10-Q 1 e-8733.txt QUARTERLY REPORT FOR THE QTR ENDED 06/30/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 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 (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: 10,706,465 shares outstanding as of July 15, 2002. Page 1 of 22 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 (unaudited): Consolidated balance sheets - June 30, 2002 and December 31, 2001. 3 Consolidated statements of income - Three months and six months ended June 30, 2002 and 2001. 4 Consolidated statements of changes in stockholders' equity - Six months ended June 30, 2002 and 2001. 5 Consolidated statements of cash flows - Six months ended June 30, 2002 and 2001. 6 Notes to consolidated financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 21 Item 2. Changes in Securities and Use of Proceeds. 21 Item 3. Defaults Upon Senior Securities. 21 Item 4. Submission of Matters to a Vote of Security Holders. 21 Item 5. Other Information. 21 Item 6. Exhibits and Reports on Form 8-K. 21 SIGNATURES 22 Page 2 of 22 PART I, ITEM 1 CAPITOL BANCORP LTD. Consolidated Balance Sheets As of June 30, 2002 and December 31, 2001
(Unaudited) June 30 December 31 2002 2001 ----------- ----------- (in thousands) ASSETS Cash and due from banks $ 111,758 $ 83,833 Money-market and mutual funds and interest-bearing deposits 26,053 10,999 Federal funds sold 81,849 68,859 ----------- ----------- Cash and cash equivalents 219,660 163,691 Loans held for resale 25,873 62,487 Investment securities: Available for sale, carried at market value 36,318 35,598 Held for long-term investment, carried at amortized cost which approximates market value 7,923 8,089 ----------- ----------- Total investment securities 44,241 43,687 Portfolio loans: Commercial 1,694,134 1,535,451 Real estate mortgage 127,362 121,676 Installment 76,280 77,462 ----------- ----------- Total portfolio loans 1,897,776 1,734,589 Less allowance for loan losses (26,310) (23,238) ----------- ----------- Net portfolio loans 1,871,466 1,711,351 Premises and equipment 17,159 16,441 Accrued interest income 10,085 9,471 Goodwill and other intangibles 15,390 8,527 Other assets 29,892 28,351 ----------- ----------- TOTAL ASSETS $ 2,233,766 $ 2,044,006 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 314,167 $ 272,593 Interest-bearing 1,594,192 1,467,792 ----------- ----------- Total deposits 1,908,359 1,740,385 Debt obligations 88,248 89,911 Accrued interest on deposits and other liabilities 15,008 14,244 ----------- ----------- Total liabilities 2,011,615 1,844,540 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES 51,551 48,621 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 40,377 70,673 STOCKHOLDERS' EQUITY Common stock, no par value, 25,000,000 shares authorized; issued and outstanding: 2002 - 10,705,378 shares 2001 - 7,829,178 shares 112,648 67,692 Retained earnings 19,273 14,173 Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) 153 158 ----------- ----------- 132,074 82,023 Less note receivable from exercise of stock options and unallocated ESOP shares (1,851) (1,851) ----------- ----------- Total stockholders' equity 130,223 80,172 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,233,766 $ 2,044,006 =========== ===========
Page 3 of 22 CAPITOL BANCORP LTD. Consolidated Statements of Income (Unaudited) For the Three Months and Six Months Ended June 30, 2002 and 2001 (in thousands, except per share data)
Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Interest income: Portfolio loans (including fees) $ 37,082 $ 36,504 $ 72,701 $ 71,508 Loans held for resale 500 637 1,234 1,234 Taxable investment securities 388 521 785 1,347 Federal funds sold 336 862 600 1,877 Other 255 370 496 742 -------- -------- -------- -------- Total interest income 38,561 38,894 75,816 76,708 Interest expense: Deposits 11,815 17,380 24,008 35,080 Debt obligations and other 2,325 1,801 4,564 3,464 -------- -------- -------- -------- Total interest expense 14,140 19,181 28,572 38,544 -------- -------- -------- -------- Net interest income 24,421 19,713 47,244 38,164 Provision for loan losses 2,684 1,697 4,774 3,321 -------- -------- -------- -------- Net interest income after provision for loan losses 21,737 18,016 42,470 34,843 Noninterest income: Service charges on deposit accounts 981 810 1,939 1,520 Trust fee income 639 526 1,170 1,009 Fees from origination of non-portfolio residential mortgage loans 1,478 789 2,371 1,391 Realized gains (losses) on sale of investment securities available for sale 46 -- (18) 3 Other 280 364 760 689 -------- -------- -------- -------- Total noninterest income 3,424 2,489 6,222 4,612 Noninterest expense: Salaries and employee benefits 11,776 9,730 22,803 18,743 Occupancy 1,622 1,328 3,142 2,703 Equipment rent, depreciation and maintenance 1,289 1,114 2,344 2,150 Other 4,353 3,919 9,544 7,893 -------- -------- -------- -------- Total noninterest expense 19,040 16,091 37,833 31,489 -------- -------- -------- -------- Income before federal income taxes and minority interest 6,121 4,414 10,859 7,966 Federal income taxes 2,151 1,370 3,694 2,801 -------- -------- -------- -------- Income before minority interest 3,970 3,044 7,165 5,165 Minority interest in net income of consolidated subsidiaries (57) (444) (208) (182) -------- -------- -------- -------- NET INCOME $ 3,913 $ 2,600 $ 6,957 $ 4,983 ======== ======== ======== ======== NET INCOME PER SHARE -- Note C Basic $ 0.37 $ 0.33 $ 0.75 $ 0.64 ======== ======== ======== ======== Diluted $ 0.35 $ 0.33 $ 0.73 $ 0.63 ======== ======== ======== ========
Page 4 of 22 CAPITOL BANCORP LIMITED Consolidated Statements of Changes in Stockholders' Equity (Unaudited) For the Six Months Ended June 30, 2002 and 2001 (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 --------- --------- ------------- ----------- --------- SIX MONTHS ENDED JUNE 30, 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 1,873 shares of common stock upon exercise of warrants 20 20 Issuance of 17,043 shares of common stock upon exercise of stock options 161 161 Cash dividends paid ($0.20 per share) (1,548) (1,548) Components of comprehensive income: Net income for the period 4,983 4,983 Market value adjustment for investment securities available for sale (net of income tax effect) 250 250 --------- Comprehensive income for the period 5,233 --------- --------- --------- --------- --------- BALANCES AT JUNE 30, 2001 $ 67,615 $ 10,004 $ 142 $ (1,996) $ 75,765 ========= ========= ========= ========= ========= SIX MONTHS ENDED JUNE 30, 2002 Balances at January 1, 2002 $ 67,692 $ 14,173 $ 158 $ (1,851) $ 80,172 Issuance of 2,721,749 shares of common stock to acquire shares of Sun Community Bancorp held by shareholders other than Capitol 43,160 43,160 Issuance of 86,136 shares of common stock upon exercise of stock options 963 963 Issuance of 52,717 shares of common stock upon exercise of warrants 583 583 Issuance of 15,598 shares of common stock in exchange for investment security 250 250 Cash dividends paid ($0.20 per share) (1,857) (1,857) Components of comprehensive income: Net income for the period 6,957 6,957 Market value adjustment for investment securities available for sale (net of income tax effect) (5) (5) --------- Comprehensive income for the period 6,952 --------- --------- --------- --------- --------- BALANCES AT JUNE 30, 2002 $ 112,648 $ 19,273 $ 153 $ (1,851) $ 130,223 ========= ========= ========= ========= =========
Page 5 of 22 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2002 and 2001
2002 2001 --------- --------- (in thousands) OPERATING ACTIVITIES Net income $ 6,957 $ 4,983 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 4,774 3,321 Depreciation of premises and equipment 1,655 1,692 Amortization of goodwill and other intangibles 133 386 Net amortization (accretion) of investment security premiums (discounts) 20 (31) Loss (gain) on sale of premises and equipment (1) 105 Minority interest in net income of consolidated subsidiaries 208 182 Originations and purchases of loans held for resale (373,681) (298,386) Proceeds from sales of loans held for resale 410,295 277,086 Decrease (increase) in accrued interest income and other assets (4,590) 1,298 Increase in accrued interest and other liabilities 764 1,033 --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 46,534 (8,331) INVESTING ACTIVITIES Proceeds from sale of investment securities available for sale 2,327 500 Proceeds from maturities of investment securities available for sale 26,462 43,298 Purchases of investment securities available for sale (29,370) (18,454) Net increase in portfolio loans (164,889) (209,218) Proceeds from sales of premises and equipment 51 292 Purchases of premises and equipment (2,423) (4,650) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (167,842) (188,232) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts and savings accounts 138,349 132,261 Net increase in certificates of deposit 29,625 96,417 Net borrowings from (payments on) debt obligations (1,663) 13,138 Net proceeds from issuance of trust-preferred securities 2,899 -- Resources provided by minority interests 8,383 3,663 Net proceeds from issuance of common stock 1,541 1,676 Cash dividends paid (1,857) (1,548) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 177,277 245,607 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 55,969 49,044 Cash and cash equivalents at beginning of period 163,691 142,784 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 219,660 $ 191,828 ========= =========
Page 6 of 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. NOTE A - BASIS OF PRESENTATION The accompanying unaudited 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 six-month period ended June 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. The consolidated balance sheet as of December 31, 2001 was derived from audited consolidated financial statements as of that date. Certain 2001 amounts have been reclassified to conform to the 2002 presentation. NOTE B - NEW BANKS Bank of Las Vegas, located in Las Vegas, Nevada, opened in February 2002. It is majority-owned by Nevada Community Bancorp Limited, which is majority-owned by Sun Community Bancorp Limited, a wholly-owned subsidiary of Capitol. Napa Community Bank, located in Napa, California, opened in March 2002. It is majority-owned by First California Northern Bancorp, which is majority-owned by Sun Community Bancorp Limited, a wholly-owned subsidiary of Capitol. Page 7 of 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. - CONTINUED NOTE C - NET INCOME PER SHARE The computations of basic and diluted earnings per share were as follows:
Three Months Ended June 30 Six Months Ended June 30 -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Numerator--net income for the period $ 3,913,000 $ 2,600,000 $ 6,957,000 $ 4,983,000 =========== =========== =========== =========== Denominator: Weighted average number of common shares outstanding (denominator for basic earnings per share) 10,685,203 7,807,442 9,300,756 7,742,229 Effect of dilutive securities--stock options and warrants 501,910 155,574 240,472 120,280 ----------- ----------- ----------- ----------- Denominator for dilutive net income per share-- Weighted average number of common shares and potential dilution 11,187,113 7,963,016 9,541,228 7,862,509 =========== =========== =========== =========== Number of antidilutive stock options excluded from diluted earnings per share computation 107,752 121,416 126,577 264,479 =========== =========== =========== ===========
NOTE D - SHARE EXCHANGE TRANSACTIONS In November 2001, the boards of directors of Capitol and Sun Community Bancorp Limited entered into a plan of share exchange. The plan of share exchange was approved by the shareholders of both Capitol and Sun at special meetings held in late March 2002. The share exchange was based on a fixed exchange ratio and resulted in Capitol issuing .734 shares of its previously unissued common stock for each common share of Sun's common stock held by shareholders other than Capitol, effective March 31, 2002. Capitol issued approximately 2.7 million shares of its common stock and 850,000 stock options resulting from the share exchange, for aggregate consideration approximating $43.2 million. This transaction has been accounted for as a purchase. Had the transaction occurred at the beginning of the periods presented, net income would have approximated $7.2 million ($0.66 per diluted share) and $5.1 million ($0.48 per diluted share) for the six months ended June 30, 2002 and 2001, respectively. Sun was previously included in Capitol's consolidated financial statements. The carrying value of assets and liabilities of Sun closely approximated their fair values at the date of the share exchange with Capitol. Identified intangible assets (principally core deposit intangibles) were estimated to approximate $2.7 million, and are being amortized over a period of approximately five years. Additionally, goodwill of approximately $4 million was recorded in conjunction with the share exchange and will not be amortized, but will be reviewed at least annually for impairment (see Note E). Page 8 of 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. - CONTINUED NOTE D - SHARE EXCHANGE TRANSACTIONS - CONTINUED As of June 30, 2002, potential share exchange transactions were pending regarding the minority shareholders of Indiana Community Bancorp Limited and Sunrise Capital Corporation which, if completed, would result in Capitol issuing approximately 450,000 additional shares of common stock and those majority-owned subsidiaries becoming wholly-owned. NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statement No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement No. 141 requires that all business combinations be accounted for under a prior standard of purchase accounting, eliminating the so-called pooling-method which was used to account for some business combinations. This standard did not have a material effect on Capitol's consolidated financial statements. Statement No. 142 requires that goodwill no longer be amortized and charged against earnings, but instead be reviewed for impairment. Amortization of goodwill ceased upon adoption of the Statement on January 1, 2002. This new standard requires that goodwill be reviewed annually for impairment and, accordingly, impairment adjustments of goodwill be charged against earnings, if and when determined. Capitol's previous business combinations (generally, acquisitions of minority interests) have been accounted for using the purchase method. As of June 30, 2002, the net carrying amount of reporting-unit goodwill approximated $12.8 million and other intangible assets approximated $2.6 million. Upon implementation, this new standard has not had a material effect on Capitol's consolidated financial statements, other than the elimination of goodwill amortization. Statement No. 142 requires that intangible assets not subject to amortization, such as Capitol's reporting-unit goodwill, be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Such potential impairment is measured by comparing the fair value of a reporting unit with its carrying amount within the consolidated group. When goodwill is reviewed for potential impairment, impairment losses must be charged against earnings if and when determined. Substantially all of Capitol's recorded reporting-unit goodwill relates to acquisitions of minority interests in consolidated subsidiaries. Such acquisitions have been made at modest premiums in relation to the underlying fair value of net assets when acquired. Based on management's review of recorded reporting-unit goodwill at the transition date for Statement No. 142, January 1, 2002, no impairment losses were identified as of that date. Page 9 of 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. - CONTINUED NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS - CONTINUED Paragraph 61 of Statement No. 142 requires supplemental disclosure of historical information, as adjusted to exclude amortization of goodwill no longer being amortized, which is summarized below (in $1,000s except per share amounts):
Six Months Ended June 30 Year Ended December 31 ----------------------- ------------------------------------ 2002 2001 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- Net income, as reported $ 6,957 $ 4,983 $ 10,718 $ 8,035 $ 5,409 Add back -- goodwill amortization -- 386 979 561 318 ---------- ---------- ---------- ---------- ---------- Net income, as adjusted $ 6,957 $ 5,369 $ 11,697 $ 8,596 $ 5,727 ========== ========== ========== ========== ========== Net income per share, as reported: Basic $ 0.75 $ 0.64 $ 1.38 $ 1.14 $ 0.84 ========== ========== ========== ========== ========== Diluted $ 0.73 $ 0.63 $ 1.35 $ 1.13 $ 0.83 ========== ========== ========== ========== ========== Add back -- goodwill amortization per share: Basic -- $ 0.05 $ 0.12 $ 0.08 $ 0.05 ========== ========== ========== ========== Diluted -- $ 0.05 $ 0.12 $ 0.08 $ 0.05 ========== ========== ========== ========== Net income per share, as adjusted: Basic $ 0.75 $ 0.69 $ 1.50 $ 1.22 $ 0.89 ========== ========== ========== ========== ========== Diluted $ 0.73 $ 0.68 $ 1.47 $ 1.21 $ 0.88 ========== ========== ========== ========== ==========
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 consolidated financial statements. Page 10 of 22 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Total assets approximated $2.2 billion at June 30, 2002, an increase of $190 million from the December 31, 2001 level of $2.0 billion. The balance sheet includes Capitol and its consolidated subsidiaries: Total Assets (in $1,000's) -------------------------- June 30 Dec 31 2002 2001 ----------- ----------- Ann Arbor Commerce Bank $ 285,357 $ 271,116 Brighton Commerce Bank 75,114 70,530 Capitol National Bank 184,564 173,177 Detroit Commerce Bank 31,791 33,768 Grand Haven Bank 116,708 98,740 Kent Commerce Bank 75,169 66,873 Macomb Community Bank 86,802 97,113 Muskegon Commerce Bank 81,937 74,284 Oakland Commerce Bank 97,409 115,249 Paragon Bank & Trust 99,374 93,667 Portage Commerce Bank 131,479 127,884 Indiana Community Bancorp Limited: Elkhart Community Bank 38,416 35,939 Goshen Community Bank 33,458 28,681 Sun Community Bancorp Limited: Arrowhead Community Bank 44,010 33,658 Bank of Tucson 126,214 121,075 Camelback Community Bank 85,356 67,210 East Valley Community Bank 40,642 39,591 Mesa Bank 60,550 52,308 Southern Arizona Community Bank 72,406 55,423 Valley First Community Bank 48,858 58,625 Yuma Community Bank 37,089 23,202 Nevada Community Bancorp Limited: Bank of Las Vegas(2) 21,882 n/a Black Mountain Community Bank 51,657 50,909 Desert Community Bank 58,797 56,844 Red Rock Community Bank 92,802 84,971 Sunrise Capital Corporation: Sunrise Bank of Albuquerque 40,304 35,984 Sunrise Bank of Arizona 66,574 63,141 Sunrise Bank of San Diego(1) 46,683 37,912 First California Northern Bancorp: Napa Community Bank(2) 23,809 n/a Other, net (21,445) (23,868) ----------- ----------- Consolidated $ 2,233,766 $ 2,044,006 =========== =========== n/a Not applicable (1) Commenced operations as a DE NOVO bank in 2001. (2) Commenced operations as DE NOVO banks in 2002. Page 11 of 22 Portfolio loans increased during the six-month 2002 period by approximately $163 million. Loan growth was funded primarily by higher levels of time deposits. The majority of portfolio loan growth occurred in commercial loans, consistent with the banks' emphasis on commercial lending activities. Portfolio loan growth in 2002 is net of about $28 million of commercial loans sold to other financial institutions. The allowance for loan losses at June 30, 2002 approximated $26.3 million or 1.39% of total portfolio loans, an increase from the year-end 2001 ratio of 1.34%. 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 potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio, loan commitments outstanding and other factors. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands): 2002 2001 ---------- ---------- Allowance for loan losses at January 1 $ 23,238 $ 17,449 Loans charged-off: Commercial 1,714 477 Real estate mortgage 146 10 Installment 154 139 ---------- ---------- Total charge-offs 2,014 626 Recoveries: Commercial 192 258 Real estate mortgage 61 3 Installment 59 15 ---------- ---------- Total recoveries 312 276 ---------- ---------- Net charge-offs 1,702 350 Additions to allowance charged to expense 4,774 3,321 ---------- ---------- Allowance for loan losses at June 30 $ 26,310 $ 20,420 ========== ========== Average total portfolio loans for period ended June 30 $1,804,451 $1,463,142 ========== ========== Ratio of net charge-offs (annualized) to average portfolio loans outstanding 0.19% 0.05% ========== ========== Page 12 of 22 The amounts of the allowance for loan losses allocated in the following table (in thousands) include all loans for which, based on Capitol's loan rating system, management has concerns, and should not be interpreted as an indication of future charge-offs.
June 30, 2002 December 31, 2001 ----------------------- ----------------------- Percentage Percentage of Total of Total Portfolio Portfolio Amount Loans Amount Loans ---------- ---------- ---------- ---------- Commercial $ 24,749 1.31% $ 20,570 1.19% Real estate mortgage 171 0.01 1,630 0.09 Installment 1,390 0.07 1,038 0.06 ---------- ---------- ---------- ---------- Total allowance for loan losses $ 26,310 1.39% $ 23,238 1.34% ========== ========== ========== ========== Total portfolio loans outstanding $1,897,776 $1,734,589 ========== ==========
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 June 30, 2002, total loans under these programs approximated $32 million. Reserves related to these loans, which are represented by earmarked funds on deposit at some of the bank subsidiaries, approximated $1.4 million and are not included in the allowance for loan losses. The state agency administering the Michigan program has announced plans to terminate the program in 2002. Upon termination of the program, loans previously enrolled in the program and related reserves would continue until the underlying loans are repaid, but no new loans would be enrolled in the program. While this program has complimented the lending efforts of Capitol's Michigan banks, termination of the program is not expected to have a material adverse affect on those banks' lending activities in the future. The termination of the program may adversely affect the future availability of credit for those borrowers who otherwise would have been eligible for enrollment in the program. 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. Page 13 of 22 Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) are summarized below (in thousands): June 30 Dec 31 2002 2001 -------- -------- Nonaccrual loans: Commercial $ 14,082 $ 11,220 Real estate 674 356 Installment 584 466 -------- -------- Total nonaccrual loans 15,340 12,042 Past due (>=90 days) loans: Commercial 6,833 4,290 Real estate 884 787 Installment 253 119 -------- -------- Total past due loans 7,970 5,196 -------- -------- Total nonperforming loans $ 23,310 $ 17,238 ======== ======== Nonperforming loans increased approximately $6 million during the six-month period ended June 30, 2002. These loans at June 30, 2002 are in various stages of resolution for which management believes such loans are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses. In addition to the identification of nonperforming loans involving borrowers with payment performance difficulties (i.e., nonaccrual loans and loans past-due 90 days or more), management utilizes an internal loan review process to identify other potential problem loans which may warrant additional monitoring or other attention. This loan review process is a continuous activity which periodically updates internal loan ratings. At inception, all loans are individually assigned a rating which grade the credits on a risk basis, based on the type and discounted value of collateral, financial strength of the borrower and guarantors and other factors such as nature of the borrowers' business climate, local economic conditions and other subjective factors. The loan rating process is fluid and subjective. Potential problem loans include loans which are generally performing as agreed; however, because of loan review's and/or lending staff's risk assessment, increased monitoring is deemed appropriate. In addition, some loans are assigned a more adverse classification, with specific performance issues or other risk factors requiring close management and development of specific remedial action plans. At June 30, 2002, potential problem loans (including nonperforming loans) approximated $83 million, or about 4% of total consolidated portfolio loans. It is important to note that these potential problem loans do not necessarily have significant loss exposure (nor are they necessarily deemed `impaired'), but rather are classified by management in this manner to aid in loan administration and risk management. Management believes such loans to be adequately considered in its evaluation of the adequacy of the allowance for loan losses. Management believes, however, that current general economic conditions may result in higher levels of future loan losses, in comparison to previous years, as evidenced by higher loan losses in the first half of 2002. Page 14 of 22 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 $2.7 million at June 30, 2002 and $3.0 million at December 31, 2001. The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming loans and ratio of the allowance as a percentage of portfolio loans (dollars in thousands):
Allowance as a Percentage Total Allowance for Nonperforming of Total Portfolio Loans Loan Losses Loans Portfolio Loans ----------------------- ---------------------- --------------------- -------------------- June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 2002 2001 2002 2001 2002 2001 2002 2001 ---------- ---------- --------- --------- --------- --------- -------- -------- Ann Arbor Commerce Bank $ 261,525 $ 233,920 $ 3,674 $ 3,219 $ 1,697 $ 1,960 1.40% 1.38% Brighton Commerce Bank 65,870 60,984 808 732 227 227 1.23 1.20 Capitol National Bank 153,647 144,485 2,202 1,983 2,486 465 1.43 1.37 Detroit Commerce Bank 28,438 29,243 328 351 282 539 1.15 1.20 Grand Haven Bank 104,845 89,989 1,424 1,212 1,578 1,234 1.36 1.35 Kent Commerce Bank 71,026 63,782 853 766 916 55 1.20 1.20 Macomb Community Bank 72,226 79,844 1,238 1,088 2,403 1,431 1.71 1.36 Muskegon Commerce Bank 74,669 70,151 934 842 259 123 1.25 1.20 Oakland Commerce Bank 82,438 81,711 926 1,063 1,754 406 1.12 1.30 Paragon Bank & Trust 84,180 81,430 1,070 1,018 3,273 586 1.27 1.25 Portage Commerce Bank 118,105 109,393 1,650 1,550 2,915 2,845 1.40 1.42 Indiana Community Bancorp Limited: Elkhart Community Bank(1) 36,739 31,492 552 473 175 222 1.50 1.50 Goshen Community Bank(1) 30,082 22,966 452 345 -- -- 1.50 1.50 Sun Community Bancorp Limited: Arrowhead Community Bank(1) 35,288 30,430 475 457 2 1.35 1.50 Bank of Tucson 87,744 88,218 1,404 1,224 572 407 1.60 1.39 Camelback Community Bank 67,823 56,555 728 743 2 334 1.07 1.31 East Valley Community Bank 26,864 27,402 377 423 372 432 1.40 1.54 Mesa Bank 53,188 45,672 766 594 678 542 1.44 1.30 Southern Arizona Community Bank 58,113 50,879 814 662 278 298 1.40 1.30 Valley First Community Bank 37,682 41,851 647 670 114 1,018 1.72 1.60 Yuma Community Bank(1) 23,887 18,539 359 285 -- -- 1.50 1.54 Nevada Community Bancorp Limited: Bank of Las Vegas(1) 12,474 n/a 188 n/a 1.51 n/a Black Mountain Community Bank(1) 44,930 40,111 665 602 135 240 1.48 1.50 Desert Community Bank(1) 45,137 50,361 678 806 527 989 1.50 1.60 Red Rock Community Bank(1) 75,257 67,117 1,130 1,008 926 942 1.50 1.50 Sunrise Capital Corporation: Sunrise Bank of Albuquerque(1) 34,155 28,061 462 379 692 614 1.35 1.35 Sunrise Bank of Arizona 56,501 55,730 763 753 997 1,329 1.35 1.35 Sunrise Bank of San Diego(1) 41,228 32,910 557 455 50 -- 1.35 1.38 First California Northern Bancorp: Napa Community Bank(1) 12,350 n/a 186 n/a -- n/a 1.51 n/a Other, net 1,365 1,363 (465) ---------- ---------- --------- --------- --------- --------- -------- -------- Consolidated $1,897,776 $1,734,589 $ 26,310 $ 23,238 $ 23,310 $ 17,238 1.39% 1.34% ========== ========== ========= ========= ========= ========= ======== ========
n/a Not applicable (1) As a condition of charter approval, bank is required to maintain an allowance for loan losses of not less than 1% for the first three years of operations. Page 15 of 22 RESULTS OF OPERATIONS Net income for the quarter ended June 30, 2002, was $3.9 million, an increase of $1.3 million over the same period last year. Diluted earnings per share were $.35 compared to $.33 for the prior year period. Net income for the first half of 2002 was $7 million ($.73 per diluted share), a 40% increase from $5 million ($.63 per diluted share) in the comparable period of 2001. The percentage increase in net income per share was less than the percentage increase in the amount of net income in 2002 because of the larger share base resulting from Capitol's share exchange regarding Sun Community Bancorp which was completed March 31, 2002. Second quarter 2002 earnings were a new record level. This period was benefited by strong bank performance coupled with earnings from Sun Community Bancorp, the southwestern bank development affiliate, and its banks. Net interest income for the second quarter of 2002 totaled $24.4 million, a 24% increase as compared to $19.7 million for the comparable period in 2001. Net interest income for the six-month 2002 period was $47.2 million, as compared to $38.2 million for the same period in 2001. Net interest income increased 24% during the six-month period versus 23% in the corresponding period of 2001. These increases are attributable to the expansion in number of banks, the banks' growth and a stable interim 2002 interest rate environment. Noninterest income for the quarter ended June 30, 2002 was $3.4 million, an increase of $935,000, or 38%, over the same period last year. On a year-to-date basis, noninterest income totaled $6.2 million for the 2002 period, as compared to $4.6 million in the first six months of 2001. Service charges on deposit accounts and trust fee income both increased due to volume in the second quarter of 2002 by 21% compared to the same period in 2001. Service charges on deposits and trust fee income totaled $1.9 million and $1.2 million, respectively, for the six-month period in 2002, as compared to $1.5 million and $1 million, respectively, for the 2001 period. Fees from origination of non-portfolio residential mortgage loans totaled $1.5 million for the second quarter of 2002, and were $2.4 million for the six-month period, as compared to $789,000 and $1.4 million for the comparable periods in 2001, due to higher loan volume resulting from lower interest rates. The provision for loan losses for the quarter ended June 30, 2002 was $2.7 million as compared to $1.7 million during the corresponding 2001 period. The loan loss provision for the six-month period in 2002 was $4.8 million, as compared to $3.3 million for the same period in 2001. Increases in the provision for loan losses are principally related to loan growth. The provisions for loan losses are based upon management's analysis of the adequacy of the allowance for loan losses, as previously discussed. Noninterest expense totaled $19 million for the second quarter, and $37.8 million for the six-month period in 2002, as compared to $16.1 million and $31.5 million, respectively, for the comparable periods in 2001. The increase in noninterest expense is associated with newly formed banks, growth and increases in general operating costs. Increases in both occupancy and salary and employee benefits mostly relate to the growth in the number of banks within the consolidated group. Page 16 of 22 Operating results (dollars in thousands) were as follows:
Six months ended June 30 -------------------------------------------------------------------------------------------- Return on Return on Total Revenues Net Income Average Equity Average Assets -------------------- -------------------- -------------------- -------------------- 2002 2001 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- -------- -------- Ann Arbor Commerce Bank $ 11,097 $ 11,738 $ 2,339 $ 2,002 21.64% 22.98% 1.67% 1.61% Brighton Commerce Bank 2,774 2,804 428 257 13.84 9.50 1.17 .81 Capitol National Bank 6,335 6,720 1,482 1,194 21.74 21.47 1.67 1.57 Detroit Commerce Bank 1,188 1,307 (29) (86) n/a n/a n/a n/a Grand Haven Bank 4,350 3,795 883 460 20.15 15.57 1.61 1.13 Kent Commerce Bank 2,946 2,170 466 (26) 13.57 n/a 1.25 n/a Macomb Community Bank 2,982 4,505 437 526 8.94 11.82 .98 .98 Muskegon Commerce Bank 3,138 3,132 631 360 16.50 12.40 1.65 1.08 Oakland Commerce Bank 3,638 4,582 632 695 14.57 18.46 1.23 1.34 Paragon Bank & Trust 3,979 4,190 515 227 11.51 7.21 1.07 .54 Portage Commerce Bank 5,029 5,801 926 801 17.58 16.75 1.50 1.24 Indiana Community Bancorp Limited: Elkhart Community Bank 1,306 1,184 93 (64) 4.01 n/a .49 n/a Goshen Community Bank 1,046 437 34 (254) 1.53 n/a .21 n/a Sun Community Bancorp Limited: Arrowhead Community Bank 1,549 631 3 (275) .14 n/a .01 n/a Bank of Tucson 4,869 5,156 1,153 1,037 22.54 24.24 1.92 2.02 Camelback Community Bank 2,906 2,411 292 208 8.55 10.50 .78 .83 East Valley Community Bank 1,348 1,641 (185) (73) n/a n/a n/a n/a Mesa Bank 2,462 2,097 381 183 13.55 8.83 1.36 .90 Southern Arizona Community Bank 2,353 2,012 288 113 9.80 5.76 .86 .50 Valley First Community Bank 1,940 2,518 65 252 2.31 9.57 .24 .90 Yuma Community Bank 1,159 392 8 (310) .42 n/a .05 n/a Nevada Community Bancorp Limited: Bank of Las Vegas(2) 375 n/a (478) n/a n/a n/a n/a n/a Black Mountain Community Bank 1,782 1,498 131 (49) 5.69 n/a .53 n/a Desert Community Bank 2,200 2,087 131 43 5.25 1.93 .43 .21 Red Rock Community Bank 3,141 2,751 407 378 9.24 9.55 .93 1.33 Sunrise Capital Corporation: Sunrise Bank of Albuquerque 1,334 1,427 (16) 70 n/a 3.87 n/a .48 Sunrise Bank of Arizona 2,751 3,316 243 238 7.88 9.33 .77 .74 Sunrise Bank of San Diego(1) 1,990 1,093 165 (743) 4.51 n/a .76 n/a First California Northern Bancorp: Napa Community Bank(2) 341 n/a (549) n/a n/a n/a n/a n/a Other, net (270) (75) (3,919) (2,181) n/a n/a n/a n/a -------- -------- -------- -------- -------- -------- -------- -------- Consolidated $ 82,038 $ 81,320 $ 6,957 $ 4,983 13.23% 13.64% .65% .57% ======== ======== ======== ======== ======== ======== ======== ========
n/a Not applicable (1) Commenced operations as a DE NOVO bank in 2001. (2) Commenced operations as DE NOVO banks in 2002. LIQUIDITY AND CAPITAL RESOURCES The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $168 million for the six-month 2002 period, compared to $229 million in the corresponding period of 2001. Such growth occurred in all deposit categories, with the majority coming from time deposits. The banks generally do not rely on brokered deposits as a key funding source; brokered deposits approximated $196 million as of June 30, 2002, or about 10% of total deposits, an increase of $53 million during the interim 2002 period. Brokered deposits, as a funding source, have increased in recent periods due to competitive environments and increased depositor usage of the Internet, and may similarly increase in future periods. Noninterest-bearing deposits approximated 16% of total deposits at June 30, 2002 and December 31, 2001. Levels of noninterest-bearing deposits fluctuate based on customers' transaction activity. Page 17 of 22 Interim 2002 deposit growth was deployed primarily into commercial loans, consistent with the banks' emphasis on commercial lending activities. Cash and cash equivalents amounted to $220 million or 10% of total assets at June 30, 2002 as compared with $164 million or 8% of total assets at December 31, 2001. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the banks' liquidity position at June 30, 2002 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 have not engaged in active trading of their investments. At June 30, 2002, the banks had approximately $36.3 million of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise. Some of the banks have secured lines of credit with a Federal Home Loan Bank. Borrowings thereunder approximated $76 million and additional borrowing capacity approximated $9.3 million at June 30, 2002. These borrowings increased ($13 million in the first half of 2002) as a lower-cost funding source versus various rates and maturities of time deposits. At June 30, 2002, Capitol had unused lines of credit from an unrelated financial institution aggregating $10 million. In November 2001, the boards of directors of Capitol and Sun entered into a plan of share exchange. The plan of share exchange was approved by the shareholders of both Capitol and Sun at special meetings held in late March 2002. The share exchange was based on a fixed exchange ratio and resulted in Capitol issuing .734 shares of its previously unissued common stock for each common share of Sun's common stock held by shareholders other than Capitol, effective March 31, 2002. Capitol issued approximately 2.7 million shares of its common stock and 850,000 stock options resulting from the share exchange, for aggregate consideration approximating $43.2 million. This transaction has been accounted for as a purchase. Had the transaction occurred at the beginning of the periods presented, net income would have approximated $7.2 million ($0.66 per diluted share) and $5.1 million ($0.48 per diluted share) for the six months ended June 30, 2002 and 2001, respectively. As of June 30, 2002, potential share exchange transactions were pending regarding the minority shareholders of Indiana Community Bancorp Limited and Sunrise Capital Corporation which, if completed, would result in Capitol issuing approximately 450,000 additional shares of common stock and those majority-owned subsidiaries becoming wholly-owned. 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. Management believes Capitol and each of its banks are in compliance with regulatory requirements and are expected to maintain such compliance. Page 18 of 22 Stockholders' equity, as a percentage of total assets, approximated 5.8% at June 30, 2002, increased from the ratio of 3.9% at the beginning of the year, primarily as a result of the previously-mentioned share exchange regarding Sun. 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 $222.2 million or 10% of total assets at June 30, 2002. 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. TRENDS AFFECTING OPERATIONS One of the most significant trends which can impact the financial condition and results of operations of financial institutions are changes in market rates of interest. 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. During 2001, the Open Market Committee of the Federal Reserve Board decreased interbank interest rates on numerous separate dates, for an unprecedented decrease of 475 basis points during the year. In the first half of 2002, interest rates have remained relatively stable. 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 2001. In 2002, however, a more stable interest rate environment has favorably impacted net interest margins at Capitol's banks from interest-bearing deposits repricing at lower rates. As the Open Market Committee continues to influence interest rates and other economic policy in 2002, including the potential of rate increases, 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 start-up banks formed in 2002 and beyond will similarly negatively impact short-term profitability. General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions. Page 19 of 22 Media reports of raising questions about the health of the domestic economy have continued in 2002. In 2002, nonperforming loans have increased and it is anticipated that levels of nonperforming loans and related loan losses may increase as economic conditions, locally and nationally, evolve. IMPACT OF NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statement No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement No. 141 requires that all business combinations be accounted for under a prior standard of purchase accounting, eliminating the so-called pooling-method which was used to account for some business combinations. This standard did not have a material effect on Capitol's consolidated financial statements. Statement No. 142 requires that goodwill no longer be amortized and charged against earnings, but instead be reviewed for impairment. Amortization of goodwill ceased upon adoption of the Statement on January 1, 2002. This new standard requires that goodwill be reviewed annually for impairment and, accordingly, impairment adjustments of goodwill be charged against earnings, if and when determined. Capitol's previous business combinations (generally, acquisitions of minority interests) have been accounted for using the purchase method. As of June 30, 2002, the net carrying amount of goodwill approximated $12.8 million and other intangible assets approximated $2.6 million. Upon implementation, this new standard has not had a material effect on Capitol's consolidated financial statements, other than the elimination of goodwill amortization (such amortization approximated $386,000 for the six months ended June 30, 2001). 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 consolidated financial statements. CRITICAL ACCOUNTING POLICIES In May 2002, the Securities and Exchange Commission proposed significant changes in disclosure rules applicable to public companies. One of those proposed significant changes involves the identification of "critical accounting policies". Capitol's significant accounting policies are described in the financial section of its 2001 Annual Report. In the circumstances of Capitol, management believes its "critical accounting policies" are those which encompass the allowance for loan losses (due to the inherent subjectivity in estimating loan losses), accounting for income taxes (due to the significant U.S. corporate income tax rate and realization of deferred tax assets) and accounting for goodwill (due to new accounting standards effective at the beginning of 2002). Page 20 of 22 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 three months ended June 30, 2002. Page 21 of 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITOL BANCORP LTD. (Registrant) /s/ Joseph D. Reid ---------------------------------------- Joseph D. Reid Chairman, President and CEO (duly authorized to sign on behalf of the registrant) /s/ Lee W. Hendrickson ---------------------------------------- Lee W. Hendrickson Executive Vice President and Chief Financial Officer Date: July 30, 2002 Page 22 of 22