-----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, ElYXd0QtYnwKgX+CCmSjhiWr2xp2ZkQIa8B+teApQy9f/6NIgJzYMPD1gnZhtOBS /9vlTOVddPxZuZIkWZ+tsQ== /in/edgar/work/0000950147-00-500100/0000950147-00-500100.txt : 20001115 0000950147-00-500100.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950147-00-500100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITOL BANCORP LTD CENTRAL INDEX KEY: 0000840264 STANDARD INDUSTRIAL CLASSIFICATION: [6021 ] IRS NUMBER: 382761672 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18461 FILM NUMBER: 766723 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 e-5644.txt QUARTERLY REPORT FOR THE PERIOD ENDED 09/30/2000 ================================================================================ 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 September 30, 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 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: 7,171,893 shares outstanding as of October 31, 2000. ================================================================================ 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 - September 30, 2000 and December 31, 1999. 3 Consolidated statements of income - Three months and nine months ended September 30, 2000 and 1999. 4 Consolidated statements of changes in stockholders' equity - Nine months ended September 30, 2000 and 1999. 5 Consolidated statements of cash flows - Nine months ended September 30, 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 September 30, 2000 and December 31, 1999 September 30 December 31 2000 1999 ----------- ----------- (in thousands) ASSETS Cash and due from banks $ 73,101 $ 41,757 Interest-bearing deposits with banks 17,106 12,025 Federal funds sold 47,901 50,524 ----------- ----------- Total cash and cash equivalents 138,108 104,306 Loans held for resale 16,672 9,078 Investment securities: Available for sale, carried at market value 71,671 102,514 Held for long-term investment, carried at amortized cost which approximates market value 5,849 4,631 ----------- ----------- Total investment securities 77,520 107,145 Portfolio loans: Commercial 1,103,556 874,560 Real estate mortgage 110,698 96,000 Installment 83,748 78,644 ----------- ----------- Total portfolio loans 1,298,002 1,049,204 Less allowance for loan losses (16,415) (12,639) ----------- ----------- Net portfolio loans 1,281,587 1,036,565 Premises and equipment, net 14,728 14,396 Accrued interest income 8,963 7,206 Excess of cost over net assets of acquired subsidiaries, net 4,915 3,652 Other assets 25,930 23,639 ----------- ----------- TOTAL ASSETS $ 1,568,423 $ 1,305,987 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 192,518 $ 147,036 Interest-bearing 1,157,690 965,757 ----------- ----------- Total deposits 1,350,208 1,112,793 Debt obligations 53,075 47,400 Accrued interest on deposits and other liabilities 13,752 12,242 ----------- ----------- Total liabilities 1,417,035 1,172,435 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,318 24,291 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 63,860 54,593 STOCKHOLDERS' EQUITY Common stock, no par value: 25,000,000 shares authorized; issued and outstanding: 2000 - 7,171,893 shares 1999 - 6,769,521 shares 60,998 56,648 Retained earnings 4,909 1,068 Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) (556) (907) ----------- ----------- 65,351 56,809 Less unallocated ESOP shares and note receivable from sale of common stock (2,141) (2,141) ----------- ----------- Total stockholders' equity 63,210 54,668 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,568,423 $ 1,305,987 =========== =========== Page 3 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Income For the Three Months and Nine Months Ended September 30, 2000 and 1999 (in thousands)
Three Months Ended Nine Months Ended September 30 September 30 -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Interest income: Portfolio loans (including fees) $ 32,017 $ 21,741 $ 87,800 $ 58,656 Loans held for resale 345 256 617 1,198 Taxable investment securities 1,039 1,279 3,394 3,250 Federal funds sold 932 1,037 2,872 3,386 Interest-bearing deposits with banks and other 243 195 601 348 Dividends on investment securities 75 53 197 132 -------- -------- -------- -------- Total interest income 34,651 24,561 95,481 66,970 Interest expense: Demand deposits 4,144 2,952 11,278 7,933 Savings deposits 446 401 1,275 1,123 Time deposits 11,593 7,252 30,517 21,283 Debt obligations and other 1,278 1,195 4,099 2,912 -------- -------- -------- -------- Total interest expense 17,461 11,800 47,169 33,251 -------- -------- -------- -------- Net interest income 17,190 12,761 48,312 33,719 Provision for loan losses 1,630 1,221 4,996 2,931 -------- -------- -------- -------- Net interest income after provision for loan losses 15,560 11,540 43,316 30,788 Noninterest income: Service charges on deposit accounts 553 429 1,505 1,155 Trust fee income 240 147 772 459 Fees from origination of non-portfolio residential mortgage loans 526 358 1,082 1,062 Realized gain on sale of investment securities available for sale -- -- 110 17 Other 231 38 905 442 -------- -------- -------- -------- Total noninterest income 1,550 972 4,374 3,135 Noninterest expense: Salaries and employee benefits 7,453 5,604 21,262 15,080 Occupancy 1,256 939 3,403 2,541 Equipment rent, depreciation and maintenance 1,133 1,056 3,074 2,940 Deposit insurance premiums 61 39 174 115 Other 3,801 2,761 10,975 7,208 -------- -------- -------- -------- Total noninterest expense 13,704 10,399 38,888 27,884 -------- -------- -------- -------- Income before federal income taxes, minority interest and cumulative effect of change in accounting principle 3,406 2,113 8,802 6,039 Federal income taxes 1,149 755 3,041 2,450 -------- -------- -------- -------- Income before minority interest and cumulative effect of change in accounting principle 2,257 1,358 5,761 3,589 Credit (charge) resulting from minority interest in net losses (income) of consolidated subsidiaries (177) (22) (33) 589 -------- -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,080 1,336 5,728 4,178 Cumulative effect of change in accounting principle -- Note B -- -- -- (197) -------- -------- -------- -------- NET INCOME $ 2,080 $ 1,336 $ 5,728 $ 3,981 ======== ======== ======== ======== NET INCOME PER SHARE -- Note D
Page 4 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Changes in Stockholders' Equity For the Nine Months Ended September 30, 2000 and 1999 (in thousands)
Unallocated ESOP Shares Accumulated and Note Other Receivable Common Retained Comprehensive From Sale of Stock Earnings Income Common Stock Total -------- -------- -------- -------- -------- NINE MONTHS ENDED SEPTEMBER 30, 1999 Balances at January 1, 1999 $ 51,868 $ (2,019) $ 168 $ (725) $ 49,292 Issuance of 224,770 shares of common stock to acquire minority interest in bank subsidiary 3,004 3,004 Issuance of 199,865 shares of common stock upon exercise of stock options 1,777 (1,561) 216 Cash dividends paid (1,713) (1,713) Components of comprehensive income: Net income for the period 3,981 3,981 Market value adjustment for investment securities available for sale (net of tax effect) income tax effect) (766) (766) -------- Comprehensive income for the period 3,215 -------- -------- -------- -------- -------- BALANCES AT SEPTEMBER 30, 1999 $ 56,649 $ 249 $ (598) $ (2,286) $ 54,014 ======== ======== ======== ======== ======== NINE MONTHS ENDED SEPTEMBER 30, 2000 Balances at January 1, 2000 $ 56,648 $ 1,068 $ (907) $ (2,141) $ 54,668 Issuance of 10,734 shares of common stock upon exercise of stock options 83 83 Proceeds from sale of 266,783 shares of common stock and 53,352 warrants to purchase common stock 2,930 2,930 Issuance of 124,855 shares of common stock to acquire minority interest in bank subsidiary 1,337 1,337 Cash dividends paid (1,887) (1,887) Components of comprehensive income: Net income for the period 5,728 5,728 Market value adjustment for investment securities available for sale (net of income tax effect) 351 351 -------- Comprehensive income for the period 6,079 -------- -------- -------- -------- -------- BALANCES AT SEPTEMBER 30, 2000 $ 60,998 $ 4,909 $ (556) $ (2,141) $ 63,210 ======== ======== ======== ======== ========
Page 5 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2000 and 1999
2000 1999 --------- --------- (in thousands) OPERATING ACTIVITIES Net income $ 5,728 $ 3,981 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,996 2,931 Depreciation of premises and equipment 2,367 2,136 Amortization of goodwill and other intangibles 396 206 Net amortization (accretion) of investment security discounts (86) 65 Loss (gain) on sale of premises and equipment 7 (6) Minority interest in net income (losses) of consolidated subsidiaries 33 (589) Cumulative effect of change in accounting principle 197 Originations and purchases of loans held for resale (162,887) (258,062) Proceeds from sales of loans held for resale 155,293 288,522 Increase in accrued interest income and other assets (5,861) (8,723) Increase in accrued interest expense and other liabilities 1,510 832 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,496 31,490 INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 1,110 2,500 Proceeds from maturities of investment securities available for sale 60,675 66,969 Purchases of investment securities available for sale (31,542) (86,275) Net increase in portfolio loans (250,018) (228,713) Proceeds from sales of premises and equipment 21 105 Purchases of premises and equipment (2,727) (4,337) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (222,481) (249,751) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts and savings accounts 98,239 99,296 Net increase in certificates of deposit 139,176 50,275 Net proceeds from debt obligations 5,675 22,400 Resources provided by minority interests 10,571 26,277 Net proceeds from issuance of common stock and warrants 3,013 6 Cash dividends paid (1,887) (1,713) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 254,787 196,541 --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,802 (21,720) Cash and cash equivalents at beginning of period 104,306 151,045 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 138,108 $ 129,325 ========= =========
Page 6 of 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. SEPTEMBER 30, 2000 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 nine-month period ended September 30, 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 - CHANGE IN ACCOUNTING PRINCIPLE 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 was recorded 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 (Sun)., a consolidated subsidiary of Capitol. Sunrise Bank of Albuquerque, located in Albuquerque, New Mexico, opened in April 2000. It is a majority-owned subsidiary of Sunrise Capital Corporation which is majority-owned by Sun. Arrowhead Community Bank, located in Glendale, Arizona, opened in September 2000. It is majority-owned by Sun. Goshen Community Bank, located in Goshen, Indiana, opened in September 2000. It is majority-owned by Indiana Community Bancorp Limited, a consolidated subsidiary of Capitol. At September 30, 2000, applications were pending for new banks in Arizona and California. Page 7 of 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. SEPTEMBER 30, 2000 NOTE D - NET INCOME PER SHARE The computations of basic and diluted earnings per share were as follows:
Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Numerator--net income for the period $ 2,080,000 $ 1,336,000 $ 5,728,000 $ 3,981,000 =========== =========== =========== =========== Denominator: Weighted average number of common shares outstanding (denominator for basic earnings per share) 7,171,893 6,349,291 7,028,882 6,357,959 Effect of dilutive securities--stock options and warrants 27,904 -- 89,317 3,103 ----------- ----------- ----------- ----------- Denominator for diluted net income per share -- Weighted average number of common shares and potential dilution 7,199,797 6,349,291 7,118,199 6,361,062 =========== =========== =========== =========== Net income per share: Before cumulative effect of change in accounting principle: Basic $ 0.29 $ 0.21 $ 0.81 $ 0.66 =========== =========== =========== =========== Diluted $ 0.29 $ 0.21 $ 0.80 $ 0.66 =========== =========== =========== =========== After cumulative effect of change in accounting principle: Basic $ 0.29 $ 0.21 $ 0.81 $ 0.63 =========== =========== =========== =========== Diluted $ 0.29 $ 0.21 $ 0.80 $ 0.63 =========== =========== =========== ===========
NOTE E - PRIVATE PLACEMENT OF COMMON STOCK In May 2000, Capitol completed a private placement of approximately 267,000 shares of common stock and 53,400 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 $2.9 million. Page 8 of 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED CAPITOL BANCORP LTD. SEPTEMBER 30, 2000 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 $1.57 billion at September 30, 2000, an increase of $262 million from the December 31, 1999 level of $1.31 billion. The consolidated balance sheets include Capitol and its majority-owned subsidiaries. In March 2000, Black Mountain Community Bank located in Henderson, Nevada commenced operations and was added to the consolidated group as a majority-owned subsidiary of Nevada Community Bancorp Limited, a majority-owned subsidiary of Sun Community Bancorp Limited, which is a majority-owned subsidiary of Capitol. In April 2000, Sunrise Bank of Albuquerque commenced operations and was added to the consolidated group as a majority-owned subsidiary of Sunrise Capital Corporation, a majority-owned subsidiary of Sun. In September 2000, Arrowhead Community Bank located in Glendale, Arizona commenced operations and was added to the consolidated group as a majority-owned subsidiary of Sun. Also in September 2000, Goshen Community Bank commenced operations and was added to the consolidated group as a majority-owned subsidiary of Indiana Community Bancorp Limited, which is a majority-owned subsidiary of Capitol. Portfolio loans increased during the nine-month period by approximately $249 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 $229 million, consistent with the banks' emphasis on commercial lending activities. Portfolio loan growth in 2000 is net of about $19 million of loans sold to other financial institutions. The allowance for loan losses at September 30, 2000 approximated $16 million or 1.26% of total portfolio loans, an 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 1,445 540 Real estate mortgage 74 Installment 81 59 ---------- ---------- Total charge-offs 1,600 599 Recoveries: Commercial 358 371 Real estate mortgage 5 5 Installment 17 4 ---------- ---------- Total recoveries 380 380 ---------- ---------- Net charge-offs 1,220 219 Additions to allowance charged to expense 4,996 2,931 ---------- ---------- Allowance for loan losses at September 30 $ 16,415 $ 11,529 ========== ========== Average total portfolio loans for period ended September 30 $1,175,977 $ 827,574 ========== ========== Ratio of net charge-offs to average portfolio loans outstanding 0.10% 0.03% ========== ========== 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. September 30, 2000 December 31, 1999 -------------------- -------------------- Percentage Percentage of Total of Total Portfolio Portfolio Loans Loans ---------- ------- ---------- ------- Commercial $ 7,427 .57% $ 5,965 .57% Real estate mortgage 137 .01 165 .01 Installment 522 .04 385 .04 Unallocated 8,329 .64 6,124 .58 ---------- ------- ---------- ------- Total allowance for loan losses $ 16,415 1.26% $ 12,639 1.20% ========== ======= ========== ======= Total portfolio loans outstanding $1,298,002 $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 September 30, 2000, total loans under this program approximated $34.6 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 September 30, 2000. Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) are summarized below (in thousands): Sept 30 Dec 31 2000 1999 ------ ------ Nonaccrual loans: Commercial $4,422 $2,709 Real estate 419 103 Installment 225 100 ------ ------ Total nonaccrual loans 5,066 2,912 Past due (>90 days) loans: Commercial 1,106 834 Real estate 288 196 Installment 151 182 ------ ------ Total past due loans 1,545 1,212 ------ ------ Total nonperforming loans $6,611 $4,124 ====== ====== Nonperforming loans increased approximately $2.5 million during the nine-month period ended September 30, 2000. Most of the nonaccrual loans at September 30, 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. 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 $3.3 million at September 30, 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 ----------------------- ------------------- ------------------ ---------------- Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 2000 1999 2000 1999 2000 1999 2000 1999 ---------- ---------- -------- -------- -------- ------- ------ ------ Ann Arbor Commerce Bank $ 204,672 $ 186,022 $ 2,706 $ 2,511 $ 645 $ 492 1.32% 1.35% Brighton Commerce Bank 53,652 46,673 581 467 1.08 1.00 Capitol National Bank 128,928 120,097 1,747 1,581 862 769 1.36 1.32 Detroit Commerce Bank(1) 22,416 20,694 245 209 1.09 1.01 Grand Haven Bank 66,890 61,498 875 802 455 257 1.31 1.30 Kent Commerce Bank(1) 39,840 36,429 435 365 73 1.09 1.00 Macomb Community Bank 86,912 69,570 906 696 211 9 1.04 1.00 Muskegon Commerce Bank(1) 53,060 41,848 572 419 44 13 1.08 1.00 Oakland Commerce Bank 80,325 77,192 940 880 504 1,504 1.17 1.14 Paragon Bank & Trust 64,353 69,752 842 804 553 64 1.31 1.15 Portage Commerce Bank 114,305 107,792 1,523 1,386 1,600 982 1.33 1.29 Indiana Community Bancorp Limited: Elkhart Community Bank(1) 17,102 4,042 186 48 1.09 1.19 Goshen Community Bank(1) -- -- Sun Community Bancorp Limited: Arrowhead Community Bank 597 9 1.51 Bank of Tucson 69,156 59,088 891 725 387 1.29 1.23 Camelback Community Bank(1) 33,100 22,731 406 228 1.23 1.00 East Valley Community Bank(1) 20,219 4,335 250 44 1.24 1.01 Mesa Bank(1) 27,415 18,884 315 189 1.15 1.00 Southern Arizona Community Bank(1) 31,748 20,610 366 207 1.15 1.00 Valley First Community Bank 43,655 36,334 516 418 491 34 1.18 1.15 Nevada Community Bancorp Limited: 384 Black Mountain Community Bank(1) 13,596 204 1.50 Desert Community Bank(1) 27,521 11,438 413 154 50 1.50 1.35 Red Rock Community Bank(1) 35,080 7,861 526 156 1.50 1.98 Sunrise Capital Corporation: 320 Sunrise Bank of Albuquerque(1) 9,078 119 1.31 Sunrise Bank of Arizona(1) 52,314 24,952 542 250 32 1.04 1.00 Other, net 2,068 1,362 300 100 ---------- ---------- -------- -------- -------- ------- ------ ------ Consolidated $1,298,002 $1,049,204 $ 16,415 $ 12,639 $ 6,611 $ 4,124 1.26% 1.20% ========== ========== ======== ======== ======== ======= ====== ======
- ---------- (1) As a condition of charter approval, bank is generally required to maintain an allowance for loan losses of not less than 1% for the first three years of operations. RESULTS OF OPERATIONS Net income for the nine months ended September 30, 2000 amounted to $5.7 million ($.80 per diluted share), an increase from the $4.2 million ($.66 per diluted share) earned from operations during the corresponding period of 1999. Net income in the nine-month 1999 period, after the cumulative effect of a change in accounting principle, approximated $4.0 million ($.63 per diluted share). Third 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. Page 13 of 19 Operating results (dollars in thousands) were as follows:
Nine months ended September 30 ----------------------------------------------------------- Total Assets Return on Return on ----------------------- Net Income Beginning Equity Average Assets Sept 30 Dec 31 ------------------- ------------------ ---------------- 2000 1999 2000 1999 2000 1999 2000 1999 ---------- ---------- -------- -------- -------- ------- ------ ------ Ann Arbor Commerce Bank $ 229,934 $ 214,955 $ 2,616 $ 1,931 22.57% 19.96% 1.57% 1.30% Brighton Commerce Bank 66,864 55,400 357 349 10.16 12.55 .83 .94 Capitol National Bank 147,338 133,179 1,695 1,597 22.74 21.82 1.61 1.67 Detroit Commerce Bank 29,072 28,160 (2) (276) n/a n/a n/a n/a Grand Haven Bank 74,536 72,915 845 714 21.09 20.15 1.53 1.35 Kent Commerce Bank 42,104 38,865 80 (59) 3.03 n/a .25 n/a Macomb Community Bank 106,733 99,214 871 522 14.47 11.40 1.09 .85 Muskegon Commerce Bank 59,323 47,405 476 74 16.47 4.07 1.17 .27 Oakland Commerce Bank 96,922 93,065 687 708 12.33 14.27 .96 .95 Paragon Bank & Trust 86,742 87,259 268 333 5.39 6.94 .41 .53 Portage Commerce Bank 133,911 123,398 1,378 1,324 20.78 22.68 1.44 1.58 Indiana Community Bancorp Limited: Elkhart Community Bank(1) 21,150 10,798 (193) (103) n/a n/a n/a n/a Goshen Community Bank(2) 5,453 n/a (100) n/a n/a n/a n/a n/a Sun Community Bancorp Limited: Arrowhead Community Bank(2) 5,651 n/a (201) n/a n/a n/a n/a n/a Bank of Tucson 96,713 82,113 1,515 713 29.12 15.75 2.25 1.34 Camelback Community Bank 45,617 30,254 146 (518) 5.88 n/a .51 n/a East Valley Community Bank(1) 23,778 10,757 (474) (464) n/a n/a n/a n/a Mesa Bank 35,203 24,738 136 (210) 4.68 n/a .60 n/a Southern Arizona Community Bank 41,557 25,778 88 (498) 3.14 n/a .34 n/a Valley First Community Bank 51,949 45,678 183 43 5.91 1.40 .52 .16 Nevada Community Bancorp Limited: Black Mountain Community Bank(2) 19,622 n/a (396) n/a n/a n/a n/a n/a Desert Community Bank(1) 33,153 17,839 (152) (241) n/a n/a n/a n/a Red Rock Community Bank(1) 40,091 15,596 39 n/a n/a n/a n/a n/a Sunrise Capital Corporation: Sunrise Bank of Albuquerque(2) 13,232 n/a (309) n/a n/a n/a n/a n/a Sunrise Bank of Arizona 54,897 30,615 101 (551) 3.19 n/a .31 n/a Other, net 6,878 18,006 (3,926) (1,407) n/a n/a n/a n/a ---------- ---------- -------- -------- ------- ------- ------ ------ Consolidated $1,568,423 $1,305,987 $ 5,728 $ 3,981 13.97% 10.77% .53% .48% ========== ========== ======== ======== ======= ======= ====== ======
n/a Not applicable (1) Commenced operations as a DE NOVO bank in 1999. (2) Commenced operations as a DE NOVO bank in 2000. Net interest income increased 43% during the nine-month period versus the corresponding period of 1999. This increase is attributable to the larger number of banks and the banks' growth. Noninterest income increased in 2000 to $4.4 million for the nine-month period, as compared with $3.1 million in 1999. Service charge revenue and trust fee income both increased significantly in the 2000 period by 30% and 68%, respectively, compared to 1999. Provisions for loan losses approximated $5 million for the nine months ended September 30, 2000 compared to $2.9 million 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. Noninterest expense for the nine months ended September 30, 2000 approximated $38.9 million compared with $27.9 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. Page 14 of 19 LIQUIDITY AND CAPITAL RESOURCES The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $237.4 million for the nine month 2000 period, compared to $149.6 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 $62.3 million as of September 30, 2000, or about 4.6% of total deposits. Noninterest-bearing deposits approximated 14.3% of total deposits at September 30, 2000, an increase from the December 31, 1999 level of 13.2%. Levels of noninterest-bearing deposits fluctuate based on customers' transaction activity. 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 $138.1 million or 9% of total assets at September 30, 2000 as compared with $104.3 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 September 30, 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 September 30, 2000 and December 31, 1999, the banks had approximately $71.7 million and $102.5 million, respectively, of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise. The majority of the 2000 decrease in investment securities available for sale was due to maturities deployed into higher yielding loans. During the first quarter of 2000, available-for-sale securities aggregating $1 million were sold. Some of the Corporation's banks have secured lines of credit with the Federal Home Loan Bank of Indianapolis. Borrowings thereunder approximated $34.8 million and additional borrowing capacity approximated $21.5 million at September 30, 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 September 30, 2000, Capitol had unused lines of credit from an unrelated financial institution approximating $20 million. Capitol's Board of Directors recently approved a fourth quarter cash dividend of $.09 per share (payable December 1, 2000 to shareholders of record as of November 1, 2000), following cash dividends of $.09 per share paid March 1, June 1 and September 1, 2000. 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. Page 15 of 19 Effective June 30, 2000, Valley First Community Bank, a previously majority-owned subsidiary of Sun, became a wholly-owned subsidiary of Sun through a share exchange between Sun and Valley First's minority shareholders. In May 2000, Capitol completed a private placement of approximately 267,000 shares of common stock and 53,400 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 $2.9 million and have been 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 4.03% at September 30, 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 $151.4 million or 9.65% of total assets at September 30, 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 September 30, 2000:
Sun Ann Arbor Capitol Community Commerce National Bancorp Bank Bank Limited Consolidated -------- -------- -------- --------- Total capital to total assets: Minimum required amount >= $ 9,197 >= $ 5,894 >= $ 19,062 >= $ 62,737 Actual amount $ 17,028 $ 10,863 $ 52,568 $ 63,210 Ratio 7.41% 7.37% 11.03% 4.03% Tier I capital to risk-weighted assets: Minimum required amount(1) >= $ 7,672 >= $ 4,869 >= $ 16,062 >= $ 52,237 Actual amount $ 17,112 $ 10,906 $ 76,514 $ 146,993 Ratio 8.92% 8.96% 19.06% 11.26% Combined Tier I and Tier II capital to risk-weighted assets: Minimum required amount(2) >= $ 15,343 >= $ 9,737 >= $ 32,123 >= $ 104,474 Amount required to meet "Well-Capitalized" category(3) >= $ 19,179 >= $ 12,171 >= $ 40,154 >= $ 130,593 Actual amount $ 19,513 $ 12,430 $ 81,146 $ 163,317 Ratio 10.17% 10.21% 20.21% 12.51%
- ---------- (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. Page 16 of 19 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. 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. 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: No reports on Form 8-K were filed during the quarter ended September 30, 2000. 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: November 14, 2000 Page 19 of 19 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 fds.xfd FINANCIAL DATA SCHEDULE
9 1,000 9-MOS Jan-01-2000 Dec-31-2000 Sep-30-2000 1,568,423 73,101 17,106 47,901 0 71,671 5,849 5,849 1,314,674 16,415 1,350,208 53,075 13,752 0 0 0 60,998 4,909 1,568,423 88,417 3,394 3,670 95,481 43,070 47,169 48,312 4,996 110 38,888 8,769 5,728 0 0 5,728 0.81 0.8 0 5,066 1,545 0 0 12,639 1,600 380 4,996 16,415 0 8,329
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