-----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, GtSDVXj6x2mlmRDGQOVbNhrUfEyjBO5QIQjhwfdTfYykWzovU2L9Hrh5MXKheNEs Ckn6JmTS27rx8fFyo+hn9A== 0000950147-01-500884.txt : 20010516 0000950147-01-500884.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950147-01-500884 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: 1636349 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-6771.txt QUARTERLY REPORT FOR QTR ENDING 3-31-01 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, 2001 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 of (I.R.S. Employer 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: 7,803,836 shares outstanding as of April 30, 2001. 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, and (xi) 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, 2001 and December 31, 2000. 3 Consolidated statements of income - Three months ended March 31, 2001 and 2000. 4 Consolidated statements of changes in stockholders' equity - Three months ended March 31, 2001 and 2000. 5 Consolidated statements of cash flows - Three months ended March 31, 2001 and 2000. 6 Notes to consolidated financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 18 Item 2. Changes in Securities and Use of Proceeds. 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 1 CAPITOL BANCORP LTD. Consolidated Balance Sheets As of March 31, 2001 and December 31, 2000
March 31 December 31 2001 2000 ----------- ----------- (in thousands) ASSETS Cash and due from banks $ 80,636 $ 71,480 Interest-bearing deposits with banks 20,686 17,027 Federal funds sold 82,004 54,277 ----------- ----------- Cash and cash equivalents 183,326 142,784 Loans held for resale 38,943 21,322 Investment securities: Available for sale, carried at market value 42,283 62,292 Held for long-term investment, carried at amortized cost which approximates market value 6,707 6,634 ----------- ----------- Total investment securities 48,990 68,926 Portfolio loans: Commercial 1,275,418 1,173,736 Real estate mortgage 113,981 113,324 Installment 69,608 68,738 ----------- ----------- Total portfolio loans 1,459,007 1,355,798 Less allowance for loan losses (18,930) (17,449) ----------- ----------- Net portfolio loans 1,440,077 1,338,349 Premises and equipment 17,630 14,651 Accrued interest income 9,588 9,778 Excess of cost over net assets of acquired subsidiaries 6,157 6,348 Other assets 29,942 27,918 ----------- ----------- TOTAL ASSETS $ 1,774,653 $ 1,630,076 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 228,636 $ 209,023 Interest-bearing 1,299,126 1,191,876 ----------- ----------- Total deposits 1,527,762 1,400,899 Debt obligations 62,475 58,150 Accrued interest on deposits and other liabilities 21,060 13,721 ----------- ----------- Total liabilities 1,611,297 1,472,770 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,335 24,327 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 65,245 62,575 STOCKHOLDERS' EQUITY Common stock, no par value: 25,000,000 shares authorized; issued and outstanding: 2001 - 7,803,563 shares 2000 - 7,673,363 shares 67,436 65,939 Retained earnings 8,186 6,569 Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) 150 (108) ----------- ----------- 75,772 72,400 Less note receivable from exercise of stock options and unallocated ESOP shares (1,996) (1,996) ----------- ----------- Total stockholders' equity 73,776 70,404 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,774,653 $ 1,630,076 =========== ===========
Page 3 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Income For the Three Months Ended March 31, 2001 and 2000 (in thousands, except per share data) Three Months Ended March 31 --------------------------- 2001 2000 ------- -------- Interest income: Portfolio loans (including fees) $35,004 $ 26,370 Loans held for resale 597 96 Taxable investment securities 826 1,195 Federal funds sold 1,015 900 Interest-bearing deposits with banks and other 299 168 Dividends on investment securities 73 60 ------- -------- Total interest income 37,814 28,789 Interest expense: Demand deposits 4,314 3,366 Savings deposits 434 408 Time deposits 12,952 8,868 Debt obligations and other 1,663 1,382 ------- -------- Total interest expense 19,363 14,024 ------- -------- Net interest income 18,451 14,765 Provision for loan losses 1,624 1,362 ------- -------- Net interest income after provision for loan losses 16,827 13,403 Noninterest income: Service charges on deposit accounts 710 461 Trust fee income 483 262 Fees from origination of non-portfolio residential mortgage loans 602 297 Realized gain (loss) on sale of investment securities available for sale 3 (4) Other 325 311 ------- -------- Total noninterest income 2,123 1,327 Noninterest expense: Salaries and employee benefits 9,013 6,732 Occupancy 1,375 1,043 Equipment rent, depreciation and maintenance 1,036 948 Deposit insurance premiums 56 47 Other 3,918 3,453 ------- -------- Total noninterest expense 15,398 12,223 ------- -------- Income before federal income taxes and minority interest 3,552 2,507 Federal income taxes 1,431 897 ------- -------- Income before minority interest 2,121 1,610 Credit resulting from minority interest in net losses of consolidated subsidiaries 262 108 ------- -------- NET INCOME $ 2,383 $ 1,718 ======= ======== NET INCOME PER SHARE -- Note C Page 4 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2001 and 2000 (in thousands except share data)
Note Receivable from Exercise of Stock Accumulated Options and Other Unallocated Common Retained Comprehensive ESOP Stock Earnings Income Shares Total ------- ------- ------- ------- -------- 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 upon exercise of stock options 49 49 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 ======= ======= ======= ======= ======== THREE MONTHS ENDED MARCH 31, 2001 Balances at January 1, 2001 $65,939 $ 6,569 $ (108) $(1,996) $ 70,404 Proceeds from the sale of 130,000 shares of common stock and 32,500 warrants to purchase common stock 1,495 1,495 Issuance of 200 shares of common stock upon exercise of warrants 2 2 Cash dividends paid (766) (766) Components of comprehensive income: Net income for the period 2,383 2,383 Market value adjustment for investment securities available for sale (net of income tax effect) 258 258 -------- Comprehensive income for the period 2,641 ------- ------- ------- ------- -------- BALANCES AT MARCH 31, 2001 $67,436 $ 8,186 $ 150 $(1,996) $ 73,776 ======= ======= ======= ======= ========
Page 5 of 19 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2001 and 2000
2001 2000 --------- --------- (in thousands) OPERATING ACTIVITIES Net income $ 2,383 $ 1,718 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,624 1,362 Depreciation of premises and equipment 812 798 Amortization of goodwill and other intangibles 191 120 Net amortization (accretion) of investment security premiums (discounts) (13) 2 Loss (gain) on sale of premises and equipment 273 (3) Minority interest in net losses of consolidated subsidiaries (262) (108) Originations and purchases of loans held for resale (118,403) (25,527) Proceeds from sales of loans held for resale 100,782 31,190 Increase in accrued interest income and other assets (1,696) (390) Increase in accrued interest and other liabilities 7,339 11 --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (6,970) 9,173 INVESTING ACTIVITIES Proceeds from sale of investment securities available for sale 500 995 Proceeds from maturities of investment securities available for sale 26,913 32,868 Purchases of investment securities available for sale (7,074) (9,342) Net increase in portfolio loans (103,352) (82,686) Proceeds from sales of premises and equipment 104 12 Purchases of premises and equipment (4,168) (499) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (87,077) (58,652) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts and savings accounts 56,470 38,018 Net increase in certificates of deposit 70,393 45,225 Net borrowings (payments) on debt obligations 4,325 (13,300) Resources provided by minority interests 2,670 2,889 Net proceeds from issuance of common stock 1,497 49 Cash dividends paid (766) (620) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 134,589 72,261 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 40,542 22,782 Cash and cash equivalents at beginning of period 142,784 104,306 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 183,326 $ 127,088 ========= =========
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, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. The consolidated balance sheet as of December 31, 2000 was derived from audited consolidated financial statements as of that date. Certain 2000 amounts have been reclassified to conform to the 2001 presentation. NOTE B - NEW BANKS AND PENDING BANK APPLICATIONS Sunrise Bank of San Diego, located in San Diego, California, opened in January 2001. It is majority-owned by Sunrise Capital Corporation which is majority-owned by Sun Community Bancorp Limited, a subsidiary of Capitol. At March 31, 2001, efforts were underway for formation of new banks in California, Indiana and Nevada. [The remainder of this page intentionally left blank] Page 7 of 19 NOTE C - NET INCOME PER SHARE The computations of basic and diluted earnings per share were as follows: Three Months Ended March 31 --------------------------- 2001 2000 ---------- ---------- Numerator--net income for the period $2,383,000 $1,718,000 ========== ========== Denominator: Weighted average number of common shares outstanding (denominator for basic earnings per share) 7,676,292 6,853,096 Effect of dilutive securities--stock options 92,010 29,705 ---------- ---------- Denominator for dilutive net income per share-- Weighted average number of common shares and potential dilution 7,768,302 6,882,801 ========== ========== Net income per share: Basic $ 0.31 $ 0.25 ========== ========== Diluted $ 0.31 $ 0.25 ========== ========== NOTE D - PRIVATE PLACEMENT OF COMMON STOCK In March 2001, Capitol completed a private placement of 130,000 shares of common stock and 32,500 warrants (each such warrant permitting the holder to purchase one share of common stock prior to the expiration date of the warrant in March 2003). Proceeds from the offering approximated $1.5 million and will be used for debt retirement and additional investment in bank development activities. NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS 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 are 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 became effective January 1, 2001 and had no effect on Capitol's 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 8 of 19 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Total assets approximated $1.77 billion at March 31, 2001, an increase of $145 million from the December 31, 2000 level of $1.63 billion. The balance sheets include Capitol and its consolidated subsidiaries. Portfolio loans increased during the three-month period by approximately $103 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 $102 million, consistent with the banks' emphasis on commercial lending activities. Portfolio loan growth in 2001 is net of about $5.2 million of loans sold to other financial institutions. The allowance for loan losses at March 31, 2001 approximated $18.9 million or 1.30% of total portfolio loans, a slight increase from the year-end 2000 ratio of 1.29%. 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 9 of 19 The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands):
2001 2000 ---------- ---------- Allowance for loan losses at January 1 $ 17,449 $ 12,639 Loans charged-off: Commercial 229 175 Real estate mortgage 1 44 Installment 36 22 ---------- ---------- Total charge-offs 266 241 Recoveries: Commercial 114 86 Real estate mortgage 2 2 Installment 7 5 ---------- ---------- Total recoveries 123 93 ---------- ---------- Net charge-offs 143 148 Additions to allowance charged to expense 1,624 1,362 ---------- ---------- Allowance for loan losses at March 31 $ 18,930 $ 13,853 ========== ========== Average total portfolio loans for period ended March 31 $1,409,323 $1,092,668 ========== ========== 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, 2001 December 31, 2000 ------------------------ ---------------------- Percentage Percentage of Total of Total Portfolio Portfolio Amount Loans Amount Loans ---------- ----- ---------- ----- Commercial $ 9,687 0.66% $ 8,307 0.61% Real estate mortgage 147 0.01 147 0.01 Installment 585 0.04 551 0.04 Unallocated 8,511 0.58 8,444 0.62 ---------- ---- ---------- ---- Total allowance for loan losses $ 18,930 1.30% $ 17,449 1.29% ========== ==== ========== ==== Total portfolio loans outstanding $1,459,007 $1,355,798 ========== ========== Page 10 of 19 In addition to the allowance for loan losses, certain commercial loans in Michigan and Indiana are enrolled in state-sponsored loan programs and have additional reserves established to provide for loss protection. At March 31, 2001, total loans under these programs approximated $33.0 million. Reserves related to these loans, which are represented by earmarked funds on deposit at certain of the bank subsidiaries, approximated $1.5 million and are not included in the allowance for loan losses. In 2001, the Michigan agency announced revised plans to terminate its loan program in 2002. 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 2000 and through March 31, 2001. 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 2001 2000 -------- ------ Nonaccrual loans: Commercial $4,912 $4,082 Real estate 648 163 Installment 114 171 ------ ------ Total nonaccrual loans 5,674 4,416 Past due (>90 days) loans: Commercial 2,080 1,656 Real estate 491 534 Installment 187 151 ------ ------ Total past due loans 2,758 2,341 ------ ------ Total nonperforming loans $8,432 $6,757 ====== ====== Nonperforming loans increased approximately $1.7 million during the three-month period ended March 31, 2001. Most of the nonaccrual loans at March 31, 2001 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 $3.0 million at March 31, 2001 and $3.1 million at December 31, 2000. Page 11 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 Total Allowance for Nonperforming Percentage 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 2001 2000 2001 2000 2001 2000 2001 2000 ---------- ---------- -------- -------- ------ ------ ------- ------ Ann Arbor Commerce Bank $ 211,239 $ 208,114 $ 2,895 $ 2,810 $ 467 $ 799 1.37% 1.35% Brighton Commerce Bank 55,508 53,886 628 602 1.13 1.12 Capitol National Bank 130,719 130,384 1,861 1,757 1,637 805 1.42 1.35 Detroit Commerce Bank(1) 23,733 21,081 269 245 1 1.13 1.16 Grand Haven Bank 73,055 67,419 939 861 324 474 1.29 1.28 Kent Commerce Bank 43,039 40,346 487 444 56 73 1.13 1.10 Macomb Community Bank 91,011 86,886 1,015 964 1.12 1.11 Muskegon Commerce Bank 59,831 55,431 677 617 302 125 1.13 1.11 Oakland Commerce Bank 80,877 79,598 1,033 971 475 515 1.28 1.22 Paragon Bank & Trust 69,349 64,820 853 807 475 507 1.23 1.24 Portage Commerce Bank 114,049 112,674 1,525 1,496 2,820 1,651 1.34 1.33 Indiana Community Bancorp Limited: Elkhart Community Bank(1) 22,356 17,968 336 270 1.50 1.50 Goshen Community Bank(1) 5,690 2,383 86 36 1.51 1.51 Sun Community Bancorp Limited: Arrowhead Community Bank(1) 10,652 4,724 160 71 1.50 1.50 Bank of Tucson 78,541 75,359 1,099 1,023 22 1.40 1.36 Camelback Community Bank(1) 42,512 37,822 564 483 20 1.33 1.28 East Valley Community Bank(1) 26,969 25,937 419 357 1.55 1.38 Mesa Bank(1) 33,482 28,930 410 374 27 1.22 1.29 Southern Arizona Community Bank(1) 37,606 36,135 463 434 1.23 1.20 Valley First Community Bank 44,399 42,759 667 663 334 306 1.50 1.55 Yuma Community Bank(1) 6,984 800 105 13 1.50 1.62 Nevada Community Bancorp Limited: Black Mountain Community Bank(1) 23,590 17,052 354 257 240 241 1.50 1.41 Desert Community Bank(1) 35,159 29,426 527 441 1,071 1,089 1.50 1.50 Red Rock Community Bank(1) 44,596 38,666 669 586 1.50 1.52 Sunrise Capital Corporation: Sunrise Bank of Albuquerque(1) 23,561 16,259 318 238 1.35 1.46 Sunrise Bank of Arizona(1) 51,952 59,465 652 650 80 35 1.26 1.09 Sunrise Bank of San Diego(1) 17,078 231 1.35 Other, net 1,470 1,474 (312) (21) 109 109 ---------- ---------- -------- -------- ------ ------ ----- ----- Consolidated $1,459,007 $1,355,798 $ 18,930 $ 17,449 $8,432 $6,757 1.30% 1.29% ========== ========== ======== ======== ====== ====== ===== =====
- ---------- (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. RESULTS OF OPERATIONS Net income for the three months ended March 31, 2001 amounted to $2,383,000 ($.31 per share), an increase from the $1,718,000 ($.25 per share) earned from operations during the corresponding period of 2000. First quarter 2001 earnings were a new record level of revenue and net income. This period was benefited by strong bank performance coupled with earnings from Sun Community Bancorp, the southwestern bank development affiliate. Page 12 of 19 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 2001 2000 2001 2000 2001 2000 2001 2000 ---------- ---------- ------- ------- ------- ------- ----- ----- Ann Arbor Commerce Bank $ 250,560 $ 242,180 $ 925 $ 844 21.23% 21.84% 1.53% 1.56% Brighton Commerce Bank 64,476 62,431 117 122 8.65 10.41 .76 .86 Capitol National Bank 154,330 148,385 577 532 20.76 21.41 1.54 1.54 Detroit Commerce Bank 31,275 30,269 (31) (9) n/a n/a n/a n/a Grand Haven Bank 81,406 76,644 199 281 13.48 21.04 1.02 1.56 Kent Commerce Bank 46,559 45,288 7 (18) .54 n/a .06 n/a Macomb Community Bank 113,375 100,597 265 239 11.91 11.91 1.01 .88 Muskegon Commerce Bank 67,499 61,867 138 115 9.50 11.94 .83 .91 Oakland Commerce Bank 102,498 97,099 313 267 16.63 14.88 1.27 1.15 Paragon Bank & Trust 81,669 79,504 104 149 6.60 8.99 .52 .68 Portage Commerce Bank 129,482 128,802 409 462 17.10 20.90 1.26 1.47 Indiana Community Bancorp Limited: Elkhart Community Bank 28,142 24,259 (36) (87) n/a n/a n/a n/a Goshen Community Bank(1) 11,084 8,402 (111) n/a n/a n/a n/a n/a Sun Community Bancorp Limited: Arrowhead Community Bank(1) 12,553 8,091 (167) n/a n/a n/a n/a n/a Bank of Tucson 103,326 98,285 524 455 24.52 26.24 2.08 2.05 Camelback Community Bank 52,477 49,364 97 3 9.83 .36 .76 .04 East Valley Community Bank 35,969 34,393 (69) (201) n/a n/a n/a n/a Mesa Bank 40,752 36,529 76 2 7.48 .21 .78 .03 Southern Arizona Community Bank 44,049 40,156 46 3 4.71 .32 .44 .04 Valley First Community Bank 58,411 53,081 129 109 9.80 10.57 .93 1.00 Yuma Community Bank(1) 11,701 5,064 (180) n/a n/a n/a n/a n/a Nevada Community Bancorp Limited: Black Mountain Community Bank(1) 29,962 26,060 (33) (98) n/a n/a n/a n/a Desert Community Bank 42,144 35,511 43 (112) 3.87 n/a .44 n/a Red Rock Community Bank 58,275 44,193 189 (91) 9.44 n/a 1.46 n/a Sunrise Capital Corporation: Sunrise Bank of Albuquerque(1) 29,298 19,762 9 n/a .95 n/a .14 n/a Sunrise Bank of Arizona 61,338 63,930 119 23 9.30 2.18 .76 .27 Sunrise Bank of San Diego(2) 20,675 n/a (619) n/a n/a n/a n/a n/a Other, net 11,368 9,930 (657) (1,272) n/a n/a n/a n/a ---------- ---------- ------- ------- ------- ------- ----- ----- Consolidated $1,774,653 $1,630,076 $ 2,383 $ 1,718 13.54% 12.57% .56% .51% ========== ========== ======= ======= ======= ======= ===== =====
- ---------- n/a Not applicable (1) Commenced operations as DE NOVO banks in 2000. (2) Commenced operations as a DE NOVO bank in 2001. Net interest income increased 25.0% during the three-month period versus the corresponding period of 2000. This increase is attributable to the expansion in number of banks and the banks' growth. Noninterest income increased in 2001 to $2,123,000 for the three-month period, as compared with $1,327,000 in 2000. Service charge revenue and trust fee income both increased due to volume in the 2001 period by 54.0% and 84.4%, respectively, compared to 2000. Fees from origination of non-portfolio residential mortgage loans more than doubled in the 2001 period, compared to 2000, due to higher volume resulting from lower interest rates. Provisions for loan losses approximated $1,624,000 for the three months ended March 31, 2001 compared to $1,362,000 during the corresponding 2000 period. The provisions for loan losses are based upon management's analysis of the allowance for loan losses, as previously discussed. Page 13 of 19 Noninterest expense for the three months ended March 31, 2001 approximated $15 million compared with $12 million in 2000. 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 $126.9 million for the three- month 2001 period, compared to $83.2 million in 2000. 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 $84.8 million as of March 31, 2001, or about 6% of total deposits. Noninterest-bearing deposits approximated 15% of total deposits at March 31, 2001 and December 31, 2000. Levels of noninterest-bearing deposits fluctuate based on customers' transaction activity. Interim 2001 deposit growth was deployed primarily into commercial loans, consistent with the banks' emphasis on commercial lending activities. Cash and cash equivalents amounted to $183.3 million or 10.3% of total assets at March 31, 2001 as compared with $142.8 million or 8.8% of total assets at December 31, 2000. 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, 2001 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, 2001 and December 31, 2000, the banks had approximately $42 million and $62 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 2001, available-for-sale securities aggregating $500,000 were sold. Some of the Corporation's banks have secured lines of credit with Federal Home Loan Banks. Borrowings thereunder approximated $39 million and additional borrowing capacity approximated $17.8 million at March 31, 2001. At March 31, 2001, Capitol had unused lines of credit from an unrelated financial institution aggregating $11.5 million. Capitol's Board of Directors recently approved a second quarter cash dividend of $.10 per share (payable June 1, 2001 to shareholders of record as of May 1, 2001), following a cash dividend of $.10 per share paid March 1, 2001 ($.09 per share in the corresponding periods of 2000). Page 14 of 19 In March 2001, Capitol completed a private placement of 130,000 shares of common stock and 32,500 warrants (each such warrant permitting the holder to purchase one share of common stock prior to the expiration date of the warrant, March 2003). Proceeds from the offering approximated $1.5 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 4.2% at March 31, 2001, a slight decrease from the beginning of the year ratio of 4.3%. 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 $163.4 million or 9.20% of total assets at March 31, 2001. The following table summarizes the amounts and related ratios of individually significant subsidiaries (total assets of $130 million or more at the beginning of 2001) and consolidated regulatory capital position at March 31, 2001:
Sun Ann Arbor Capitol Community Commerce National Bancorp Bank Bank Limited Consolidated --------- -------- --------- ------------ Total capital to total assets: Minimum required amount >= $ 10,022 >= $ 6,173 >= $ 24,486 >= $ 70,986 Actual amount $ 18,196 $ 11,297 $ 53,037 $ 73,776 Ratio 7.26% 7.32% 8.66% 4.16% Tier I capital to risk-weighted assets: Minimum required amount(1) >= $ 8,302 >= $ 5,118 >= $ 20,521 >= $ 59,630 Actual amount $ 18,179 $ 11,307 $ 81,546 $157,025 Ratio 8.76% 8.84% 15.90% 10.53% Combined Tier I and Tier II capital to risk-weighted assets: Minimum required amount(2) >= $ 16,605 >= $ 10,235 >= $ 41,041 >= $119,260 Amount required to meet "Well-Capitalized" category(3) >= $ 20,756 >= $ 12,794 >= $ 51,301 >= $149,076 Actual amount $ 20,777 $ 12,909 $ 87,843 $175,659 Ratio 10.09% 10.01% 17.12% 11.78%
- ---------- (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 15 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. At March 31, 2001, plans were underway for formation of new banks in California, Indiana and Nevada. TRENDS AFFECTING OPERATIONS The most significant trends which can impact the financial condition and results of operations of financial institutions are changes in market rates of interest and changes in general economic conditions. Changes in interest rates, either up or down, have an impact on net interest income (plus or minus), depending on the direction and timing of such changes. At any point in time, there is an imbalance between interest rate-sensitive assets and interest rate-sensitive liabilities. This means that when interest rates change, the timing and magnitude of the effect of such interest rate changes can alter the relationship between asset yields and the cost of funds. In January 2001, the Open Market Committee of the Federal Reserve Board decreased interbank interest rates on two separate dates, for a total decrease of 100 basis points. In March 2001, another 50 basis points decrease was initiated by the Federal Reserve. Because variable rate loans reprice more rapidly than interest-bearing deposits, such market interest rate decreases compressed net interest margins at Capitol's banks in early 2001. As the Open Market Committee continues to influence interest rates and other economic policy in 2001, including the potential of additional rate decreases, net interest margins may become more compressed (having an adverse impact on earnings) as the year progresses. Start-up banks generally incur operating losses during their early periods of operations. Recently-formed start-up banks are expected to detract from consolidated earnings performance and additional start-up banks formed in 2001 and beyond will similarly negatively impact short-term profitability. Capitol's Board of Directors has determined to reduce the rate of start-ups in the near term in contrast to the previous three years. General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions. Widespread media reports of concerns about the health of the domestic economy have continued in early 2001. While local economic conditions appear to indicate a weakening environment, loan losses in this initial period of 2001 have remained approximately level with the prior year's period. In early 2001, however, nonperforming loans have increased and it is anticipated that levels of nonperforming loans and related loan losses may trend upward as economic conditions, locally and nationally, evolve. Page 16 of 19 IMPACT OF NEW ACCOUNTING STANDARDS 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 are 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 became effective January 1, 2001 and, because Capitol and its banks have not typically entered into derivative contracts either to hedge existing risks or for speculative purposes, it had no effect on Capitol's 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 AND USE OF PROCEEDS. 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: None (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended March 31, 2001. [The remainder of this page intentionally left blank] 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, 2001 Page 19 of 19 -----END PRIVACY-ENHANCED MESSAGE-----