at the same share price as the public, aggregating $13.6 million, maintaining its 51% ownership of Sun. Capitol's purchase of those Sun shares was funded by an increase in its credit facilities with an unaffiliated bank negotiated in June 1999. Page 9 of 22 10 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Total assets approximated $1.11 billion at June 30, 1999, an increase of $90 million from the December 31, 1998 level of $1.02 billion. The consolidated balance sheets include Capitol and its majority-owned subsidiaries. On June 30, 1999, one newly formed bank, East Valley Community Bank in Chandler, Arizona, was added to the consolidated group. Portfolio loans increased during the six-month period by approximately $139 million. Loan growth was funded primarily by higher levels of time deposits. The majority of portfolio loan growth occurred in commercial loans, which increased approximately $123 million, consistent with the banks' emphasis on commercial lending activities. The allowance for loan losses at June 30, 1999 approximated $10.4 million or 1.21% of total portfolio loans, a slight decrease from the year-end 1998 ratio of 1.22%. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio at the balance sheet date. Management's determination of the adequacy of the allowance is based on evaluation of the portfolio (including volume, amount and composition, potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, loan commitments outstanding and other factors. [The remainder of this page intentionally left blank] Page 10 of 22 11 The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the six month periods (in thousands):
1999 1998 ------------- -------------- Allowance for loan losses at January 1 $ 8,817 $ 6,229 Loans charged-off: Commercial 213 554 Real estate mortgage 9 Installment 40 52 ------------- ------------- Total charge-offs 253 615 Recoveries: Commercial 137 96 Real estate mortgage 3 1 Installment 3 4 ------------- ------------- Total recoveries 143 101 ------------- ------------- Net charge-offs 110 514 Additions to allowance charged to expense 1,710 1,658 ------------- ------------- Allowance for loan losses at June 30 $ 10,417 $ 7,373 ============= ============= Average total portfolio loans for period ended June 30 $ 786,594 $ 551,373 ============= ============= Ratio of net charge-offs to average portfolio loans outstanding 0.01% 0.09% ============= =============
For internal purposes, management allocates the allowance to all loan classifications. The amounts allocated in the following table (in thousands), which includes all loans for which management has concerns based on Capitol's loan rating system, should not be interpreted as an indication of future charge-offs. In addition, amounts allocated are not intended to reflect the amount that may be available for future losses.
June 30, 1999 December 31, 1998 -------------------------------- -------------------------------- % % Total Total Portfolio Portfolio Loans Loans ------------- ------------- Commercial $ 5,403 0.63% $ 4,501 0.62% Real estate mortgage 128 0.01 127 0.02 Installment 303 0.04 262 0.04 Unallocated 4,583 0.53 3,927 0.54 -------- ------- -------- ------- Total allowance for loan losses $ 10,417 1.21% $ 8,817 1.22% ======== ======= ======== ======= Total portfolio Loans outstanding $863,579 $724,280 ======== ========
Page 11 of 22 12 In addition to the allowance for loan losses, some loans to Michigan borrowers are enrolled in a state government loan program and have additional reserves established to provide for loss protection. At June 30, 1999, total loans under this program approximated $28.1 million. Reserves related to these loans, which are represented by earmarked funds on deposit at participating bank subsidiaries, approximated $2.1 million and are not included in the recorded allowance for loan losses. Impaired loans (i.e., loans for which there is a reasonable probability that borrowers would be unable to repay all principal and interest due under the contractual terms of the loan documents) were not material in 1998 and through June 30, 1999. Impaired loans include amounts owed to one of the Corporation's banks relating to a customer's checks drawn on uncollected funds which arose in early February 1998. The total of the customer's overdrafts at the bank subsidiary approximated $1.5 million. Management subsequently became aware that larger overdrafts occurred at other, unaffiliated, financial institutions (one of which subsequently filed suit against the bank subsidiary and remains pending). Based on management's analysis of the customer's loan collateral and amounts owing the bank by that customer, an estimated loss accrual and write-off of $600,000 was recorded at March 31, 1998 relating to the advances arising from uncollected funds. In addition, the bank increased its interim provision for loan losses at March 31, 1998 by $300,000 relating to that customer. Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) are summarized below (in thousands):
June 30 Dec 31 1999 1998 ------------- ------------- Nonaccrual loans: Commercial $ 5,953 $ 2,608 Real estate 199 Installment 101 185 ------------ ------------ Total nonaccrual loans 6,054 2,992 Past due (>90 days) loans: Commercial 1,400 3,963 Real estate 180 183 Installment 205 104 ------------ ------------ Total past due loans 1,785 4,250 ------------ ------------ Total nonperforming loans $ 7,839 $ 7,242 ============ ============
Nonperforming loans increased approximately $597,000 during the six-month period ended June 30, 1999. During this period, however, nonaccrual loans increased $3.1 million and past due loans on accrual status decreased $2.5 million as certain nonperforming loans were transferred to nonaccrual status during the first quarter of 1999. Most of that change (about $2 million) relates to one customer relationship of which $1.6 million is guaranteed by a governmental agency. Most of the other nonaccrual loans are a small number of loans in various stages of resolution which management believes to be adequately collateralized or otherwise appropriately recorded in its determination of the adequacy of the allowance for loan losses. Page 12 of 22 13 If nonperforming loans (including loans in nonaccrual status) had performed in accordance with their contractual terms, additional interest income of $361,000 and $194,000 would have been recorded for the six months ended June 30, 1999 and 1998, respectively. Interest income recognized on loans in nonaccrual status for these periods approximated $22,000 and $23,000, respectively. Other real estate owned (generally real estate acquired through foreclosure or a deed in lieu of foreclosure and classified as a component of other assets) approximated $413,000 at June 30, 1999 and $541,000 at December 31, 1998. The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming assets and allowance ratios (dollars in thousands):
Total Allowance for Nonperforming Allowance as a Percentage Portfolio Loans Loan Losses Loans of Total Portfolio Loans -------------------- ------------------ ------------------ -------------------------- June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 1999 1998 1999 1998 1999 1998 1999 1998 -------- --------- ------- ------- ------- ------- ------- ------- Ann Arbor Commerce Bank $ 168,122 $ 154,060 $ 2,270 $ 2,080 $ 732 $ 662 1.35% 1.35% Brighton Commerce Bank(1) 42,712 34,024 428 341 --- --- 1.00 1.00 Capitol National Bank 106,239 104,333 1,438 1,406 973 880 1.35 1.35 Detroit Commerce Bank(1) 13,258 506 133 6 --- --- 1.00 1.19 Grand Haven Bank 60,371 57,057 754 682 355 62 1.25 1.20 Kent Commerce Bank(1) 31,441 22,930 315 250 --- --- 1.00 1.09 Macomb Community Bank(1) 50,593 40,426 507 405 --- --- 1.00 1.00 Muskegon Commerce Bank(1) 31,832 24,491 319 245 258 1 1.00 1.00 Oakland Commerce Bank 70,869 63,261 822 724 1,788 2,032 1.16 1.14 Paragon Bank & Trust 68,449 63,417 868 732 2,967 2,936 1.27 1.15 Portage Commerce Bank 97,329 90,589 1,232 1,150 741 669 1.27 1.27 Sun Community Bancorp Limited: Bank of Tucson(1) 45,653 37,899 480 392 --- --- 1.05 1.03 Camelback Community Bank(1) 13,777 3,246 138 33 --- --- 1.00 1.02 Mesa Bank (1) 11,550 1,386 116 14 --- --- 1.00 1.01 Southern Arizona Community Bank(1) 9,410 2,925 95 30 --- --- 1.01 1.03 Sunrise Bank of Arizona(1) 9,402 1,745 95 18 --- --- 1.01 1.03 Valley First Community Bank(1) 29,368 20,879 307 209 25 --- 1.05 1.00 Other, net 3,204 1,106 100 100 --- --- --- --- --------- --------- ------- ------- ------ ------- ----- ----- Consolidated $ 863,579 $ 724,280 $10,417 $ 8,817 $7,839 $ 7,242 1.21% 1.22% ========= ========= ======= ======= ====== ======= ===== =====
n/a Not applicable (1) As a condition of charter approval, bank is required to maintain an allowance for loan losses of not less than 1% for the first three years of operations. Noninterest-bearing deposits approximated 14.4% of total deposits at June 30, 1999, a slight increase from the December 31, 1998 level of 13.6%. Levels of noninterest-bearing deposits fluctuate based on customers' transaction activity. [The remainder of this page intentionally left blank] Page 13 of 22 14 Results of Operations Net income from operations (before cumulative effect of an accounting change) for the six months ended June 30, 1999 amounted to $2.84 million ($.45 per basic share), an increase from the $2.02 million ($.32 per basic share) earned during the corresponding period of 1998. Operating results and total assets (in thousands) were as follows:
Six months ended June 30 ------------------------------------------------------------ Return on Return on Total Assets Net Income Beginning Equity Average Assets -------------------- ------------------ ----------------- ---------------- June 30 Dec 31 1999 1998 1999 1998 1999 1998 1999 1998 -------- -------- -------- ------- ------- ------ ------ ------- Ann Arbor Commerce Bank $ 197,846 $ 196,446 $ 1,258 $ 1,023 19.50% 20.97% 1.30% 1.42% Brighton Commerce Bank 50,006 42,871 208 (127) 11.20 n/a .87 n/a Capitol National Bank 125,891 136,776 1,028 977 21.06 21.97 1.62 1.66 Detroit Commerce Bank (1) 23,103 18,620 (241) n/a n/a n/a n/a n/a Grand Haven Bank 71,781 66,872 468 264 19.82 14.11 1.36 1.03 Kent Commerce Bank (1) 35,880 31,587 (62) (249) n/a n/a n/a n/a Macomb Community Bank 82,919 76,044 292 80 9.14 4.55 .74 .33 Muskegon Commerce Bank 37,300 28,552 10 (126) .80 n/a .06 n/a Oakland Commerce Bank 98,720 108,747 442 348 13.36 11.98 .87 .77 Paragon Bank & Trust 82,929 86,692 222 381 6.95 14.04 .53 .98 Portage Commerce Bank 111,131 110,867 865 603 22.23 19.82 1.59 1.22 Sun Community Bancorp Limited: Bank of Tucson 76,731 63,860 558 371 18.44 13.71 1.55 1.35 Camelback Community Bank (1) 26,414 10,017 (298) (45) n/a n/a n/a n/a East Valley Community Bank (2) 4,406 n/a 2 n/a n/a n/a n/a n/a Mesa Bank (1) 17,669 6,192 (150) n/a n/a n/a n/a n/a Southern Arizona Community Bank (1) 19,373 12,395 (274) n/a n/a n/a n/a n/a Sunrise Bank of Arizona (1) 15,033 5,411 (240) n/a n/a n/a n/a n/a Valley First Community Bank 36,984 36,588 96 (90) 4.81 n/a .50 n/a Nevada Community Bancorp Limited 10,000 n/a -- n/a n/a n/a n/a n/a Indiana Community Bancorp Limited 5,027 n/a -- n/a n/a n/a n/a n/a Other, net (14,978) (14,093) (1,539) (1,393) n/a n/a n/a n/a ---------- ---------- ------- ------- ------- ------ ------ ------ Consolidated $1,114,165 $1,024,444 $ 2,645 $ 2,017 10.73% 8.96% .50% .52% ========== ========== ======= ======= ======= ====== ====== ======
n/a Not applicable (1) Kent Commerce Bank, Camelback Community Bank, Southern Arizona Community Bank, Mesa Bank, Detroit Commerce Bank and Sunrise Bank of Arizona commenced operations in January, May, August, October and December 1998, respectively. (2) East Valley Community Bank commenced operations on June 30, 1999. Net interest income increased 38.5% during the six-month period versus the corresponding period of 1998 primarily due to growth in total assets and the number of banks within the consolidated group. Noninterest income increased to $2.16 million for the 1999 six-month period, as compared with $1.59 million in 1998. Service charge revenue and trust fee income both increased in the 1999 period by 33% and 54%. Provisions for loan losses were $1.71 million for the six months ended June 30, 1999 compared to $1.66 million during the corresponding 1998 period. The provisions for loan losses are based upon management's analysis of the allowance for loan losses, as previously discussed. Noninterest expense for the six months ended June 30, 1999 was $17.48 million compared with $11.96 million in 1998. The increase in noninterest expense is associated with newly formed banks, growth and increases in general operating costs. Increases in employee compensation and occupancy mostly relate to the growth in number of banks within the consolidated group. Page 14 of 22 15 Liquidity and Capital Resources The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $78.92 million for the six month 1999 period, compared to $144.12 million in 1998. Such growth occurred in all deposit categories, with the majority from time deposits. The Corporation's banks generally do not rely on brokered deposits as a key funding source; brokered deposits approximated $16.73 million as of June 30, 1999, or about 2% of total deposits. Interim 1999 deposit growth was deployed primarily into commercial loans, consistent with the banks' emphasis on commercial lending activities. Cash and cash equivalents amounted to $132.6 million or 12% of total assets at June 30, 1999 as compared with $151.05 million or 14.7% of total assets at December 31, 1998. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the banks' liquidity position at June 30, 1999 is adequate to fund loan demand and meet depositor needs. In addition to cash and cash equivalents, a source of long-term liquidity is the banks' marketable investment securities. Capitol's liquidity requirements have not historically necessitated the sale of investments in order to meet liquidity needs. It also has not engaged in active trading of its investments and has no intention of doing so in the foreseeable future. During the first six months of 1999, four available-for-sale securities aggregating $2.50 million were sold to meet liquidity needs at two banks. At June 30, 1999 and December 31, 1998, the Corporation had approximately $67.99 million and $83.6 million, respectively, of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise. Six of the banks, (Macomb Community Bank, Brighton Commerce Bank, Grand Haven Bank, Oakland Commerce Bank, Capitol National Bank and Ann Arbor Commerce Bank) have secured lines of credit with the Federal Home Loan Bank of Indianapolis. Borrowings thereunder approximated $8.50 million and additional borrowing capacity approximated $12.04 million at June 30, 1999. At June 30, 1999, the Corporation had unused lines of credit from an unrelated financial institution aggregating $18.3 million, including an increase in credit facilities negotiated in June. Borrowings increased in early July 1999 as a result of Capitol's investment in Sun's initial public offering. In late July 1999, Capitol filed a registration statement regarding a secondary common stock offering, the proceeds from which would be used to repay indebtedness, if completed. In early July 1999, Sun Community Bancorp completed an initial public offering of 1,650,000 shares of its common stock at $16.00 per share. Of the offering, Capitol purchased 850,000 shares, at the same share price as the public, aggregating $13.6 million, maintaining its 51% ownership of Sun. Page 15 of 22 16 Capitol's Board of Directors recently approved a third quarter cash dividend of $.09 per share (payable September 1, 1999 to shareholders of record as of August 1, 1999), following cash dividends of $.09 per share paid March 1 and June 1, 1999. Capitol and its banks are subject to complex regulatory capital requirements which require maintaining certain minimum capital ratios. These ratio measurements, in addition to certain other requirements, are used by regulatory agencies to determine the level of regulatory intervention and enforcement applied to financial institutions. Capitol and each of its banks are in compliance with the regulatory requirements and management expects to maintain such compliance. Capital, as a percentage of total assets, approximated 4.5% at June 30, 1999, a slight decrease from the beginning of the year ratio of 4.8%. Total capital funds (stockholders' equity, plus minority interests in consolidated subsidiaries and guaranteed preferred beneficial interests in the Corporation's subordinated debentures) aggregated $110.3 million or 9.9% of total assets at June 30, 1999. The following table summarizes the amounts and related ratios of individually significant subsidiaries (assets of $125 million or more at the beginning of 1999) and consolidated regulatory capital position at June 30, 1999:
Sun Ann Arbor Capitol Community Commerce National Bancorp Bank Bank Limited Consolidated ------------- -------------- --------------- --------------- Total capital to total assets: Minimum required amount > $ 7,914 > $ 5,036 > $ 7,926 > $ 44,567 - - - - Actual amount $ 13,944 $ 9,641 $ $25,835 $ 50,143 Ratio 7.05% 7.66% 13.04% 4.50% Tier I capital to risk-weighted assets: Minimum required amount(1) > $ 6,365 > $ 3,969 > $ 6,606 > $ 39,528 - - - - Actual amount $ 14,024 $ 9,677 $ 40,618 $ 108,643 Ratio 8.81% 9.75% 24.60% 10.99% Combined Tier I and Tier II capital to risk-weighted assets: Minimum required amount(2) > $ 12,730 > $ 7,938 > $ 13,212 > $ 79,056 - - - - Amount required to meet "Well-Capitalized" category(3) > $ 15,912 > $ 9,923 > $ 16,514 > $ 98,820 - - - - Actual amount $ 16,016 $ 10,920 $ 41,849 $ 119,030 Ratio 10.07% 11.01% 25.34% 12.05%
(1) The minimum required ratio of Tier I capital to risk-weighted assets is 4%. (2) The minimum required ratio of Tier I and Tier II capital to risk-weighted assets is 8%. (3) In order to be classified as a "well-capitalized" institution, the ratio of Tier I and Tier II capital to risk-weighted assets must be 10% or more. Capitol's operating strategy continues to be focused on the ongoing growth and maturity of its existing banks, coupled with new bank expansion in selected markets as opportunities arise. Accordingly, Capitol may invest in or otherwise add additional banks in future periods, subject to economic conditions and other factors, although the timing of such additional banking units, if any, is uncertain. Such future new banks and/or additions of other operating units could be either wholly-owned, majority-owned or otherwise controlled by Capitol. Plans to form additional banks in the states of Arizona, Nevada and Indiana were announced earlier this year. At June 30, 1999, applications were pending for two new banks, one in Nevada and one in Indiana. Page 16 of 22 17 Year 2000 The year 2000 issue confronting Capitol and its suppliers, customers, and competitors, centers on the inability of computer systems and embedded technology to properly recognize dates near the end of and beyond the year 1999. Capitol has been actively implementing a comprehensive plan throughout 1998 and 1999, as required by bank regulatory guidelines, to address potential impacts of the year 2000 issue on Capitol's information technology (IT) and non-IT systems. Capitol's year 2000 plans are subject to modification and are revised periodically as additional information is developed. READINESS. Capitol has completed the inventory, assessment, remediation and planning phases for its mission-critical IT and non-IT systems, which are those systems that pose risks to Capitol's ability to process data for its loans, deposits, general ledger, revenues and operating results. Of the 17 mission-critical systems, all have tested as being year 2000 compliant. Capitol recognizes that its ability to be year 2000 compliant is somewhat dependent upon the year 2000 efforts of its vendors. Capitol and its banks sent questionnaires to its significant vendors in 1998. Follow-up letters requesting additional information of the vendors' year 2000 readiness were sent when necessary. All mission-critical vendors have responded to the questionnaires or have otherwise represented that they are year 2000 compliant. Capitol also routinely monitors its nonmission-critical vendors to determine their level of year 2000 readiness. Capitol and its banks have been required by bank regulatory agencies to update their customers on the banks' year 2000 compliance efforts. Letters and informational brochures have been, and will continue to be, sent to customers heightening their awareness of the year 2000 issue and notifying them of the banks' efforts in addressing year 2000 issues. Compliance efforts are also communicated to customers on their account statements and through brochures available in bank lobbies. Capitol and its banks are also following regulatory requirements that require an assessment of loan customers' year 2000 readiness. Letters and questionnaires have been utilized to assess material loan customers' readiness based on the size of their loan type. The number of existing customers that have not responded to the letters and questionnaires is minimal. Follow-up letters or phone calls are being made when necessary to obtain additional information from these customers. Of those who have responded, all material customers represented that they are year 2000 compliant or are working toward compliance. The number of customers still working towards year 2000 compliance is minimal and, in Capitol's opinion, their inability to become compliant will not have a material adverse effect on Capitol's business or operating results. Capitol and its banks also monitor customers applying for new loans that exceed a certain dollar amount by requiring a written representation that the customer is year 2000 compliant. Page 17 of 22 18 WORST CASE SCENARIO AND CONTINGENCY PLANS. Capitol and its banks have determined the most reasonably likely worst case scenario is the possibility of the lack of power or communication services for a period of time in excess of one day. If this scenario were to occur, Capitol and its banks' operations could be interrupted. Capitol and its banks have developed plans and procedures to address this scenario, ranging from producing complete printed reports from the core banking systems prior to January 1, 2000, to ensure that a hard copy of the data is available in the event of a failure, to preparations for failures of voice and data communications through the use of manual posting and courier services, use of generators, alternative customer service locations and/or reduced lobby hours. Contingency planning, including the type discussed above, is an integral part of Capitol's year 2000 readiness plan. Capitol's contingency plans address alternative courses of action in the event that mission-critical systems do not function properly with the date change. Development of the contingency plans was recently completed. The year 2000 contingency plans will be tested during the third and fourth quarters of 1999 to validate the effectiveness of contingent procedures and refined as additional information becomes available. COSTS. The costs associated with Capitol's year 2000 compliance in 1999 are estimated at approximately $250,000, of which approximately $175,000 has been incurred through June 30, 1999. A similar amount was incurred in 1998. These costs principally relate to the added personnel costs, the employment of external consultants, and the purchase of software upgrades. These estimated costs are part of Capitol's information technology budget. Capitol's information technology staff and senior management have devoted significant time and resources to year 2000 activities. While this has resulted in allocating resources that would have otherwise been devoted to other information technology projects, no projects have been delayed or postponed that would have a material adverse impact on Capitol or its banks' operations. REGULATORY OVERSIGHT. Bank regulators have issued numerous statements and guidance on year 2000 compliance issues and the responsibilities of senior management and directors of banks and bank holding companies. In addition, the bank regulators have issued safety and soundness guidelines to be followed by insured depository institutions, including Capitol and its banks, to ensure resolution of any year 2000 problems. Periodic year 2000 reviews are performed by various bank regulatory agencies. Most of the recent examinations have been performed by the FDIC and it is expected that the FDIC will continue its frequent examinations throughout 1999. The banking regulatory agencies have asserted that year 2000 testing and certification is a key safety and soundness issue in conjunction with regulatory examinations. Consequently, Capitol's or its banks' failure to address appropriately the year 2000 issue could result in supervisory action, including the reduction of the banks' supervisory ratings, the denial of applications for expansion, or the imposition of civil money penalties. The Federal Financial Institutions Examination Council maintains an Internet site that lists financial institutions which have been subject to enforcement actions relating to year 2000 readiness. As of July 31, 1999, none of Capitol's banks are subject to enforcement actions for year 2000 readiness. Page 18 of 22 19 Impact of New Accounting Standards As discussed elsewhere herein, a new accounting standard requiring the write-off of previously capitalized start-up and preopening costs was implemented effective January 1, 1999. That standard requires that such costs be charged to expense, when incurred, in future periods. FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" requires all derivatives to be recognized in financial statements and to be measured at fair value. Gains and losses resulting from changes in fair value would be included in income, or in comprehensive income, depending on whether the instrument qualifies for hedge accounting and the type of hedging instrument involved. This new standard will become effective in 2001 and, because Capitol and its banks have not typically entered into derivative contracts either to hedge existing risks or for speculative purposes, is not expected to have a material effect on its financial statements. A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to Capitol's financial statements. Page 19 of 22 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on Capitol's consolidated financial position or results of operations. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. a. The following matters were submitted to a vote of the holders of common stock at the registrant's annual meeting of shareholders held May 4, 1999. b. Election of directors. Proxies for the meeting were solicited pursuant to Regulation 14, there was no solicitation in opposition to management's nominees as listed in the proxy statement and all of management's nominees were elected. c. A proposal to amend the registrant's articles of incorporation to increase the number of authorized shares of common stock from 10,000,000 to 25,000,000 shares. The proposal was approved by the following vote of the holders of Capitol's common stock (each share represents one vote): For 5,287,422 Against 414,235 Abstentions 9,747 d. Not applicable. Item 5. Other Information. None. Page 20 of 22 21 Item 6. Exhibits and reports on Form 8-K. (a) Exhibits: (27) Financial Data Schedule. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended June 30, 1999. Page 21 of 22 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITOL BANCORP LTD. (Registrant) \s\ Joseph D. Reid ---------------------------------- Joseph D. Reid Chairman, President and CEO (duly authorized to sign on behalf of the registrant) \s\ Lee W. Hendrickson ---------------------------------- Lee W. Hendrickson Executive Vice President and Chief Financial Officer Date: August 6, 1999 - -------------------- Page 22 of 22 23 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 42,600 9,632 80,370 0 71,712 0 0 883,356 10,417 1,114,165 969,809 25,200 8,865 0 0 0 51,868 (516) 1,114,165 37,857 2,050 2,502 42,409 19,734 21,451 20,958 1,710 17 16,874 4,537 2,842 0 (197) 2,645 .45 .44 4.22 6,054 1,785 0 0 8,817 253 143 10,417 10,417 0 4,583
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