-----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, R1Pea3oVZB5DK/XxodVqnuT8BzuMVXUSrw0qOXJGHda3v0JzB27k5XpSnC5Z1P2g hjpQbyWI6Np2QpW1WYy0Yg== 0000950147-00-000757.txt : 20000516 0000950147-00-000757.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950147-00-000757 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 634304 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 FOR THE QTR ENDED 3/31/00 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 March 31, 2000 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 organization) Identification Number) 200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN 48933 (Address of principal executive offices) (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: 6,901,392 shares outstanding as of April 30, 2000. Page 1 of 19 INDEX PART I. FINANCIAL INFORMATION FORWARD-LOOKING STATEMENTS Certain of the statements contained in this document, including Capitol'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 Capitol 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 Capitol's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol'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 Capitol's banks and Capitol's ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol'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 Capitol'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 Capitol 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. Capitol 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. Page ---- Item 1. Financial Statements: Consolidated balance sheets - March 31, 2000 and December 31, 1999. 3 Consolidated statements of income - Three months ended March 31, 2000 and 1999. 4 Consolidated statements of changes in stockholders' equity - Three months ended March 31, 2000 and 1999. 5 Consolidated statements of cash flows - Three months ended March 31, 2000 and 1999. 6 Notes to consolidated financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 18 Item 2. Changes in Securities. 18 Item 3. Defaults Upon Senior Securities. 18 Item 4. Submission of Matters to a Vote of Security Holders. 18 Item 5. Other Information. 18 Item 6. Exhibits and Reports on Form 8-K. 18 SIGNATURES 19 Page 2 of 19 PART I, ITEM I CAPITOL BANCORP LTD. Consolidated Balance Sheets As of March 31, 2000 and December 31, 1999
March 31 December 31 2000 1999 ----------- ----------- (in thousands) ASSETS Cash and due from banks $ 57,022 $ 41,757 Interest-bearing deposits with banks 7,116 12,025 Federal funds sold 62,950 50,524 ----------- ----------- Cash and cash equivalents 127,088 104,306 Loans held for resale 3,415 9,078 Investment securities: Available for sale, carried at market value 77,520 102,514 Held for long-term investment, carried at amortized cost which approximates market value 4,881 4,631 ----------- ----------- Total investment securities 82,401 107,145 Portfolio loans: Commercial 950,631 874,560 Real estate mortgage 98,964 96,000 Installment 82,147 78,644 ----------- ----------- Total portfolio loans 1,131,742 1,049,204 Less allowance for loan losses (13,853) (12,639) ----------- ----------- Net portfolio loans 1,117,889 1,036,565 Premises and equipment 14,088 14,396 Accrued interest income 7,595 7,206 Excess of cost over net assets of acquired subsidiaries 3,903 3,652 Other assets 23,353 23,639 ----------- ----------- TOTAL ASSETS $ 1,379,732 $ 1,305,987 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 164,605 $ 147,036 Interest-bearing 1,031,431 965,757 ----------- ----------- Total deposits 1,196,036 1,112,793 Debt obligations 34,100 47,400 Accrued interest on deposits and other liabilities 12,253 12,242 ----------- ----------- Total liabilities 1,242,389 1,172,435 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,300 24,291 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 56,037 54,593 STOCKHOLDERS' EQUITY Common stock, no par value: 25,000,000 shares authorized; issued and outstanding: 2000 - 6,900,376 shares 1999 - 6,769,521 shares 58,034 56,648 Retained earnings 2,166 1,068 Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) (1,053) (907) ----------- ----------- 59,147 56,809 Less note receivable from exercise of stock options and unallocated ESOP shares (2,141) (2,141) ----------- ----------- Total stockholders' equity 57,006 54,668 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,379,732 $ 1,305,987 =========== ===========
Page 3 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Income For the Three Months Ended March 31, 2000 and 1999 (in thousands, except per share data)
Three Months Ended March 31 ----------------------------- 2000 1999 -------- -------- Interest income: Portfolio loans (including fees) $ 26,370 $ 17,603 Loans held for resale 96 471 Taxable investment securities 1,195 965 Federal funds sold 900 1,367 Interest-bearing deposits with banks and other 168 52 Dividends on investment securities 60 33 -------- -------- Total interest income 28,789 20,491 Interest expense: Demand deposits 3,366 2,368 Savings deposits 408 357 Time deposits 8,868 7,049 Debt obligations and other 1,382 827 -------- -------- Total interest expense 14,024 10,601 -------- -------- Net interest income 14,765 9,890 Provision for loan losses 1,362 809 -------- -------- Net interest income after provision for loan losses 13,403 9,081 Noninterest income: Service charges on deposit accounts 461 323 Trust fee income 262 117 Fees from origination of non-portfolio residential mortgage loans 297 335 Realized gain (loss) on sale of investment securities available for sale (4) 21 Other 311 245 -------- -------- Total noninterest income 1,327 1,041 Noninterest expense: Salaries and employee benefits 6,732 4,623 Occupancy 1,043 783 Equipment rent, depreciation and maintenance 948 858 Deposit insurance premiums 47 29 Other 3,453 1,473 -------- -------- Total noninterest expense 12,223 7,766 -------- -------- Income before federal income taxes, minority interest and cumulative effect of change in accounting principle 2,507 2,356 Federal income taxes 897 765 -------- -------- Income before minority interest and cumulative effect of change in accounting principle 1,610 1,591 Credit (charge) resulting from minority interest in net losses (income) of consolidated subsidiaries 108 (252) -------- -------- NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 1,718 1,339 Cumulative effect of change in accounting principle -- Note B (197) -------- -------- NET INCOME $ 1,718 $ 1,142 ======== ========
NET INCOME PER SHARE -- Note D Page 4 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2000 and 1999 (in thousands except share data)
Note Receivable from Exercise of Stock Options Accumulated and Other Unallocated Common Retained Comprehensive ESOP Stock Earnings Income Shares Total -------- ------- ------- ------- ------- THREE MONTHS ENDED MARCH 31, 1999 Balances at January 1, 1999 $ 51,868 $(2,019) $ 168 $ (725) $49,292 Cash dividends paid (571) (571) Components of comprehensive income: Net income for the period 1,142 1,142 Market value adjustment for investment securities available for sale (net of income tax effect) (201) (201) ------- Comprehensive income for the period 941 -------- ------- ------- ------- ------- BALANCES AT MARCH 31, 1999 $ 51,868 $(1,448) $ (33) $ (725) $49,662 ======== ======= ======= ======= ======= THREE MONTHS ENDED MARCH 31, 2000 Balances at January 1, 2000 $ 56,648 $ 1,068 $ (907) $(2,141) $54,668 Issuance of 6,000 shares of common stock 49 49 upon exercise of stock options Issuance of 124,855 shares of common stock to acquire minority interest in bank subsidiary 1,337 1,337 Cash dividends paid (620) (620) Components of comprehensive income: Net income for the period 1,718 1,718 Market value adjustment for investment securities available for sale (net of income tax effect) (146) (146) ------- Comprehensive income for the period 1,572 -------- ------- ------- ------- ------- BALANCES AT MARCH 31, 2000 $ 58,034 $ 2,166 $(1,053) $(2,141) $57,006 ======== ======= ======= ======= =======
Page 5 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2000 and 1999
2000 1999 --------- --------- (in thousands) OPERATING ACTIVITIES Net income $ 1,718 $ 1,142 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,362 809 Depreciation of premises and equipment 798 657 Amortization of goodwill and other intangibles 120 515 Net amortization (accretion) of investment security discounts 2 (146) Gain on sale of premises and equipment (3) (6) Minority interest in net income (losses) of consolidated subsidiaries (108) 252 Cumulative effect of change in accounting principle 197 Originations and purchases of loans held for resale (25,527) (107,208) Proceeds from sales of loans held for resale 31,190 115,831 Increase in accrued interest income and other assets (390) (1,120) Increase (decrease) in accrued interest and other liabilities 11 (97) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,173 10,826 INVESTING ACTIVITIES Proceeds from sale of investment securities available for sale 995 1,500 Proceeds from maturities of investment securities available for sale 32,868 45,177 Purchases of investment securities available for sale (9,342) (42,127) Net increase in portfolio loans (82,686) (56,830) Proceeds from sales of premises and equipment 12 24 Purchases of premises and equipment (499) (779) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (58,652) (53,035) FINANCING ACTIVITIES Net payments on debt obligations (13,300) (6,900) Resources provided by minority interests 2,889 129 Net proceeds from issuance of common stock 49 Cash dividends paid (620) (571) Net increase in demand deposits, NOW accounts and savings accounts 38,018 36,344 Net increase in certificates of deposit 45,225 11,572 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 72,261 40,574 --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,782 (1,635) Cash and cash equivalents at beginning of period 104,306 151,045 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 127,088 $ 149,410 ========= =========
Page 6 of 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. NOTE A - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of Capitol Bancorp Ltd. ("Capitol") 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 three-month period ended March 31, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. The consolidated balance sheet as of December 31, 1999 was derived from audited consolidated financial statements as of that date. Certain 1999 amounts have been reclassified to conform to the 2000 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, required 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. NOTE C - NEW BANKS AND PENDING BANK APPLICATIONS Black Mountain Community Bank, located in Henderson, Nevada, opened in March 2000. It is majority-owned by Nevada Community Bancorp Limited which is majority-owned by Sun Community Bancorp Limited, a majority-owned subsidiary of Capitol. In early 2000, First California Northern Bancorp and First California Southern Bancorp were formed to facilitate bank development strategies in California. At March 31, 2000, applications were pending for a new bank in New Mexico. Page 7 of 19 NOTE D - NET INCOME PER SHARE The computations of basic and diluted earnings per share were as follows:
Three Months Ended March 31 -------------------------------- 2000 1999 ------------ ------------- Numerator--net income for the period $ 1,718,000 $ 1,142,000 ============ ============= Denominator: Weighted average number of common shares outstanding (denominator for basic earnings per share) 6,853,096 6,344,886 Effect of dilutive securities--stock options 29,705 159,941 ------------ ------------- Denominator for dilutive net income per share-- Weighted average number of common shares and potential dilution 6,882,801 6,504,827 ============ ============= Net income per share: Before cumulative effect of change in accounting principle: Basic $ 0.25 $ 0.21 ============ ============= Diluted $ 0.25 $ 0.21 ============ ============= After cumulative effect of change in accounting principle: Basic $ 0.25 $ 0.18 ============ ============= Diluted $ 0.25 $ 0.18 ============ =============
NOTE E - SUBSEQUENT EVENT In early May 2000, Capitol completed a private placement of approximately 275,000 shares of common stock and 55,000 warrants (each such warrant permitting the holder to purchase one share of common stock prior to the expiration date of the warrant in May 2002). Proceeds from the offering approximated $3 million and will be used for debt retirement and additional investment in bank development activities. Page 8 of 19 NOTE F - 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. 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. [The remainder of this page intentionally left blank] Page 9 of 19 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Total assets approximated $1.38 billion at March 31, 2000, an increase of $74 million from the December 31, 1999 level of $1.31 billion. The consolidated balance sheets include Capitol and its majority-owned subsidiaries. Portfolio loans increased during the three-month period by approximately $83 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 $76 million, consistent with the banks' emphasis on commercial lending activities. Portfolio loan growth in 2000 is net of about $10 million of loans sold to other financial institutions. The allowance for loan losses at March 31, 2000 approximated $13.9 million or 1.22% of total portfolio loans, a slight increase from the year-end 1999 ratio of 1.20%. 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 19 The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands): 2000 1999 ---------- -------- Allowance for loan losses at January 1 $ 12,639 $ 8,817 Loans charged-off: Commercial 175 102 Real estate mortgage 44 Installment 22 28 ---------- -------- Total charge-offs 241 130 Recoveries: Commercial 86 44 Real estate mortgage 2 2 Installment 5 1 ---------- -------- Total recoveries 93 47 ---------- -------- Net charge-offs 148 83 Additions to allowance charged to expense 1,362 809 ---------- -------- Allowance for loan losses at March 31 $ 13,853 $ 9,543 ========== ======== Average total portfolio loans for period ended March 31 $1,092,668 $751,348 ========== ======== Ratio of net charge-offs to average portfolio loans outstanding 0.01% 0.01% ========== ======== For internal purposes, management allocates the allowance to all loan classifications. The amounts allocated in the following table (in thousands), which includes all loans for which, based on Capitol's loan rating system management has concerns, should not be interpreted as an indication of future charge-offs. In addition, amounts allocated are not intended to reflect the amount that may be available for future losses. March 31, 2000 December 31, 1999 --------------------- ---------------------- Percentage Percentage of Total of Total Portfolio Portfolio Loans Loans ----- ----- Commercial $ 6,393 .56% $ 5,965 .57% Real estate mortgage 270 .02 165 .01 Installment 314 .03 385 .04 Unallocated 6,876 .61 6,124 .58 ---------- ----- ---------- ----- Total allowance for loan losses $ 13,853 1.22% $ 12,639 1.20% ========== ===== ========== ===== Total portfolio loans outstanding $1,131,742 $1,049,204 ========== ========== Page 11 of 19 In addition to the allowance for loan losses, certain loans to Michigan borrowers are enrolled in a state government loan program and have additional reserves established to provide for loss protection. At March 31, 2000, total loans under this program approximated $34.5 million. Reserves related to these loans, which are represented by earmarked funds on deposit at certain of the bank subsidiaries, approximated $2 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 1999 and through March 31, 2000. Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) are summarized below (in thousands): March 31 Dec 31 2000 1999 ------ ------ Nonaccrual loans: Commercial $3,261 $2,709 Real estate 2 103 Installment 138 100 ------ ------ Total nonaccrual loans 3,401 2,912 Past due (>90 days) loans: Commercial 1,443 834 Real estate 177 196 Installment 185 182 ------ ------ Total past due loans 1,805 1,212 ------ ------ Total nonperforming loans $5,206 $4,124 ====== ====== Nonperforming loans increased approximately $1.1 million during the three-month period ended March 31, 2000. Most of the nonaccrual loans at March 31, 2000 are a small number of loans in various stages of resolution which management believes to be adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses. If nonperforming loans (including loans in nonaccrual status) had performed in accordance with their contractual terms during the period, additional interest income of $93,000 and $150,000 would have been recorded for the three months ended March 31, 2000 and 1999, respectively. Interest income recognized on loans in nonaccrual status for those periods approximated $79,000 and $12,000, 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 $3.2 million at March 31, 2000 and $3.6 million at December 31, 1999. Page 12 of 19 The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming loans and certain ratios (dollars in thousands):
Allowance as a Percentage Total Allowance for Nonperforming of Total Portfolio Loans Loan Losses Loans Portfolio Loans ----------------------- ----------------- ----------------- ---------------- March 31 Dec 31 March 31 Dec 31 March 31 Dec 31 March 31 Dec 31 2000 1999 2000 1999 2000 1999 2000 1999 ---------- ---------- ------- ------- ------- ------- ---- ---- Ann Arbor Commerce Bank $ 192,157 $ 186,022 $ 2,594 $ 2,511 $ 416 $ 492 1.35% 1.35% Brighton Commerce Bank 47,047 46,673 486 467 1.03 1.00 Capitol National Bank 120,543 120,097 1,560 1,581 674 769 1.29 1.32 Detroit Commerce Bank(1) 20,786 20,694 215 209 1.03 1.01 Grand Haven Bank 63,122 61,498 823 802 407 257 1.30 1.30 Kent Commerce Bank(1) 41,420 36,429 427 365 1.03 1.00 Macomb Community Bank 77,993 69,570 780 696 9 1.00 1.00 Muskegon Commerce Bank(1) 47,600 41,848 491 419 37 13 1.03 1.00 Oakland Commerce Bank 81,472 77,192 1,029 880 1,483 1,504 1.26 1.14 Paragon Bank & Trust 69,754 69,752 819 804 35 64 1.17 1.15 Portage Commerce Bank 110,571 107,792 1,457 1,386 1,347 982 1.32 1.29 Indiana Community Bancorp Limited: Elkhart Community Bank(1) 6,041 4,042 73 48 1.21 1.19 Sun Community Bancorp Limited: Bank of Tucson 61,555 59,088 763 725 1.24 1.23 Camelback Community Bank(1) 27,510 22,731 293 228 1.07 1.00 East Valley Community Bank(1) 6,640 4,335 70 44 1.05 1.01 Mesa Bank(1) 23,519 18,884 247 189 1.05 1.00 Southern Arizona Community Bank(1) 24,732 20,610 260 207 1.05 1.00 Valley First Community Bank(1) 39,403 36,334 461 418 423 34 1.17 1.15 Nevada Community Bancorp Limited: Black Mountain Community Bank(1) 39 1 2.59 Desert Community Bank(1) 17,855 11,438 252 154 384 1.41 1.35 Red Rock Community Bank(1) 16,491 7,861 268 156 1.63 1.98 Sunrise Capital Corporation: Sunrise Bank of Arizona(1) 34,130 24,952 312 250 0.91 1.00 Other, net 1,362 1,362 172 100 ---------- ---------- ------- ------- ------- ------- ---- ---- Consolidated $1,131,742 $1,049,204 $13,853 $12,639 $ 5,206 $ 4,124 1.22% 1.20% ========== ========== ======= ======= ======= ======= ==== ====
(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 13.8% of total deposits at March 31, 2000, a slight increase from the December 31, 1999 level of 13.2%. Levels of noninterest-bearing deposits fluctuate based on customers' transaction activity. [The remainder of this page intentionally left blank] Page 13 of 19 Results of Operations Net income for the three months ended March 31, 2000 amounted to $1,718,000 ($.25 per share), an increase from the $1,339,000 ($.21 per share) earned from operations during the corresponding period of 1999. Net income in 1999, after the cumulative effect of a change in accounting principle, approximated $1,142,000 ($.18 per share). First quarter 2000 earnings were a new record level of income and net income per share. This period was benefited by strong bank performance coupled with earnings from Sun Community Bancorp, the southwestern bank development affiliate. Operating results (in thousands) were as follows:
Three months ended March 31 ------------------------------------------------------ Return on Return on Total Assets Net Income Beginning Equity Average Assets ------------------------ ---------------- ----------------- ---------------- March 31 Dec 31 2000 1999 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- ---- ---- Ann Arbor Commerce Bank $ 217,542 $ 214,955 $ 844 $ 580 21.84% 17.98% 1.56% 1.21% Brighton Commerce Bank 57,736 55,400 122 87 10.41 9.38 .86 .72 Capitol National Bank 137,615 133,179 532 506 21.41 20.74 1.54 1.58 Detroit Commerce Bank 28,670 28,160 (9) (140) n/a n/a n/a n/a Grand Haven Bank 72,538 72,915 281 229 21.04 19.39 1.56 1.37 Kent Commerce Bank 44,865 38,865 (18) (26) n/a n/a n/a n/a Macomb Community Bank 106,203 99,214 239 130 11.91 8.50 .88 .68 Muskegon Commerce Bank 52,817 47,405 115 (5) 11.94 n/a .91 n/a Oakland Commerce Bank 92,669 93,065 267 213 14.38 12.91 1.15 .83 Paragon Bank & Trust 86,336 87,259 149 96 8.99 5.98 .68 .45 Portage Commerce Bank 127,311 123,398 462 416 20.90 21.40 1.47 1.54 Indiana Community Bancorp Limited: Elkhart Community Bank(1) 14,582 10,798 (87) n/a n/a n/a n/a n/a Sun Community Bancorp Limited: Bank of Tucson 89,115 82,113 455 247 26.24 16.34 2.05 1.45 Camelback Community Bank 38,447 30,254 3 (177) .36 n/a .04 n/a East Valley Community Bank(1) 10,832 10,757 (201) n/a n/a n/a n/a n/a Mesa Bank 29,194 24,738 2 (92) .21 n/a .03 n/a Southern Arizona Community Bank 29,176 25,778 3 (142) .32 n/a .04 n/a Valley First Community Bank 45,558 45,678 109 49 10.57 4.88 1.00 .59 Nevada Community Bancorp Limited: Black Mountain Community Bank(2) 5,614 n/a (98) n/a n/a n/a n/a n/a Desert Community Bank(1) 23,592 17,839 (112) n/a n/a n/a n/a n/a Red Rock Community Bank(1) 20,486 15,596 (91) n/a n/a n/a n/a n/a Sunrise Capital Corporation: Sunrise Bank of Arizona 42,564 30,615 23 (113) 2.18 n/a .27 n/a Other, net 6,270 18,006 (1,272) (716) n/a n/a n/a n/a ---------- ---------- ------- ------ ----- ----- ----- ----- Consolidated $1,379,732 $1,305,987 $ 1,718 $1,142 12.57% 9.27% .51% .44% ========== ========== ======= ====== ===== ===== ===== =====
n/a Not applicable (1) Commenced operations as DE NOVO banks in 1999. (2) Commenced operations as a DE NOVO bank in 2000. Net interest income increased 49.3% during the three-month period versus the corresponding period of 1999. This increase is attributable to the expansion in number of banks and the banks' growth. Noninterest income increased in 2000 to $1,327,000 for the three-month period, as compared with $1,041,000 in 1999. Service charge revenue and trust fee income both increased in the 2000 period by 42.7% and 123.9%, respectively, compared to 1999. Provisions for loan losses approximated $1,362,000 for the three months ended March 31, 2000 compared to $809,000 during the corresponding 1999 period. The provisions for loan losses are based upon management's analysis of the allowance for loan losses, as previously discussed. Page 14 of 19 Noninterest expense for the three months ended March 31, 2000 approximated $12 million compared with $8 million in 1999. The increase in noninterest expense is associated with newly formed banks, growth and increases in general operating costs. Increases in both employee compensation and occupancy mostly relate to the growth in number of banks within the consolidated group. LIQUIDITY AND CAPITAL RESOURCES The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $83.2 million for the three month 2000 period, compared to $47.9 million in 1999. Such growth occurred in all deposit categories, with the majority coming from time deposits. Capitol's banks generally do not rely on brokered deposits as a key funding source; brokered deposits approximated $47 million as of March 31, 2000, or about 4% of total deposits. Interim 2000 deposit growth was deployed primarily into commercial loans, consistent with the banks' emphasis on commercial lending activities. Cash and cash equivalents amounted to $127.1 million or 9.2% of total assets at March 31, 2000 as compared with $104 million or 8% of total assets at December 31, 1999. 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 March 31, 2000 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. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements. The banks also have not engaged in active trading of their investments and have no intention of doing so in the foreseeable future. At March 31, 2000 and December 31, 1999, the banks had approximately $78 million and $103 million, respectively, of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise. During the first quarter of 2000, available-for-sale securities aggregating $1 million were sold. Eight of the Corporation's banks, (Capitol National Bank, Portage Commerce Bank, Paragon Bank & Trust, Macomb Community Bank, Brighton Commerce Bank, Grand Haven Bank, Oakland Commerce Bank and Ann Arbor Commerce Bank) have secured lines of credit with the Federal Home Loan Bank of Indianapolis. Borrowings thereunder approximated $15 million and additional borrowing capacity approximated $18.1 million at March 31, 2000. In February 2000, Capitol's borrowings under lines of credit from an unaffiliated bank were reduced through intercompany borrowings from Sun Community Bancorp Limited. At March 31, 2000, Capitol had unused lines of credit from an unrelated financial institution aggregating $15.9 million. Capitol's Board of Directors recently approved a second quarter cash dividend of $.09 per share (payable June 1, 2000 to shareholders of record as of May 1, 2000), following a cash dividend of $.09 per share paid March 1, 2000. Page 15 of 19 Effective January 31, 2000, the Corporation acquired the minority shares of Brighton Commerce Bank, previously a 59% owned bank subsidiary, in a share exchange transaction. Under the terms of the exchange, the Corporation issued approximately 125,000 previously unissued shares. As a result of the share exchange transaction, Brighton Commerce Bank became a wholly-owned subsidiary. In early May 2000, Capitol completed a private placement of approximately 275,000 shares of common stock and 55,000 warrants (each such warrant permitting the holder to purchase one share of common stock prior to the expiration date of the warrant, May 2002). Proceeds from the offering approximated $3 million and will be used for debt retirement and additional investment in bank development activities. 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. Stockholders' equity, as a percentage of total assets, approximated 4.1% at March 31, 2000, a slight decrease from the beginning of the year ratio of 4.2%. Total capital funds (Capitol's stockholders' equity, plus minority interests in consolidated subsidiaries, plus guaranteed preferred beneficial interests in the corporation's subordinated debentures) aggregated $137.3 million or 9.95% of total assets at March 31, 2000. The following table summarizes the amounts and related ratios of individually significant subsidiaries (assets of $130 million or more at the beginning of 2000) and consolidated regulatory capital position at March 31, 2000:
Sun Ann Arbor Capitol Community Commerce National Bancorp Bank Bank Limited Consolidated ---- ---- ------- ------------ Total capital to total assets: Minimum required amount >= $ 8,702 >= $ 5,505 >= $14,077 >= $ 55,189 Actual amount $15,729 $10,059 $50,087 $ 57,006 Ratio 7.23% 7.31% 14.23% 4.13% Tier I capital to risk-weighted assets: Minimum required amount(1) >= $ 7,214 >= $ 4,495 >= $13,231 >= $ 52,355 Actual amount $15,890 $10,143 $73,710 $ 134,459 Ratio 8.81% 9.03% 22.28% 10.27% Combined Tier I and Tier II capital to risk-weighted assets: Minimum required amount(2) >= $14,427 >= $ 8,990 >= $26,463 >= $104,710 Amount required to meet "Well-Capitalized" category(3) >= $18,034 >= $11,238 >= $33,079 >= $130,888 Actual amount $18,148 $11,550 $76,709 $148,312 Ratio 10.06% 10.28% 23.19% 11.33%
(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 develop 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. Page 16 of 19 CENTURY DATE CHANGE Throughout 1999, significant attention was drawn to the century date change and concerns about whether banks were prepared. What was predicted by some media to become a catastrophic disaster of computer failures, proved to be a nonevent. Capitol and its banks were well prepared, far in advance of the regulatory initiatives, and were pleased to celebrate the new year without any significant problems. Bank regulatory agencies have advised that they remain somewhat concerned about the banking industry on this matter for the remainder of 2000 and are likely to perform some limited follow-up examinations during the period. Management estimates additional future costs relating to the century date change will be minimal. 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. [The remainder of this page intentionally left blank] Page 17 of 19 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. None. Item 5. Other Information. None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits: (27) Financial Data Schedule. (b) Reports on Form 8-K: A report on Form 8-K was filed on January 14, 2000, reporting two related matters: Capitol is adding an acquisition strategy to its bank development activities. In recent years, Capitol has emphasized adding affiliated banks through DE NOVO, or start-up, activity. This successful emphasis has been key to expanding Capitol's group to include more than twenty banks in several states. Augmenting this focus is the new addition of an acquisition strategy which will enable Capitol to add banks in two ways--acquisition and start-up. Capitol announced the creation of a new management position to implement this additional bank development strategy. Michael M. Moran has joined Capitol as Executive Vice President of Corporate Development, to focus on acquisition opportunities. Mr. Moran has significant experience in the banking industry and was previously affiliated with the investment banking firm of Raymond James & Associates, Inc. and its predecessor, Roney & Co., in Detroit, Michigan. Page 18 of 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITOL BANCORP LTD. (Registrant) /s/ Joseph D. Reid ---------------------------------------- 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: May 15, 2000 Page 19 of 19 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 57,022 7,116 62,950 0 77,520 4,881 4,881 1,135,157 13,853 1,379,732 1,196,036 34,100 12,253 0 0 0 58,034 2,166 1,379,732 26,466 1,195 1,128 28,789 12,642 14,024 14,765 1,362 (4) 12,115 2,615 1,718 0 0 1,718 .25 .25 0 3,401 1,805 0 0 12,639 241 93 13,853 13,853 0 6,879
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