-----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, UaEnLXZpzJCEC+2Phb5jIGm1QPuegxklsscLlt28Z2rxVXt4IC5HaVP4wWaaYJHJ iKoJdOQcNGvN87SoqJAcPQ== 0000950147-03-000422.txt : 20030328 0000950147-03-000422.hdr.sgml : 20030328 20030328164852 ACCESSION NUMBER: 0000950147-03-000422 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18461 FILM NUMBER: 03625870 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-K 1 e-9766.txt ANNUAL REPORT FOR YEAR ENDED 12/31/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2002 or ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (IRS Employer incorporation or organization) Identification Number) CAPITOL BANCORP CENTER 200 WASHINGTON SQUARE NORTH LANSING, MICHIGAN 48933 (Address of principal executive offices) Registrant's telephone number, including area code: (517) 487-6555 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of class) 8.50% CUMULATIVE TRUST PREFERRED SECURITIES, $10 LIQUIDATION AMOUNT (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ] Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common security, as of the last business day of the registrant's most recently completed second fiscal quarter: $225,733,593. (Such amount was computed based on shares held by non-affiliates as of March 17, 2003 and the common stock closing price reported by Nasdaq on June 28, 2002. For purposes of this computation, all executive officers, directors and 5% shareholders of registrant have been assumed to be affiliates. Certain of such persons may disclaim that they are affiliates of registrant.) Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: 11,717,709 as of March 17, 2003. DOCUMENTS INCORPORATED BY REFERENCE See Cross-Reference Sheet CAPITOL BANCORP LTD. Form 10-K Fiscal Year Ended: December 31, 2002 CROSS REFERENCE SHEET
ITEM OF FORM 10-K INCORPORATION BY REFERENCE FROM: - ----------------- -------------------------------- PART I Item 1, Business Pages 7-10, 18-20, 21-24, 30-31 and 42, Financial Information Section of Annual Report Item 2, Properties Page 40, Financial Information Section of Annual Report; Proxy Statement; and certain individual pages, Marketing Section of Annual Report PART II Item 5, Market for Registrant's Pages 2-3, 41, 43 and 50-51, Financial Information Common Equity and Related Section of Annual Report Stockholder Matters Item 6, Selected Financial Data Page 2, Financial Information Section of Annual Report Item 7, Management's Discussion Pages 5 and 7-24, Financial Information Section of and Analysis of Financial Condition Annual Report and Results of Operations Item 7a, Quantitative and Qualitative Pages 5 and 21-24, Financial Information Section of Disclosures About Market Risk Annual Report Item 8, Financial Statements and Pages 2 and 26-54, Financial Information Section of Supplementary Data Annual Report PART III Item 10, Directors and Executive Officers Proxy Statement of the Registrant Item 11, Executive Compensation Proxy Statement Item 12, Security Ownership of Certain Beneficial Proxy Statement Owners and Management and Related Stockholder Matters Item 13, Certain Relationships and Related Proxy Statement Transactions PART IV Item 15, Exhibits, Financial Statement Schedules Pages 26-54, Financial Information Section of Annual Report and Reports on Form 8-K KEY: "Annual Report" means the 2002 Annual Report of the Registrant provided to Stockholders and the Commission pursuant to Rule 14a-3(b). Capitol's 2002 Annual Report consists of two documents: a Financial Information Section and a Marketing Section. "Proxy Statement" means the Proxy Statement of the Registrant on Schedule 14A to be filed pursuant to Rule 14a-101, within 120 days after December 31, 2002. Note: The page number references herein are based on the paper version of the referenced documents. Accordingly, those page number references may differ from the electronically filed versions of those documents.
-2- CAPITOL BANCORP LTD. 2002 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I ITEM 1. Business........................................................ 5 ITEM 2. Properties...................................................... 15 ITEM 3. Legal Proceedings............................................... 16 ITEM 4. Submission of Matters to a Vote of Security Holders............. 16 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters .......................................... 17 ITEM 6. Selected Financial Data......................................... 17 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................... 17 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk...... 18 ITEM 8. Financial Statements and Supplementary Data..................... 18 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................................... 18 PART III ITEM 10. Directors and Executive Officers of the Registrant............... 19 ITEM 11. Executive Compensation........................................... 19 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................................ 19 ITEM 13. Certain Relationships and Related Transactions................... 19 ITEM 14. Controls and Procedures.......................................... 20 PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 20 -3- FORWARD-LOOKING STATEMENTS Some of the statements contained in this annual report that are not historical facts are forward-looking statements. Those 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", "will", "may", "believe", and similar expressions also identify forward-looking statements. Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of Capitol's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol's banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of Capitol's banks and Capitol's ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, (xi) changes in management, and (xii) other risks detailed in Capitol's other filings with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize, or if 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. [The remainder of this page intentionally left blank] -4- PART I ITEM 1, BUSINESS. a. General development of business: Incorporated by reference from Pages 7-9 under the captions "The Business of Capitol and its Banks", and "Capitol's Structure", and Pages 31-32, Financial Information Section of Annual Report, under the caption "Note A--Nature of Operations, Basis of Presentation and Principles of Consolidation". b. Financial information about segments: Incorporated by reference from Pages 31-32, Financial Information Section of Annual Report, under the caption "Note A--Nature of Operations, Basis of Presentation and Principles of Consolidation". c. Narrative description of business: Incorporated by reference from Pages 7-9 under the captions "The Business of Capitol and its Banks", and "Capitol's Structure", Pages 31-32, Financial Information Section of Annual Report, under the caption "Note A--Nature of Operations, Basis of Presentation and Principles of Consolidation", Page 10, Financial Information Section of Annual Report, under the caption "Critical Accounting Policies", Pages 22-25, Financial Information Section of Annual Report, under the caption "Trends Affecting Operations" and Pages 18-21, Financial Information Section of Annual Report, under the caption "Liquidity, Capital Resources and Capital Adequacy". At December 31, 2002, Capitol and its subsidiaries employed 801 full time equivalent employees. In 1997, the Registrant formed Capitol Trust I, a Delaware statutory business trust. Capitol Trust I's business and affairs are conducted by its property trustee, a Delaware trustee, and three individual administrative trustees who are employees and officers of the Registrant. Capitol Trust I exists for the sole purpose of issuing and selling its preferred securities and common securities, using the proceeds from the sale of those securities to acquire subordinated debentures issued by the Registrant and certain related services. During 2001, the Registrant formed Capitol Trust II and Capitol Statutory Trust III, in conjunction with private placements of trust-preferred securities, which are structured similar to Capitol Trust I. Capitol Trust IV was similarly formed in 2002. Additional information regarding trust-preferred securities is incorporated by reference from Page 43, Financial Information Section of Annual Report, under the caption "Note I--Trust-Preferred Securities". The following tables (Tables A to G, inclusive), present certain statistical information regarding Capitol's business. -5- DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A) CAPITOL BANCORP LIMITED Net interest income, the primary component of earnings, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the rates earned or paid on them. This table shows the daily average balances for the major asset and liability categories and the actual related interest income and expense (in $1,000s) and average yield/cost for the years ended December 31, 2002, 2001 and 2000.
2002 2001 -------------------------------------- -------------------------------------- Interest (1) Interest (1) Average Income/ Average Average Income/ Average Balance Expense Yield/Cost Balance Expense Yield/Cost ---------- ---------- ---------- ---------- ---------- ---------- ASSETS Federal funds sold $ 87,460 $ 1,376 1.57% $ 82,237 $ 3,186 3.87% Interest-bearing deposits with banks 29,592 807 2.73% 16,335 322 1.97% Investment securities: U.S. Treasury, government agencies and other 43,447 1,792 4.12% 46,962 2,804 5.97% States and political subdivisions 470 20 4.26% 1,572 66 4.20% Loans held for resale 51,042 2,674 5.24% 42,894 3,002 7.00% Portfolio loans (2) 1,884,646 149,785 7.95% 1,560,337 144,417 9.26% ---------- ---------- ----- ---------- ---------- ----- Total interest-earning assets/interest income 2,096,657 156,454 7.46% 1,750,337 153,797 8.79% Allowance for loan losses (deduct) (26,010) (20,337) Cash and due from banks 99,604 73,573 Premises and equipment, net 18,184 16,910 Other assets 46,699 40,434 ---------- ---------- Total assets $2,235,134 $1,860,917 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings deposits $ 65,124 1,036 1.59% $ 51,801 1,558 3.01% Time deposits under $100,000 335,332 12,910 3.85% 356,338 20,533 5.76% Time deposits of $100,000 or more 550,381 20,546 3.73% 478,497 27,388 5.72% Other interest-bearing deposits 654,853 13,356 2.04% 479,314 16,176 3.37% Debt obligations 89,992 3,981 4.42% 68,510 4,422 6.45% ---------- ---------- ---------- ---------- Total interest-bearing liabilities/interest expense 1,695,682 51,829 3.06% 1,434,460 70,077 4.89% Trust - preferred securities 50,213 4,031 8.03% 34,112 3,215 9.42% ---------- ---------- ----- ---------- ---------- ----- 1,745,895 55,860 3.20% 1,468,572 73,292 4.99% Noninterest-bearing demand deposits 303,227 236,048 Accrued interest on deposits and other liabilities 15,738 47,009 Minority interests in consolidated subsidiaries 45,324 38,886 Stockholders' equity 124,950 70,402 ---------- ---------- Total liabilities and stockholders' equity $2,235,134 $1,860,917 ========== ---------- ========== ---------- Net interest income $ 100,594 $ 80,505 ========== ========== Interest Rate Spread (3) 4.26% 3.80% ===== ===== Net Yield on Interest-Earning Assets (4) 4.80% 4.60% ===== ===== Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities 1.20 1.19 ========== ========== 2000 -------------------------------------- Interest (1) Average Income/ Average Balance Expense Yield/Cost ASSETS ---------- ---------- ---------- Federal funds sold $ 63,664 $ 3,985 6.26% Interest-bearing deposits with banks 13,681 820 5.99% Investment securities: U.S. Treasury, government agencies and other 79,092 4,645 5.87% States and political subdivisions 1,605 80 4.98% Loans held for resale 11,081 1,044 9.42% Portfolio loans (2) 1,213,192 121,737 10.03% ---------- ---------- ----- Total interest-earning assets/interest income 1,382,315 132,311 9.57% Allowance for loan losses (deduct) (14,866) Cash and due from banks 54,581 Premises and equipment, net 14,490 Other assets 36,096 ---------- Total assets $1,472,616 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings deposits $ 45,251 1,758 3.88% Time deposits under $100,000 328,605 21,162 6.44% Time deposits of $100,000 or more 367,751 21,657 5.89% Other interest-bearing deposits 353,956 15,679 4.43% Debt obligations 45,249 3,506 7.75% ---------- ---------- Total interest-bearing liabilities/interest expense 1,140,812 63,762 5.59% Trust - preferred securities 24,244 2,150 8.87% ---------- ---------- ----- 1,165,056 65,912 5.66% Noninterest-bearing demand deposits 176,804 Accrued interest on deposits and other liabilities 25,512 Minority interests in consolidated subsidiaries 46,956 Stockholders' equity 58,288 ---------- Total liabilities and stockholders' equity $1,472,616 ========== ---------- Net interest income $ 66,399 ========== Interest Rate Spread (3) 3.91% ===== Net Yield on Interest-Earning Assets (4) 4.80% ===== Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities 1.19 ==========
(1) Average yield/cost is determined by dividing the actual interest income/expense by the daily average balance of the asset or liability category. (2) Average balance of loans includes non-accrual loans. (3) Interest rate spread represents the average yield on interest-earning assets less the average cost of interest-bearing liabilities. (4) Net yield is based on net interest income as a percentage of average total interest-earning assets. -6- CHANGES IN NET INTEREST INCOME (TABLE B) CAPITOL BANCORP LIMITED The table below summarizes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected Capitol's net interest income (in $1,000s). The change in interest attributable to volume is calculated by multiplying the annual change in volume by the prior year's rate. The change in interest attributable to rate is calculated by multiplying the annual change in rate by the prior year's average balance. Any variance attributable jointly to volume and rate changes has been allocated to each category based on the percentage of each to the total change in both categories.
2002 compared to 2001 2001 compared to 2000 -------------------------------- -------------------------------- Volume Rate Net Total Volume Rate Net Total -------- -------- --------- -------- -------- --------- Increase (decrease) in interest income: Federal funds sold $ 191 $ (2,001) $ (1,810) $ 970 $ (1,769) $ (799) Interest-bearing deposits with banks 329 156 485 135 (633) (498) Investment securities: U.S. Treasury, government agencies and other (197) (815) (1,012) (1,917) 76 (1,841) States and political subdivisions (47) 1 (46) (2) (12) (14) Loans held for resale 509 (837) (328) 2,290 (332) 1,958 Portfolio loans 27,492 (22,124) 5,368 32,707 (10,027) 22,680 -------- -------- -------- -------- -------- -------- Total 28,277 (25,620) 2,657 34,183 (12,697) 21,486 Increase (decrease) in interest expense deposits: Savings deposits 334 (856) (522) 232 (432) (200) Time deposits under $100,000 (1,150) (6,473) (7,623) 1,702 (2,331) (629) Time deposits of $100,000 or more 3,683 (10,525) (6,842) 6,354 (623) 5,731 Other interest-bearing deposits 4,797 (7,617) (2,820) 4,762 (4,265) 497 Debt obligations 1,169 (1,610) (441) 1,575 (659) 916 Trust preferred securities 1,346 (530) 816 923 142 1,065 -------- -------- -------- -------- -------- -------- Total 10,179 (27,611) (17,432) 15,548 (8,168) 7,380 -------- -------- -------- -------- -------- -------- Increase (decrease) in net interest income $ 18,098 $ 1,991 $ 20,089 $ 18,635 $ (4,529) $ 14,106 ======== ======== ======== ======== ======== ========
-7- INVESTMENT PORTFOLIO (TABLE C) CAPITOL BANCORP LIMITED The table below shows amortized cost and estimated market value of investment securities as of December 31, 2002, 2001 and 2000 (in $1,000s):
2002 2001 2000 --------------------- --------------------- --------------------- Estimated Estimated Estimated Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- --------- --------- --------- --------- --------- U.S. Treasury $ 2,505 $ 2,586 $ 3,704 $ 3,757 $ 5,086 $ 5,101 Government agencies 22,460 22,668 30,253 30,429 55,514 55,334 States and political subdivisions 101 101 1,402 1,412 1,604 1,606 Corporate bonds 251 251 --------- --------- --------- --------- --------- --------- 25,066 25,355 35,359 35,598 62,455 62,292 Other securities: Federal Reserve Bank stock 424 424 394 394 394 394 Federal Home Loan Bank stock 5,950 5,950 4,716 4,716 3,583 3,583 Corporate stock 1,075 1,075 895 895 907 907 Other investments 1,335 1,335 2,084 2,084 1,750 1,750 --------- --------- --------- --------- --------- --------- Total other securities 8,784 8,784 8,089 8,089 6,634 6,634 --------- --------- --------- --------- --------- --------- Total investment securities $ 33,850 $ 34,139 $ 43,448 $ 43,687 $ 69,089 $ 68,926 ========= ========= ========= ========= ========= =========
The table below shows the amortized cost, relative maturities and weighted average yields of investment securities at December 31, 2002 (in $1,000s):
U.S. Treasury and States and Political Government Agencies Subdivisions --------------------------------- --------------------------------- Total Estimated Weighted Estimated Weighted Total Estimated Amortized Market Average Amortized Market Average Amortized Market Cost Value Yield Cost Value Yield Cost Value --------- --------- --------- --------- --------- --------- --------- --------- Maturity: Due in one year or less $ 3,411 $ 3,445 4.38% $ 3,411 $ 3,445 Due after one year but within five years 17,375 17,551 3.68% 17,375 17,551 Due after five years but within ten years 1,664 1,682 5.69% $ 101 $ 101 5.40% 1,765 1,783 Due after ten years 2,515 2,576 6.65% 2,515 2,576 Without stated maturities 8,784 8,784 --------- --------- --------- --------- --------- --------- Total $ 24,965 $ 25,254 $ 101 $ 101 $ 33,850 $ 34,139 ========= ========= ========= ========= ========= =========
Investment securities which do not have stated maturities (corporate stock, Federal Reserve Bank and Federal Home Loan Bank stock) do not have stated yields or rates of return and such rates of return vary from time to time. Following is a summary of the weighted average maturities of investment securities (exclusive of securities without stated maturities) at December 31, 2002: U.S. Treasury securities 1 year 7 months U.S. Agencies 5 years 7 months States and political subdivisions 6 years -8- LOAN PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D) CAPITOL BANCORP LIMITED Portfolio loans outstanding as of December 31 are shown below (in $1,000s):
2002 2001 2000 1999 1998 ------------------- ------------------- ------------------- ------------------- ------------------- Commercial - real estate $1,531,637 76.91% $1,154,757 66.57% $ 865,382 63.83% $ 627,029 59.76% $ 417,296 57.62% Commercial - other 257,399 12.93% 380,694 21.95% 308,354 22.74% 247,531 23.59% 173,055 23.89% ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total commercial loans 1,789,036 89.84% 1,535,451 88.52% 1,173,736 86.57% 874,560 83.35% 590,351 81.51% Real estate mortgage 127,855 6.42% 121,676 7.01% 113,324 8.36% 96,000 9.15% 80,808 11.16% Installment 74,481 3.74% 77,462 4.47% 68,738 5.07% 78,644 7.50% 53,121 7.33% ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total portfolio loans $1,991,372 100.00% $1,734,589 100.00% $1,355,798 100.00% $1,049,204 100.00% $ 724,280 100.00% ========== ====== ========== ====== ========== ====== ========== ====== ========== ======
The table below summarizes (in $1,000s) the remaining maturity of portfolio loans outstanding at December 31, 2002 according to scheduled repayments of principal.
Fixed Variable Rate Rate Total ---------- ---------- ---------- Aggregate maturities of portfolio loan balances which are due in one year or less: $ 339,821 $ 735,247 $1,075,068 After one year but within five years 547,397 263,338 810,735 After five years 28,363 60,589 88,952 Nonaccrual loans 16,617 16,617 ---------- ---------- ---------- Total $ 932,198 $1,059,174 $1,991,372 ========== ========== ==========
The following summarizes, in general, Capitol's various loan classifications: Commercial - real estate Comprised of a broad mix of business use and multi-family housing properties, including office, retail, warehouse and light industrial uses. A typical loan size approximates $500,000 and, at December 31, 2002, approximately 25% of such properties were owner-occupied and approximately 11% of the commercial real estate total consisted of a combination of multi-family and residential rental income properties. Commercial - other Includes a range of business credit products, current asset lines of credit and equipment term loans. These products bear higher inherent economic risk than other types of lending activities. A typical loan size approximates $250,000, and multiple account relationships serve to reduce such risks. Real Estate Mortgage Includes single family residential loans held for permanent portfolio, and home equity lines of credit. Risks are nominal, borne out by loss experience, housing economic data and loan-to-value percentages. Installment Includes a broad range of consumer credit products, secured by automobiles, boats, etc., with typical consumer credit risks. All loans are subject to underwriting procedures commensurate with the loan size, nature of collateral, industry trends, risks and experience factors. Appropriate collateral is required for most loans, as is documented evidence of debt repayment sources. -9- TABLE D, CONTINUED CAPITOL BANCORP LIMITED The aggregate amount of nonperforming portfolio loans is summarized below as of December 31 (in $1,000's). Nonperforming loans are comprised of (a) loans accounted for on a nonaccrual basis and (b) loans contractually past due 90 days or more as to principal and interest payments (but not included in nonaccrual loans in (a) above) and consist primarily of commercial real estate loans. See Note D of the Notes to Consolidated Financial Statements for additional information regarding nonperforming loans.
2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Nonperforming loans: Nonaccrual loans: Commercial $ 15,444 $ 11,220 $ 4,082 $ 2,709 $ 2,608 Real estate 560 356 163 103 199 Installment 613 466 171 100 185 -------- -------- -------- -------- -------- Total nonaccrual loans 16,617 12,042 4,416 2,912 2,992 Past due loans: Commercial 5,728 4,290 1,656 834 3,963 Real estate 323 787 534 196 183 Installment 222 119 151 182 104 -------- -------- -------- -------- -------- Total past due loans 6,273 5,196 2,341 1,212 4,250 -------- -------- -------- -------- -------- Total nonperforming loans $ 22,890 $ 17,238 $ 6,757 $ 4,124 $ 7,242 ======== ======== ======== ======== ======== Nonperforming loans as a percentage of total portfolio loans 1.15% 0.99% 0.50% 0.39% 1.00% ======== ======== ======== ======== ======== Nonperforming loans as a percentage of total assets 0.95% 0.84% 0.41% 0.32% 0.71% ======== ======== ======== ======== ======== Allowance for loan losses as a percentage of nonperforming loans 126.49% 134.81% 258.24% 306.47% 121.75% ======== ======== ======== ======== ========
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 classifications. At inception, all loans are individually assigned a classification 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 classification 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 identified for monitoring because of specific performance issues or other risk factors requiring closer management and development of specific remedial action plans. At December 31, 2002, potential problem loans (including nonperforming loans) approximated $98.5 million or about 5% of total consolidated portfolio loans. Such totals typically approximate 4% to 5% of loans outstanding as an important part of management's ongoing and augmented loan review activities which are designed to early-identify loans which warrant close monitoring at the bank and corporate credit-administration levels. 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 identified by management in this manner to aid in loan administration and risk management. Management believes these 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. The table below summarizes activity in other real estate owned (in $1,000s) for the year ended December 31:
2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Other real estate owned at January 1 $ 3,044 $ 3,094 $ 3,614 $ 541 $ 165 Properties acquired in restructure of loans or in lieu of foreclosure 4,578 860 324 3,426 612 Properties sold (2,998) (233) (717) (376) (161) Payments received from borrowers or tenants, credited to carrying amount -- (3) -- -- (75) Other changes, net (19) (674) (127) 23 -- -------- -------- -------- -------- -------- Other real estate owned at December 31 $ 4,605 $ 3,044 $ 3,094 $ 3,614 $ 541 ======== ======== ======== ======== ========
Of the other real estate owned at December 31, 2002, one property, with a carrying value of $1.7 million is partially guaranteed by an agency of the federal government. Other real estate owned is valued at the lower of cost or fair value (net of estimated selling cost) at the date of transfer/acquisition. Management performs a periodic analysis of estimated fair values to determine potential impairment of other real estate owned. -10- SUMMARY OF LOAN LOSS EXPERIENCE (TABLE E) CAPITOL BANCORP LIMITED The table below summarizes changes in the allowance for loan losses and related portfolio data and ratios for the year ended December 31 (in $1,000's):
2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Allowance for loan losses at January 1 $ 23,238 $ 17,449 $ 12,639 $ 8,817 $ 6,229 Loans charged-off: Commercial 6,824 2,280 2,850 1,201 1,165 Real estate 352 143 204 9 Installment 527 506 117 97 131 ---------- ---------- ---------- ---------- ---------- Total charge-offs 7,703 2,929 3,171 1,298 1,305 Recoveries: Commercial 588 485 734 391 336 Real estate 61 37 13 6 4 Installment 93 29 18 13 30 ---------- ---------- ---------- ---------- ---------- Total recoveries 742 551 765 410 370 ---------- ---------- ---------- ---------- ---------- Net charge-offs 6,961 2,378 2,406 888 935 Additions to allowance charged to expense 12,676 8,167 7,216 4,710 3,523 ---------- ---------- ---------- ---------- ---------- Allowance for loan losses at December 31 $ 28,953 $ 23,238 $ 17,449 $ 12,639 $ 8,817 ========== ========== ========== ========== ========== Total portfolio loans outstanding at December 31 $1,991,372 $1,734,589 $1,355,798 $1,049,204 $ 724,280 ========== ========== ========== ========== ========== Ratio of allowance for loan losses to portfolio loans outstanding 1.45% 1.34% 1.29% 1.20% 1.22% ========== ========== ========== ========== ========== Average total portfolio loans for the year $1,884,646 $1,560,337 $1,213,192 $ 872,481 $ 605,923 ========== ========== ========== ========== ========== Ratio of net charge-offs to average portfolio loans outstanding 0.37% 0.15% 0.20% 0.10% 0.15% ========== ========== ========== ========== ==========
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for additional information regarding the allowance for loan losses and description of factors which influence management's judgment in determining the amounts of additions to the allowance. -11- SUMMARY OF LOAN LOSS EXPERIENCE (TABLE E CONTINUED) CAPITOL BANCORP LIMITED The amount of the allowance for loan losses allocated in the following table (in $1,000's) as of December 31, is based on management's estimate of losses inherent in the portfolio at the balance sheet date, and should not be interpreted as an indication of future charge-offs:
2002 2001 2000 ------------------------ ------------------------ ------------------------ Percentage Percentage Percentage Amount of Loans Amount of Loans Amount of Loans ---------- ---------- ---------- ---------- ---------- ---------- Commercial $ 27,226 1.37% $ 20,570 1.19% $ 16,096 1.19% Real estate mortgage 1,009 0.05% 1,630 0.09% 285 0.02% Installment 718 0.03% 1,038 0.06% 1,068 0.08% Unallocated -- -- -- ---------- ---------- ---------- Total allowance for loan losses $ 28,953 1.45% $ 23,238 1.34% $ 17,449 1.29% ========== ===== ========== ===== ========== ===== Total portfolio loans outstanding $1,991,372 $1,734,589 $1,355,798 ========== ========== ========== 1999 1998 ------------------------ ------------------------ Percentage Percentage Amount of Loans Amount of Loans ---------- ---------- ---------- ---------- Commercial $ 5,965 0.57% $ 4,501 0.62% Real estate mortgage 165 0.02% 127 0.02% Installment 385 0.04% 262 0.04% Unallocated 6,124 0.58% 3,927 0.54% ---------- ---------- Total allowance for loan losses $ 12,639 1.20% $ 8,817 1.22% ========== ===== ========== ===== Total portfolio loans outstanding $1,049,204 $ 724,280 ========== ==========
-12- AVERAGE DEPOSITS (TABLE F) CAPITOL BANCORP LIMITED The table below summarizes the average balances of deposits (in $1,000s) and the average rates of interest for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000 ------------------------ ------------------------ ------------------------ Average Average Average Amount Rate Amount Rate Amount Rate ---------- ---------- ---------- ---------- ---------- ---------- Noninterest-bearing demand deposits $ 303,227 $ 236,048 $ 176,804 Savings deposits 65,124 1.59% 51,801 3.01% 45,251 3.88% Time deposits under $100,000 335,332 3.85% 356,338 5.76% 328,605 6.44% Time deposits of $100,000 or more 550,381 3.73% 478,497 5.72% 367,751 5.89% Other interest-bearing deposits 654,853 2.04% 479,314 3.37% 353,956 4.43% ---------- ---------- ---------- Total deposits $1,908,917 $1,601,998 $1,272,367 ========== ========== ==========
The table below shows the amount of time certificates of deposit issued in amounts of $100,000 or more, by time remaining until maturity, which were outstanding at December 31, 2002 (in $1,000s): Three months or less $ 140,408 Three months to six months 103,259 Six months to twelve months 154,125 Over 12 months 166,768 ---------- Total $ 564,560 ========== -13- FINANCIAL RATIOS (TABLE G) CAPITOL BANCORP LIMITED Year Ended December 31 ------------------------ 2002 2001 2000 ------ ------ ------ Net income as a percentage of: Average stockholders' equity 13.33% 15.22% 13.78% Average total assets 0.75% 0.58% 0.55% Capital ratios: Average stockholders' equity as a percentage of average total assets 5.59% 3.78% 3.96% Average total equity (stockholders' equity and minority interests in consolidated subsidiaries) as a percentage of average total assets 7.62% 5.87% 7.15% Average total capital funds (stockholders' equity, minority interests in consolidated subsidiaries and trust-preferred securities) as a percentage of average total assets 9.86% 7.71% 8.79% Dividend payout ratio (cash dividends per share as a percentage of net income per share): Basic 26.83% 28.99% 31.58% Diluted 28.03% 29.63% 31.86% -14- ITEM 2, PROPERTIES. Substantially all of the office locations are leased. Each of Capitol's banks operates from a single location, except Capitol National Bank (which has two branch locations, one in Okemos and one in Lansing, Michigan), Red Rock Community Bank (which has two locations in Las Vegas, Nevada), Mesa Bank (which has two locations in Mesa, Arizona) and Sunrise Bank of Arizona (which has multiple office locations). The addresses of each bank's main office are shown in the Marketing Section of Annual Report, which are incorporated herein by reference, from the following captioned pages therein: Ann Arbor Commerce Bank Macomb Community Bank Arrowhead Community Bank Mesa Bank Bank of Tucson Muskegon Commerce Bank Bank of Las Vegas Napa Community Bank Black Mountain Community Bank Oakland Commerce Bank Brighton Commerce Bank Paragon Bank & Trust Camelback Community Bank Portage Commerce Bank Capitol National Bank Red Rock Community Bank Desert Community Bank Southern Arizona Community Bank Detroit Commerce Bank Sunrise Bank of Albuquerque East Valley Community Bank Sunrise Bank of Arizona Elkhart Community Bank Sunrise Bank of San Diego Goshen Community Bank Valley First Community Bank Grand Haven Bank Yuma Community Bank Kent Commerce Bank Ann Arbor Commerce Bank, in 1998, and Portage Commerce Bank, in 1997, relocated their main offices to substantially larger leased facilities (approximately 18,000 and 10,000 square feet, respectively) in response to asset growth and to better serve customers. Grand Haven Bank owns its stand-alone bank facility. Most of the other bank subsidiaries' facilities are generally small (i.e., less than 10,000 square feet), first floor offices with convenient access to parking. Some of the banks have drive-up customer service. The banks are typically located in or near high traffic centers of commerce in their respective communities. Customer service is enhanced through utilization of ATMs to process some customer-initiated transactions and some of the banks also make available a courier service to pick up transactions at customers' locations. Capitol's Great Lakes headquarters are located within the same building as Capitol National Bank in Lansing, Michigan. Those headquarters include administrative, operations, accounting, and executive staff. Data processing centers are located in Lansing, Michigan and Tempe, Arizona. Capitol's Western Regions headquarters are located within the same building as Camelback Community Bank in Phoenix, Arizona. Certain of the office locations are leased from related parties. Incorporated by reference from Page 41, Financial Information Section of Annual Report, under the caption "Note F--Premises and Equipment". Additional disclosures regarding leases with related parties are incorporated by reference from the Corporation's definitive proxy statement to be filed within 120 days after December 31, 2002. Management believes Capitol's and its subsidiaries' offices to be in good and adequate condition and adequately covered by insurance. -15- ITEM 3, LEGAL PROCEEDINGS. As of December 31, 2002, there were no material pending legal proceedings to which Capitol or its subsidiaries is a party or to which any of its property was subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position or results of operations of Capitol. ITEM 4, SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the fourth quarter of 2002, no matters were submitted to a vote by security holders. [The remainder of this page intentionally left blank] -16- PART II ITEM 5, MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. A. Market Information: Incorporated by reference from Page 3, Financial Information Section of Annual Report, under the caption "Information Regarding Capitol's Common Stock", Pages 44-45 under the caption "Note J--Common Stock, Warrants and Stock Options" and Page 4, under the caption "Shareholder Information". B. Holders: Incorporated by reference from first sentence of third paragraph on Page 3, Financial Information Section of Annual Report, under the caption "Information Regarding Capitol's Common Stock". C. Dividends: Incorporated by reference from Page 2, Financial Information Section of Annual Report, under the caption "Quarterly Results of Operations" and subcaption "Cash dividends paid per share", Pages 50-51, Financial Information Section of Annual Report, under the caption "Note P--Dividend Limitations of Subsidiaries and Other Capital Requirements" and the last paragraph on Page 42, Financial Information Section of Annual Report, under the caption "Note H--Debt Obligations". D. Securities Authorized for Issuance Under Equity Compensation Plan: Summary of equity compensation plans as of December 31, 2002:
Weighted Average Number Available Number Exercise for Future Outstanding Price Issuance --------- ------ --------- Equity compensation plans: Approved by shareholders 450,394 $11.87 114,501 Not approved by shareholders 446,511 15.63 -- Resulting from share exchanges 1,651,631 16.20 -- --------- ------ --------- Total 2,548,536 $15.23 114,501 ========= ====== =========
ITEM 6, SELECTED FINANCIAL DATA. Incorporated by reference from Page 2, Financial Information Section of Annual Report, under the caption "Selected Consolidated Financial Data" under the column heading "As of and for the Year Ended December 31, 2002, 2001, 2000, 1999 and 1998". ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated by reference from Pages 7-25, Financial Information Section of Annual Report, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Page 5, Financial Information Section of Annual Report, under the caption "Forward Looking Statements". -17- ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Incorporated by reference from Pages 21-24, Financial Information Section of Annual Report, under the caption "Trends Affecting Operations" and Page 5, Financial Information Section of Annual Report, under the caption "Forward Looking Statements". ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14 (under subcaption "A. Exhibits") of this Form 10-K for specific description of financial statements incorporated by reference from Financial Information Section of Annual Report. Incorporated by reference from Page 2, Financial Information Section of Annual Report, under the caption "Quarterly Results of Operations". ITEM 9, CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -18- PART III ITEM 10, DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Incorporated by reference from Corporation's definitive proxy statement to be filed within 120 days after December 31, 2002. Executive officers of Capitol are as follows:
Name and Year First Became Principal Positions Age An Officer ------------------------------------------------- ----- ----------------- Joseph D. Reid 60 1988 Chairman, President and Chief Executive Officer David O'Leary 72 1988 Secretary Robert C. Carr 63 1988 Executive Vice President and Treasurer David J. Dutton 52 2000 Chief Information Officer Cristin Reid English 34 1997 Chief Administrative Officer Lee W. Hendrickson 47 1991 Chief Financial Officer Michael L. Kasten 57 2002 Vice Chairman Lyle W. Miller 59 2002 Vice Chairman John S. Lewis 49 2002 President - Western Regions Michael M. Moran 43 2000 Chief of Capital Markets David K. Powers 57 1990 Director of Loan Administration William E. Rheaume 61 1998 Senior Counsel Bruce A. Thomas 45 1998 Chief of Bank Performance, Great Lakes Region Brian K. English 37 2001 General Counsel Carl C. Farrar 53 1998 Senior Vice President John C. Smythe 56 1983 Senior Vice President Marie D. Walker 43 1990 Senior Vice President, Accounting Linda D. Pavona 51 1991 Senior Vice President
ITEM 11, EXECUTIVE COMPENSATION. Incorporated by reference from Corporation's definitive proxy statement to be filed within 120 days after December 31, 2002. ITEM 12, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from Corporation's definitive proxy statement to be filed within 120 days after December 31, 2002. ITEM 13, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference from Corporation's definitive proxy statement to be filed within 120 days after December 31, 2002. -19- PART III, CONTINUED ITEM 14, CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934) were evaluated as of December 31, 2002 ("Evaluation Date"). Such evaluation concluded that Capitol's disclosure controls and procedures are effective to ensure that material information relating to Capitol, including its consolidated subsidiaries, is made known to Capitol's senior management, particularly during the period for which this annual report has been prepared. (b) CHANGES IN INTERNAL CONTROL. As of the signature date of this report, there have been no significant changes in Capitol's internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date referred to in (a) above. (c) ASSET-BACKED ISSUERS. Not applicable. PART IV ITEM 15, EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. A. Exhibits: The following consolidated financial statements of Capitol Bancorp Limited and subsidiaries and report of independent auditors included on Pages 26-54 of the Financial Information Section of Annual Report of the Registrant to its stockholders for the year ended December 31, 2002, are incorporated by reference in Item 8: Report of Independent Auditors. Consolidated balance sheets--December 31, 2002 and 2001. Consolidated statements of income--Years ended December 31, 2002, 2001 and 2000. Consolidated statements of changes in stockholders' equity--Years ended December 31, 2002, 2001 and 2000. Consolidated statements of cash flows--Years ended December 31, 2002, 2001 and 2000. Notes to consolidated financial statements. All financial statements and schedules have been incorporated by reference from the Annual Report or are included in Management's Discussion and Analysis of Financial Condition and Results of Operations. No schedules are included here because they are either not required, not applicable or the required information is contained elsewhere. B. Reports on Form 8-K: During the fourth quarter of 2002, no reports on Form 8-K were filed by the Registrant. -20- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ Joseph D. Reid By: /s/ Lee W. Hendrickson --------------------------------- ---------------------------------- Joseph D. Reid Lee W. Hendrickson Chairman and Chief Financial Officer Chief Executive Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant as Directors of the Corporation on March 28, 2003. /s/ Joseph D. Reid /s/ Robert C. Carr - ------------------------------------- ---------------------------------- Joseph D. Reid, Chairman, Robert C. Carr, Executive Vice Chief Executive Officer and Director President, Treasurer and Director /s/ David O'Leary /s/ Michael L. Kasten - ------------------------------------ ---------------------------------- David O'Leary, Secretary and Director Michael L. Kasten, Vice Chairman and Director /s/ Lyle W. Miller - ------------------------------------- ---------------------------------- Lyle W. Miller, Vice Chairman and Louis G. Allen, Director Director /s/ Paul R. Ballard /s/ David L. Becker - ------------------------------------- ---------------------------------- Paul R. Ballard, Director David L. Becker, Director /s/ Douglas E. Crist /s/ Michael J. Devine - ------------------------------------- ---------------------------------- Douglas E. Crist, Director Michael J. Devine, Director /s/ James C. Epolito /s/ Gary A. Falkenberg - ------------------------------------- ---------------------------------- James C. Epolito, Director Gary A. Falkenberg, Director /s/ Kathleen A. Gaskin - ------------------------------------- ---------------------------------- Joel I. Ferguson, Director Kathleen A. Gaskin, Director /s/ H. Nicholas Genova /s/ Michael F. Hannley - ------------------------------------- ---------------------------------- H. Nicholas Genova, Director Michael F. Hannley, Director /s/ Lewis D. Johns /s/ John S. Lewis - ------------------------------------- ---------------------------------- Lewis D. Johns, Director John S. Lewis, President, Western Regions and Director /s/ Humberto S. Lopez /s/ Leonard Maas - ------------------------------------- ---------------------------------- Humberto S. Lopez, Director Leonard Maas, Director /s/ Kathryn L. Munro /s/ Cristin Reid English - ------------------------------------- ---------------------------------- Kathryn L. Munro, Director Cristin Reid English, Chief Administrative Officer and Director /s/ Ronald K. Sable - ------------------------------------- Ronald K. Sable, Director -21- CERTIFICATIONS I, Joseph D. Reid, Chairman and CEO, certify that: 1. I have reviewed this annual report on Form 10-K of Capitol Bancorp Ltd.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Joseph D. Reid ----------------------------- Joseph D. Reid Chairman and CEO -22- CERTIFICATIONS--CONTINUED I, Lee W. Hendrickson, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Capitol Bancorp Ltd.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Lee W. Hendrickson -------------------------- Lee W. Hendrickson Chief Financial Officer -23- EXHIBIT INDEX
PAGE NUMBER OR INCORPORATED BY EXHIBIT NO. DESCRIPTION REFERENCE FROM: - ----------- ----------- --------------- 3 Articles of Incorporation and Bylaws (1) 4 Instruments Defining the Rights of Security Holders: (a) Common Stock Certificate (1) (b) Indenture dated December 18, 1997 (14) (c) Subordinated Debenture (14) (d) Amended and Restated Trust Agreement dated December 18, 1997 (14) (e) Preferred Security Certificate dated December 18, 1997 (14) (f) Preferred Securities Guarantee Agreement of Capitol Trust I dated December 18, 1997 (14) (g) Agreement as to Expenses and Liabilities of Capitol Trust I (14) (h) Capitol Bancorp Ltd. 2000 Incentive Stock Plan 10 Material Contracts: (a) Joseph D. Reid Employment Agreement (as amended effective January 1, 1989) (2) (b) Profit Sharing/401(k) Plan (as amended and restated April 1, 1995) (13) (b1) First and Second Amendments to Profit Sharing/ 401(k) Plan (15) (b2) Third, Fourth and Fifth Amendments to Profit Sharing/401(k) Plan (17) (b3) Sixth, Seventh, Eighth and Ninth Amendments to Profit Sharing/401(k) Plan (18) (b4) Tenth, Eleventh, Twelfth, Thirteenth, Fourteenth and Fifteenth Amendments to Profit Sharing/401(k) Plan (20) (b5) Sixteenth and Seventeenth Amendments to Profit Sharing 401(k) Plan (c) Lease Agreement with Business & Trade Center, Ltd. (11) (d) Employee Stock Ownership Plan (as amended and restated February 10, 1994) (12) (d1) Second and Third Amendments to Employee Stock Ownership Plan (15) (d2) Fourth Amendment to Employee Stock Ownership Plan (17) (d3) Fifth Amendment to Employee Stock Ownership Plan (18) (e) Employment Agreements with Robert C. Carr, John C. Smythe, and Charles J. McDonald (2)
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PAGE NUMBER OR INCORPORATED BY EXHIBIT NO. DESCRIPTION REFERENCE FROM: - ----------- ----------- --------------- 10 Material Contracts--continued: (f) Executive Supplemental Income Agreements with Robert C. Carr, Paul R. Ballard, Richard G. Dorner, James R. Kaye, Scott G. Kling, John D. Groothuis, David K. Powers, John C. Smythe and Charles J. McDonald (13) (g) Amendment to Employment Agreement of Joseph D. Reid, dated October 2, 1989 (3) (h) Consolidation Agreement between the Corporation and Portage Commerce Bank (4) (i) Amendment to Employment Agreement of Joseph D. Reid, dated January 30, 1990 (5) (j) Employment Agreements with Paul R. Ballard and Richard G. Dorner (6) (k) Employment Agreement with David K. Powers (7) (l) Definitive Exchange Agreement and Closing Memorandum between the Registrant and United Savings Bank, FSB (8) (m) Employment Agreement with James R. Kaye (9) (n) Definitive Exchange Agreement between the Registrant and Financial Center Corporation (10) (o) Employment Agreement by and between Sun Community Bancorp Limited and Joseph D. Reid. (Exhibit 10.1 of Sun Community Bancorp Limited) (16) (p) Employment Agreement by and between Sun Community Bancorp Limited and John S. Lewis. (Exhibit 10.7 of Sun Community Bancorp Limited) (16) (q) Anti-dilution Agreement by and between Sun Community Bancorp Limited and Capitol Bancorp Ltd. (Exhibit 10.10 of Sun Community Bancorp Limited) (16) (r) Plan of Share Exchange dated November 16, 2001 between and among Capitol Bancorp Ltd, and Sun Community Bancorp Limited (19) 13 Annual Report to Security Holders A. Marketing Section of 2002 Annual Report B. Financial Information Section of 2002 Annual Report
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PAGE NUMBER OR INCORPORATED BY EXHIBIT NO. DESCRIPTION REFERENCE FROM: - ----------- ----------- --------------- 21 Subsidiaries of the Registrant 23 Consent of BDO Seidman, LLP 99.1 Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
KEY: - ---- (1) Form S-18, Reg. No. 33-24728C, filed September 15, 1988. (2) Form S-1, Reg. No. 33-30492, filed August 14, 1989. (3) Amendment No. 1 to Form S-1, Reg. No. 33-31323, filed November 20, 1989. (4) Form S-1, Reg. No. 33-31323, filed September 29, 1989. (5) Originally filed as exhibit to Form 10-K for year ended December 31, 1989, filed March 30, 1990; refiled as exhibit to Form 10-KSB for year ended December 31, 1995, filed March 14, 1996, due to time limit for incorporation by reference pursuant to Regulation SB Item 10(f). (6) Originally filed as exhibit to Form 10-K for year ended December 31, 1990, filed March 6, 1991; refiled as exhibit to Form 10-KSB for year ended December 31, 1995, filed March 14, 1996, due to time limit for incorporation by reference pursuant to Regulation SB Item 10(f). (7) Form 10-K for year ended December 31, 1991, filed February 28, 1992. (8) Form 8-K dated July 15, 1992, as amended under Form 8 on September 14, 1992. (9) Form 10-KSB for year ended December 31, 1992, filed February 25, 1993. (10) Form S-4, Reg. No. 33-73474, filed December 27, 1993. (11) Form 10-KSB for year ended December 31, 1993, filed March 14, 1994. (12) Form 10-KSB for year ended December 31, 1994, filed March 15, 1995. (13) Form 10-KSB for the year ended December 31, 1995, filed March 14, 1996. (14) Post Effective Amendment No.1 to Form S-3, Reg. No. 333-41215 and 333-41215-01 filed February 9, 1998. (15) Form 10-K for year ended December 31, 1998, filed March 17, 1999. (16) Amendment No. 2 to the Registration Statement on Form S-1 of Sun Community Bancorp Limited (Registration No. 333-76719) dated June 15, 1999. (17) Form 10-K for year ended December 31, 1999, filed March 27, 2000. (18) Form 10-K for year ended December 31, 2000, filed March 23, 2001. (19) Amendment No. 4 to the Registration Statement on Form S-4 Reg. No. 333-73624 filed February 12, 2002. (20) Form 10-K for year ended December 31, 2001, filed March 15, 2002. -26- EX-10.B5-1 3 ex10-b5.txt AMENDMENT NO. 16 TO ESSOP Exhibit (b5-1) AMENDMENT TO THE CAPITOL BANCORP, LTD. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN AMENDMENT NUMBER 16 The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is hereby amended effective February 22, 2002 adding the following participating employer at the end of the list contained: Name of Type of State of Date of Employer Entity Organization Participation -------- ------ ------------ ------------- Bank of Bank Nevada 2/14/2002 Las Vegas CAPITOL BANCORP LIMITED Dated: February 14, 2002 By: \s\ Joseph D. Reid --------------------------------------- Joseph D. Reid Chairman and CEO BANK OF LAS VEGAS Dated: February 14, 2002 By: \s\ Vincent Ciminise --------------------------------------- Vincent Ciminise President EX-10.B5-2 4 ex10b52.txt AMENDMENT NO. 17 TO ESSOP Exhibit (b5-2) AMENDMENT TO THE CAPITOL BANCORP, LTD. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN AMENDMENT NUMBER 17 The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is hereby amended effective February 15, 2002 adding the following participating employer at the end of the list contained: Name of Type of State of Date of Employer Entity Organization Participation -------- ------ ------------ ------------- Napa Community Bank California 2/15/2002 Bank CAPITOL BANCORP LIMITED Dated: February 15, 2002 By: \s\ Joseph D. Reid ------------------------------------ Joseph D. Reid Chairman and CEO NAPA COMMUNITY BANK Dated: February 15, 2002 By: \s\ Dennis Pedisich ------------------------------------ Dennis Pedisich President and CEO EX-13.A 5 ex13a.txt MARKETING SECTION OF 2002 ANNUAL REPORT Exhibit 13(a) OUR CORE VALUES [PHOTO] ITEM PROCESSING GREAT LAKES REGION ENTREPRENEURSHIP Entrepreneurship is the essence of our company spirit. LOYALTY The way we treat our customers begins with the way we treat each other. Respect and reliability encourage loyalty in all of us. COMMUNITY COMMITMENT Our success depends upon the success of our community. INTEGRITY It is our standard of behavior, which always seeks to do the right thing. MAXIMIZING POTENTIAL We are committed to maximizing potential as a company and as individuals. TO OUR SHAREHOLDERS Dear Shareholders: In the year 2002 we achieved another plateau in our long-term journey toward lasting success as a public company. Earnings grew 55%; earnings per share grew 16%; net operating revenues increased 28% and assets increased 18%. We had a good year. We were rewarded by the stock market with a 74% price increase. As we build for the future, we are challenged by the reckless indifference many public companies have demonstrated regarding their own credibility as leaders and as fiduciaries. CREDIBILITY Our ability to succeed as bankers in a competitive environment has been built on our credibility as service providers. We deliver a higher level of service by interfacing our customers with human beings. The customers are not left to fend for themselves when interacting with our banking system. We treat our customers' concerns with confidentiality and care. We will continue to operate in this manner at each of our affiliate banks. The credibility we have established is enhanced by the continuity of our banking operations. It is a comfort to our customers to know that our banks are committed to long-term success, thereby avoiding the disruption other competitors have demonstrated through mergers with out-of-town companies. However, the responsibility of demonstrating our credibility does not end with our customer. Recent events regarding the activities of CEOs and boards of directors throughout corporate America have called into question the conduct of all public corporations. We do not wish to risk our credibility with our shareholders. We will do all that is necessary to protect this important trust. For these reasons the board of directors, during the first quarter of last year, initiated a review of our corporate governance practices and executive compensation arrangements. This effort resulted in the revision of our Corporate Code of Ethics and the development of Corporate Governance Guidelines. Moreover, the board adopted a charter for each standing committee. These important accomplishments are published on our website. In addition, the Compensation, Audit and Nomination and Governance Committees are made up exclusively of independent directors consistent with the new guidelines published by the New York Stock Exchange and the NASDAQ Stock Market. ------------------------- WE DO NOT WISH TO RISK OUR CREDIBILITY WITH OUR SHAREHOLDERS. WE WILL DO ALL THAT IS NECESSARY TO PROTECT THIS IMPORTANT TRUST. ------------------------- Finally, a review and revision of the employment contracts of senior officers was completed to ensure that management is incented toward long-term objectives. As we continue to develop our long-range strategic plan, we know that ongoing credibility with our customers and our shareholders remains vital to our success. CORE VALUES Our credibility is driven by our core values. We currently have 29 banks and operate in 8 states. Each of our banks is benefited by a board of directors who are residents of their banking community. Our bank directors are the most significant off-balance-sheet assets of the Corporation. Their impartial oversight of banking operations is matched by significant individual business development efforts. Unlike most other banking models, ours is built around our bank directorships. 2 During the past year we initiated an effort to identify our core values as a company. This undertaking recognized both the geographic and cultural diversity of our bank boards and our employees. At the conclusion of the process we were able to construct a definition of our core values: ENTREPRENEURSHIP ENTREPRENEURSHIP IS THE ESSENCE OF OUR COMPANY SPIRIT. LOYALTY THE WAY WE TREAT OUR CUSTOMERS BEGINS WITH THE WAY WE TREAT EACH OTHER. RESPECT AND RELIABILITY ENCOURAGE LOYALTY IN ALL OF US. COMMUNITY COMMITMENT OUR SUCCESS DEPENDS UPON THE SUCCESS OF OUR COMMUNITY. INTEGRITY IT IS OUR STANDARD OF BEHAVIOR, WHICH ALWAYS SEEKS TO DO THE RIGHT THING. MAXIMIZING POTENTIAL WE ARE COMMITTED TO MAXIMIZING POTENTIAL AS A COMPANY AND AS INDIVIDUALS. [PHOTO] These values are not objectives we would like to attain -- they represent who we are as a company. They serve as an instrument of measurement in all that we undertake. I invite you to view the various letters each bank president has submitted in this report which demonstrate our core values. PERFORMANCE For the year 2002, record net operating revenues of $115.6 million increased approximately 28% when compared to the $90.1 million figure recorded in 2001. Record earnings of approximately $16.7 million for 2002 reflect 55% growth when compared to $10.7 million in 2001. On an earnings per share (EPS) basis, Capitol reported basic ($1.64) and diluted ($1.57) figures for 2002 that were 19% and 16%, respectively, ahead of 2001's comparable period levels of $1.38 and $1.35. The 28% growth in net operating revenues for 2002 was aided by an approximate 56% increase in noninterest income, offsetting the 20% expansion in operating expense that reflects both the opening of two new affiliate banks in California and Nevada and new loan production offices in Texas, California and Georgia. In addition, the consolidation of minority interests at several of Capitol's affiliate development holding companies during 2002 served to dramatically expand the share base from approximately 7.8 million shares at the end of 2001 to roughly 11.3 million shares at year end. INVESTOR SIMPLIFICATION On March 31, 2002, the public ownership profile of our primary southwest-based development holding company, Sun Community Bancorp Limited, was consolidated in a share exchange with Capitol Bancorp. Subsequently, the shared investments in our Indiana, Nevada, and SBA-specialist, Sunrise Capital, holding companies were 3 exchanged for stock in Capitol Bancorp. These four second-tier holding companies are now 100% owned by Capitol Bancorp. The share base of Capitol Bancorp was increased by nearly 50% and our corporate structure was simplified. These actions were received positively within the investor community. At the end of 2000, the market capitalization, or the total value the investor community had assigned to the Corporation, equaled approximately $75 million. Closing out 2001, the market capitalization of the Corporation measured just shy of $105 million. Following the share exchanges, Capitol Bancorp's market capitalization increased more than 2.5 times to over $270 million in 2002. BUILDING A TRACK RECORD Our message, supported by our performance, is connecting with the investor community to produce operating results in line with investor expectations, while not sacrificing potential growth opportunities which serve to enhance the future earnings stream. The performance of the past few years reflects this operating dynamic. Since the end of 1998, assets have more than doubled from just over $1 billion to more than $2.4 billion. In the same time frame, shareholder equity has nearly quadrupled from approximately $49 million to over $160 million, while earnings ($4.6 million to approximately $16.7 million) and operating revenues ($37 million to more than $115 million) have both more than tripled. At the end of 1998, we had 17 community banks in our family. Today, the affiliate system totals 29, with new opportunities being explored every day. In 1998, EPS measured $0.72, while total shares outstanding equaled 6.3 million. In 2002, our EPS exceeded "street" expectations reaching $1.57, and we entered 2003 with more than 11.3 million shares outstanding. We are often perceived as a company running contrarian to the banking industry's trend of "bigger means better" by remaining committed to our most critical operating constituency -- the customer relationship. We continue to believe that this strategy will promote long-term success. EMERGING PROFITABILITY As we enter 2003, only 11 of our 29 affiliate banks are more than 5 years old. The earnings potential of our other 18 maturing, but youthful, banks will serve to expand our revenue and earnings stream over the next few years. ------------------------------- THESE VALUES ARE NOT OBJECTIVES WE WOULD LIKE TO ATTAIN -- THEY REPRESENT WHO WE ARE AS A COMPANY. ------------------------------- A FOOTNOTE REGARDING ACQUISITIONS Capitol Bancorp has successfully completed numerous "acquisitions" of the internally-generated variety as we consolidated the minority interests of our affiliates. These transactions were transparent to the customer, effectively resulting in an accounting formality for what had been operating reality. However, as we survey the landscape, we recognize that there may be possibilities to augment our traditional de novo development efforts with selective acquisitions. As we have successfully done in the past, we will continue to look at potential transactions, searching for both a cultural fit and an accretive earnings opportunity. We invite you to share our optimism for the coming years. /s/ Joseph D. Reid Joseph D. Reid Chairman & CEO 4 CAPITOL BANCORP LIMITED BOARD OF DIRECTORS Louis G. Allen Michael F. Hannley Myrl D. Nofziger Retired Banker President & CEO President Bank of Tucson Hoogenboom Nofziger Paul R. Ballard Retired President & CEO Lewis D. Johns Kathryn L. Munro Portage Commerce Bank President Chairman & CEO Mid-Michigan Investment Co. Bridge West, LLC David L. Becker Retired Insurance Agent Michael L. Kasten David O'Leary Managing Partner Chairman Robert C. Carr Kasten Investments, LLC O'Leary Paint Company Executive Vice President Capitol Bancorp Limited John S. Lewis Joseph D. Reid President-Western Regions Chairman & CEO [PHOTO] Capitol Bancorp Limited Capitol Bancorp Limited JOHN S. LEWIS, PRESIDENT-WESTERN REGIONS [PHOTO] Ronald K. Sable CRISTIN REID ENGLISH, Vice President Public Sector Douglas E. Crist CHIEF ADMINISTRATIVE OFFICER Guardent, Inc. President Developers of SW Florida, Inc. [PHOTO] FIRST CALIFORNIA NORTHERN ROBERT C. CARR, BANCORP Michael J. Devine EXECUTIVE VICE PRESIDENT & TREASURER Attorney at Law BOARD OF DIRECTORS Humberto S. Lopez Cristin Reid English President Geni A. Bennetts, MD Chief Administrative Officer HSL Properties, Inc. Medical Consulting Capitol Bancorp Limited Leonard Maas Cristin Reid English James C. Epolito President Chief Administrative Officer President & CEO Gillisse Construction Company Capitol Bancorp Limited The Accident Fund Company Lyle W. Miller Jeffrey L. Epps Gary A. Falkenberg President President Gary A. Falkenberg, D.O., P.C. Servco, Inc. Epps Chevrolet Joel I. Ferguson Paul J. Krsek Chairman Managing Partner Ferguson Development K&A Asset Management, LLC Kathleen A. Gaskin David L. McSherry Associate Broker/State Appraiser Investor Tomie Raines, Inc. Realtors Northwind Investment Co., L.L.C. H. Nicholas Genova David O'Leary Chairman & CEO Chairman Washtenaw News Co. Inc. O'Leary Paint Company H.N. Genova Development Joseph D. Reid Chairman & CEO Capitol Bancorp Limited
5 CAPITOL BANCORP LIMITED OFFICERS Joseph D. Reid David J. Meninga Nancy A. Schoolman Chairman & CEO Assistant Corporate Counsel Vice President Michael L. Kasten John R. Myers Patricia L. Stone Vice Chairman Vice President Senior Vice President Lyle W. Miller Michael M. Moran Patrick R. Sturm Vice Chairman Chief of Capital Markets Corporate Counsel David O'Leary Phillip Kyle Oesterle Stephanie M. Swan Secretary Vice President Corporate Governance Officer Robert C. Carr Gregory E. Patten Darryl S. Tenenbaum Executive Vice President & Treasurer Vice President Vice President/Auditor Art R. Aguirre Linda D. Pavona Bruce A. Thomas Vice President Senior Vice President Chief of Bank Performance Carol A. Blaine [PHOTO] [PHOTO] Vice President BRUCE A. THOMAS, LEE W. HENDRICKSON, CHIEF OF BANK PERFORMANCE CHIEF FINANCIAL OFFICER Katherine P. Bowden Vice President [PHOTO] [PHOTO] DAVID J. DUTTON, MICHAEL M. MORAN, Brent R. Branch CHIEF INFORMATION OFFICER CHIEF OF CAPITAL MAKETS Assistant Vice President David K. Powers Stephen D. Todd Margarete L. Chalker Director of Loan Administration Director of Bank Performance-Western Regions Assistant Vice President Amy L. Pramov Marie D. Walker Staci L. Charles Assistant Vice President Senior Vice President-Accounting Marketing Director-Western Regions Joseph D. Reid, III Leonard C. Zazula James F. Crawford Corporate Counsel Cashier-Western Regions Director of Strategic Products & Services William E. Rheaume David J. Dutton Senior Counsel Chief Information Officer Brian K. English General Counsel Cristin Reid English Chief Administrative Officer Carl C. Farrar Senior Vice President David D. Fortune Chief Credit Officer - Western Regions Reginald A. Hansom, Jr. Assistant Vice President Janet L. Hardin Vice President Lee W. Hendrickson Chief Financial Officer John S. Lewis President - Western Regions Tina M. Luha Assistant Vice President Stephanie A. Maat Vice President Charles J. McDonald Cashier-Great Lakes Region
6 [PHOTO] NETWORK SERVICES GREAT LAKES REGION E N T R E P R E N U E R S H I P [GRAPHIC] [PHOTO] NETWORK SERVICES WESTERN REGIONS BOARD OF DIRECTORS BANK OF LAS VEGAS Vincent J. Ciminise Bank of Las Vegas opened in February of 2002 to opportunity, excitement, President anticipation, and challenge. Throughout its first year the Bank realized the Bank of Las Vegas successful completion of many goals. These accomplishments were achieved through an unprecedented level of entrepreneurship exhibited by our employees. Following Darlene Copsey are a few examples of the spirit demonstrated by our team: Secretary/Treasurer The Alpha Group Ltd. We developed a marketing plan for the Bank utilizing landmarks that are synonymous with our namesake -- Las Vegas. This unique advertising is used Michael J. Devine on our courier van, and it was also used to give our temporary facility Attorney at Law some needed character. The van carries replicas of landmarks in the city including the head of the Egyptian from the Luxor Hotel and the distinctive Leo N. Durant "Welcome to Fabulous Las Vegas" marker located at the entrance to the city. Owner We covered the front of the bank with a large billboard that depicted the LND Construction skyline of downtown Las Vegas. The comments from the local community have been very positive. I can assure you that people remember our courier van Scott R. Gragson and eye-catching signage, which is entrepreneurial advertising at its best. Managing Partner GKT Acquisitions During our first year we benefited from the unification efforts of our affiliated banks and implemented procedures consistent with the new Donald K. Hamrick consolidated systems. The staff embraced the opportunity to learn new General Manager skills and apply them to meet the bank's specific needs, as would any Signature Lincoln Mercury entrepreneur. Darryl J. Hardy Whether adjusting to an incredibly small temporary working facility, or Vice President helping a customer find a way to start their own business, our employees Hardy Painting & Drywall exemplify those traits associated with a true entrepreneur. Their positive attitudes, and the consistent encouragement they provide to new customers, Alan R. Houldsworth stems from the pleasure that comes from running an autonomous operation. Partner Entrepreneurs enjoy their creative freedom, working hard and the Houldsworth & Company, CPAs satisfaction of ultimate success. Charles L. Lasky As the Bank continues to grow and mature, we must never lose sight of how we President reached this point. That strength will ensure our future. Lasky, Fifarek & Hogan, P.C. Thomas C. Mangione BANKING LAS VEGAS! Chairman, President & CEO Red Rock Community Bank /s/ Vincent J. Ciminise Joseph D. Reid Vincent J. Ciminise Chairman & CEO President Capitol Bancorp Limited 6001 S. Decatur, Suite P Joseph D. Reid III Las Vegas, NV 89118 Corporate Counsel 702-939-2400 Capitol Bancorp Limited www.bankoflasvegas.com Philip P. Saunders Retired Executive General Motors Corporation OFFICERS Joseph D. Reid Chairman Thomas C. Mangione Vice Chairman Charles L. Lasky Secretary Vincent J. Ciminise President Roger S. Mellies Executive Vice President/CCO Carol A. Clemens Senior Vice President William C. Russell Senior Vice President Debbie V. Clarke Vice President
E N T R E P R E N U E R S H I P 8 CAMELBACK COMMUNITY BANK BOARD OF DIRECTORS Our team at Camelback Community Bank takes great pride in our commitment to all Shirley A. Agnos of our shared core values. We display these values every day in our work, our President volunteer activities and our personal behavior. Arizona Town Hall The past several years have proven that a bank must create a reputation for Cord D. Armstrong customer service outside of the traditional scope if it is going to provide CPA/Manager financial services that are truly unique and tailored to meet the needs of its Miller Wagner Business Services, Inc. customers. Customers have many choices today and have more access to information than ever before. This new banking environment requires our bank to be ever more Michael J. Devine entrepreneurial and cutting edge. Attorney at Law We have concluded that Camelback's new checking account that rewards our Winfield L. Holden III customers for increasing their account balance, while offering both convenience Publisher and a competitive interest rate, provides an attractive investment opportunity. Arizona Highways Magazine In today's low interest-rate environment, many individuals are investing in cash vehicles that earn very little interest. In an effort to meet our customers' Michael L. Kasten needs, and at the same time add growth to the Bank, we created an Managing Partner interest-bearing checking account that pays a premium interest rate for deposits Kasten Investments, LLC in excess of $25,000. Additionally, the account is tiered, and at each of the higher levels, the interest rate increases substantially. Gregory M. Kruzel Attorney at Law & Partner In our continued effort to support the nonprofit agencies in our community, we Braun, Becker, Kruzel, P.C. offered this account to them as well. They are extremely grateful to increase the return on their deposits, especially now when fundraising is more difficult Robert V. Lester than ever and every penny counts. President Progressive Financial Concepts This checking account has delivered all that we expected and more. It increased our total deposits by 20% in 90 days and is a great opportunity for introducing John S. Lewis new customers to Camelback Community Bank. President - Western Regions Capitol Bancorp Limited THE BANK WHERE YOU BELONG. Tammy A. Linn Director /s/ Barbara J. Ralston Governor's Community Policy Officer Barbara J. Ralston Susan C. Mulligan President & CEO CPA Earl A. Petznick 2777 East Camelback Road, Suite 100 President & CEO Phoenix, AZ 85016 Northside Hay Company 602-224-5800 www.camelbackbank.com Barbara J. Ralston President & CEO Camelback Community Bank Dan A. Robledo President & CEO Lawyer's Title of Arizona, Inc. Jacqueline J. Steiner Retired State Senator & Community Volunteer OFFICERS Dan A. Robledo Chairman Michael L. Kasten Vice Chairman Shirley A. Agnos Secretary Barbara J. Ralston President & CEO John Robert Boosman Executive Vice President & CCO James J. Brandes Senior Vice President Betty L. Cornish Senior Vice President Patrick B. Westman Senior Vice President Dorsey J. Tisdale Vice President William Von Hatten Vice President
E N T R E P R E N U E R S H I P 9 BOARD OF DIRECTORS DESERT COMMUNITY BANK Robert J. Andrews Desert Community Bank has carved out a niche in the greater Las Vegas CFO & Director of Operations marketplace, which has distinguished us from our peers. Although Las Vegas is IGT Lottery Division often touted as the fastest growing city in America, with some 5,000 new residents every month, many of our directors have extensive community roots. Tracy R. Bouchard Many are from local, established families who have conducted business in Las President Vegas for generations. They, and their family members, have held noteworthy National Title Company public offices, successfully operated family businesses for over 50 years, and remain well connected with county and municipal government, as well as the Michael J. Devine varied industries that fuel this town's economy. The contacts they share, as Attorney at Law well as the history that accompanies their experience in the marketplace, gives us an opportunity to enrich the opportunities not normally offered to newcomers Rose M.K. Dominguez to this city. President Discovery Travel Las Vegas is known for entertainment and gaming. Manufacturing, education, and trades that facilitate the town's tourism are the less known side of Las Vegas. Tom R. Grimmett Desert Community Bank is constantly working on innovative ways to assist our Owner customers, and our community in achieving their dreams. Grimmett & Company For example, we have a customer with a continual need for new technicians to Garry L. Hayes work in his specialty of selling and installing automated HVAC systems and President controls in large facilities. It is a difficult field in which to find qualified Law Office of Garry L. Hayes employees. The owner decided to solve that problem by starting a school within his business to train technicians at all levels of HVAC installation, James W. Howard maintenance and repair. Tuition financing is not generally offered to students President attending trade schools. At the suggestion of one of our directors, Desert Desert Community Bank Community Bank was able to acquaint our customer with another contact who provides student loan assistance for trade schools who do not yet qualify for Charles L. Lasky the Title IV assistance offered by the government guaranteed student loan President programs. This helped our customer succeed in uniquely achieving their growth Lasky, Fifarek & Hogan, P.C. objectives. Thomas C. Mangione Our directors, our employees, and our customers all benefit when we work to Chairman, President & CEO solve problems together. It makes us unique from other community banks in Las Red Rock Community Bank Vegas. We have one location -- with many solutions for our customers. Leland D. Pace Managing Partner SMALLER BANK. BIGGER SERVICE.(TM) Stewart, Archibald & Barney, LLP /s/ James W. Howard Joseph D. Reid III Corporate Counsel James W. Howard Capitol Bancorp Limited President Stephen D. Stiver Retired 3740 South Pecos-McLeod Las Vegas, NV 89121 702-938-0500 OFFICERS www.desertcommunity.com Thomas C. Mangione Chairman Michael J. Devine Vice Chairman James W. Howard President Charles L. Lasky Secretary Al G. Gourrier II Executive Vice President & Chief Credit Officer Rodney K. Chaney Senior Vice President Private Banking Manager Eileen S. Hagler Vice President Troy I. Morris Vice President
E N T R E P R E N U E R S H I P 10 KENT COMMERCE BANK BOARD OF DIRECTORS Entrepreneurship is a word rarely associated with banking. One dictionary James M. Badaluco defines an entrepreneur as "one who organizes and assumes the risk of a business Vice President or enterprise." Bankers are in the business of minimizing and managing risk. S.J. Wisinski & Company They are generally not willing to step out and assume risk. That willingness -- even eagerness, at times -- is the root source of Capitol Bancorp's success. Paul R. Ballard Retired President & CEO Three years ago, Kent Commerce Bank had no U.S. Small Business Administration Portage Commerce Bank (SBA) loans in its commercial portfolio. SBA loans can be complex, require significant training and expertise, and have rigorous servicing requirements. Sharon M. Buursma Yet in 2002, Kent was the primary contributor to the program that resulted in Executive Vice President Capitol Bancorp being named SBA "Community Lender of the Year" in Michigan -- Spectrum Health the highest SBA award given to a community bank. Why? We recognized the opportunity for SBA lending in the market and we felt it was an essential Kevin J. Einfeld service that we needed to provide to our customers. We then looked for, and President committed the people and resources necessary, to be successful. Was it a risk? BDR, Inc. Absolutely. SBA lending is highly specialized and mistakes can be costly. The financial rewards from our success, however, have been great, both for our Bank Grant J. Gruel and the company's reputation as a whole. Partner/Trial Attorney Gruel, Mills, Nims & Pylman As a bank focused on small business, we find that the majority of our clients are entrepreneurs themselves, having built their businesses from the ground up. Gary D. Hensch Very few bankers truly understand what that means. We do, because we built our CPA bank the same way. Without taking a few risks, success comes very slowly, if Redstone Group ever. Our clients understand how we built our bank and, accordingly, they know we're able to relate to them like no one else can. R. Ted Hudson Owner Bankers are typically not interested in trying something new, particularly if an Prestige Property, Inc. element of risk exists. At Kent Commerce Bank, however, our entrepreneurial spirit is foundational. It is a much-cherished value all our banking Harold A. Marks professionals embrace and exemplify. CPA/Partner Prangley Marks LLP KENT COMMERCE BANK -- PAYING A HIGHER RATE OF ATTENTION. Calvin D. Meeusen Managing Partner /s/ David E. Veen Calvin D. Meeusen, CPA David E. Veen President & CEO Valerie R. Overheul President & CEO Summit Training Source, Inc. 4050 Lake Drive SE Grand Rapids, MI 49546 Mary L. Ursul 616-974-0200 Vice President www.kentcommerce.com Professionals Direct, Inc. David E. Veen President & CEO Kent Commerce Bank Michael C. Walton Attorney at Law Rhoades, McKee, Boer, Goodrich & Titta OFFICERS Michael C. Walton Chairman Paul R. Ballard Vice Chairman Kevin J. Einfeld Secretary David E. Veen President & CEO William H. Young Senior Vice President Michael P. Boelens Vice President John J. Coder Vice President Linda S. Crawford Vice President Thomas J. Kim Vice President Sandra L. Bloem Vice President
E N T R E P R E N U E R S H I P 11 BOARD OF DIRECTORS MACOMB COMMUNITY BANK Robert C. Carr Macomb Community Bank (MCB) believes that entrepreneurs provide a significant Executive Vice President economic contribution to any community. Supporting entrepreneurs in a timely Capitol Bancorp Limited manner, with financial products designed to meet their needs, is what we do. Although many banks have changed their focus in the last several years, MCB Timothy J. Cuttle remains committed to its vision of supporting small business by providing a high President & CEO level of communication and quality products. As a smaller bank, we think of Macomb Community Bank ourselves more like the entrepreneurs we serve. At MCB, customers can meet with a senior officer, or even the President, at any time. We think it's an important Christina C. D'Alessandro part of our overall responsibility. I would like to share with you some recent Vice President examples of MCB supporting small business in our community: Villa Custom Homes In 2002, MCB assumed a major leadership role in hosting and sponsoring a Ronald G. Forster series of five economic luncheons that focused on areas of interest to Retired small business. Topics such as economics, technology, global competition, real estate and the automotive industry were discussed at length during James R. Kaye these meetings. The program was so successful that we have committed to President & CEO continue this event on an annual basis. Oakland Commerce Bank MCB is a major sponsor of the 100th anniversary of the Central Macomb David F. Keown County Chamber of Commerce, one of the oldest chambers in the state of Building Official Michigan and the country. The Chamber, with its 1,000 members, exists to Washington Township support entrepreneurs and MCB supports its vision. Dr. Albert L. Lorenzo Entrepreneurship can begin at any stage in life. MCB believes we can help President develop entrepreneurs of the future. In 2003, the Bank will provide a Macomb Community College business scholarship for tuition at Macomb Community College. The college, one of the largest junior colleges in the country, has a student enrollment Delia Rendon Martin of nearly 50,000. We support its efforts in providing a quality educational Co-Owner opportunity for future entrepreneurs. Martin Enterprises A visionary bank does much more than simply manage money. It is a source of Robert Pelachyk leadership that promotes economic prosperity and the welfare of the community. EVP & General Manager As entrepreneurs, Macomb Community Bank is committed to providing this Cross Huller-North America leadership. OFFICERS SMALLER BANK. BIGGER SERVICE(TM) Robert C. Carr /s/ Timothy J. Cuttle Chairman Timothy J. Cuttle President & CEO Ronald G. Forster Vice Chairman 16000 Hall Road, Suite 102 Christina C. D'Alessandro Clinton Township, MI 48038 Secretary 586-228-1600 www.macombcommunity.com Timothy J. Cuttle President & CEO Kenneth E. Bryant Vice President Frank J. Buscemi Vice President Kenneth O. Flynn Vice President
E N T R E P R E N U E R S H I P 12 MESA BANK BOARD OF DIRECTORS Entrepreneurship is the essence of our success at Mesa Bank. We define Neil R. Barna entrepreneurship as the recognition and pursuit of opportunity, the confidence President & CEO that we can be successful, and the flexibility to adjust our course in response Mesa Bank to changes in our marketplace and community. Richard D. Crandall, CPA Entrepreneurship is about vision, persistence and innovation. We believe that we President/Partner have the vision to expand, improve or change our products and services to meet C N Resource, LLC the needs of our community. Working personally with businessmen and women of our community is our practice. Meeting their banking needs and wants is our goal. Michael J. Devine Attorney at Law We also recognize the value of giving back to our community. We have staff members on local boards of educational foundations and boards of chambers of Debra L. Duvall commerce. We have a bank officer that has dedicated her time to Junior Superintendent Achievement and teaches classes sponsored by JA. Susan Haverstrom teaches Mesa Public Schools elementary school children the value of learning and staying in school, community involvement and various aspects of business. Her persistence in Brian K. English teaching local children these aspects of life will serve them well as they General Counsel become active members of our community. Capitol Bancorp Limited To maintain market leadership, we must meet our customers' changing needs. At Robert R. Evans Mesa Bank we attempt to bring out the "inner innovator" that resides in each of President us. By doing so we find the right solutions for our customers. Mesa Bank opened Evans Management Company a loan production office in the Falcon Field area of Mesa in December 2002. What makes this entrepreneurial endeavor unique is that the person spearheading this Stewart A. Hogue effort was not in the banking business before joining Mesa Bank in 2002. Jim Principal LeCheminant, a thirty-year resident of Mesa, has adapted well to the banking SALK Management, LLC environment by introducing innovative methods of developing new customers and meeting their needs. Michael L. Kasten Managing Partner At Mesa Bank, we realize entrepreneurship is not static, but fluid. We must Kasten Investments, LLC continue to seek opportunities and methods to assist our customers and our community. Philip S. Kellis Partner Dobson Ranch Inn BANKING -- WITH A HUMAN TOUCH. Ruth L. Nesbitt /s/ Neil R. Barna Community Volunteer Neil R. Barna President & CEO Wayne C. Pomeroy Owner Pomeroy's Men's Stores 63 East Main, Suite 100 Mesa, AZ 85201 Daniel P. Skinner 480-649-5100 Owner & Manager www.mesabankers.com LeBaron & Carroll LSI, Inc. Terry D. Turk President Sun American Mortgage Company James K. Zaharis President The Zaharis Group OFFICERS Robert R. Evans Chairman Michael L. Kasten Vice Chairman Neil R. Barna President & CEO David D. Fortune Executive Vice President, Secretary & CCO Daniel R. Laux Vice President James G. LeCheminant Vice President Steven R. Mitchell Vice President Sandra S. Zazula Vice President
E N T R E P R E N U E R S H I P 13 BOARD OF DIRECTORS SUNRISE BANK OF ARIZONA Sandra A. Abalos "If opportunity doesn't knock, build a door." President ... And so we did. Abalos & Associates, PC Since Sunrise Bank of Arizona opened in December of 1998; the Sunrise team has Michael R. Allen built a lot of doors and taken the worlds of SBA lending and banking by storm. President Sunrise married owner-user real estate lending with banking services for small Sureway Properties businesses. Before the Sunrise Bank model was invented, SBA lending and banking were different worlds. The Sunrise team shared a vision with Capitol Bancorp, a James P. Dew vision that brought two entrepreneurs together to create a bank built on this Dew Wealth Management very unique model. Our model is quite simple -- concentrate on the needs of dynamic small business owners and entrepreneurs, provide them with extraordinary Michael J. Devine service, with an emphasis on SBA loans for equipment, working capital and Attorney at Law facilities, and turn them into loyal, long-term customers. The customer relationships begin with SBA lending. While many traditional banks consider SBA Brian K. English lending the last resort for their customers, Sunrise believes it presents an General Counsel incredible opportunity to differentiate itself from the competition. Since 94% Capitol Bancorp Limited of businesses in the United States are classified as "small," Sunrise has tapped into a remarkable customer base. As a result, the Sunrise model is a successful Patrick C. Hayes and innovative business model that seeks out these growing markets. Patrick Hayes Architecture After we built the doors, we opened them to industrious professionals who share the same vision of providing unparalleled financial services for the underserved William D. Hinz II small business market. Sunrise is committed to recruiting the best -- smart, CEO motivated, and entrepreneurial people who care about others... those who will Sunrise Bank of Arizona take a personal interest in small business owners, get to know their businesses, and help them reach their goals... people who know that by helping their J. Garth Jax customers prosper, they will succeed as well. Entrepreneur SBA lending is an innovative vehicle for building a community bank. It requires Michael L. Kasten a collective team effort to help finance people's dreams, and their Managing Partner entrepreneurial ventures. Sunrise Bank of Arizona is composed of an Kasten Investments, LLC entrepreneurial team whose personalities create and innovate to build more banks of recognized value around real opportunities. The energy that emanates from Kevin B. Kinerk this team is powerful, and this influence makes a difference in the community, Executive Vice President in the Bank, and in the spirit exemplified by the employees. Sunrise Bank of Arizona John S. Lewis BRINGING THE RELATIONSHIP BACK INTO BANKING. President, Western Regions Capitol Bancorp Limited /s/ William D. Hinz, II William D. Hinz, II Gerald D. Paquette CEO President Caliber Construction, Inc. 4350 East Camelback Road, Suite 100A Michael L. Smith Phoenix, AZ 85018 Jokake Construction 602-956-6250 www.sunrisebankofarizona.com OFFICERS John S. Lewis Chairman Michael L. Kasten Vice Chairman William D. Hinz II CEO Kevin B. Kinerk Executive Vice President & Secretary Ross L. Shannon Executive Vice President, Scottsdale Marian B. Creel Senior Vice President Mary D. Hurley Senior Vice President & CCO Joan M. Lessner Senior Vice President, Scottsdale Douglas M. Reynolds Senior Vice President & CCO Debra L. Ingle Vice President Bryan J. Kort Vice President Tyrone D. Couch Vice President
E N T R E P R E N U E R S H I P 14 [PHOTO] EXECUTIVE OFFICES GREAT LAKES REGION L O Y A L T Y [GRAPHIC] [PHOTO] EXECUTIVE OFFICES WESTERN REGIONS BOARD OF DIRECTORS BLACK MOUNTAIN COMMUNITY BANK Peter M. Atkinson Before Black Mountain Community Bank was organized three years ago, several President members of our original team of eight worked together for banks that have since Black Mountain Community Bank been lost in mergers. We often spoke of having our own bank where banking was done the way we remembered. Some of us mentioned going to the bank with our Michael D. Ballard parents when we were kids. Besides the lollipops, what we recalled was how the President tellers cheerfully greeted our parents by name, and took a few moments to catch Ballard Communications, Inc. up on what the family was up to. At our dream bank each member of the team would be upbeat like that, because each member of the team would be working at a job Michael J. Devine he or she genuinely enjoyed and one where he or she knew his or her contribution Attorney at Law was valued. Our customers would want to do business with us, rather than the next bank down the street, because they would know that we could, and would, Betty A. Kincaid serve them better than any other bank. President Southwest Exchange Corporation Once our bank was capitalized, creating was relatively easy. Three years later, our team now numbers twelve, and we collectively have 296 years of banking Charles L. Lasky experience. Our shareholders expect a strong return on their investment. In President order to accomplish that, we have recruited and retained satisfied customers Lasky, Fifarek & Hogan, P.C. like those we envisioned in our planning sessions. We have earned the respect of our customers, who are engaged as extended members of the Team. We trust each Claire M. MacDonald other to do our respective jobs with excellence and our clients trust us to MacDonald Properties effectively handle their banking business. Thomas C. Mangione Because of the mutual respect among bank team and customers, we are able to Chairman, President & CEO provide superior service in extraordinary circumstances. Recently, a customer Red Rock Community Bank and his wife were vacationing in Mexico when she became critically ill. It became necessary that she be quickly airlifted to Las Vegas at great expense. Michael J. Mixer When the Bank received a telephone call requesting that a large sum be wire Corporate Broker transferred to Mexico, we had all of the normal concerns. We worried for her Colliers International health, as she was personally known by all of us. As professionals, we had to be sure our customer was in fact, making the request. We also needed to confirm Colleen C. O'Callaghan-Miele that our customers weren't being forced, under duress, to transfer the amount out VP/Circulations Manager of their accounts. Our bank manager was able to talk to our customers by phone at H.B.C. Publications the hospital and confirm to her satisfaction that the request was real so the funds could be wired to Mexico. Two months later, to our great pleasure, the Phillip N. Ralston recovered customer walked into the bank to personally thank us. Chief Financial Officer/Treasurer American Nevada Company The original team is proud that Black Mountain Community Bank has developed the way we designed it. Our customers are glad we live our bank motto... banking the Joseph D. Reid III way you remember. Corporate Counsel Capitol Bancorp Limited /s/ Peter M. Atkinson Christopher G. Samson Peter M. Atkinson President & Owner President FN Investments Inc. 1700 West Horizon Ridge Parkway, Suite 101 OFFICERS Henderson, NV 89102 702-990-5900 Thomas C. Mangione www.blackmountaincommunitybank.com Chairman & CEO Michael J. Devine Vice Chairman Charles L. Lasky Secretary Peter M. Atkinson President David S. Rennick Executive Vice President & CCO Dennis L. Monson Senior Vice President Kathy M. Lucero Vice President RaMon McBride Vice President Shari A. Smith Vice President & Manager
L O Y A L T Y 16 CAPITOL NATIONAL BANK BOARD OF DIRECTORS Capitol National Bank recognized a little more than twenty years ago, the Robert C. Carr importance of developing a strong spirit of loyalty to our employees. They, in Executive Vice President turn, have shown the same concern and dedication, not only to the Bank, but also Capitol Bancorp Limited to our customers. We have always encouraged a working atmosphere that is respectful and caring of one another, knowing those same traits are key to Nan Elizabeth Casey providing successful customer relationship management. Attorney at Law Fraser Law Firm To that end, CNB encourages a free flow of employee ideas on how to improve our product and service delivery. We encourage and expect our management and staff Charles J. Clark to continually enhance their job knowledge and skills by participating in President banking courses and seminars. Several years ago we began monthly "Lunch & Learn" Clark Construction Company programs conducted by our senior management team. This format has been an excellent tool to continually reinforce a strong sense of camaraderie, as well Brian K. English as showing our commitment to making our employees the best they can be. By General Counsel regularly providing training and information about the Bank, its products and Capitol Bancorp Limited banking in general, members of our team increase their value to the Bank, and to each other. David E. Ferguson President This work environment, which enhances employee value and reliability, has been Ferguson Development nurtured and is a key ingredient in the development of our long-lasting customer relationships. Unlike the behavior of many of today's larger financial Patrick F. Hayes institutions, we always try to work with our customers both in good times and President during periods when running a profitable business is more challenging. We do not F.D. Hayes Electric run hot or cold based on the economy or a customer's short-term performance. We value loyalty, character, integrity and working together to create an Richard A. Henderson environment that has been critical to the long-term success of our customers and President the Bank. Henderson & Associates, PC The fact that the average tenure of members of our management team is 14 years J. Christopher Holman gives our staff and customers the comfort of knowing we will continue to be here Publisher to meet their needs. That level of continuity has no price tag as we build and Greater Lansing Business Monthly expand a solid business base, which in turn becomes a wonderful referral source, continually assisting Capitol National's development plan and success. L. Douglas Johns, Jr. Vice President Mid Michigan Investment Company SMALLER BANK. BIGGER SERVICE.(TM) Kevin A. Kelly /s/ John C. Smythe Managing Director John C. Smythe Michigan State Medical Society President & CEO Mark A. Latterman President 200 Washington Square North Latterman & Associates, PC Lansing, MI 48933 517-484-5080 Charles J. McDonald www.capitolnational.com Cashier-Great Lakes Region Capitol Bancorp Limited John D. O'Leary Co-President O'Leary Paint Company Patricia A. Reynolds Development Consultant Kolt & Serkaian Communications, Inc. John C. Smythe President & CEO Capitol National Bank OFFICERS Robert C. Carr Chairman Mark A. Latterman Vice Chairman Patrick F. Hayes Secretary John C. Smythe President & CEO John R. Farquhar Senior Vice President David E. Feldpausch Vice President Lori M. Garcia Vice President Theodore M. Terzian Vice President
L O Y A L T Y 17 BOARD OF DIRECTORS ELKHART COMMUNITY BANK Nancy B. Banks Loyalty to our shareholders, clients, and employees is demonstrated daily at Community Volunteer Elkhart Community Bank. Extraordinary customer anecdotes evidencing the loyalty of our banking professionals stand side-by-side with day-to-day procedures, R. Steven Bennett which reinforce the importance of loyalty. President Voyager Products, Inc. When one of our clients was purchasing a condominium in Florida, an opportunity arose to demonstrate our core values. We had discussed a real estate loan and Kenneth W. Brink planned on closing it the following Tuesday morning so the customer could take Treasurer the check with him when he flew to Florida that afternoon. On the Saturday prior Hart Housing Group, Inc. to the scheduled closing, we received a call at home from the client saying he needed the check on Monday afternoon instead of Tuesday. Because that Monday was Steven L. Brown a holiday, the Bank was not scheduled to be open. We were able to come into the President bank on a Sunday afternoon and prepare the appropriate loan information, to Elkhart Community Bank accommodate this emergency request for our client. Robert C. Carr Our procurement policy reminds us routinely of our loyalty to community vendors. Executive Vice President We believe that giving business back to our clients and community first is an Capitol Bancorp Limited important part of relationship banking and a true advantage over our big bank competitors. During 2002, we needed to replace the heating and air conditioning Andrew W. Frech units for our bank building. Both of the firms from which the Bank solicited Chairman & CEO bids on the job have borrowing and depository relationships with the bank. Even Ancon Construction Company, Inc. when the Bank is planning a small lunch for our board meetings, we hire local eateries that bank here to cater the meals. Curtis T. Hill, Jr. Attorney at Law Elkhart Community Bank exhibits loyalty every day. We understand that we are in Elkhart Co. Pros. Attorney Office business because of our directors, employees, shareholders, and our clients, and we treat them with the respect that they deserve. Richard J. Jensen Retired ELKHART'S BANK. Richard L. Max, Sr. President & General Manager /s/ Steven L. Brown Heart City Enterprises House of Herbs Steven L. Brown President Myrl D. Nofziger President Hoogenboom Nofziger 303 South Third Street Elkhart, IN 46516 Brian J. Smith, CPA 574-295-9600 President www.elkhartbank.com The Heritage Group Jack E. Welter President Elkhart Plastics, Inc. OFFICERS Robert C. Carr Chairman & CEO Myrl D. Nofziger Vice Chairman & Secretary Steven L. Brown President Lori A. Faltynski Vice President Kenneth L. Kasamis Vice President Vincent J. VonDerVellen Vice President
L O Y A L T Y 18 GRAND HAVEN BANK BOARD OF DIRECTORS In May of 1995, Grand Haven was ready for a community bank. Small banks offer a Stanley L. Boelkins high level of personal customer service and attention. The concept of meeting Appraiser face-to-face across the desk with customers is reminiscent of days gone by. Boelkins & Associates Grand Haven Bank takes a common sense approach toward banking to meet the needs John D. Groothuis of its customers. The Bank began with word-of-mouth referrals, knocking on doors President & CEO and building trust and relationships. As the customers' needs have grown, so has Grand Haven Bank the Bank. We opened with 4 employees; Grand Haven Bank now has over 30 professionals on its team. Mark A. Kleist Attorney at Law Needs have changed, but our focus remains on customer service and relationship Scholten and Fant, P.C. building. The Bank has continually added products, services and people to meet the needs of our customer. This includes both personal and business banking, Steven L. Maas commercial, consumer and mortgage lending, investment services, on-line, Vice President telephone and drive-through banking. Gillisse Construction Company All of Grand Haven Bank's employees are respected and encouraged to be creative, Michael A. McKeough develop solutions, and make solid decisions, which fosters high morale, team President support, loyalty and improved customer service. A note recently received from a McKeough Land Company Inc. customer reads, "Besides being an efficient and competent bank for my banking needs, you are all so very nice when I come to see you." Calvin D. Meeusen Managing Partner Loan Committee meetings have an essence of a forgotten era in banking where Calvin D. Meeusen, CPA Directors consider not only the financial merit of a loan request, but the people behind the project and their families. This approach demonstrates Grand Robert J. Trameri Haven Bank's willingness to think holistically to accomplish the financing goal, Retired rather than trying to make the customer's project fit into an inflexible, standardized formula. Bruce A. Thomas Chief of Bank Performance Grand Haven Bank consistently endeavors to meet the needs of its customers and Capitol Bancorp Limited its employees. In doing so, we build lasting relationships that promote satisfaction in a job well done, continued loyalty, numerous referrals, and John P. Van Eenenaam satisfied customers that want to be known by name and not just by an account Attorney at Law number or address. Scholten and Fant, P.C. The key to this success has been maintaining the high level of service that Bernard J. Wade customers have come to expect and demand. President Advanced Signs, Inc. CARING THROUGH INVOLVEMENT. Gerald A. Witherell President /s/ John D. Groothuis Oakes Agency, Inc. John D. Groothuis President & CEO OFFICERS 333 Washington Avenue John P. Van Eenenaam Grand Haven, MI 49417 Chairman 616-846-1930 www.grandhavenbank.com Calvin D. Meeusen Vice Chairman Steven L. Maas Secretary John D. Groothuis President & CEO Karen K. Benson Vice President Sherry J. Patterson Vice President Todd M. Sellon Vice President
L O Y A L T Y 19 BOARD OF DIRECTORS OAKLAND COMMERCE BANK Mark A. Aiello Oakland Commerce Bank has always believed that for a bank, or any business for Foley & Lardner that matter, loyalty is a reciprocal process. It is unrealistic to believe that a customer will be loyal to the bank when the bank's actions do not demonstrate Donald A. Bosco loyalty to the customer. President Donald A. Bosco Building, Inc. As an example, a long time customer approached us on behalf of his wife who wanted to start a computer hardware/software business. She had been unable to Robert C. Carr obtain financing at other banks in the Farmington Hills area. The usual declines Executive Vice President were received.... start-up business, no experience, no money.... no loan. Capitol Bancorp Limited Because of the long-term bank relationship with our customer, we responded to Mark B. Churella his request to meet with his wife and explore her business needs. We eventually President & CEO determined that with her technical background and professional contacts, her FDI Group request had merit. We were also convinced that her business plan was sound and that all she needed was a small working capital line of credit to get the Leon S. Cohan business up and running. We provided the initial loan in 1993, and have provided Counsel to the Firm several increases through the years. Today, the company is very profitable and Barris, Scott, Denn & Driker is poised to generate several million dollars in revenue. Michael J. Devine Other banks now approach this customer on a regular basis, but the customer Attorney at Law informs them that there is only one bank that she deals with... Oakland Commerce Bank. Jeffrey L. Hauswirth CPA, CVA, Principal We are also loyal to our employees. We have a solid history of, first and Jenkins, Magnus, Volk & Carroll, PC foremost, promoting from within. One of the key members of the Oakland Commerce Bank management team began her career as a teller sixteen years ago. She then James R. Kaye moved to various departments within the Bank and developed her position to the President & CEO level of Vice President. She is also a key member of the senior management staff Oakland Commerce Bank who relies on her sense of history, overall knowledge of the customers and the mechanics of banking operations. Ihor J. Kuczer Senior Vice President Our customers, directors, and employees all enjoy the success of Oakland Oakland Commerce Bank Commerce Bank that, by design, requires that we rely on one another. David F. Lau Lau & Lau Associates, L.L.C. OAKLAND COMMERCE BANK... OFFERING DIVERSE LENDING SOLUTIONS FOR OUR COMMUNITY. Jeffrey M. Leib President /S/ James R. Kaye Leib, Leib & Kramer James R. Kaye President & CEO Akram G. Namou CPA 31731 Northwestern Highway Julius L. Pallone Farmington Hills, MI 48334 President 248-855-0550 J.L. Pallone Associates www.oaklandcommerce.com Francine Pegues Regional Sales Director Blue Cross Blue Shield of Michigan Southeast Region OFFICERS Michael J. Devine Chairman Robert C. Carr Vice Chairman James R. Kaye President & CEO Ihor J. Kuczer Senior Vice President & Secretary Thomas K. Perkins Vice President Nicolet B. Cassidy Vice President James F. Miller Vice President
L O Y A L T Y 20 PORTAGE COMMERCE BANK BOARD OF DIRECTORS During 2002, Portage Commerce Bank entered its fifteenth year of exceeding the Paul R. Ballard financial service needs of small businesses and individuals. No greater measure Retired President & CEO can be found of the loyalty and dedication established among the Bank, its Portage Commerce Bank employees, and its customers than the long-standing relationships that have developed. We are proud that two of the six employees that opened the Bank David L. Becker reached retirement serving our customers. Five of our employees have over ten Retired Insurance Agent years of service and nine have more than five years of service. Their dedication is appreciated. Thomas R. Berglund, MD Portage Physicians At the same time, we have built a loyal following among the people we serve, including over 300 accounts established during our inaugural year that continue Robert B. Borsos to do business with us today. Our most effective resource in the development of Attorney & Shareholder new business opportunities continues to be testimonials of the customers who Kreis, Enderle, Callander & Hudgins, PC helped launch their bank, in addition to newer faithful customers. John M. Brink, CPA In 1988 a group of local businesspeople who helped form Portage Commerce Bank Partner accepted the responsibility of participating on its board of directors. Nine of Brink, Key & Chludzinski, P.C. those original directors remain on the board today! It is their steadfast, focused attention on broadening the customer base that supports and sustains the Patricia E. Dolan Bank. In 1999, a number of them formed a partnership that built the current Community Volunteer banking facility, providing a more substantial presence in the Portage market. Their continued investment in our community reflects the entrepreneurial spirit Alan A. Halpern, MD that launched Portage Commerce Bank. Michigan Orthopedic Surgery & Rehabilitation, PC We renew our commitment to provide quality bank products and service to our community and to offer our employees an opportunity to work in an environment Robert L. Johnson that treats them with respect. We look forward to the future, continuing to give Retired Secretary & Treasurer back to the community that has offered us so much. Medallion Properties, Inc. Michael L. Kasten WE APPRECIATE THE OPPORTUNITY TO SERVE OUR COMMUNITY. Managing Partner Kasten Investments, LLC /s/ Dennis J. Kuhn Dennis J. Kuhn Dennis J. Kuhn President & CEO President & CEO Portage Commerce Bank 800 East Milham Road Paul M. Lane, PhD Portage, MI 49002 Seidman School of Business 269-323-2200 Grand Valley State University www.portagecommerce.com William J. Longjohn Retired Vice President Midwest Business Exchange John W. Martens, CPA Retired Russell M. Rathburn President Rathco Safety Supply, Inc. OFFICERS Michael L. Kasten Chairman William J. Longjohn Vice Chairman & Secretary Dennis J. Kuhn President & CEO James V. Lunarde Senior Vice President Roy L. Dangel, Jr. First Vice President Kenneth R. Blough Vice President John M. Crandle Vice President Kimberlee M. Ferris Vice President Cheryl M. Germain Vice President and Cashier Beth A. Wright Vice President
L O Y A L T Y 21 BOARD OF DIRECTORS SOUTHERN ARIZONA COMMUNITY BANK William R. Assenmacher Loyalty is a quality that's becoming increasingly harder to find, whether it's President employee loyalty to a company or consumer loyalty to a product. T.A. Caid Industries, Inc. The way we treat our bank customers begins with the way we treat each other. The Jody A. Comstock importance of workplace loyalty resonates throughout the corporate world. There Physician/Owner are systemic links between employee loyalty and organizational performance. At Skin Spectrum Southern Arizona Community Bank, employee loyalty deserves a place on the balance sheet, right next to other key assets. Michael J. Devine Attorney at Law Building loyalty is not an easy task, but one we focus on every day. The pendulum of employer-employee loyalty has swung from one extreme to the other in Robert A. Elliott the past 50 years. What constitutes the key responsibilities of a loyal President & Owner employer? Collecting employee feedback. Assessing and rewarding performance, and The Elliott Accounting Group offering the right jobs to the right people. Giving employees a stake in the business. Brian K. English General Counsel Employees must take charge of their own careers, but a good company will offer Capitol Bancorp Limited the tools to succeed. It is the employee's responsibility to pick up those tools and use them effectively. Take training seriously. Responsible employees Michael W. Franks understand that promotions are not gifts -- they are corporate acknowledgement Principal for the job done well. In the best of worlds, strong performance and loyalty are Seaver Franks Architects connected and reinforced through a web of recognition and reward. Michael L. Kasten Although loyalty's impact on the financial statement of a company is difficult Managing Partner to measure, at Southern Arizona Community Bank, loyalty is the driving force of Kasten Investments, LLC our continued success. Seeing the same faces in our bank on a day-to-day basis promotes a sense of security in our customers. Employee loyalty evolves into Yoram S. Levy customer loyalty. President Yoram Levy Development, Inc. Employee loyalty is the crowning achievement in any business. At Southern Arizona Community Bank employee and customer loyalty are priceless. John P. Lewis President Southern Arizona Community Bank BANKING THE WAY IT SHOULD BE. Jim Livengood, Jr. /s/ John P. Lewis Director of Athletics John P. Lewis The University of Arizona President James A. Mather Attorney at Law & CPA 6400 North Oracle Road Tucson, AZ 85704 Morgan E. North 520-219-5000 President & Owner www.southernarizonabank.com Borderland Construction Company, Inc. James M. Sakrison Principal Slutes Sakrison & Hill, P.C. Jean M. Tkachyk CFO University Physicians, Inc. Paul A. Zucarelli Principal CBIZ, Gordon, Zucarelli & Handley Insurance OFFICERS Paul A. Zucarelli Chairman Michael L. Kasten Vice Chairman Joseph D. Reid CEO Robert A. Elliott Secretary John P. Lewis President Michael J. Trueba Executive Vice President/CCO Terri R. Gomez Senior Vice President Sue Mullery Hansen Vice President Craig A. Larson Vice President Mindy C. Webb Vice President
L O Y A L T Y 22 [PHOTO] ACCOUNTING DEPARTMENT C O M M U N I T Y C O M M I T M E N T [GRAPHIC] [PHOTO] OPERATING SERVICES WESTERN REGIONS BOARD OF DIRECTORS NAPA COMMUNITY BANK Kevin S. Alfaro Good stewardship makes its own rewards. The opportunity to demonstrate our Partner commitment to the community that gives us our name, and our livelihood, G & J Seiberlich & Co., LLP sometimes arises out of misfortune. Sometimes it involves an act of superior customer service. Sometimes both. Geni A. Bennetts, MD Medical Consulting A new commercial real estate loan was scheduled to be completed in mid-December, 2002. The borrower, a prominent architect in California, has devoted the last 2 Charles H. Dickenson years to renovating a 2-story retail-office building in historic downtown Napa. Dickenson, Peatman & Fogarty The building is home to a popular restaurant and several retailers on its ground floor, with several other businesses on the 2nd floor. William H. Dodd General Manager, Culligan Water During the preceding 5 days, Northern California had been deluged with rain, and Napa County Supervisor area lakes, rivers, and streams were at maximum capacity. The Napa River was nearing flood stage in its course through downtown Napa. At 3 a.m. on the day Jeffrey L. Epps before our loan transaction, a tributary that flows from the valley's western President hills to the Napa River unexpectedly overflowed its banks and flooded several Epps Chevrolet blocks in downtown Napa. Our borrower's property was among the first to be hit with floodwater, and roads began to close in the area. Later that day, Douglas W. Hill floodwaters subsided and clean up began. Our borrower was among the first on the Vineyard Manager scene with crews and equipment to help ground level tenants clean up their shops Jaeger Vineyards, Inc. in order to hasten the resumption of business. Andrew L. Hoxsey We were able to make contact with the borrower to determine whether he still Managing Partner planned to sign loan documents as planned. Upon learning of his harrowing Napa Wine Company experience with the flood, we agreed to amend his loan to provide additional funds in support of clean up and repair expenses. Flood insurance eventually Carlee S. Leftwich covered most expenses, but the borrower was astonished to hear of such an offer. Former Mayor He was particularly surprised that we were able to amend our loan and keep the Yountville, California scheduled appointment to sign loan documents. Harold D. Morrison The borrower expressed appreciation for our responsiveness and took steps to President notify his tenants of the Bank's proactive service and support. As a result of Bridgeford Flying Service our service, we have become his primary bank and doors opened to establishing bank relationships with his tenants. Helping not only our customers, but also Betty L. O'Shaughnessy the greater community, get back to business with a minimum of lost revenue is Owner good for Napa and that is good for Napa Community Bank. O'Shaughnessy Estate Winery John R. Pappas, DDS, MD /s/ Dennis J. Pedisich Oral & Maxillo-Facial Surgeon Dennis J. Pedisich President & CEO Dennis J. Pedisich President & CEO Napa Community Bank 600 Trancas Street Napa, CA 94558 General Charles E. Yeager 707-227-9300 Retired-Military www.napacommunitybank.com Advisory Directors Paul J. Krsek Managing Partner K & A Asset Management, LLC Joseph D. Reid Chairman & CEO Capitol Bancorp Limited OFFICERS Betty L. O'Shaughnessy Chairman Geni A. Bennetts, MD Vice Chairman Charles H. Dickenson Secretary Dennis J. Pedisich President & CEO Richard W. Hemming Executive Vice President/CCO Arlette A. Roddy Vice President
C O M M U N I T Y C O M M I T M E N T 24 PARAGON BANK & TRUST BOARD OF DIRECTORS Paragon Bank & Trust is proud of its community commitment. A part of the Bank's Dr. Robert J. Bates involvement in our community's success comes in the form of lending decisions Physician that fulfill the intent of such governmental initiatives as the Community Western Michigan Urological Assoc. P.C. Reinvestment Act. It is our people, however, who carry that commitment outside of the Bank's doors, outside of business hours and into the community, one Charles A. Brower project at a time. During 2002, Paragon Bank & Trust's staff committed many CPA/Partner hours of time and energy when: DeLong & Brower, P.C. The Bank as a whole split into four "work groups" to work on local projects. One Scott Diepenhorst of our work groups constructed a retaining wall and installed siding on a house Principal for Habitat for Humanity. Representatives from our local United Way featured a SD & Associates, Inc. photo of the group in their annual publication. A second group took on the task of doing odd jobs at the Community Action House. A third group labored at the Paul Elzinga Holland Rescue Mission and a fourth group of employees put on their painter's Co-Chairman & Director of Business Development caps and assisted Wildlife Unlimited in sprucing up their facilities. Not only Elzinga & Volkers, Inc. did these activities benefit the community, but we also gained a positive feeling from helping others in need. John D. Groothuis President & CEO We have acted as a community sponsor in a local "adopt-a-park" project. We Grand Haven Bank "adopted" a local skate park, which is very close to our new location in Holland. It is our job to keep the park clean and the equipment safe for those Jeffrey K. Helder who enjoy this facility. Attorney at Law Cunningham Dalman, PC The local United Way recognized the Bank's 100% employee participation during the recent annual campaign. Lawrence D. Kerkstra Chairman of the Board A group from our bank raised over $1,000 by walking in a local Juvenile Diabetes Kerkstra Precast, Inc. Foundation fundraiser. Scott G. Kling We know that our success depends on the success of the community in which we President/Trust & Investments Division live and work. Paragon Bank & Trust is proud of the spirit exhibited by our Great Lakes Region dedicated team of employees and their commitment to the Holland community. Leonard Maas President PROVIDING EXCELLENCE IN RELATIONSHIP BANKING. Gillisse Construction Company /s/ Randall R. Smith Mitchell W. Padnos Randall R. Smith Executive Vice President President & CEO Louis Padnos Iron & Metal Company Henri P. Paterson 240 E. 8th Street Associate Broker/Partner Holland, MI 49423 Woodland Realty, Inc. 616-394-9600 www.paragonbank.com Randall R. Smith President & CEO Paragon Bank & Trust Richard G. Swaney Attorney at Law Swaney & Thomas, P.C. Bruce A. Thomas Chief of Bank Performance Capitol Bancorp Limited Robert J. Trameri Retired Paragon Bank & Trust DIRECTOR EMERITUS Richard H. Ruch OFFICERS Richard G. Swaney Chairman Robert J. Bates Vice Chairman Randall R. Smith President & CEO Eric J. Hoogstra Senior Vice President/Trust Officer G. Robert Mohr Senior Vice President M. Jane Reimersma Vice President Dean R. Weerstra Vice President/Trust Officer
C O M M U N I T Y C O M M I T M E N T 25 BOARD OF DIRECTORS SUNRISE BANK OF ALBUQUERQUE Frederick D. Bernson At Sunrise Bank of Albuquerque, we embrace our state's multicultural composition President through active participation in local organizations formed to promote a sense of Sunrise Bank of Albuquerque community, as well as our diversity. We pride ourselves in being active participants in many organizations and projects, which exemplify this Turner W. Branch commitment: Branch Law Firm, P.A. * Sunrise Bank of Albuquerque is an active member of The Albuquerque Chamber David J. Daniel of Commerce, Albuquerque Economic Development, the Greater Hispano Chamber Executive Vice President of Commerce, the American Indian Chamber of Commerce of New Mexico, and the Sunrise Bank of Albuquerque Downtown Action Team. Helen A. Elliott * Sunrise Bank of Albuquerque was a significant sponsor of the Hispano CPA Chamber of Commerce fundraiser for the new Hispanic Cultural Center in Helen Elliott & Associates, PC Albuquerque. Sunrise Bank was also the Title Sponsor for the American Indian Chamber fundraiser for scholarships for Native American youth. E. Gary Fichtner Esthetic Dental Arts, Inc. * Sunrise Bank of Albuquerque aggressively participates in Small Business Administration Loan programs, which create jobs and help with community Donald E. Fry, MD redevelopment. Sunrise Bank of Albuquerque is located in the heart of the UNM-School of Medicine Downtown Revitalization District and has been instrumental in assisting the development of new businesses in the Revitalization Zone. William D. Hinz II President * Sunrise Bank of Albuquerque has originated numerous credit facilities for Sunrise Bank of Arizona the building of low-income apartment projects, and has provided funding for low and moderate-income housing developments. John R. Lewinger CEO * Several of our employees are active participants in the Credit Grubb & Ellis/Lewinger Hamilton Professionals International as well as the National Association of Women Business Owners. These organizations are directly involved in community Jason A. Shaffer causes, including scholarships for lower income disabled children, CEO counseling, and many other charitable endeavors. Sunrise Bank of Albuquerque It is through the considerable efforts of the directors, officers and employees Randy E. Whitehead of Sunrise Bank of Albuquerque that our institution has been a significant President contributor to the success of our community. New Mexico Coffee Company SMALLER BANK. BIGGER SERVICE.(TM) OFFICERS /s/ Jason A. Shaffer William D. Hinz II Jason A. Shaffer Chairman CEO Jason A. Shaffer CEO 225 Gold SW Albuquerque, NM 87102 Frederick D. Bernson 505-244-8000 President www.sunrisebankofalbuquerque.com David J. Daniel Executive Vice President, Secretary & CCO Conni L. Nunez-Jones Vice President J. Rodney Tafoya Vice President
C O M M U N I T Y C O M M I T M E N T 26 VALLEY FIRST COMMUNITY BANK BOARD OF DIRECTORS Valley First Community Bank is committed to supporting our community through W. Craig Berger involvement in civic and non-profit organizations. Our commitment extends beyond CLU, ChFC fiscal support. Spence, Driscoll & Company We are a community partner with Camp CEO, an alliance of public and private Marilyn D. Cummings organizations that sponsors and runs a one-week summer camp for young women ages Realtor 13-17. The Camp introduces them to the possibilities of becoming business owners Russ Lyon Realty Company or executive professionals through a series of talks and group activities, including a Ropes course and a Business-in-a-Box project. All counselors and Michael J. Devine presenters at the camp are female business owners and executives who interact Attorney at Law with and mentor the young women throughout the week. I plan to represent Valley First by chairing the sponsorship committee and serving as a camp counselor Judith R. Egan during the 2003 camp. President Valley First Community Bank In December 2002, a group of Valley First employees orchestrated a support campaign for the Chrysalis Shelter for Victims of Domestic Violence, a local William R. Fitzpatrick organization that provides safe housing, counseling and domestic support for CPA victims of domestic violence. Our team obtained a wish list from Chrysalis and Hein & Associates, LLP then developed a holiday campaign that involved a lobby display and a direct solicitation of employees, directors and customers. By the end of the 3-week Steven M. Goldstein campaign, we had filled to overflowing an entire section of our lobby with Attorney at Law diapers, bedding, toys, clothing, baby and toddler accessories, food, and cash, Sacks, Tierney, P.A. Lawyers which we delivered with great joy to the very appreciative executive director of Chrysalis. In 2003, our employees plan to conduct at least two more similar Dr. Ross Halliday campaigns for Chrysalis. General Orthopedics Institute for Bone & Joint Disorders We have developed a special banking program for Scottsdale-based nonprofit organizations that includes a package of free basic banking services. We also Michael L. Kasten offer our conference room free of charge to local non-profit groups for their Managing Partner monthly meetings. Kasten Investments, LLC At Valley First Community Bank we believe in the power of partnership. We are Donald J. Mahoney very proud to actively partner with the nonprofit and civic organizations in our Managing Director community. Together we can help our community grow and improve our collective Trammell Crow Company quality of life. Gordon D. Murphy Retired EVP OUR BUSINESS IS HELPING YOUR BUSINESS TO GROW! Arizona Bankers Association /s/ Judith R. Egan Harry Rosenzweig, Jr. Judith R. Egan Co-Owner President Harry's Fine Jewelry Patricia B. Ternes 7501 East McCormick Parkway, Vice President North Court, Suite 105N Dain Rauscher Incorporated Scottsdale, AZ 85258 480-596-0883 www.valleyfirstbank.com OFFICERS Gordon D. Murphy Chairman Michael J. Devine Vice Chairman Harry Rosenzweig, Jr. Secretary Joseph D. Reid CEO Judith R. Egan President David D. Fortune Executive Vice President/CCO J. Patrick Blaine Vice President Victoria L. Bushnell Vice President David F. Forwood Vice President Daniel R. Klenske Vice President Nancy E. Selby Vice President
C O M M U N I T Y C O M M I T M E N T 27 BOARD OF DIRECTORS YUMA COMMUNITY BANK Bruce I. Ash Yuma Community Bank has built on its motto of "Putting Yuma First," not only by Vice President continuing to focus on exceptional customer service, but also by giving the Paul Ash Management, LLC staff the opportunity to live that motto every day. Steven M. Binkley, Jr. Yuma Dentist Craig Barrows was pleasantly surprised by his experience with Yuma SW Division Manager Community Bank's new chief credit officer. "I called and Keith's response was, Arizona Public Service Company `What can we do for you? When is a good time for me to come to your office?' I've had other banks tell me to come in and fill out the paperwork. This bank Katherine M. Brandon was able to deliver what I needed a lot faster than what I was expecting. President Customer service is going away all over the country. I know how important it is, Yuma Community Bank and so does Yuma Community Bank. They just do everything for you." Raymond R. Corona Jane Kiley, who owns Hunter Employment Services with her husband, Tom, said they Optometrist and President have found Yuma Community Bank to be very responsive. "When we have had Corona Optique processes we needed to do differently, they were able to accommodate us cheerfully - we were able to use the Internet very effectively" she said. "The Juli Jessen staff at the bank has a can-do attitude. You tell them your needs and they find Director a way to do it." Gowan Company In addition to "Putting Yuma First" in the Bank, our employees have taken their Ram R. Krishna commitment to the community beyond the Bank. By joining organizations like the Ram R. Krishna, MD, P.C. board of the Yuma Community Food Bank, they are able to use their contacts to connect with farmers and get their products donated to the Yuma Food Bank. John T. Osterman Owner Yuma Community Bank's pledge to put Yuma first is the essence of a solid Osterman Financial Group commitment to serve the community. David S. Sellers President PUTTING YUMA FIRST. Sellers Petroleum Products, Inc. /s/ Katherine M. Brandon Caryl L. Stanley Katherine M. Brandon Partner President Costen-Stanley Partnership John R. Sternitzke 454 West Catalina Drive President Yuma, AZ 85365 Sternco Engineers, Inc. 928-782-7000 www.yumabank.com Pamela K. Walsma Attorney at Law Westover, Shadle, Carter & Walsma, PLC Ronald S. Watson Broker/Owner Era Matt Fischer Realtor Leonard C. Zazula Cashier-Western Regions Capitol Bancorp Limited OFFICERS Ronald S. Watson Chairman Ram R. Krishna Vice Chairman Joseph D. Reid CEO Pamela K. Walsma Secretary Katherine M. Brandon President Keith L. Simmonds Executive Vice President & CCO Theresa N. Wine Senior Vice President Kari M. Reily Vice President Roy E. Brown Vice President
C O M M U N I T Y C O M M I T M E N T 28 [PHOTO] RISK MANAGEMENT WESTERN REGION I N T E G R I T Y [GRAPHIC] [PHOTO] RISK MANAGEMENT GREAT LAKES REGION BOARD OF DIRECTORS ANN ARBOR COMMERCE BANK Robert C. Carr Customers -- staff -- shareholders -- community. When each supports the other, Executive Vice President respect, reliability, and fidelity create trust and confidence. Capitol Bancorp Limited `Take care of the customers and the numbers will take care of themselves' has Richard G. Dorner been the basis of our decision-making. When this is the emphasis, staff, President & CEO shareholders and the community all benefit. Since our inception in 1990, we have Ann Arbor Commerce Bank experienced a variety of economic conditions. `Taking care of the customer' cannot be a generic phrase -- the individual and the situation must define it. James A. Fajen During the 13 years since we opened our doors, we have prospered by learning Attorney at Law what options to offer during various economic climates. The most recent trend in Fajen & Miller, P.L.L.C. the economy has benefited the borrower. The Federal Reserve System's pattern of lowering interest rates has been beneficial to the business community. James W. Finn Start-ups, spin-offs and expansions flourish during periods of low interest Chairman & CEO rates. Certainly, individuals have enjoyed the low mortgage rates. Refinancing Finn's-JM&J Insurance Agency, Inc. and investing in home remodeling or a house upgrade have balanced the consumer's lack of gains in other markets. H. Nicholas Genova Chairman & CEO But what about those who save? Current lower interest rate trends have not Washtenaw News Co. Inc. provided a benefit to them. This comes at the time when the largest segment of H.N. Genova Development consumers, the `Boomers', has experienced a diminished need to borrow with a greater emphasis on saving and investing. We wanted to create a benefit for Richard M. Greene those consumers. To that end we offered a CD Upgrade Voucher Promotion in President February 2002, anticipating CD rates would increase within the next few months. Point Training As that was not the case, we decided to extend the offer and provide options that will benefit the customer and are fair to the Bank. We have been able to Marilyn D. Katz-Pek realize our full potential by applying fairness to all involved. We have a loyal General Managing Partner customer base because we always seek to do the right thing. Biotechnology Business Consultants James C. Keen BUILDING LASTING RELATIONSHIPS...CREATING LIFETIME VALUE. President Cliff Keen Athletic /s/ Richard G. Dorner Richard G. Dorner David W. Lutton President & CEO President Charles Reinhart Company 2950 State Street South Fritz Seyferth Ann Arbor, MI 48104 Consultant 734-887-3100 Fritz Seyferth & Associates www.annarborcommerce.com Dr. Carl Van Appledorn Vice President Urological Surgery Associates, P.C. Warren E. Wright Chairman & Partner Renosol Corporation OFFICERS James A. Fajen Chairman Robert C. Carr Vice Chairman Warren E. Wright Secretary Richard G. Dorner President & CEO Clifford G. Sheldon Executive Vice President John J. Wilkins Senior Vice President Mary Hayes Vice President Rick H. James Vice President Louise A. Morse Vice President & Cashier John Nixon III Vice President James J. Plummer Vice President Bryan T. Singer Vice President Richard G. Tice Vice President
I N T E G R I T Y 30 ARROWHEAD COMMUNITY BANK BOARD OF DIRECTORS As we organized Arrowhead Community Bank, the staff and founding board members Shelley L. Bade developed new relationships within the local business community: trades people, RPA, President community leaders, prospective investors and local media. We learned that these Bade Commercial Services, Inc. people were excited about the prospect of a bank focusing on building relationships. From "Day One", we shared the concept of a true community bank; David Brnilovich developing relationships based on honesty and trust; and establishing a Jennings, Strouss & Salmon, P.L.C. reputation for business integrity. W. Patrick Daggett Integrity is our standard. Board members and staff instinctively act with CPA integrity in all aspects of business. In selecting key personnel, we look for Daggett & Daggett, LLP that same kind of values match. Integrity within our organization is assumed -- it is the standard, not the exception. Michael J. Devine Attorney at Law We, at Arrowhead, have a "golden rule" to do what we say we are going to do, when we say we are going to do it. It is our practice to fully disclose all Richard J. Hilde costs related to doing business with Arrowhead at our first meeting with a Owner & CEO prospective client. This practice, at times, initially results in the loss of EPW, Inc. business to the competitors who appear to offer lower pricing. However, many times, these prospects return to our Bank once our competitors fully disclose Michael L. Kasten their pricing and fees. The Bank's straight-forward approach during the initial Managing Partner meeting transforms prospects into clients. We firmly believe if we are Kasten Investments, LLC forthright and act with integrity, we save the client time and money, which gains and preserves valuable relationships. Arlene Kulzer President A recent residential real estate loan applicant would agree. She was concerned Arrowhead Community Bank about the fees and time involved in the refinance of her home. Rather than attempt to persuade her to refinance with us, we suggested she speak with her Dennis E. Landauer, CPA current mortgage company about a streamline refinance. She did, was very pleased American Express Tax with our guidance and has since referred several clients to the Bank. & Business Services While the American media is full of examples of questionable business practices, Dr. Elaine P. Maimon, CEO we are encouraged by the response to our philosophy "integrity goes hand in hand Arizona State University West with good business". James J. McCue Aviation Consultant ARROWHEAD COMMUNITY BANK ...A RELATIONSHIP YOU CAN BANK ON. Sherwin Industries /s/ Arlene Kulzer Terrance C. Mead Arlene Kulzer Attorney at Law President Mead & Associates John C. Ogden 17235 North 75th Avenue, Suite B100 President & CEO Glendale, AZ 85308 SunCor Development Company 623-776-0800 www.arrowheadcommunitybank.com Carol A. Poore Vice Provost Arizona State University West Richard A. Shelton Executive Director Symphony of the West Valley OFFICERS Michael L. Kasten Chairman John C. Ogden Vice Chairman Joseph D. Reid CEO James J. McCue Secretary Arlene Kulzer President Dennis E. Landauer Chair, Directors Loan Committee Gary L. Weitner Executive Vice President/CCO William H. Smith Senior Vice President Deborah M. Charlesworth Vice President Barry S. Edwards Vice President Ursula L. Jackson Vice President
I N T E G R I T Y 31 BOARD OF DIRECTORS DETROIT COMMERCE BANK Ralph J. Burrell Acts of kindness and commitment to the community are a standard of behavior we President practice each and every day at Detroit Commerce Bank. Our customers learn to SymCon expect a high level of integrity from us. We earn their trust. All of our customers, from high profile professionals to those with modest bank activity, Robert C. Carr know we will always do what we can, morally and ethically, to protect their good Executive Vice President name and financial reputation. Offering valued customers the benefits of on-line Capitol Bancorp Limited banking increases confidentiality and benefits both the bank, in goodwill, and the customers, in increased accessibility. The customers who benefit from such Vivian L. Carpenter an act of consideration tells friends how well the bankers at Detroit Commerce President Bank treat them. Atwater Entertainment Associates In some cases we generate additional business for the bank simply by Donald M. Davis, Jr. exemplifying honorable behavior. When one of our customers was ill, we were Vice President asked to provide some financial oversight to ensure that his money was safe from Health Alliance Plan unauthorized transactions until he was well enough to resume responsibility for his own finances. Later, that same customer found himself in need of greater Barbara B. Gattorn fiduciary assistance than we, as his bank, were prepared to provide. We did, Senior Advisor to the President however, assist him with securing a guardian appointed by the probate court, Detroit Regional Chamber thus saving his retirement funds. The guardian was so impressed with the honorable handling this man's finances received from Detroit Commerce Bank, the John R. Hirzel guardian became a customer who now brings his probate accounts to us on a CPA regular basis. Hirzel, Jackson and Swaine, PC Civic agencies and governmental units have to be particularly prudent in Martha K. Richardson selecting the professionals who take care of their finances. Detroit Commerce President Bank considers it a significant endorsement that city leaders and governmental Service Marketing Specialists, Inc. agencies have found us worthy of being invested with the public trust. Ben L. Schwegman President SMALLER BANK... BETTER SERVICE... Schwegman & Associates, Inc. EXPERIENCE THE DIFFERENCE. James F. Stapleton /s/ Linda A. Watters President Linda A. Watters B & R Consultants President & CEO Bruce A. Thomas Chief of Bank Performance 645 Griswold, Suite 70 Capitol Bancorp Limited Detroit, MI 48226 313-967-9700 Linda A. Watters www.detroitcommerce.com President & CEO Detroit Commerce Bank Neal F. Zalenko President & CPA Zalenko & Associates, Inc. OFFICERS Robert C. Carr Chairman Donald M. Davis, Jr. Secretary Linda A. Watters President & CEO Valora L. Jackson Vice President
I N T E G R I T Y 32 EAST VALLEY COMMUNITY BANK BOARD OF DIRECTORS Taking the time to notice that a customer's behavior is out of the ordinary and Mark R. Allen strained, is good service. Having a relationship that makes that customer feel President & Attorney comfortable enough to confide in you is just the way we do business at East Mark R. Allen, P.C. Valley Community Bank. When a charter client asked to view the endorsement on a cashier's check she had sent through our Bank, an East Valley teammate inquired Blake L. Bottle further into her request. Partner Innovative Financial Solutions In our training as banking professionals, we have all learned that intelligent people with good common sense are favorite targets of con artists. Those Michael J. Devine criminals are very practiced and have a ready answer for every objection a Attorney at Law person is likely to make to their schemes. We believe it is our professional responsibility to help our customers identify situations that could put their Richard D. Frazier assets at risk. Executive Director Chandler Regional Hospital Foundation At East Valley Community Bank we accomplish this by knowing our customers well. Because of her prior experiences with the East Valley team and our relationships David L. Heuermann with her, she was receptive to inquiries about her transaction. President Axis Mortgage & Investments, LLC The customer believed she had won the Canadian Lottery. To claim her $250,000 prize, she was told she would need to send the taxes due in the form of a Michael L. Kasten cashier's check made payable to her husband. The cashier's check was to be held Managing Partner and returned to her when she received her lottery winnings. She waited four long Kasten Investments, LLC weeks for the armored car to deliver her winnings, speaking often with fictitious Canadian lottery officials who assured her that customs was holding Don B. Lindner up her delivery, and that she must have patience to reap this great reward. Senior Consultant Meanwhile, she learned that the check had cleared the Bank. Charon ECA By the time she asked East Valley Community Bank to view the endorsement, our Darra L. Rayndon client was certain that she had lost $10,000, with no hope of recovery. The bank Principal & President operations officer intervened with good news. The endorsement on the cashier's Rayndon & Longfellow, PC check was obviously a forgery, and instead of a few days, as she had been lead to believe, our client had plenty of time to dispute the transaction. Happily, Gerry J. Smith her $10,000 has been returned to her. President East Valley Community Bank This customer's experience demonstrates how East Valley Community Bank operates. We take the time, every time, to do the right thing. Our customers call this James C. Stratton integrity. We are proud to be a Bank that identifies integrity as a core value. President & CEO Boys & Girls Clubs of Scottsdale IN A WORD... QUALITY. Joseph A. Tameron CPA/Partner /s/ Gerry J. Smith Skinner, Tameron & Company, LLP Gerry J. Smith President Deborah A. Waitkus Owner Golf for Cause 1940 North Alma School Road Chandler, AZ 85224 480-726-6500 OFFICERS www.eastvalleybank.com Michael L. Kasten Chairman Michael J. Devine Vice Chairman James C. Stratton Secretary Joseph D. Reid CEO Gerry J. Smith President David D. Fortune Executive Vice President & CCO James D. Kennedy Senior Vice President Kevin L. Sellers Senior Vice President David M. Anderson Vice President James C. Laine Vice President
I N T E G R I T Y 33 BOARD OF DIRECTORS GOSHEN COMMUNITY BANK Robert C. Carr Goshen Community Bank was formed with four main goals -- provide the best Executive Vice President service of any Bank in Goshen, provide assistance to the community, establish a Capitol Bancorp Limited great place for employees to work, and provide an excellent return to shareholders. Bank employees have opportunities to go above and beyond to assist David L. Cripe members of our community. Doctor of Optometry/Senior Partner Drs. Cripe & Stephens In October 2002 two customers entered Goshen Community Bank and requested a $7,000 advance on their joint credit card. While this activity seems harmless Carol M. Ebersole enough, it was when the couple returned and told the customer service VP Corporate Development representative they needed additional funds that the employees of Goshen Goshen Health System Community Bank exhibited integrity and an exceptional standard of behavior. While in conversation to complete the transaction, employees discovered that the Stephen L. Fidler couple had received a letter offering the chance to win $500,000 if they sent President money to Israel. The couple attempted to send the money to Israel but did not Kuert Concrete, Inc. have funds sufficient to cover the wire transfer transaction, so they returned to the Bank. Christopher J. Graff President & Chairman Employees asked the couple if a Bank employee could contact the police to Marque, Inc. confirm their suspicions about the request. Ultimately, the police and Goshen Community Bank employees convinced the couple that the situation was a scam. The Richard A. Hetler, Jr. customers then stated they had already wired $6,000 and were very thankful they Vice President & General Manager did not send another $7,000. They were very complimentary to everyone involved. Indiana Wood Products, Inc. Their relationship with Goshen Community Bank saved them from being defrauded further. Goshen police commended Bank staff for intervening in the situation and Gregory A. Hoogenboom providing personal financial safety to these citizens. President Hoogenboom Masonry, Inc. In this one customer encounter, Goshen Community Bank accomplished all four of its goals. Most important of all, Goshen Community Bank acted with the highest Douglas A. Johnston degree of integrity and made a lasting impact on our customers' lives. President Goshen Community Bank WE MAKE PEOPLE SMILE! Larry W. Newswanger Self-Employed /s/ Douglas A. Johnston Douglas A. Johnston Matthew J. Pletcher President Partner Whitcraft & Pletcher 511 W. Lincoln Avenue Fred M. Ramser Goshen, IN 46526 Retired 574-533-2006 www.goshenbank.com Dennis L. Sorg President Sorg Dodge, Inc. Douglas A. Stanley Owner Douglas A. Stanley, DDS OFFICERS Robert C. Carr Chairman & CEO Gregory A. Hoogenboom Secretary Douglas A. Johnston President Connie O. Horvath Vice President Leah L. Stevens Vice President
I N T E G R I T Y 34 [PHOTO] ITEM PROCESSING GREAT LAKES REGION MAXIMIZING POTENTIAL [GRAPHIC] [PHOTO] OPERATING SYSTEMS WESTERN REGIONS BOARD OF DIRECTORS BANK OF TUCSON Bruce I. Ash This year marks the 100th anniversary of flight when the Wright brothers changed Vice President the world of transportation. Their example of maximizing potential is a great Paul Ash Management, LLC one. They succeeded where others failed by commitment to their goal. They focused on refining the details related to the balance and control required to Slivy Edmonds Cotton launch a successful flight. Their goal was to fly an airplane, but their focus Chairman & CEO was on the many steps required to get there. Perpetua, Inc. The Bank of Tucson has not been around for 100 years, but it looks to the Michael J. Devine example set by the Wrights as a lesson for success. Bank of Tucson focuses on Attorney at Law the details. Like the Wrights, Bank of Tucson identifies the steps necessary to achieve success. Our goal is to be the bank of choice for the Tucson community. Brian K. English General Counsel Bank of Tucson will celebrate its 7th anniversary this year. Each year we have Capitol Bancorp Limited endeavored to take full advantage of the potential and opportunity that we face as a company and as individuals. We enjoy our affiliation with the other Richard N. Flynn financial institutions in the Capitol Bancorp family because it helps us to President maximize our potential. We are able to focus on the details of servicing our Flynn & Associates customers and developing our unique bank, while relying on the support from Capitol. We are also able to serve a greater range of customers in the Tucson Michael F. Hannley community through our relationship with our affiliated banks. President & CEO Bank of Tucson As the first Capitol affiliate in the Western regions, we liken ourselves to the Wright brothers. We are the Bank that completed the inaugural flight. Our Michael J. Harris commitment to success is both an example for our affiliates, and a continued Associate Broker challenge for our company and our employees. Long Realty Company Richard F. Imwalle IN THE SPIRIT OF GIVING, WE RECEIVE. President University of Arizona Foundation /s/ Michael F. Hannley Michael F. Hannley Michael L. Kasten President & CEO Managing Partner Kasten Investments, LLC 4400 East Broadway Burton J. Kinerk Tucson, AZ 85711 Attorney at Law 520-321-4500 Kinerk, Beal, Schmidt & Dyer, PC www.bankoftucson.com Humberto S. Lopez President HSL Properties, Inc. Lyn M. Papanikolas Realtor Long Realty Company OFFICERS Richard F. Imwalle Chairman Michael J. Devine Vice Chairman Richard N. Flynn Secretary Michael F. Hannley President & CEO C. David Foust Executive Vice President & CCO Barbara A. Sadler Senior Vice President Sandi L. Smithe Senior Vice President Julie E. Souverielle First Vice President Michael G. Rombold Vice President
M A X I M I Z I N G P O T E N T I A L 36 BRIGHTON COMMERCE BANK BOARD OF DIRECTORS Capitol Bancorp's core values encompass numerous critical aspects of banking. At Robert C. Carr Brighton Commerce Bank we have appropriately addressed these values within our Executive Vice President strategic plan as outlined in our core strategies. These core strategies are Capitol Bancorp Limited Brighton Commerce Bank's long-term principles that we follow consistently. John C. Codere Our strategies focus on the core value of "Maximizing Potential". These President strategies are: Brighton Block & Concrete * To establish and maintain a presence in the greater Brighton area as THE Michael B. Corrigan local community bank that provides superior customer service. We feel President confident our local community bank philosophy and image will help attract Corrigan Oil Company, Inc. and retain customers, whether businesses or consumers; Scott C. Griffith * To set the highest standards for hiring and maintaining the most qualified, President customer service oriented associates in the industry. We believe our Era Griffith Realty representatives are the most important asset we have and are essential to our success; William A. LaMarra Chairman & CEO * To establish and implement the most effective communication systems and Excelda Manufacturing networks for, and with, our customers and associates. These are essential to provide superior customer service; Mark A. Latterman President * To build diverse deposit and loan portfolios of the highest quality with a Latterman & Associates, PC primary focus on the local community. This helps substantiate that we are a local community bank, which in turn helps maximize the Bank's potential Piet W. Lindhout with our community; CEO Lindhout Associates Architects AIA * To create a professional and enjoyable environment so that customers and associates will find great pleasure in working with Brighton Commerce Bank. Gary T. Nickerson This strategy is instrumental in the growth and retention of customers and President & CEO associates. Brighton Commerce Bank With the proper execution of these strategies, we are provided with the Candice G. Randolph opportunity to fulfill our mission of exceeding the expectations of our Executive Vice President customers, associates and shareholders while "Maximizing Potential." Randolph Custom Homes Mitchell J. Stanley PERSONALIZED SERVICE BY LOCAL EXPERIENCED PERSONNEL. President Mickey Stanley & Associates /s/ Gary T. Nickerson, Sr. Gary T. Nickerson, Sr. James A. Winchel President & CEO President Colt Park Agency, Inc. 8700 North Second Street Brighton, MI 48116 OFFICERS 810-220-1199 www.brightoncommerce.com Robert C. Carr Chairman Michael B. Corrigan Vice Chairman Gary T. Nickerson, Sr. President & CEO Joseph M. Petrucci Senior Vice President John P. Szydzik Vice President & Cashier William R. Anderson Vice President Mark R. DuShane Vice President Linda K. Lavely Vice President J. Todd Potter Vice President
M A X I M I Z I N G P O T E N T I A L 37 BOARD OF DIRECTORS MUSKEGON COMMERCE BANK Dr. Rick E. Amidon I've been asked many times by people outside of our organization, "What makes President your bank successful compared to your competition in Muskegon?" Muskegon Baker College of Muskegon Commerce Bank's success can be partially attributed to many factors including: timing, luck, excellent employees and a dedicated Board of Directors. Still, the Philip J. Andrie primary reason that we've grown profitably has been our ability to Maximize our President Potential. Andrie, Inc. While all of the Capitol Bancorp banks share similar core values, it is up to William C. Cooper each individual bank's management team to develop its own niche and to exploit President it to the bank's full advantage. I was often reminded during our organizational Omni Fitness Club period that the bank would not come with a playbook, and that all of Capitol's banks are successful for different reasons. What works in another community Thomas F. DeVoursney might not necessarily work in Muskegon and vice versa. Our challenge would be to President assess the market and to develop a strategy to showcase our strengths. Shape Corporation When we opened our bank in late 1997, it had been over 100 years since a bank Edgar W. Hunt had been chartered in Muskegon. That, combined with the fact that we initially President had only six employees and only one location, made customers understandably United Way of Muskegon County skeptical. We overcame the limitations of a single location by utilizing our courier service to greatly expand our service area. Although this practice had Christopher L. Kelly been widely used by the existing Capitol Bancorp banks, it was a new and welcome Attorney at Law service in Muskegon. Our courier now serves approximately 75 business customers Parmenter O'Toole within a 15 mile radius of the Bank that would likely not be customers without the service. We were also able to convince our customers that being small was an Daniel J. Kuznar advantage since the customers and staff could easily get acquainted and that all Owner decisions would be made by the six employees on site. Quality Tool & Stamping Company, Inc. The most notable area in which we have maximized our potential is residential Donald Martines mortgage lending. While we're not among the top ten affiliate banks in terms of President asset size, we are consistently among the top two or three residential mortgage West Michigan Grinding & Machine Co. producers. Muskegon Commerce Bank has been able to develop strong relationships Ace Tooling with homeowners, realtors, builders and developers in Muskegon that should pay dividends for years to come. Robert J. McCarthy President & CEO Muskegon Commerce Bank BANKING ON OUR COMMUNITY... Chris Ann McGuigan /s/ Robert J. McCarthy President & CEO Robert J. McCarthy Community Foundation for President & CEO Muskegon County Bruce A. Thomas 255 Seminole Road Chief of Bank Performance Muskegon, MI 49444 Capitol Bancorp Limited 231-737-4431 www.muskegoncommerce.com James Stanford Tyler President Tyler Sales Company, Inc. OFFICERS James Stanford Tyler Chairman Christopher L. Kelly Vice Chairman Robert J. McCarthy President & CEO Eric B. Seifert Senior Vice President Terri K. Swarts Vice President David C. Christopher Vice President Brent A. McCarthy Vice President
M A X I M I Z I N G P O T E N T I A L 38 RED ROCK COMMUNITY BANK BOARD OF DIRECTORS By helping an employee realize a personal community service goal, Red Rock Eric L. Colvin Community Bank has made steps toward maximizing its potential as well. In August Secretary/Treasurer of 2002, Red Rock Community Bank joined with several other sponsors of a Marnell Corrao Assoc., Inc. nonprofit Hospice fundraiser to benefit terminally ill children and their families. Michael J. Devine Attorney at Law A Red Rock employee who has taken an active interest in the local Hospice organization, and sits on the sponsoring Golden Monarch Council, brought this Molly K. Hamrick opportunity to the Bank. Our employee became interested in Nathan Adelson Vice President & CFO Hospice while serving as a United Way campaign representative. The group was Coldwell Banker Premier Realty given a tour after one of the leadership meetings was held at the Hospice facility. After that one tour, our employee knew in her heart that it was a goal Philip G. Hardy, Jr. of hers to become a volunteer and to make a difference in the community. Vice President & Project Manager Hardy Painting & Drywall She has recently reduced her role to a part-time basis at the Bank in order to work in an expanded capacity as a hospice volunteer. Volunteering in this James A. Harris capacity required training classes that were held on Saturdays as well as an Vice President in-house job-shadowing program so that she could be effective with her patients Brown and Brown Insurance and families at this very difficult stage of life. Keith W. Langlands Preparations are already in motion for this year's annual event and our employee Partner & CPA is actively soliciting sponsorships throughout the community for the function. Langlands and Anaya Limited She continues to have interaction with several bank clients who have had exposure to, or experience with, this same organization. Several banking Charles L. Lasky relationships have been strengthened and maintained due to her personal interest President in her clients and their mutual experiences involving hospice care. Lasky, Fifarek & Hogan, P.C. Red Rock will continue to develop with the community by responding to Thomas C. Mangione needs-personal and financial. Chairman, President & CEO Red Rock Community Bank PART OF THE SUMMERLIN LANDSCAPE. Joseph D. Reid III Corporate Counsel /s/ Thomas C. Mangione Capitol Bancorp Limited Thomas C. Mangione Chairman, President & CEO John A. Stuart President Tartan Consultants, Ltd. 10000 West Charleston, Suite 100 Las Vegas, NV 89135 John Christopher Stuhmer 702-948-7500 CEO www.redrockcommunity.com Christopher Homes Fredrick P. Waid COO Peccole Nevada Corp. OFFICERS Thomas C. Mangione Chairman, President & CEO Charles L. Lasky Secretary James F. Wojewodka Executive Vice President & Senior Lending Officer Brian W. Astle Senior Vice President & CCO
M A X I M I Z I N G P O T E N T I A L 39 BOARD OF DIRECTORS SUNRISE BANK OF SAN DIEGO Steven K. Black Sunrise Bank of San Diego is passionate in our mission to provide unparalled Director service to our team members, clients, community, and shareholders, through Sunrise Bank of San Diego embracing our belief in respect, integrity and an appreciation for the combined benefits of maximizing potential. Richard A. Byer President Our all-star team of bankers created this mission statement to represent a focus Bycor General Contractor of continued growth as a premier community bank in San Diego and to compliment the core values of our bank development partner, Capitol Bancorp. Utilizing the Craig V. Castanos talent and ability of our local team of professionals, while leveraging the CPA/Owner support of our partner, we share a vision embodied in the core value of Craig V. Castanos, CPA maximizing potential as a company and as individuals. Randall S. Cundiff Maximizing potential starts with promoting a culture where excellence is the President standard and everyone has the opportunity to grow -- both personally and Sunrise Bank of San Diego professionally. In our effort to continually exceed client expectations, attracting and retaining individuals of the highest caliber is paramount. The William D. Hinz II essence of this core value has helped us attain recognition as the 2002 #1 CEO Community Bank SBA 504 Lender for San Diego County. The Small Business Sunrise Bank of Arizona Administration honored Sunrise Bank as the number two overall bank lender in San Diego County, out of 25 lenders who participated in the small business loan John S. Lewis program. Our 14 varsity players outperformed expectations. The synergy of our President-Western Regions efforts helped us close 15 SBA 504 loan transactions totaling over $18 million Capitol Bancorp Limited in loan volume for the year. Toby T. Macfarlane Through our network of secondary market funding sources and participations from Senior Vice President our family of sister banks, we are meeting the financing needs of clients that United Title Company would traditionally be out of the lending scope for a bank of our size. In September 2002, through the use of the SBA 504 loan program and participating Robert J. Matkovich lenders, Sunrise Bank structured a financing package for a small business owner Robert J. Matkovich, DDS, Inc. to purchase a commercial property. The total project, which exceeded $3.5 million, is an example of our ability to maximize alternative financing sources John F. McColl for the benefit of our clients. The knowledge, expertise, and experience of our Owner/Treasurer team combine to represent the potential of our organization. Attitude, drive, Trinity Housing Group and dedication maximize return on our abilities. James L. McCullough Entrepreneur WE WILL STAY THE COURSE. Ronald D. McMahon /s/ Randall S. Cundiff President Randall S. Cundiff McMahon Development Group, LLC President John M. Rooney President 4570 Executive Drive, Suite 110 Torrey Financial Group San Diego, CA 92121 858-625-9050 Rande H. Turner www.sunrisebanksandiego.com President T2 Ventures OFFICERS John S. Lewis Chairman & CEO William D. Hinz, II Vice Chairman Randall S. Cundiff President Suzanne K. Gregory Executive Vice President, CCO & Secretary Timothy M. Himstreet Senior Vice President Joseph L. Kennedy Vice President
M A X I M I Z I N G P O T E N T I A L 40 EX-13.B 6 ex13b.txt FINANCIAL INFO. SECTION OF 2002 ANNUAL REPORT Exhibit 13(b) [LOGO] CAPITOL BANCORP LIMITED Financial Information Section of 2002 Annual Report to Shareholders Capitol Bancorp Center 2777 East Camelback Road 200 Washington Square North Suite 375 Lansing, MI 48933 Phoenix, AZ 85016 (517) 487-6555 (602) 955-6100 TABLE OF CONTENTS Selected Consolidated Financial Data..........................................................................2 Information Regarding Capitol's Common Stock..................................................................3 Availability of Form 10-K and Certain Other Reports...........................................................3 Other Corporate and Shareholder Information...................................................................4 Responsibility For Financial Statements.......................................................................5 Cautionary Statement Regarding Forward-Looking Statements.....................................................5 Management's Report on Internal Controls......................................................................6 Management's Discussion and Analysis of Financial Condition and Results of Operations: The Business of Capitol and Its Banks.....................................................................7 Capitol's Structure.......................................................................................8 Banking Technology at Capitol.............................................................................9 Critical Accounting Policies.............................................................................10 Changes in Consolidated Financial Position...............................................................11 Consolidated Results of Operations.......................................................................15 Liquidity, Capital Resources and Capital Adequacy........................................................18 Trends Affecting Operations..............................................................................22 New Accounting Standards.................................................................................25 Consolidated Financial Statements: Report of Independent Auditors...........................................................................26 Consolidated Balance Sheets..............................................................................27 Consolidated Statements of Income........................................................................28 Consolidated Statements of Changes in Stockholders' Equity...............................................29 Consolidated Statements of Cash Flows....................................................................30 Notes to Consolidated Financial Statements...............................................................31
1 SELECTED CONSOLIDATED FINANCIAL DATA (in $1,000s, except per share data)
As of and for the Year Ended December 31 -------------------------------------------------------------------- 2002(1) 2001(3) 2000(4) 1999(5) 1998(6) ---------- ---------- ---------- ---------- ---------- For the year: Interest income $ 156,454 $ 153,797 $ 132,311 $ 93,602 $ 69,668 Interest expense 55,860 73,292 65,912 46,237 36,670 Net interest income 100,594 80,505 66,399 47,365 32,998 Provision for loan losses 12,676 8,167 7,216 4,710 3,523 Noninterest income 14,982 9,585 6,137 4,714 3,558 Noninterest expense 77,151 64,136 52,846 40,257 26,325 Income before cumulative effect of change in accounting principle 16,653 10,718 8,035 5,606(7) 4,628 Net income 16,653 10,718 8,035 5,409 4,628 Net income per share: Basic 1.64 1.38 1.14 .84 .74 Diluted 1.57 1.35 1.13 .83 .72 Cash dividends paid per share .44 .40 .36 .36 .33 At end of year: Total assets $2,409,288 $2,044,006 $1,630,076 $1,305,987 $1,024,444 Total earning assets 2,226,969 1,920,621 1,517,350 1,227,976 953,315 Portfolio loans 1,991,372 1,734,589 1,355,798 1,049,204 724,280 Deposits 2,062,072 1,740,385 1,400,899 1,112,793 890,890 Debt obligations 93,398 89,911 58,150 47,400 23,600 Trust-preferred securities 51,583 48,621 24,327 24,291 24,255 Minority interests in consolidated subsidiaries 28,016(2) 70,673 62,575 54,593 27,576 Stockholders' equity 160,037(2) 80,172 70,404 54,668 49,292 Quarterly Results of Operations (unaudited) ---------------------------------------------------- Total for Fourth Third Second First the Year Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- ---------- Year ended December 31, 2002:(1) Interest income $ 156,454 $ 40,176 $ 40,462 $ 38,561 $ 37,255 Interest expense 55,860 13,019 14,269 14,140 14,432 Net interest income 100,594 27,157 26,193 24,421 22,823 Provision for loan losses 12,676 3,984 3,918 2,684 2,090 Net income 16,653 5,249 4,447 3,913 3,044 Net income per share: Basic 1.64 .47 .42 .37 .39 Diluted 1.57 .45 .40 .35 .38 Cash dividends paid per share .44 .12 .12 .10 .10 Year ended December 31, 2001:(3) Interest income $ 153,797 $ 38,031 $ 39,058 $ 38,894 $ 37,814 Interest expense 73,292 16,398 18,350 19,181 19,363 Net interest income 80,505 21,633 20,708 19,713 18,451 Provision for loan losses 8,167 2,530 2,316 1,697 1,624 Net income 10,718 2,963 2,772 2,600 2,383 Net income per share: Basic 1.38 .38 .35 .33 .31 Diluted 1.35 .37 .35 .33 .31 Cash dividends paid per share .40 .10 .10 .10 .10
(1) Includes Bank of Las Vegas (located in Las Vegas, Nevada), effective February 2002 and Napa Community Bank (located in Napa, California), effective March 2002. (2) Reflects the January 2003 share exchange regarding the minority interest of Nevada Community Bancorp Limited as if it had occurred on December 31, 2002. (3) Includes Sunrise Bank of San Diego (located in San Diego, California), effective January 2001. (4) Includes Black Mountain Community Bank effective March 2000 (located in Henderson, Nevada), Sunrise Bank of Albuquerque effective April 2000 (located in Albuquerque, New Mexico), Arrowhead Community Bank effective September 2000 (located in Glendale, Arizona), Goshen Community Bank effective September 2000 (located in Goshen, Indiana) and Yuma Community Bank effective December 2000 (located in Yuma, Arizona). (5) Includes East Valley Community Bank effective June 1999 (located in Chandler, Arizona); Desert Community Bank (effective August 1999) and Red Rock Community Bank (effective November 1999), both located in Las Vegas, Nevada; and Elkhart Community Bank effective September 1999 (located in Elkhart, Indiana). (6) Includes Kent Commerce Bank effective January 1998 and Detroit Commerce Bank effective December 1998, both located in Michigan and, in Arizona, Camelback Community Bank (effective May 1998), Southern Arizona Community Bank (effective August 1998), Mesa Bank (effective October 1998) and Sunrise Bank of Arizona (effective December 1998). (7) Implementation of a new accounting standard requiring the write-off of previously capitalized start-up costs resulted in a one-time charge of $197,000 (net of income tax effect) or $.03 per share effective January 1, 1999. 2 INFORMATION REGARDING CAPITOL'S COMMON STOCK Capitol's common stock is traded on the National Market System of The Nasdaq Stock MarketSM under the symbol "CBCL". Market quotations regarding the range of high and low sales prices of Capitol's common stock, which reflect inter-dealer prices without retail mark-up, mark-down or commissions, were as follows: 2002 2001 ----------------- ----------------- Low High Low High ------- ------- ------- ------- Quarter Ended: March 31 $13.300 $16.820 $ 9.688 $14.250 June 30 16.450 23.860 12.000 15.660 September 30 15.810 24.250 12.250 17.500 December 31 15.130 23.780 12.800 15.200 During 2002, Capitol paid cash dividends of $0.10 per share in the first and second quarters and $0.12 per share in the third and fourth quarters. In 2001, Capitol paid quarterly cash dividends of $0.10 per share. As of March 17, 2003, there were 5,228 beneficial holders of Capitol's common stock, based on information supplied to Capitol from its stock transfer agent and other sources. At that date, 11,803,521 shares of common stock were outstanding. Capitol's stock transfer agent is UMB Bank, n.a., 928 Grand Ave., P.O. Box 410064, Kansas City, Missouri 64141-0064 (telephone 800/884-4225). The web site for UMB Bank, n.a. is HTTP:\\WWW.UMB.COM. Capitol has a Shareholder Investment Program which offers a variety of convenient features including dividend reinvestment, certain fee-free transactions, certificate safekeeping and other benefits. For a copy of the program prospectus, informational brochure and enrollment materials, contact UMB Bank, n.a. at 800/884-4225 or Capitol at 517/487-6555. In addition to Capitol's common stock, trust-preferred securities of Capitol Trust I (a subsidiary of Capitol) are also traded on the National Market System of The Nasdaq Stock MarketSM under the symbol "CBCLP". Those trust-preferred securities consist of 2,530,000, 8.5% cumulative preferred securities, with a liquidation amount of $10 per preferred security. The trust-preferred securities are guaranteed by Capitol and mature in 2027, are callable after 2002 and may be extended to 2036 if certain conditions are met. AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS A copy of Capitol's 2002 report on Form 10-K, without exhibits, is available to holders of its common stock or trust-preferred securities without charge, upon written request. Form 10-K includes certain statistical and other information regarding Capitol and its business. Requests to obtain Form 10-K should be addressed to Investor Relations, Capitol Bancorp Limited, Capitol Bancorp Center, 200 Washington Square North, Lansing, Michigan 48933. Form 10-K, and certain other periodic reports, are filed with the Securities and Exchange Commission (SEC). The SEC maintains an internet web site that contains reports, proxy and information statements and other information regarding companies which file electronically (which includes Capitol). The SEC's web site address is HTTP:\\WWW.SEC.GOV. Capitol's filings with the SEC are also available at Capitol's web site, HTTP:\\WWW.CAPITOLBANCORP.COM. 3 OTHER CORPORATE INFORMATION CORPORATE OFFICES Capitol Bancorp Center 2777 East Camelback Road 200 Washington Square North Suite 375 Lansing, Michigan 48933 Phoenix, Arizona 85016 517/487-6555 602/955-6100 www.capitolbancorp.com www.capitolbancorp.com INDEPENDENT AUDITORS BDO Seidman, LLP, Grand Rapids, Michigan SHAREHOLDER INFORMATION ANNUAL MEETING Capitol's Annual Meeting will be held on Thursday, May 8, 2003 at 4:00 p.m. at the Lansing Center, located at 333 E. Michigan Avenue, Lansing, Michigan. COMMON STOCK TRADING INFORMATION Capitol's common stock trades on the National Market System of the Nasdaq Stock MarketSM under the trading symbol CBCL. The following brokerage firms make a market in the common stock of Capitol: AnPac Securities Group, Inc. - Atlanta, Georgia Knight Securities L.P. - Jersey City, New Jersey Cincinnati Stock Exchange - Cincinnati, Ohio Merrill Lynch, Pierce, Fenner - New York, New York Fahnestock & Co., Inc. - New York, New York Morgan Stanley & Co., Inc. - San Francisco, California First Tennessee Securities - Memphis, Tennessee Robert W. Baird & Co., Inc. - Milwaukee, Wisconsin Friedman Billings Ramsey & Co. - Arlington, Virginia Sandler O'Neill & Partners - New York, New York Goldman, Sachs & Co. - New York, New York Schwab Capital Markets - San Francisco, California Howe Barnes Investments, Inc. - Chicago, Illinois Stifel Nicolaus & Company, Inc. - St. Louis, Missouri Keefe, Bruyette & Woods, Inc. - New York, New York Susquehanna Capital Group - Bala Cynwyd, Pennsylvania
COMMON STOCK TRANSFER AGENT UMB Bank, n.a. 928 Grand Avenue P.O. Box 410064 Kansas City, Missouri 64141-0064 800/884-4225 SHAREHOLDER INVESTMENT PROGRAM Capitol offers an easy and affordable way to invest in Capitol's common stock through its Shareholder Investment Program. The program's benefits include reinvestment of dividends in additional common stock, direct deposit of dividends, ability to purchase as little as $50 in common stock as frequently as once a month, and the option to make transfers or gifts of Capitol's common stock to another person. Participation in the program is voluntary and all shareholders are eligible. Purchases under the program are not currently subject to any brokerage fees or commissions. For further information regarding Capitol's Shareholder Investment Program or a copy of the program's prospectus, informational brochure and enrollment materials, contact UMB Bank, n.a. at 800/884-4225 or Capitol at 517/487-6555. TRUST-PREFERRED SECURITIES TRADING INFORMATION Preferred securities of Capitol Trust I (a subsidiary of Capitol) trade on the Nasdaq Stock MarketSM under the trading symbol CBCLP. TRUST-PREFERRED SECURITIES TRUSTEE Bank One Investment Management Group - Chicago, Illinois 4 RESPONSIBILITY FOR FINANCIAL STATEMENTS Capitol's management is responsible for the preparation of the consolidated financial statements and all other information appearing in this annual report. The financial statements have been prepared in accordance with generally accepted accounting principles and prevailing practices of the financial institution industry in the United States of America. Capitol's management is also responsible for establishing and maintaining the internal control structure of Capitol, its banks and its bank development affiliates. The general objectives of the internal control structure are to provide management with reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are completed in accordance with generally accepted accounting principles in the United States of America. In fulfilling this objective, management has various control procedures in place which include review and approval of transactions, a code of ethical conduct for employees, internal auditing and an annual audit of Capitol's consolidated financial statements performed by a qualified independent audit firm. FORWARD-LOOKING STATEMENTS Some of the statements contained in this annual report that are not historical facts are forward-looking statements. Those 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", "will", "may", "believe", and similar expressions also identify forward-looking statements. Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of Capitol's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol's banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of Capitol's banks and Capitol's ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, (xi) changes in management, and (xii) other risks detailed in Capitol's other filings with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize, or if 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. 5 MANAGEMENT'S REPORT ON INTERNAL CONTROLS Capitol Bancorp's management is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with accounting principles generally accepted in the United States of America and necessarily include some amounts that are based on management's best estimates and judgments. We, as executive management of Capitol Bancorp, are responsible for establishing and maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in conformity with accounting principles generally accepted in the United States of America. The systems of internal controls over financial reporting as they relate to the financial statements contain self-monitoring mechanisms, and compliance is tested and evaluated through a program of internal audits and other checks and test procedures. Actions are taken to correct potential deficiencies when identified. Any system of internal controls, no matter how well designed, has inherent limitations, including the possibility that controls can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, any effective system of internal controls will provide only reasonable assurance with respect to financial statement preparation. Capitol's Audit Committee, consisting entirely of outside directors, meets regularly with management, internal auditors and Capitol's independent auditors, and reviews audit plans and results, as well as management's actions taken in discharging responsibilities for accounting, financial reporting, and internal controls. BDO Seidman, LLP, independent auditors, and our internal auditors have direct and confidential access to Capitol's Audit Committee at all times to discuss the results of their examinations. Management assessed the Corporation's system of internal control over financial reporting as of December 31, 2002. Based on this assessment, management believes that, as of December 31, 2002, its systems of internal controls over financial reporting were adequate to meet those stated objectives of internal controls over financial reporting. /s/ Joseph D. Reid /s/ Lee W. Hendrickson - ---------------------------- ---------------------------- Joseph D. Reid Lee W. Hendrickson Chairman and CEO Chief Financial Officer January 31, 2003 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Most of this section discusses items of importance regarding Capitol's financial statements which appear elsewhere in this report. In order to obtain a full understanding of this discussion, it is important to read it with those financial statements. However, before discussing the financial statements and related highlights, an introductory section includes some important background information about the business of Capitol and its banks, Capitol's structure and recent developments. THE BUSINESS OF CAPITOL AND ITS BANKS Capitol defines itself as a BANK DEVELOPMENT COMPANY. In the highly regulated business of banking, it is viewed by governmental agencies as a "bank holding company". Capitol views bank DEVELOPMENT as a much more dynamic activity than the seemingly passive regulatory label for bank HOLDING companies. Bank development at Capitol is the business of mentoring, monitoring and managing its investments in community banks. Bank development is also the activity of adding new banks through start-up, or DE NOVO, formation or through other affiliation efforts, such as exploring acquisitions of existing banks. Capitol's banks have similar characteristics: * Each bank has an on-site president and management team, as local decision makers. * Each bank has a local board of directors which has actual authority over the bank. * Each bank predominately operates from a single office location. * Each bank can fully meet customers' needs anywhere, anytime through bankers-on-call, courier services, Internet and telephone banking and other delivery methods. * Each bank has access to an efficient back-room processing facility and leading-edge technology through shared financial and operating resources. Capitol's banks seek the profitable customer relationships which are often displaced through mergers, mass marketing and megabanks. Capitol's banks are focused on commercial banking activities, emphasizing business customers, although they also offer a complete array of financial products and services. Each bank has a separate charter. A bank charter is similar to articles of incorporation and enables each bank to exist as a distinct legal entity. Most of these banks are state-chartered, which means they are organized under a particular state's banking laws. All of the banks are FDIC-insured. Banks are highly regulated by state and federal agencies. Because each bank has its own charter, each bank is examined by both state and federal agencies as a separate and distinct legal entity for safety, soundness and compliance with banking laws and regulations. At December 31, 2002, Capitol consisted of 29 community banks, operating in 8 states. 7 Capitol's bank development philosophy is one of "SHARED VISION", which encompasses a commitment to community banking emphasizing local leadership and investment, with the shared resources of efficient management. Capitol provides these shared resources to its banks, including common data processing systems, centralized item processing, loan review, internal audit, credit administration, accounting, legal and risk management. CAPITOL'S STRUCTURE Capitol's structure is unique. Based on management's recent research, Capitol is the second largest banking company in the United States, based on the number of bank charters within its consolidated group. Of Capitol's twenty-nine banks, most are directly owned by Capitol, and most of them are wholly-owned, as of December 31, 2002. At the beginning of 2002, Capitol's structure was much more complex. At that time it had several second and third-tier subsidiary bank-development subsidiaries (majority-owned by Capitol or by an affiliate) which, in turn, had majority-owned bank subsidiaries. This complex structure was the result of Capitol's significant bank-development expansion activities in the years of 1998-2001, which involved the formation of partially-owned bank-development subsidiaries to form majority-owned DE NOVO banks. That complex structure made it difficult to understand the component parts of Capitol and how the multiple ownership tiers impacted consolidated operating results. In response to that perceived difficulty and improved performance of its maturing banks, Capitol's management embarked on a significant initiative in 2002 to simplify its structure by 'consolidating' the minority ownership of its largest second and third-tier bank-development subsidiaries: * Sun Community Bancorp Limited ...COMPLETED MARCH 31, 2002 * Sunrise Capital Corporation ...COMPLETED SEPTEMBER 30, 2002 * Indiana Community Bancorp Limited ...COMPLETED SEPTEMBER 30, 2002 * Nevada Community Bancorp Limited ...COMPLETED JANUARY 17, 2003 Each of these 'consolidations' involved Capitol issuing shares of its common stock (previously unissued) in exchange for the minority interests of those bank-development subsidiaries held by shareholders other than Capitol. Because the Nevada share exchange was substantially complete at year end 2002, and awaiting only the vote of its shareholders on January 17, 2003 (at which time it was overwhelmingly approved, without any dissenting votes), it has been reflected in Capitol's consolidated balance sheet as if it occurred on December 31, 2002. With those bank-development subsidiaries becoming wholly-owned by Capitol, they have subsequently been merged into Capitol and, accordingly, their direct bank subsidiaries are now direct bank subsidiaries of Capitol. The largest of these 'consolidation' transactions was the one involving Sun Community Bancorp. Sun was formed by Capitol in 1997 and became a public company in 1998, majority-owned by Capitol. Sun was the bank-development company focused on Capitol's expansion in the Southwestern Region of the United States. Upon completion of the 2002 share-consolidation with Capitol, Sun's executive offices became Capitol's Western Regions' headquarters. 8 At year-end 2002, Capitol has one additional bank-development subsidiary which is not discussed above. It is First California Northern Bancorp (majority-owned by Capitol), which commenced operations in early 2002 and has one majority-owned bank subsidiary. This bank-development company and its current subsidiary are in their early stages of operation. All of the banks and subsidiary bank-development companies are combined, or consolidated, for financial reporting purposes because Capitol has ownership control of them either directly or indirectly. Current accounting rules require consolidated reporting when one entity has majority voting control of another. The reporting entity is the parent organization and entities which are majority-owned by the parent are subsidiaries. In the circumstances of Capitol, this parent and subsidiary relationship applies also to second and third tier subsidiaries which have consolidated subsidiaries of their own. The accounting rules in this area inhibit an understanding of the consolidated financial statements. For example, consolidated balance sheets include all of the combined entities' assets and liabilities. On the other hand, the consolidated income statement includes all of the combined entities, but includes net income only to the extent of the parent's ownership percentage. Because of the number of banks and bank development companies added in recent periods, comparing financial results for those and prior periods is difficult. In 2002, two new banks were added. In 2001, one new bank was added. In 2000, a total of five new banks were added to the consolidated group. In 1999, four new banks were added. In 1998, there were six new banks added to the group. BANKING TECHNOLOGY AT CAPITOL The use of high technology banking systems is key to the delivery of accurate and timely customer service. Capitol currently operates two data processing sites, located in Lansing, Michigan and Tempe, Arizona. The Lansing site handles item processing for the banks located in the Great Lakes Region, while the Tempe data center processes all activity for the banks located in the Western Regions. Both sites use mainframe computers and software which are nearly identical. While physically separate, both sites function under common management. 9 CRITICAL ACCOUNTING POLICIES Capitol's most significant accounting policies are described in Note B of the consolidated financial statements, beginning on page 33. Within those significant polices are some which are particularly critical or crucial to a reader's understanding of Capitol's financial position and results of operations. Management believes Capitol's CRITICAL ACCOUNTING POLICIES to be the following: * USE OF ESTIMATES--Some very significant items (allowances for loan losses, tax accruals and determinations of fair values or impairment, for example) can have a pervasive impact on the reported financial position and results of operations. * CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES--Again, because of the inherent subjectivity in estimating losses, actual variances from estimates or subsequent changes to estimates can be significant. In addition, many of Capitol's banks are quite young and do not have seasoned loan portfolios or significant past loss experience upon which to base current estimates of losses inherent in the loan portfolio at a particular balance-sheet date. Despite regulatory guidance and other standard-setting encouragement to reduce such loss estimation techniques to a mathematical formula, the fact remains that loss estimates require significant judgment on the part of management and cannot be reduced to be a succinct standard or actuarial formula in the context of Capitol's banks. * ACCOUNTING FOR INCOME TAXES--Because of the level of taxation imposed upon corporate entities, including banks, at the federal level (up to 35%, currently), measurement of income tax expense and related liabilities and deferred tax assets have a material effect on Capitol's financial statements. Further, some states in which Capitol's banks are domiciled have income tax rates which exceed 10%. * ACCOUNTING FOR GOODWILL--A new accounting standard was issued in 2002, which changed the way companies account for goodwill. Capitol has goodwill on its balance sheet, which represents the 'premium' it has paid in conjunction with acquisition of minority interests in some of its subsidiaries and some other prior acquisitions. In the circumstances of Capitol, the new standard requires that goodwill will no longer be amortized. Instead, goodwill will be reviewed at least annually by management for impairment and impairment losses, if any, will be charged against operations when known. 10 CHANGES IN CONSOLIDATED FINANCIAL POSITION Total assets have grown significantly to $2.4 billion at year-end 2002 from $1 billion at the end of 1998. This sustained pace of asset growth is the result of adding new banks and the ongoing growth and evolution of Capitol's more mature banks. [GRAPH] TOTAL ASSETS ($ millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 1,024 1,306 1,630 2,044 2,409 At year-end 2002, total combined assets of the three banks formed within the last two years approximated $113 million ($38 million at December 31, 2001). Banks formed in 2000 reported total assets of $234 million at the end of 2002, an increase of $61 million during the year. Total assets of the four banks which became three years old in 2002 grew 12% during the past year to $243 million. The six banks formed in 1998 continued strong asset growth of 21% in 2002, achieving total assets of $410 million. The most mature group of banks, those formed before 1998, reported total assets of $1.4 billion at year-end 2002, an increase of about 9% for the year. [The remainder of this page intentionally left blank] 11 The total assets and revenues of each bank, the consolidated totals and ownership percentages are summarized below as of year-end 2002 and 2001 (in $1,000s):
December 31, 2002 Percentage Ownership By Total Assets Total Revenues ------------------------- -------------------------- -------------------------- Capitol 2nd Tier 2002 2001 2002 2001 ----------- ----------- ----------- ----------- ----------- ----------- Great Lakes Region: Ann Arbor Commerce Bank 100% $ 309,152 $ 271,116 $ 22,890 $ 23,372 Brighton Commerce Bank 100% 78,382 70,530 5,689 5,608 Capitol National Bank 100% 206,130 173,177 13,032 13,196 Detroit Commerce Bank 100% 30,589 33,768 2,288 2,620 Grand Haven Bank 100% 123,505 98,740 9,226 7,822 Kent Commerce Bank 100% 73,801 66,873 5,797 4,763 Macomb Community Bank 100% 87,050 97,113 5,812 8,364 Muskegon Commerce Bank 100% 86,465 74,284 6,538 6,305 Oakland Commerce Bank 100% 115,916 115,249 7,568 8,681 Paragon Bank & Trust 100% 103,044 93,667 8,292 8,270 Portage Commerce Bank 100% 139,068 127,884 10,499 11,134 Elkhart Community Bank 51% 53,210 35,939 2,934 2,481 Goshen Community Bank 51% 38,115 28,681 2,305 1,215 ----------- ----------- ----------- ----------- Great Lakes Region Total 1,444,427 1,287,021 102,870 103,831 Southwest Region: Arrowhead Community Bank 87% 47,427 33,658 3,500 1,804 Bank of Tucson 100% 132,094 121,075 9,907 10,516 Camelback Community Bank 100% 82,387 67,210 6,052 5,161 East Valley Community Bank 100% 37,640 39,591 2,765 3,261 Mesa Bank 100% 66,312 52,308 5,036 4,277 Southern Arizona Community Bank 100% 75,253 55,423 5,011 4,107 Valley First Community Bank 100% 42,127 58,625 3,573 4,694 Yuma Community Bank 51% 38,214 23,202 2,623 1,244 Bank of Las Vegas 51%(1) 26,880 1,157 Black Mountain Community Bank 51%(1) 63,202 50,909 4,004 3,259 Desert Community Bank 51%(1) 55,170 56,844 4,183 4,341 Red Rock Community Bank 51%(1) 96,906 84,971 6,829 5,659 Sunrise Bank of Albuquerque 87% 46,898 35,984 2,840 2,851 Sunrise Bank of Arizona 100% 82,126 63,141 6,526 6,466 ----------- ----------- ----------- ----------- Southwest Region Total 892,636 742,941 64,006 57,640 California Region: Sunrise Bank of San Diego 64% 50,450 37,912 3,977 2,658 First California Northern Bancorp: 51% Napa Community Bank 51% 36,042 1,241 ----------- ----------- ----------- ----------- California Region Total 86,492 37,912 5,218 2,658 Other, net (14,267) (23,868) (658) (747) ----------- ----------- ----------- ----------- Consolidated totals $ 2,409,288 $ 2,044,006 $ 171,436 $ 163,382 =========== =========== =========== ===========
(1) Reflects the January 2003 share exchange regarding the minority interest of Nevada Community Bancorp Limited as if it had occurred on December 31, 2002. Most of the consolidated assets consist of loans. Portfolio loans approximated $2 billion at year-end 2002, and net portfolio loans approximated 81.5% of total consolidated assets, a slight decrease from 83.7% at year-end 2001. [GRAPH] TOTAL PORTFOLIO LOANS ($ millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 724 1,049 1,356 1,735 1,991 12 The banks emphasize commercial loans, consistent with their focus on serving small to mid-sized business customers. The majority of commercial loans are secured by real estate. Commercial loans approximated $1.8 billion or about 89.8% of total portfolio loans at year-end 2002, a slight increase from 88.5% at the end of 2001. Loan growth in 2002 was $257 million, or a growth rate of 14.8%--somewhat less than the growth rate experienced in preceding years due, in part, to softer economic conditions. The banks maintain an allowance for loan losses to absorb estimated losses in the loan portfolio at the balance sheet date. At December 31, 2002, the allowance for loan losses approximated $29 million or 1.45% of portfolio loans, compared to $23.2 million or 1.34% at the end of 2001. The allowance ratio was increased in 2002 in response to higher levels of nonperforming loans and potential problem loans. The following table summarizes portfolio loans, the allowance for loan losses and its ratio, and nonperforming loans (in $1,000s):
Allowance as a Allowance for Nonperforming % of Total Total Portfolio Loans Loan Losses Loans Portfolio Loans ----------------------- ----------------------- ------------------------ --------------- 2002 2001 2002 2001 2002 2001 2002 2001 ---------- ---------- ---------- ---------- ---------- ---------- ---- ---- Great Lakes Region: Ann Arbor Commerce Bank $ 272,604 $ 233,920 $ 3,840 $ 3,219 $ 2,624 $ 1,960 1.41% 1.38% Brighton Commerce Bank 68,239 60,984 851 732 170 227 1.25% 1.20% Capitol National Bank 158,651 144,485 2,322 1,983 1,753 465 1.46% 1.37% Detroit Commerce Bank 26,799 29,243 627 351 751 539 2.34% 1.20% Grand Haven Bank 114,616 89,989 1,626 1,212 1,605 1,234 1.42% 1.35% Kent Commerce Bank 68,848 63,782 830 766 293 55 1.21% 1.20% Macomb Community Bank 73,915 79,844 1,136 1,088 3,012 1,431 1.54% 1.36% Muskegon Commerce Bank 77,247 70,151 966 842 1,806 123 1.25% 1.20% Oakland Commerce Bank 86,049 81,711 1,119 1,063 1,805 406 1.30% 1.30% Paragon Bank & Trust 86,571 81,430 1,291 1,018 2,628 586 1.49% 1.25% Portage Commerce Bank 129,710 109,393 1,815 1,550 3,135 2,845 1.40% 1.42% Elkhart Community Bank 43,277 31,492 658 473 245 222 1.52% 1.50% Goshen Community Bank 35,408 22,966 532 345 1.50% 1.50% ---------- ---------- ---------- ---------- ---------- ---------- Great Lakes Region Total 1,241,934 1,099,390 17,613 14,642 19,827 10,093 Southwest Region: Arrowhead Community Bank 36,185 30,430 543 457 1.50% 1.50% Bank of Tucson 90,176 88,218 1,461 1,224 187 407 1.62% 1.39% Camelback Community Bank 63,516 56,555 960 743 232 334 1.51% 1.31% East Valley Community Bank 25,932 27,402 389 423 17 432 1.50% 1.54% Mesa Bank 55,588 45,672 834 594 242 542 1.50% 1.30% Southern Arizona Community Bank 60,913 50,879 914 662 298 1.50% 1.30% Valley First Community Bank 29,075 41,851 620 670 261 1,018 2.13% 1.60% Yuma Community Bank 25,485 18,539 383 285 1.50% 1.54% Bank of Las Vegas 19,404 292 1.50% Black Mountain Community Bank 52,240 40,111 784 602 324 240 1.50% 1.50% Desert Community Bank 43,351 50,361 675 806 734 989 1.56% 1.60% Red Rock Community Bank 80,152 67,117 1,203 1,008 861 942 1.50% 1.50% Sunrise Bank of Albuquerque 38,577 28,061 521 379 614 1.35% 1.35% Sunrise Bank of Arizona 65,195 55,730 881 753 205 1,329 1.35% 1.35% ---------- ---------- ---------- ---------- ---------- ---------- Southwest Region Total 685,789 600,926 10,460 8,606 3,063 7,145 California Region: Sunrise Bank of San Diego 39,116 32,910 577 455 1.48% 1.38% First California Northern Bancorp: Napa Community Bank 20,177 303 1.50% ---------- ---------- ---------- ---------- ---------- ---------- California Region Total 59,293 32,910 880 455 -0- -0- Other, net 4,356 1,363 (465) ---------- ---------- ---------- ---------- ---------- ---------- ----- ----- Consolidated totals $1,991,372 $1,734,589 $ 28,953 $ 23,238 $ 22,890 $ 17,238 1.45% 1.34% ========== ========== ========== ========== ========== ========== ===== =====
13 Nonperforming loans, which consist of loans more than 90 days past due and loans on nonaccrual status, approximated $22.9 million at year-end 2002, compared to $17.2 million at the end of 2001, an increase of approximately $5.7 million. Most of these 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. 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 classifications. At inception, all loans are individually assigned a classification 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 classification 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 identified for monitoring because of specific performance issues or other risk factors requiring closer management and development of specific remedial action plans. At December 31, 2002, potential problem loans (including nonperforming loans) approximated $98.5 million or about 5% of total consolidated portfolio loans. Such totals typically approximate 4% to 5% of loans outstanding as an important part of management's ongoing and augmented loan review activities which are designed to early-identify loans which warrant close monitoring at the bank and corporate credit-administration levels. 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 identified by management in this manner to aid in loan administration and risk management. Management believes these 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. Loan loss experience through December 31, 2002 remained below industry statistics, although nonperforming and other potential problem loans have increased. Loan charge-offs in 2002 at Capitol increased significantly, from approximately $3 million in 2001 and 2000 to $7.7 million. Management's assessment of loans as of December 31, 2002 suggests future loss experience will return to levels more closely approximating past experience. 14 How financial institutions establish their allowance for loan losses is an important and critical accounting policy and process. 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. It is analyzed quarterly by each bank. The adequacy of the allowance is an estimate based on management's evaluation of the loan portfolio (including volume, amount and composition, potential impairment of individual loans and concentration of credit), past loss experience, current economic conditions, loan commitments outstanding, regulatory requirements and other factors. Standard-setting bodies, regulatory agencies and the SEC (Securities and Exchange Commission) have, on an industry-wide basis, separately issued proposals and other guidance in recent years on how the allowance for loan losses should be estimated and documented. Estimation of requirements for the allowance for loan losses is an inherently subjective process which involves significant judgement by management of many variables potentially impacting borrowers' ability to repay loans and the estimated values of underlying loan collateral. New banks, as a condition of charter approval, are required to maintain an allowance ratio of not less than 1% for their first three years of operations. Because they are new banks with new and unseasoned loans and no prior loss history, 1% is often used as a starting point for the allowance, particularly in the earliest years of operation. As some of the younger banks now have more seasoned loan portfolios and the 1% regulatory requirement represents only an absolute minimum, loan loss allowance ratios have been increased at Capitol's banks based on management's estimates of loss potential inherent in the loan portfolios at the balance sheet date. CONSOLIDATED RESULTS OF OPERATIONS Revenue growth has been significant. Total revenues grew to $171.4 million in 2002 from $73.2 million in 1998. The primary revenue source is interest income from loans. Net interest income is the difference between total interest income on loans and other earning assets and interest expense on deposits and borrowings. The following graphs summarize growth in total revenue (which includes noninterest income revenues such as fees and service charges) and net interest income: [GRAPH] TOTAL REVENUES ($ millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 73.2 98.3 138.4 163.4 171.4 15 [GRAPH] NET INTEREST INCOME ($ millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 33.0 47.4 66.4 80.5 100.6 Most of the 2002 revenues, $103 million or about 60%, came from the most mature banks--those formed prior to 1998. Banks formed in 2000, 1999 and 1998 reported 2002 revenues of $62.7 million or 36% of the consolidated total. The youngest banks, those formed in 2002 and 2001, generated 2002 revenues totaling $6.4 million or about 4% of total consolidated revenues. Noninterest income increased about 56% in both 2002 and 2001. These increases resulted from higher levels of service-charge revenue associated with growth in the number of accounts and banks. A significant increase in noninterest income was also due to revenues from origination of non-portfolio mortgage loans. These revenues increased about 116% to $6.8 million in 2002 as homeowners took advantage of interest rates that decreased to their lowest levels in more than thirty years. Additional discussion about mortgage loan origination activity appears in the next section of this narrative. Growth in net interest income, noninterest income and noninterest expense, is the result of the addition of new banks during the periods presented and the ongoing growth of Capitol's more mature banks. Growth in net interest income, however, was tempered by a decrease in yields on assets and a decrease in the cost of interest-bearing funds which fund the growth at each of the banks. Net interest margin decreased in 2001 mainly due to interest rate decreases impacting interest income at a rate faster than decreases in interest rates paid on deposits. 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. The largest component of noninterest expense is salaries and employee benefits, which has increased significantly due to the larger number of banks and bank development subsidiaries. 16 The following table summarizes net income for each of the banks, and on a consolidated basis, the related rates of return on average equity and assets, where applicable (in $1,000s):
Net Income Return on Average Equity Return on Average Assets -------------------------------- -------------------------- -------------------------- 2002 2001 2000 2002 2001 2000 2002 2001 2000 -------- -------- -------- ------ ------ ------ ------ ------ ------ Great Lakes Region: Ann Arbor Commerce Bank $ 5,022 $ 4,200 $ 3,508 22.40% 22.02% 21.43% 1.72% 1.64% 1.55% Brighton Commerce Bank 973 597 534 15.26% 10.55% 10.22% 1.28% 0.90% 0.90% Capitol National Bank 3,176 2,647 2,319 22.68% 22.04% 22.08% 1.69% 1.66% 1.63% Detroit Commerce Bank (517) (187) 10 0.37% 0.03% Grand Haven Bank 1,924 1,060 1,084 20.51% 15.39% 19.20% 1.67% 1.21% 1.46% Kent Commerce Bank 992 113 130 13.72% 2.03% 3.21% 1.33% 0.20% 0.30% Macomb Community Bank 530 1,145 1,212 5.47% 12.33% 14.41% 0.60% 1.08% 1.14% Muskegon Commerce Bank 1,472 816 689 18.68% 12.73% 15.14% 1.83% 1.17% 1.23% Oakland Commerce Bank 1,414 1,328 1,027 16.01% 16.62% 13.78% 1.32% 1.27% 1.08% Paragon Bank & Trust 771 231 431 8.04% 3.23% 6.72% 0.77% 0.26% 0.50% Portage Commerce Bank 2,005 1,556 1,552 18.69% 15.62% 16.76% 1.49% 1.21% 1.21% Elkhart Community Bank 257 14 (229) 5.48% 0.30% 0.61% 0.04% Goshen Community Bank 125 (413) (216) 2.83% 0.36% -------- -------- -------- Great Lakes Region Total 18,144 13,107 12,051 Southwest Region: Arrowhead Community Bank 117 (386) (419) 2.70% 0.27% Bank of Tucson 2,312 2,095 2,149 21.87% 22.64% 27.69% 1.99% 1.89% 2.33% Camelback Community Bank 714 534 297 9.74% 10.80% 8.22% 0.90% 0.93% 0.74% East Valley Community Bank (336) 18 (532) 0.58% 0.05% Mesa Bank 848 386 268 14.51% 8.53% 6.77% 1.44% 0.87% 0.85% Southern Arizona Community Bank 668 320 169 10.67% 7.42% 4.44% 0.94% 0.67% 0.47% Valley First Community Bank 113 328 88 1.99% 5.94% 1.82% 0.23% 0.61% 0.18% Yuma Community Bank 147 (438) (176) 4.05% 0.43% Bank of Las Vegas (611) Black Mountain Community Bank 439 12 (468) 9.26% 0.27% 0.81% 0.03% Desert Community Bank 209 35 (180) 4.16% 0.76% 0.35% 0.07% Red Rock Community Bank 243 635 190 2.71% 7.64% 2.45% 0.26% 0.96% 0.62% Sunrise Bank of Albuquerque (40) 28 (386) 0.77% 0.09% Sunrise Bank of Arizona (194) 830 206 15.24% 4.64% 1.27% 0.43% -------- -------- -------- Southwest Region Total 4,629 4,397 1,206 California Region: Sunrise Bank of San Diego 342 (806) 4.53% 0.68% First California Northern Bancorp: Napa Community Bank (609) -------- -------- -------- California Region Total (267) (806) -0- Other, net (5,853) (5,980) (5,222) -------- -------- -------- ------ ------ ------ ------ ------ ------ Consolidated totals $ 16,653 $ 10,718 $ 8,035 13.33% 15.22% 13.78% 0.75% 0.58% 0.55% ======== ======== ======== ====== ====== ====== ====== ====== ======
Provisions for loan losses also increased significantly during recent years, commensurate with the growth in both the number of banks and loans, and trends in asset quality and loan charge-offs. [GRAPH] NET INCOME ($ millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 4.6 5.4 8.0 10.7 16.7 17 LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY Asset liquidity for financial institutions typically consists of cash and cash equivalents, investment securities available for sale and loans held for resale. These categories totaled $352 million at year-end 2002, or about 15% of total assets. This compares to $262 million or 13% of total assets at year-end 2001. Liquidity is important for financial institutions because of their need to meet loan funding commitments, depositor withdrawal requests and various other commitments discussed in the accompanying notes to consolidated financial statements. Liquidity varies significantly daily, based on customer activity. Most of the investment securities portfolio is classified as available for sale, although the banks generally have not sold investments to meet liquidity needs. Also, to the extent warranted, the banks may sell loans from time to time. Loans held for resale approximated $75.4 million at December 31, 2002, an increase of about 21% over year end 2001 levels. These loans are residential real estate mortgages originated by the banks, primarily through Capitol's mortgage affiliate, Amera Mortgage Corporation. These loans are subsequently sold into the secondary market, rather than being held in the banks' portfolio, to reduce interest rate risk. Loan origination volume in 2002 increased nearly 37%, to $891.5 million compared to $651.1 million in 2001 and $251 million in 2000. Most of this volume was achieved through record low interest rates and Amera's working with Capitol's Great Lakes Region banks. Future volume will depend on whether interest rates remain low and the strength of residential real estate market conditions. In early 2003, Amera's activities have expanded to include all of Capitol's affiliate banks. The primary source of funds for the banks is deposits. The banks emphasize interest-bearing time deposits as part of their funding strategy. The banks also seek noninterest-bearing deposits, or checking accounts, which reduce the banks' cost of funds. Noninterest-bearing deposits were about 17% of total deposits at year-end 2002 (about 16% at year-end 2001) and increased $88 million, or 32%, during the year. [GRAPH] TOTAL DEPOSITS ($ millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 891 1,113 1,401 1,740 2,062 18 In recent periods, many banks have experienced some competitive challenges in obtaining additional deposits to fuel growth. Capitol's banks have had similar experiences in their individual markets. As depositors have wider access to the Internet and other real-time interest rate monitoring resources, deposit pricing has become more competitive. Deposit growth is achievable, but at a competitive price, with tight net interest margins, especially during these most recent periods of low interest rates. The banks do not generally rely on brokered deposits as a key funding source (approximately $200 million at year-end 2002 or 11.7% of interest-bearing deposits compared to 9.7% in 2001); however, brokered deposits are a ready resource to help meet urgent funding needs, such as loan commitments (which are discussed in greater detail in Note O of the consolidated financial statements). To supplement their funding sources, some of the banks have lines of credit from the Federal Home Loan Bank system. At year-end 2002, a total of $79 million ($63 million at year-end 2001) was borrowed under those facilities and additional borrowing availability approximated $15 million. Some of the banks also have smaller lines of credit with their correspondent banks. Borrowings under these facilities are generally at short-term market rates of interest and, although the repayment dates can be extended, are generally outstanding for brief periods of time. Capitol has credit facilities aggregating $25 million from an unaffiliated bank. At year-end 2002, a total of $12.5 million ($14.1 million at year-end 2001) was borrowed under this facility. Borrowings under this credit facility were reduced in 2002 and 2001 through use of available corporate funds within the consolidated group. Capitol's longer-term contractual obligations are disclosed in the notes to the consolidated financial statements. Excluding time deposits of the banks, such obligations consist principally of debt and lease obligations and trust-preferred securities, summarized as follows (in $1,000s):
Payments Due by Period -------------------------------- Within Within After Total 1 Year 2-5 Years 5 Years -------- -------- --------- -------- Debt obligations $ 93,398 $ 36,824 $ 20,074 $ 36,500 Rent commitments under noncancelable leases 19,515 3,773 12,131 3,611 Trust-preferred securities 53,300 -- -- 53,300 -------- -------- -------- -------- Total $166,213 $ 40,597 $ 32,205 $ 93,411 ======== ======== ======== ========
Loan commitments of Capitol's banks (stand-by letters of credit and unfunded loans) generally expire within one year. A significant source of capital has been investments provided by minority shareholders in the subsidiaries which are consolidated for financial reporting purposes. Total minority interests in consolidated subsidiaries amounted to $28.0 million at year-end 2002, a decrease of $42.7 million from the $70.7 million level at year-end 2001. The decreases in minority interests in 2002 resulted mainly from Capitol consolidating the ownership of some of its subsidiaries. 19 Three majority-owned bank-development subsidiaries became 100% owned in 2002. In each of these transactions, the shares acquired from the minority shareholders were exchanged for Capitol's common stock according to fixed, but differing, exchange ratios. The exchange with Sun Community Bancorp (Sun) was completed effective March 31, 2002 and resulted in the issuance of approximately 2.7 million Capitol shares. Share exchanges regarding Sunrise Capital Corporation and Indiana Community Bancorp Limited were completed effective September 30, 2002 and resulted in the issuance of about 450,000 shares of Capitol. Additionally, 383,000 Capitol shares were issued from the share exchange with Nevada Community Bancorp Limited which was completed in January 2003; this transaction has been reflected for balance-sheet purposes as if it occurred on December 31, 2002. Two majority-owned banks also became wholly-owned in 2002. Share exchange transactions for Detroit Commerce Bank and East Valley Community Bank were completed effective December 31, 2002. About 54,000 shares of Capitol's common stock were issued in those transactions. While it is likely that similar share exchange transactions, as a harvest strategy to gain full ownership of some bank subsidiaries, may occur in the future, any such transactions depend upon whether Capitol (or one of its subsidiary bank holding companies) offers such an exchange and whether minority shareholders vote in favor of it on a transaction-by-transaction basis. Total stockholders' equity approximated $160.0 million at year-end 2002, an increase of $79.9 million for the year. The 2002 increase in stockholders' equity includes earnings (less dividends paid) and proceeds from the issuance of common stock. A substantial portion of the increase in stockholders' equity was the result of the previously-mentioned share-exchange transactions which reduced minority interests in consolidated subsidiaries. The book value per share of common stock was $13.72 at year-end 2002, compared with $10.24 at year-end 2001. Cash dividends of $0.44 were paid in 2002, compared to $0.40 in 2001 and $0.36 in 2000. Future payment of dividends is subject to approval by Capitol's board of directors, future operating performance and management's assessment of the consolidated organization's capital adequacy. [The remainder of this page intentionally left blank] 20 Capitol's capital structure consists of these primary elements: * Trust-preferred securities, * Minority interests in consolidated subsidiaries, and * Stockholders' equity. [GRAPH] TOTAL CAPITALIZATION ($ millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 101.1 133.6 157.3 199.5 239.6 In June 2002, Capitol participated in the private placement of a pooled trust-preferred security totaling $3 million. This is a variable rate security with a thirty year term and, subject to certain provisions, may be repaid early. In 2001, Capitol participated in two private placements of pooled trust-preferred securities totaling $25 million. These securities, along with Capitol Trust I (a $25 million public offering of trust-preferred securities in 1997), are treated as elements of capital for regulatory purposes. Total capitalization at year-end 2002 amounted to $239.6 million or 9.9% of total assets. This compares to $199.5 million or 9.8% at year-end 2001. Capitol and each of its banks and bank development subsidiaries are subject to a complex series of regulatory rules and requirements which require specific levels of capital adequacy at both the bank level and on a consolidated basis. Under those rules and regulations, banks are categorized as WELL CAPITALIZED, ADEQUATELY CAPITALIZED or INADEQUATELY CAPITALIZED using several ratio measurements, including a risk-weighting approach to assets and financial commitments. Banks falling into the INADEQUATELY CAPITALIZED category are subject to the prompt corrective action provisions of the FDIC Improvement Act, which can result in significant regulatory agency intervention and other adverse action. Although it is permissible to maintain capital adequacy at the ADEQUATELY CAPITALIZED level, Capitol operates with the objective of its banks meeting the WELL CAPITALIZED standard. The well capitalized banks benefit from lower FDIC deposit insurance costs and less restrictive limitations on some banking activities. New banks, as a condition of regulatory charter approval, are required to maintain higher ratios of capital adequacy. Generally, they are required to keep a specific ratio of capital-to-average-total-assets of not less than 8% during their first three years of operation. In the opinion of management, all of the affiliated banks met the criteria to be classified as WELL CAPITALIZED at year-end 2002. 21 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. This timing difference between interest rate-sensitive assets and interest rate-sensitive liabilities is characterized as a "gap" which is quantified by the distribution of rate-sensitive amounts within various time periods in which they reprice or mature. The following table summarizes the consolidated financial position in relation to "gap" at December 31, 2002 (in $1,000s):
Interest Rate Sensitivity --------------------------------------------------------- 0 to 3 4 to 12 2 to 5 Over 5 Months Months Years Years Total ----------- ----------- ----------- ----------- ----------- ASSETS Federal funds sold $ 83,737 $ 83,737 Interest-bearing bank deposits 42,301 42,301 Investment securities 500 $ 2,910 $ 17,524 $ 13,205 34,139 Portfolio loans: Commercial 870,775 175,411 721,126 21,724 1,789,036 Real estate mortgage 64,469 15,170 42,354 5,862 127,855 Installment 10,494 14,765 47,645 1,577 74,481 Loans held for resale 75,420 75,420 Non-earning assets 182,319 ----------- ----------- ----------- ----------- ----------- Total assets $ 1,147,696 $ 208,256 $ 828,649 $ 42,368 $ 2,409,288 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Time deposits under $100,000 $ 59,245 $ 137,045 $ 134,670 $ $ 330,960 Time deposits over $100,000 140,408 257,384 166,768 564,560 All other interest-bearing deposits 661,031 142,094 2,758 805,883 ----------- ----------- ----------- ----------- ----------- Total interest-bearing deposits 860,684 536,523 304,196 1,701,403 Debt obligations 24,750 12,074 20,074 36,500 93,398 Noninterest-bearing liabilities 374,851 Trust-preferred securities 17,471 34,112 51,583 Minority interests in consolidated subsidiaries 28,016 Stockholders' equity 160,037 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity $ 902,905 $ 548,597 $ 324,270 $ 70,612 $ 2,409,288 =========== =========== =========== =========== =========== Interest rate sensitive period gap $ 244,791 $ (340,341) $ 504,379 $ (28,244) =========== =========== =========== =========== Interest rate sensitive cumulative gap $ 244,791 $ (95,550) $ 408,829 $ 380,585 =========== =========== =========== =========== Period rate sensitive assets/period rate sensitive liabilities 1.27 0.38 2.56 0.60 Cumulative rate sensitive assets/cumulative rate sensitive liabilities 1.27 0.93 1.23 1.21 Cumulative gap to total assets 10.16% (3.97)% 16.97% 15.80%
22 The "gap" changes daily based upon changes in the underlying assets and liabilities at the banks. Analyzing exposure to interest rate risk is prone to imprecision because the "gap" is constantly changing, the "gap" differs at each of the banks, and it is difficult to predict the timing, amount and direction of future changes in market interest rates and the potential corresponding effect on customer behavior. The banks endeavor to manage and monitor interest rate risk in concert with market conditions and risk parameters. Management strives to maintain a reasonably balanced position of interest rate-sensitive assets and liabilities. The banks have not engaged in speculative positions, for example, through the use of derivatives, in anticipation of interest rate movements. In periods of relatively lower interest rates, the banks emphasize variable rate loans and time deposits to the extent possible in a competitive environment; however, competitive influences often result in making fixed rate loans, although the banks seek to limit the duration of such loans. These most recent periods of record low interest rates have created a huge volume of fixed-rate mortgage refinancing activity; those loans are sold to the secondary market and are not retained for the banks' loan portfolios. Similarly, low interest rates generally make competition more intense for deposits, since loan demand will typically increase during periods of lower rates and, accordingly, result in higher interest costs on deposits as competitors bid-up rates, adversely impacting interest margins. Future interest rates and the impact on earnings are difficult to predict. In addition to interest rate risk relating to interest-bearing assets and liabilities, changes in interest rates also can impact future transaction volume of loans and deposits at the banks. For activities which are influenced by levels of interest rates for transaction volume (for example, origination of residential mortgage loans), pricing margins and demand can become impacted significantly by changes in interest rates. As a means of monitoring and managing exposure to interest rate risk, management uses a computerized simulation model which is intended to estimate pro forma effects of changes in interest rates. Using the simulation model, the following table illustrates, on a consolidated basis, changes which would occur in annual levels of interest income, interest expense and net interest income (in $1,000s) assuming both one hundred and two hundred basis point ("bp") parallel increases and decreases in interest rates:
Pro Forma Pro Forma Effect of Pro Forma Effect of Assuming No Interest Rate Increases Interest Rate Decreases Change in ----------------------- ----------------------- Interest Rates +100 bp +200 bp -100 bp -200 bp -------------- -------- -------- -------- -------- Interest income $116,576 $127,323 $138,186 $105,908 $ 95,821 Interest expense 51,087 54,752 58,417 47,422 44,229 -------- -------- -------- -------- -------- Net interest income $ 65,489 $ 72,571 $ 79,769 $ 58,486 $ 51,592 ======== ======== ======== ======== ========
The pro forma analysis above is intended to quantify theoretical changes in interest income based on stated assumptions. The pro forma analysis excludes the effect of numerous other variables such as borrowers' ability to repay loans, the ability of banks to obtain deposits in a radically changed interest-rate environment and how management would revise its asset and liability management priorities in concert with rate changes. 23 In November 2002, the Open Market Committee of the Federal Reserve Board decreased interbank interest rates by 50 basis points. During 2001, the Federal Reserve decreased interbank interest rates 11 times, which was an unprecedented action to reduce rates 475 basis points within a year. While the pro forma analysis above is intended to estimate the impact of an immediate 100 and 200 basis point change in rates, actual results will be different. Those results will differ (and may be materially different) because a sudden rate change in market rates does not result in an instantaneous parallel shift in rates on loans and deposits at banks. Further, any financial model intended to estimate the impact of interest rate changes will not necessarily incorporate other variables, including management's efforts to manage its asset and liability interest rate sensitivity, nor customer behavior. General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions. Local economic conditions, and to some extent national economic conditions, have a significant impact on levels of loan demand as well as the ability of borrowers to repay loans and the availability of funds for customers to make deposits. 2001 marked the end of the longest peacetime economic expansion in U.S. history. The terrorist acts of September 11, 2001, our Nation's subsequent war on terrorism, the diagnosis of economic recession in the U.S., worldwide economic and political instability, recent major business bankruptcies and their related high-profile questionable accounting and financial reporting practices, raised significant concerns over the near-term and longer-horizons for economic and political uncertainty. 2002 ended with the United States' economy still mired in recession and the threat of war looming. While there are some indications of an improving economy, 2003 and beyond are very uncertain. At the time this narrative was written, uncertainties of domestic economic health and global stability preclude prediction of near-term trends and their potential effects. Continuing consolidation of the banking industry on a national basis, and in the markets of Capitol's banks, has presented opportunities for growth. As a result of consolidation of the banking industry and the conversion of customer relationships into perceived `commodities' by the larger banks, many customer relationships have been displaced, generating opportunities for development by Capitol's banks. For many retail customers, banking services have become a commodity in an environment that is dominated by larger mega-bank or mass-merchandising institutions. For the professional, entrepreneur and other customers seeking a more service-oriented, customized banking relationship, Capitol's banks fill that need through their focus on single-location banks with full, local decision-making authority. As the banks focus on service delivery and keeping their size at a manageable level, only a modest market share of deposits and loan activity is necessary to achieve profitability and investor-oriented earnings performance. Start-up banks generally incur operating losses during their early periods of operations. Recently-formed start-up banks will detract from consolidated earnings performance and additional start-up banks formed in 2002 and beyond will similarly negatively impact short-term profitability. On a consolidated basis, such operating losses reduce net income by the pro rata share of Capitol's ownership percentage in those banks. When those banks become profitable, their operating results will contribute to consolidated earnings to the extent of Capitol's ownership percentage. 24 Commercial banks continue to be subject to significant regulatory requirements which impact current and future operations. In addition to the extent of regulatory interaction with financial institutions, extensive rules and regulations governing lending activities, deposit gathering and capital adequacy (to name a few), translate into a significant cost burden of financial institution regulation. Such costs include the significant amount of management time and expense which is incurred in maintaining compliance and developing systems for compliance with those rules and regulations as well as the cost of examinations, audits and other compliance activities. The future of financial institution regulation, and its costs, is uncertain and difficult to predict. Premiums for FDIC insurance have historically been a significant cost of doing business as financial institutions, but in the most recent years, deposit insurance premiums have been maintained at a stable and modest level. Future deposit insurance premium levels are difficult to predict inasmuch as deposit insurance premiums will be determined based on general economic conditions, the relative health of the banking and financial institution industry and other unpredictable factors. It is reasonable to expect that deposit insurance premiums may increase at some point in the future. NEW ACCOUNTING STANDARDS There were several new accounting standards which were issued or became effective in 2002, in addition to some which have later effective dates. They are listed and discussed in Note B of the consolidated financial statements, beginning on page 36. [The remainder of this page intentionally left blank] 25 Board of Directors and Stockholders Capitol Bancorp Ltd. We have audited the accompanying consolidated balance sheets of Capitol Bancorp Ltd. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capitol Bancorp Ltd. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note B to the consolidated financial statements, the Corporation adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002. /s/ BDO Seidman, LLP Grand Rapids, Michigan January 31, 2003 26 CONSOLIDATED BALANCE SHEETS
- December 31 - 2002 2001 ----------- ----------- (in $1,000s) ASSETS Cash and due from banks $ 125,146 $ 83,833 Money market, mutual funds and interest-bearing deposits 42,301 10,999 Federal funds sold 83,737 68,859 ----------- ----------- Cash and cash equivalents 251,184 163,691 Loans held for resale 75,420 62,487 Investment securities--Note C: Available for sale, carried at market value 25,355 35,598 Held for long-term investment, carried at amortized cost which approximates market value 8,784 8,089 ----------- ----------- Total investment securities 34,139 43,687 Portfolio loans, less allowance for loan losses of $28,953 in 2002 and $23,238 in 2001--Note D 1,962,419 1,711,351 Premises and equipment--Note F 21,737 16,441 Accrued interest income 9,286 9,471 Goodwill and other intangibles 24,739 8,527 Other assets 30,364 28,351 ----------- ----------- TOTAL ASSETS $ 2,409,288 $ 2,044,006 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 360,669 $ 272,593 Interest-bearing--Note G 1,701,403 1,467,792 ----------- ----------- Total deposits 2,062,072 1,740,385 Debt obligations--Note H 93,398 89,911 Accrued interest on deposits and other liabilities 14,182 14,244 ----------- ----------- Total liabilities 2,169,652 1,844,540 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES (Trust-Preferred Securities)--Note I 51,583 48,621 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES--Note A 28,016 70,673 STOCKHOLDERS' EQUITY--Notes H, J and P: Common stock, no par value, 25,000,000 shares authorized; issued and outstanding: 2002--11,663,412 shares--Notes J and S 2001--7,829,178 shares 135,234 67,692 Retained earnings 26,318 14,173 Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) 191 158 ----------- ----------- 161,743 82,023 Less note receivable from exercise of stock options and unallocated ESOP shares--Notes J and K (1,706) (1,851) ----------- ----------- Total stockholders' equity 160,037 80,172 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,409,288 $ 2,044,006 =========== ===========
See notes to consolidated financial statements. 27 CONSOLIDATED STATEMENTS OF INCOME
- Year Ended December 31 - 2002 2001 2000 --------- --------- --------- (in $1,000s, except per share data) Interest income: Portfolio loans (including fees) $ 149,785 $ 144,417 $ 121,737 Loans held for resale 2,674 3,002 1,044 Taxable investment securities 1,422 2,201 4,353 Federal funds sold 1,376 3,186 3,985 Other 1,197 991 1,192 --------- --------- --------- Total interest income 156,454 153,797 132,311 Interest expense: Deposits 47,848 65,655 60,256 Debt obligations and other 8,012 7,637 5,656 --------- --------- --------- Total interest expense 55,860 73,292 65,912 --------- --------- --------- Net interest income 100,594 80,505 66,399 Provision for loan losses--Note D 12,676 8,167 7,216 --------- --------- --------- Net interest income after provision for loan losses 87,918 72,338 59,183 Noninterest income: Service charges on deposit accounts 4,020 3,251 2,070 Trust fee income 2,434 1,839 1,077 Fees from origination of non-portfolio residential mortgage loans 6,837 3,165 1,543 Other 1,691 1,330 1,447 --------- --------- --------- Total noninterest income 14,982 9,585 6,137 Noninterest expense: Salaries and employee benefits 47,454 37,970 28,995 Occupancy 6,528 5,772 4,681 Equipment rent, depreciation and maintenance 4,544 4,646 4,113 Other 18,625 15,748 15,057 --------- --------- --------- Total noninterest expense 77,151 64,136 52,846 --------- --------- --------- Income before federal income taxes and minority interest 25,749 17,787 12,474 Federal income taxes--Note L 8,701 5,824 4,289 --------- --------- --------- Income before minority interest 17,048 11,963 8,185 Minority interest in net income of consolidated subsidiaries (395) (1,245) (150) --------- --------- --------- NET INCOME $ 16,653 $ 10,718 $ 8,035 ========= ========= ========= NET INCOME PER SHARE--Note M: Basic $ 1.64 $ 1.38 $ 1.14 ========= ========= ========= Diluted $ 1.57 $ 1.35 $ 1.13 ========= ========= =========
See notes to consolidated financial statements. 28 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN $1,000S)
Unallocated Accumulated ESOP Shares and Other Note Receivable Common Retained Comprehensive From Sale of Stock Earnings Income Common Stock Total --------- --------- --------- ----------- --------- Balances at January 1, 2000 $ 56,648 $ 1,068 $ (907) $ (2,141) $ 54,668 Issuance of 10,734 shares of common stock upon exercise of stock options 83 83 Issuance of 626,325 shares of common stock to acquire minority interests in bank subsidiaries 6,278 6,278 Proceeds from issuance of 266,783 shares of common stock and 53,352 warrants 2,930 2,930 Allocation of shares to ESOP participants' accounts 145 145 Cash dividends paid ($.36 per share) (2,534) (2,534) Components of comprehensive income: Net income for 2000 8,035 8,035 Market value adjustment for investment securities available for sale (net of income tax effect) 799 799 --------- Comprehensive income for 2000 8,834 --------- --------- --------- --------- --------- BALANCES AT DECEMBER 31, 2000 65,939 6,569 (108) (1,996) 70,404 Proceeds from the sale of 130,000 shares of common stock and 32,500 warrants to purchase common stock 1,495 1,495 Issuance of 7,465 shares of common stock upon exercise of warrants 82 82 Issuance of 18,350 shares of common stock upon exercise of stock options 176 176 Allocation of shares to ESOP participants' accounts 145 145 Cash dividends paid ($.40 per share) (3,114) (3,114) Components of comprehensive income: Net income for 2001 10,718 10,718 Market value adjustment for investment securities available for sale (net of income tax effect) 266 266 --------- Comprehensive income for 2001 10,984 --------- --------- --------- --------- --------- BALANCES AT DECEMBER 31, 2001 67,692 14,173 158 (1,851) 80,172 Issuance of 3,606,306 shares of common stock to acquire minority interests in bank and bank holding-company subsidiaries 64,801 64,801 Issuance of 138,447 shares of common stock upon exercise of stock options 1,693 1,693 Issuance of 54,859 shares of common stock upon exercise of warrants 608 608 Issuance of 34,622 shares of common stock in exchange for investment security 440 440 Allocation of shares to ESOP participants' accounts 145 145 Cash dividends paid ($.44 per share) (4,508) (4,508) Components of comprehensive income: Net income for 2002 16,653 16,653 Market value adjustment for investment securities available for sale (net of income tax effect) 33 33 --------- Comprehensive income for 2002 16,686 --------- --------- --------- --------- --------- BALANCES AT DECEMBER 31, 2002 $ 135,234 $ 26,318 $ 191 $ (1,706) $ 160,037 ========= ========= ========= ========= =========
See notes to consolidated financial statements. 29 CONSOLIDATED STATEMENTS OF CASH FLOWS
- Year Ended December 31 - 2002 2001 2000 --------- --------- --------- (in $1,000s) OPERATING ACTIVITIES Net income $ 16,653 $ 10,718 $ 8,035 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 12,676 8,167 7,216 Depreciation of premises and equipment 3,451 3,340 3,178 Amortization of goodwill and other intangibles 399 979 561 Net accretion of investment security discounts (22) (94) (104) Loss on sales of premises and equipment 64 100 11 Minority interest in net income of consolidated subsidiaries 395 1,245 150 Deferred income taxes (2,224) (1,345) (1,312) Originations and purchases of loans held for resale (891,498) (651,149) (251,157) Proceeds from sales of loans held for resale 878,565 609,984 238,913 Increase in accrued interest income and other assets (2,187) (1,883) (9,178) Increase (decrease) in accrued interest expense and other liabilities (62) 523 1,479 --------- --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 16,210 (19,415) (2,208) INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 8,672 500 3,156 Proceeds from calls and maturities of investment securities available for sale 67,938 67,393 71,882 Purchases of investment securities available for sale (66,989) (42,159) (35,503) Net increase in portfolio loans (263,744) (381,169) (309,000) Proceeds from sales of premises and equipment 60 306 22 Purchases of premises and equipment (8,871) (5,536) (3,466) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (262,934) (360,665) (272,909) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts and savings accounts 271,571 268,677 125,178 Net increase in certificates of deposit 50,116 70,809 162,928 Net proceeds from debt obligations 3,487 31,761 10,750 Net proceeds from issuance of trust-preferred securities 2,899 24,248 Resources provided by minority interests 8,351 6,853 14,262 Net proceeds from issuance of common stock 2,301 1,753 3,011 Cash dividends paid (4,508) (3,114) (2,534) --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 334,217 400,987 313,595 --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 87,493 20,907 38,478 Cash and cash equivalents at beginning of year 163,691 142,784 104,306 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 251,184 $ 163,691 $ 142,784 ========= ========= =========
See notes to consolidated financial statements. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION Capitol Bancorp Limited ("Capitol" or the "Corporation") is a multibank holding company. Consolidated subsidiaries consist of the following:
Percentage Owned at December 31, Year Formed Affiliate Location 2002 or Acquired - ---------------------------------- -------------------------- ------------ ----------- Michigan Banks: Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990 Brighton Commerce Bank Brighton, Michigan 100% 1997 Capitol National Bank Lansing, Michigan 100% 1982 Detroit Commerce Bank Detroit, Michigan 100% 1998 Grand Haven Bank Grand Haven, Michigan 100% 1995 Kent Commerce Bank Grand Rapids, Michigan 100% 1998 Macomb Community Bank Clinton Township, Michigan 100% 1996 Muskegon Commerce Bank Muskegon, Michigan 100% 1997 Oakland Commerce Bank Farmington Hills, Michigan 100% 1992 Paragon Bank & Trust Holland, Michigan 100% 1994 Portage Commerce Bank Portage, Michigan 100% 1988 Indiana Banks: Elkhart Community Bank Elkhart, Indiana 51% 1999 Goshen Community Bank Goshen, Indiana 51% 2000 Arizona Banks: Arrowhead Community Bank Glendale, Arizona 87% 2000 Bank of Tucson Tucson, Arizona 100% 1996 Camelback Community Bank Phoenix, Arizona 100% 1998 East Valley Community Bank Chandler, Arizona 100% 1999 Mesa Bank Mesa, Arizona 100% 1998 Southern Arizona Community Bank Tucson, Arizona 100% 1998 Valley First Community Bank Scottsdale, Arizona 100% 1997 Yuma Community Bank Yuma, Arizona 51% 2000 Nevada Banks: Bank of Las Vegas Las Vegas, Nevada 51%(1) 2002 Black Mountain Community Bank Henderson, Nevada 51%(1) 2000 Desert Community Bank Las Vegas, Nevada 51%(1) 1999 Red Rock Community Bank Las Vegas, Nevada 51%(1) 1999 Sunrise Bank Group: Sunrise Bank of Albuquerque Albuquerque, New Mexico 87% 2000 Sunrise Bank of Arizona Phoenix, Arizona 100% 1998 Sunrise Bank of San Diego San Diego, California 64% 2001 First California Northern Bancorp: Napa, California 51% 2001 Napa Community Bank Napa, California 2002
(1) Reflects the January 2003 share exchange regarding the minority interest of Nevada Community Bancorp Limited as if it had occurred on December 31, 2002. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION--CONTINUED Capitol views itself as a bank-development company. In recent years it has engaged in the formation of DE NOVO banks through majority ownership made directly by Capitol, or through a subsidiary bank-development company, with the remainder of the banks' start-up capital provided by local investors in the bank's community. When the DE NOVO bank reaches a point of development near its third year of operation, Capitol may offer the bank's minority shareholders an opportunity to exchange their bank shares for shares of Capitol. Capitol has made similar exchange proposals regarding the minority interests of some of its bank-development-company subsidiaries. In each instance, however, Capitol is under no obligation to offer such a share exchange and such share exchange proposals are generally subject to approval by the minority shareholders in each proposed transaction. Capitol and its subsidiaries are engaged in a single business activity--banking. The bank affiliates provide a full range of banking services to individuals, businesses and other customers located in their respective communities. Each of the banks generally operate from a single location and focus their activities on meeting the various credit and other banking needs of entrepreneurs, professionals and other businesses and individuals. A variety of deposit products are offered, including checking, savings, money market, individual retirement accounts and certificates of deposit. In addition, trust and investment services are offered through Paragon Bank & Trust. The principal markets for the banks' financial services are the communities in which they are located and the areas immediately surrounding those communities. In addition to commercial banking units, mortgage banking activities are offered through Amera Mortgage Corporation, a less than 50%-owned affiliate. Each bank is viewed by management as being a separately identifiable business or segment from the perspective of monitoring performance and allocation of financial resources. Although the banks operate independently and are managed and monitored separately, each bank is substantially similar in terms of business focus, type of customers, products and services. Further, each of the banks and the Corporation are subject to substantially similar laws and regulations unique to the banking industry. Accordingly, the Corporation's consolidated financial statements reflect the presentation of segment information on an aggregated basis. The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions, and after giving effect to applicable minority interests. Banks formed during 2000, 2001 and 2002 are included in the consolidated financial statements for periods after joining the consolidated group. Certain 2001 and 2000 amounts have been reclassified to conform to the 2002 presentation. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand, amounts due from banks (interest-bearing and noninterest-bearing), money-market funds and federal funds sold. Generally, federal funds transactions are entered into for a one-day period. LOANS HELD FOR RESALE: Loans held for resale represent residential real estate mortgage loans held for sale into the secondary market. Loans held for resale are stated at the aggregate lower of cost or market. Fees from the origination of loans held for resale are recognized in the period the loans are originated. INVESTMENT SECURITIES: Investment securities available for sale (generally most debt investment securities of Capitol's banks) are carried at market value with unrealized gains and losses reported as a separate component of stockholders' equity, net of tax effect (accumulated other comprehensive income). All other investment securities are classified as held for long-term investment and are carried at amortized cost which approximates market value (see Note C). Investments are classified at the date of purchase based on management's analysis of liquidity and other factors. The adjusted cost of the specific securities sold is used to compute realized gains or losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at their principal balance based on management's intent and ability to hold such loans for the foreseeable future until maturity or repayment. Credit risk arises from making loans and loan commitments in the ordinary course of business. Substantially all portfolio loans are made to borrowers in the banks' geographic areas. Consistent with the banks' emphasis on business lending, there are concentrations of credit in loans secured by commercial real estate, equipment and other business assets. The maximum potential credit risk to Capitol, without regard to underlying collateral and guarantees, is the total of loans and loan commitments outstanding. Management reduces Capitol's exposure to losses from credit risk by requiring collateral and/or guarantees for loans granted and by monitoring concentrations of credit, in addition to recording provisions for loan losses and maintaining an allowance for loan losses. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the portfolio at the balance sheet date. Management's determination of the adequacy of the allowance is an estimate 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. INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon the principal balance of loans outstanding. Fees from origination of portfolio loans generally approximate the direct costs of successful loan originations. The accrual of interest is generally discontinued when a loan becomes 90 days past due as to interest. When interest accruals are discontinued, interest previously accrued (but unpaid) is reversed. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest and the loan is in process of collection. PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost. Depreciation, which relates primarily to equipment and furniture with estimated useful lives of approximately three to seven years, is computed principally by the straight-line method. Buildings are generally depreciated on a straight-line basis with estimated useful lives of approximately 40 years. Leasehold improvements are generally depreciated over the respective lease term. GOODWILL AND OTHER INTANGIBLES: Amortization of goodwill ceased, as required, January 1, 2002, upon implementation of a new accounting standard (see "New Accounting Standards" below). Goodwill is reviewed periodically by management for impairment and, accordingly, impairment adjustments of goodwill are charged against earnings, when determined. Other intangibles, which generally consist of core deposit intangibles, are amortized over varying periods of less than 10 years and are not material. OTHER REAL ESTATE: Other real estate (included as a component of other assets, and at December 31, 2002 and 2001 approximated $4,605,000 and $3,044,000, respectively) comprises properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties held for sale are carried at the lower of cost or estimated fair value (net of estimated selling cost) at the date acquired and are periodically reviewed for subsequent impairment. STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon granting of stock options because such stock options are accounted for under the provisions of Accounting Principles Board (APB) Opinion 25 (and related interpretations) and are granted at an exercise price equal to the market price of common stock at grant date. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, establishes an alternative fair value method of accounting for stock options whereby compensation expense would be recognized based on the computed fair value of the options on the grant date. By not electing this alternative, certain pro forma disclosures of the expense recognition provisions of Statement No. 123 are required, which are as follows: 2002 2001 2000 ---- ---- ---- Fair value assumptions: Risk-free interest rate 4.5% 5.0% 7.0% Dividend yield 2.5% 2.8% 3.0% Stock price volatility .46 .39 .83 Expected option life 7 years 7 years 7 years Aggregate estimated fair value of options granted (in thousands) $ 11,548 $ 95 $ 4,932 Net income (in thousands): As reported 16,653 10,718 8,035 Pro forma 8,078 9,809 6,471 Net income per share: Basic: As reported 1.64 1.38 1.14 Pro forma 0.80 1.26 .92 Diluted: As reported 1.57 1.35 1.13 Pro forma $ 0.76 $ 1.24 $ .91 TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit, held in a fiduciary or agency capacity by Capitol's banks is not included in the consolidated balance sheet because it is not an asset of the banks or Capitol. Trust fee income is recorded on the accrual method. FEDERAL INCOME TAXES: Capitol and subsidiaries owned 80% or more by Capitol file a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax laws or rates is recognized in income in the period that includes the enactment date. COMPREHENSIVE INCOME: Comprehensive income is the sum of net income and certain other items which are charged or credited to stockholders' equity. For the periods presented, Capitol's only element of comprehensive income other than net income was the net change in the market value adjustment for investment securities available for sale. Accordingly, the elements and total of comprehensive income are shown within the statement of changes in stockholders' equity presented herein. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED NEW ACCOUNTING STANDARDS: Financial Accounting Standards Board (FASB) Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, 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. Capitol's previous business combinations (generally, acquisitions of minority interests) have been accounted for using the purchase method. Upon implementation, this new standard did not have a material effect on Capitol's consolidated financial statements, other than the elimination of goodwill amortization ($979,000 in 2001 and $561,000 in 2000) in future periods. 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, and in the fourth quarter of 2002, no impairment losses were identified as of those dates. 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): Year Ended December 31 ---------------------- 2001 2000 --------- --------- Net income, as reported $ 10,718 $ 8,035 Add back -- goodwill amortization 979 561 --------- --------- Net income, as adjusted $ 11,697 $ 8,596 ========= ========= Net income per share, as reported: Basic $ 1.38 $ 1.14 ========= ========= Diluted $ 1.35 $ 1.13 ========= ========= Add back -- goodwill amortization per share: Basic $ 0.12 $ 0.08 ========= ========= Diluted $ 0.12 $ 0.08 ========= ========= Net income per share, as adjusted: Basic $ 1.50 $ 1.22 ========= ========= Diluted $ 1.47 $ 1.21 ========= ========= 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED The FASB has also recently issued Statements No. 143 (ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS), No. 144 (ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS), No. 145 (which updates, clarifies and simplifies certain existing accounting pronouncements--rescission of Statements No. 4, 44 and 64, amendment of Statement No. 13 and technical corrections) and No. 146 (ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES). These new standards have varying effective dates in 2002 and 2003 and, based on management's analysis, are not expected to have a material effect on Capitol's consolidated financial statements, upon implementation. Statement No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, amends prior standards relating to some acquisitions of financial institutions, requiring such transactions to be accounted for in accordance with Statements No. 141 and 142. It had no material effect on Capitol's consolidated financial statements, upon implementation. Statement No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation and it amends the prior disclosure requirements of Statement No. 123 to require more prominent and frequent disclosures about the effects of stock-based compensation. As permitted, Capitol has retained its prior method of accounting for stock-based employee compensation. FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES AND INDEBTEDNESS OF OTHERS, expands disclosures about obligations under certain guarantees and, in addition, requires recording a liability for the fair value of the obligations undertaken in issuing the guarantee, applicable to guarantees issued or modified after December 31, 2002. Capitol's disclosure of guarantees is made in Note O. This new guidance had no impact on Capitol's consolidated financial position or results of operations, upon implementation. FASB Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, clarifies when some entities previously not consolidated under prior accounting guidance, should be. This new guidance, which was effective upon issuance in January 2003, is not expected to have a material effect upon Capitol's consolidated financial statements. In 2001, the Securities and Exchange Commission, American Institute of Certified Public Accountants and Federal Financial Institutions Examination Council each issued new guidance (some of which remains to be finalized) on accounting for allowances for loan losses. While the new guidance does not change prior accounting rules in this area, it provides additional clarification and guidance on how the calculation, adequacy and approval of the allowances should be documented by management. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to Capitol's consolidated financial statements. NOTE C--INVESTMENT SECURITIES Investment securities consisted of the following at December 31 (in $1,000s): 2002 2001 -------------------- -------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ------- ------- ------- ------- Available for sale: United States Treasury securities $ 2,505 $ 2,586 $ 3,704 $ 3,757 United States government agency securities 22,460 22,668 30,253 30,429 States and political subdivisions 101 101 1,402 1,412 ------- ------- ------- ------- 25,066 25,355 35,359 35,598 Held for long-term investment: Federal Reserve Bank stock 424 424 394 394 Federal Home Loan Bank stock 5,950 5,950 4,716 4,716 Corporate stock 1,075 1,075 895 895 Other 1,335 1,335 2,084 2,084 ------- ------- ------- ------- 8,784 8,784 8,089 8,089 ------- ------- ------- ------- $33,850 $34,139 $43,448 $43,687 ======= ======= ======= ======= At December 31, 2002, securities with a market value approximating $8.9 million were pledged to secure public and trust deposits and for other purposes as required by law. Investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are restricted and may only be resold to or redeemed by the issuer. Gross unrealized gains and losses on investment securities available for sale were as follows at December 31 (in $1,000s): 2002 2001 ------------------ ------------------ Gains Losses Gains Losses ------- ------- ------- ------- United States Treasury securities $ 81 $ -- $ 53 $ -- United States government agency securities 217 9 252 76 States and political subdivisions -- -- 10 -- ------- ------- ------- ------- $ 298 $ 9 $ 315 $ 76 ======= ======= ======= ======= 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE C--INVESTMENT SECURITIES--CONTINUED Gross realized gains and losses from sales and maturities of investment securities were insignificant for each of the periods presented. Scheduled maturities of investment securities held as of December 31, 2002 were as follows (in $1,000s): Estimated Amortized Market Cost Value ---------- ---------- Due in one year or less $ 3,411 $ 3,445 After one year, through five years 17,375 17,551 After five years, through ten years 1,765 1,783 After ten years 2,515 2,576 Securities held for long-term investment, without stated maturities 8,784 8,784 ---------- ---------- $ 33,850 $ 34,139 ========== ========== NOTE D--LOANS Portfolio loans consisted of the following at December 31 (in $1,000s): 2002 2001 ---------- ---------- Commercial $1,789,036 $1,535,451 Real estate mortgage 127,855 121,676 Installment 74,481 77,462 ---------- ---------- Total portfolio loans 1,991,372 1,734,589 Less allowance for loan losses (28,953) (23,238) ---------- ---------- Net portfolio loans $1,962,419 $1,711,351 ========== ========== Transactions in the allowance for loan losses are summarized below (in $1,000s): 2002 2001 2000 ---------- ---------- ---------- Balance at January 1 $ 23,238 $ 17,449 $ 12,639 Provision charged to operations 12,676 8,167 7,216 Loans charged off (deduction) (7,703) (2,929) (3,171) Recoveries 742 551 765 ---------- ---------- ---------- Balance at December 31 $ 28,953 $ 23,238 $ 17,449 ========== ========== ========== 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE D--LOANS--CONTINUED 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. Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) are summarized below (in $1,000s): December 31 ------------------- 2002 2001 ------- ------- Nonaccrual loans: Commercial $15,444 $11,220 Real estate 560 356 Installment 613 466 ------- ------- Total nonaccrual loans 16,617 12,042 Past due (>90 days) loans: Commercial 5,728 4,290 Real estate 323 787 Installment 222 119 ------- ------- Total past due loans 6,273 5,196 ------- ------- Total nonperforming loans $22,890 $17,238 ======= ======= If nonperforming loans had performed in accordance with their contractual terms during the year, additional interest income of $1,514,000, $694,000 and $315,000 would have been recorded in 2002, 2001 and 2000, respectively. Interest income recognized on loans in nonaccrual status in 2002, 2001 and 2000 operations approximated $385,000, $513,000 and $205,000, respectively. At December 31, 2002, there were no material amounts of loans which were restructured or otherwise renegotiated as a concession to troubled borrowers. The amounts of the allowance for loan losses allocated in the following table (in $1,000s) are based on management's estimate of losses inherent in the portfolio at the balance sheet date, and should not be interpreted as an indication of future charge-offs:
December 31, 2002 December 31, 2001 --------------------- --------------------- Percentage Percentage of Total of Total Portfolio Portfolio Amount Loans Amount Loans ------- ------- ------- ------- Commercial $27,226 1.37% $20,570 1.19% Real estate mortgage 1,009 0.05 1,630 0.09 Installment 718 0.03 1,038 0.06 ------- ------- ------- ------- Total allowance for loan losses $28,953 1.45% $23,238 1.34% ======= ======= ======= =======
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE E--RELATED PARTIES TRANSACTIONS In the ordinary course of business, Capitol's banking subsidiaries make loans to officers and directors of Capitol and its subsidiaries including their immediate families and companies in which they are principal owners. At December 31, 2002 and 2001, total loans to these persons were $94.3 million and $80.9 million, respectively. During 2002, $69.7 million of new loans were made to these persons and repayments totaled $56.3 million. Such loans are made at the banking subsidiaries' normal credit terms. Officers and directors of Capitol (and their associates, family and/or affiliates) are also depositors of the banking subsidiaries. Such deposits are similarly made at the banks' normal terms as to interest rate, term and deposit insurance. NOTE F--PREMISES AND EQUIPMENT Major classes of premises and equipment consisted of the following at December 31 (in $1,000s): 2002 2001 -------- -------- Land, buildings and improvements $ 7,344 $ 6,274 Leasehold improvements 7,965 6,659 Equipment and furniture 20,120 15,014 -------- -------- 35,429 27,947 Less accumulated depreciation (13,692) (11,506) -------- -------- $ 21,737 $ 16,441 ======== ======== Capitol and certain subsidiaries rent office space under operating leases. Rent expense (net of sublease income) under these lease agreements approximated $4,394,000, $3,652,000 and $3,064,000 (including rent expense of $1,457,000, $1,138,000 and $1,034,000 under leases with related parties) in 2002, 2001 and 2000, respectively. At December 31, 2002, future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year were as follows (in $1,000s): 2003 $ 3,773 2004 3,414 2005 3,210 2006 3,055 2007 2,452 2008 and thereafter 3,611 -------- $ 19,515 ======== 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE G--DEPOSITS The aggregate amount of time deposits of $100,000 or more approximated $564.6 million and $510.3 million as of December 31, 2002 and 2001, respectively. At December 31, 2002, the scheduled maturities of such time deposits were as follows (in $1,000s): 2003 $ 397,792 2004 99,219 2005 45,538 2006 8,463 2007 and thereafter 13,548 --------- $ 564,560 ========= Interest paid approximates amounts charged to operations on an accrual basis for the periods presented. NOTE H--DEBT OBLIGATIONS Debt obligations consisted of the following at December 31 (in $1,000s): 2002 2001 ------- ------- Borrowings from Federal Home Loan Bank $79,198 $63,211 Notes payable to unaffiliated bank 12,500 14,100 Federal funds purchased 1,700 12,600 ------- ------- $93,398 $89,911 ======= ======= Borrowings from Federal Home Loan Bank (FHLB) represent advances secured by certain portfolio residential real estate mortgage loans and other eligible collateral. Such advances become due at varying dates and bear interest at market short-term rates (approximately 3.94% at December 31, 2002). At December 31, 2002, unused lines of credit under these facilities approximated $15 million. Notes payable to unaffiliated bank represents borrowings under a line of credit. Up to $25 million can be borrowed pursuant to a one-year revolving credit agreement which bears interest at a variable rate (4% at December 31, 2002), payable monthly. $12.5 million was drawn on the line of credit at December 31, 2002. The credit facility is reviewed annually for continuance and requires Capitol, among other things, to maintain certain minimum levels of capital, rates of return on assets and other ratios or requirements and is secured by the common stock of certain bank subsidiaries. For the periods presented, interest paid on all debt obligations approximates amounts charged to expense. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE H--DEBT OBLIGATIONS--CONTINUED At December 31, 2002, scheduled debt maturities were as follows (in $1,000s): 2003 $ 36,824 2004 9,600 2005 7,474 2006 1,000 2007 and thereafter 38,500 -------- $ 93,398 ======== In addition to the foregoing, Capitol has guaranteed some obligations of its subsidiaries (see Note O). NOTE I--TRUST-PREFERRED SECURITIES Trust-preferred securities represent interests in subordinated debentures of Capitol which are summarized as follows:
Net Carrying Amount Aggregate at December 31 Current Liquidation ------------------- Interest Scheduled Amount (in $1,000s) Description Rate Maturity (in $1,000s) 2002 2001 - ----------- ---- -------- ------------ ---- ---- Capitol Trust I 8.50% fixed 2027 $25,300 $24,399 $24,363 Capitol Trust II 10.25% fixed 2031 10,000 9,713 9,703 Capitol Statutory Trust III 5.34% variable 2031 15,000 14,570 14,555 Capitol Trust IV 5.43% variable 2032 3,000 2,901 ------- ------- ------- $53,300 $51,583 $48,621 ======= ======= =======
Securities of Capitol Trust I were issued in a 1997 public offering. Capitol Trust II and Capitol Statutory Trust III were formed in 2001 in conjunction with private placements of pooled trust-preferred securities. Capitol Trust IV was similarly formed in 2002. Each of these securities have similar terms and, subject to certain provisions, may be called by the issuer five years after issuance. The liquidation amount of these securities is guaranteed by Capitol. Interest paid to the Trusts by Capitol (which is recorded as interest expense in its consolidated financial statements) is distributed by the Trusts to the holders of the trust-preferred securities. Under certain conditions, Capitol may defer payment of interest on the subordinated debentures for periods of up to five years. Because these Trusts are subsidiaries (due to Capitol's ownership of the common interests of the Trusts), they are consolidated for financial reporting purposes. The amount of outstanding trust-preferred securities (net of issuance costs which are being amortized over the life of the securities) is classified between liabilities and equity in Capitol's consolidated balance sheet. Under current regulatory guidelines, such trust-preferred securities are included as capital for purposes of meeting certain ratio requirements. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE J--COMMON STOCK, WARRANTS AND STOCK OPTIONS At December 31, 2002, a share exchange proposal was pending regarding the minority interests of Nevada Community Bancorp Limited. This share exchange proposal was subject to approval by Nevada's shareholders (other than Capitol) at a meeting held on January 17, 2003, at which time the share exchange was approved. Capitol has reflected the Nevada share exchange, for purposes of its consolidated balance sheet, as if the share exchange occurred on December 31, 2002. Such share exchange resulted in Capitol issuing approximately 383,000 shares of its previously unissued common stock. At December 31, 2002, approximately 30,000 warrants for the purchase of common stock were outstanding. Each warrant permits the holder to purchase a share of Capitol's common stock at an exercise price of $11.50 and expires in 2003. Stock options have been granted to certain officers and directors which provide for the purchase of shares of common stock. Generally, stock options are granted at an exercise price equal to the fair value of common stock on the grant date. Of the stock options granted in 2000, pursuant to the Corporation's 2000 Stock Option Plan, 563,435 vest over a three-year period; the remainder are fully vested and currently exercisable. All such stock options expire seven years after the date granted. Under the terms of an employment agreement with a certain director and executive officer of Capitol, options granted thereunder shall be increased when the Corporation issues additional shares so that such options granted equal 15% of outstanding shares prior to exercise. In 1999, Capitol negotiated a reduction of the executive officer's benefit from 15% to 10%. In exchange for the reduced benefit to the executive officer, Capitol agreed to a one-time exercise of previously granted stock options with an aggregate exercise price of $1.6 million funded by a note receivable of $1.9 million from the executive officer. The note bears interest at a fixed rate over its ten-year term. As part of the terms of this agreement, the executive officer's compensation will be increased in an amount equal to the interest due on the note receivable. Under certain circumstances, such as death of the executive officer, the note will be forgiven. The death benefit is covered by company-owned life insurance. The note receivable was repaid subsequent to December 31, 2002. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE J--COMMON STOCK, WARRANTS AND STOCK OPTIONS--CONTINUED Stock option activity is summarized as follows:
Number Weighted of Stock Average Options Exercise Exercise Outstanding Price Range Price ----------- ------------------ ------ Outstanding at January 1, 2000 491,962 $ 4.92 to $25.10 $14.51 Granted in 2000 722,934 9.88 to 12.50 10.86 Exercised in 2000 (10,734) 4.92 to 7.72 6.48 --------- ------------------ ------ Outstanding at December 31, 2000 1,204,162 4.92 to 25.10 12.39 Granted in 2001 17,311 11.50 to 14.48 11.95 Exercised in 2001 (18,350) 4.92 to 11.00 7.18 --------- ------------------ ------ Outstanding at December 31, 2001 1,203,123 4.92 to 25.10 12.46 Granted in 2002 1,669,004 13.50 to 23.24 16.39 Exercised in 2002 (138,447) 8.17 to 16.17 9.68 Cancelled or expired in 2002 (185,144) --------- ------------------ ------ Outstanding at December 31, 2002 2,548,536 $ 4.92 to $25.10 $15.23
As of December 31, 2002, stock options outstanding had a weighted average remaining contractual life of 4.9 years. The following table summarizes stock options outstanding segregated by exercise price range: Weighted Average ------------------------- Remaining Exercise Price Number Exercise Contractual Range Outstanding Price Life ----- ----------- ----- ---- Less than $10.00 104,793 $ 9.10 3.0 years $10.00 to 14.99 1,031,269 12.57 4.6 years $15.00 to 19.99 1,204,076 16.60 5.0 years $20.00 to 24.99 107,772 22.11 6.6 years $25.00 or more 100,626 $ 25.10 2.0 years --------- 2,548,536 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE K--EMPLOYEE RETIREMENT PLANS Capitol has a contributory employee retirement savings 401(k) plan which covers substantially all full-time employees of Capitol and certain subsidiaries over age 21. The Plan provides for employer contributions in amounts determined annually by Capitol's board of directors. Eligible employees make voluntary contributions to the Plan. Contributions to the Plan, which are an employer match (50%, subject to certain limitations) for employee contributions, charged to expense for the years ended December 31, 2002, 2001 and 2000 were $717,000, $691,000 and $475,000, respectively. Capitol also has a defined contribution employee stock ownership plan (ESOP) which covers substantially all employees of Capitol and certain subsidiaries. Certain common stock purchases by the ESOP were financed by long-term debt. ESOP contributions charged to expense in 2002, 2001 and 2000 approximated $405,000, $525,000 and $180,000 (including ESOP note payable interest of $24,000, $37,000 and $49,000), respectively. Shares of common stock held by the ESOP which have not yet been allocated to participants' accounts are shown as a reduction of stockholders' equity. As of December 31, 2002, the ESOP held approximately 218,000 shares of Capitol's common stock which have been allocated to participants' accounts and 18,000 shares of common stock with an approximate fair value of $418,000 which have not yet been allocated to participants' accounts. NOTE L--INCOME TAXES Federal income taxes consist of the following components (in $1,000s): 2002 2001 2000 -------- -------- -------- Current $ 10,925 $ 7,169 $ 5,601 Deferred credit (2,224) (1,345) (1,312) -------- -------- -------- $ 8,701 $ 5,824 $ 4,289 ======== ======== ======== Federal income taxes paid in 2002, 2001 and 2000 approximated $11.9 million, $8.4 million and $5.1 million, respectively. Differences between federal income tax expense recorded and amounts computed using the statutory tax rate are reconciled below (in $1,000s): 2002 2001 2000 -------- -------- -------- Federal income tax computed at statutory rate(1) $ 9,012 $ 6,048 $ 4,241 Tax effect of: Amortization of goodwill and other intangibles 139 333 180 Minority interest (213) (641) (77) Adjustment of deferred income taxes to effective tax rate of 35% (221) Other (16) 84 (55) -------- -------- -------- $ 8,701 $ 5,824 $ 4,289 ======== ======== ======== (1) 35% in 2002 and 34% in 2001 and 2000. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE L--INCOME TAXES--CONTINUED Net deferred income tax assets consisted of the following at December 31 (in $1,000s): 2002 2001 -------- -------- Allowance for loan losses $ 8,541 $ 6,540 Net operating losses of subsidiaries 1,116 1,154 Deferred compensation 1,370 1,190 Market value adjustment for investment securities available for sale (98) (81) Other, net 643 562 -------- -------- $ 11,572 $ 9,365 ======== ======== Certain consolidated subsidiaries have net operating loss carryforwards which may reduce income taxes payable in future periods. Such carryforwards approximate $3.2 million at December 31, 2002, have been recognized for financial reporting purposes and expire at the following dates and amounts (in $1,000s): 2019 $ 185 2020 364 2021 1,201 2022 1,438 ------- $ 3,188 ======= NOTE M--NET INCOME PER SHARE The computations of basic and diluted net income per share were as follows (in 1,000s):
2002 2001 2000 ------- ------- ------- Numerator--net income $16,653 $10,718 $ 8,035 ======= ======= ======= Denominator: Weighted average number of shares outstanding (denominator for basic earnings per share) 10,139 7,784 7,065 Effect of dilutive securities: Warrants 12 15 2 Stock options 449 136 45 ------- ------- ------- Potential dilution 461 151 47 ------- ------- ------- Denominator for diluted earnings per share--weighted average number of shares and potential dilution 10,600 7,935 7,112 ======= ======= ======= Number of antidilutive stock options excluded from diluted earnings per share computation 243 159 347 ======= ======= =======
Additional disclosures regarding stock options are set forth in Note J. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE N--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values and estimated fair values of financial instruments were as follows at December 31 (in $1,000s):
2002 2001 ---------------------------- ---------------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ----------- ----------- ----------- ----------- Financial Assets: Cash and cash equivalents $ 251,184 $ 251,184 $ 163,691 $ 163,691 Loans held for resale 75,420 75,420 62,487 62,487 Investment securities: Available for sale 25,355 25,355 35,598 35,598 Held for long-term investment 8,784 8,784 8,089 8,089 ----------- ----------- ----------- ----------- 34,139 34,139 43,687 43,687 Portfolio loans: Fixed rate 932,198 932,209 1,071,753 1,070,097 Variable rate 1,059,174 1,059,753 662,836 661,154 ----------- ----------- ----------- ----------- Total portfolio loans 1,991,372 1,991,962 1,734,589 1,731,251 Less allowance for loan losses (28,953) (28,953) (23,238) (23,238) ----------- ----------- ----------- ----------- Net portfolio loans 1,962,419 1,963,009 1,711,351 1,708,013 Financial Liabilities: Deposits: Noninterest-bearing 360,669 360,669 272,593 272,593 Interest-bearing: Demand accounts 805,883 807,182 620,842 620,468 Time certificates of less than $100,000 330,960 331,852 336,680 336,729 Time certificates of $100,000 or more 564,560 567,319 510,270 511,350 ----------- ----------- ----------- ----------- Total interest-bearing 1,701,403 1,706,353 1,467,792 1,468,547 ----------- ----------- ----------- ----------- Total deposits 2,062,072 2,067,022 1,740,385 1,741,140 Debt obligations 93,398 93,385 89,911 89,892 Trust-preferred securities 51,583 53,300 48,621 50,300
Estimated fair values of financial assets and liabilities are based upon a comparison of current interest rates on financial instruments and the timing of related scheduled cash flows to the estimated present value of such cash flows using current estimated market rates of interest (unless quoted market values or other fair value information is more readily available). Such estimates of fair value are not intended to represent market value or portfolio liquidation value, and only represent an estimate of fair values based on current financial reporting requirements. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE O--COMMITMENTS, GUARANTEES AND OTHER CONTINGENCIES In the ordinary course of business, loan commitments are made to accommodate the financial needs of bank customers. Loan commitments include stand-by letters of credit, lines of credit, and other commitments for commercial, installment and mortgage loans. Stand-by letters of credit, when issued, commit the bank to make payments on behalf of customers if certain specified future events occur and are used infrequently by the banks ($17.3 million and $19.2 million outstanding at December 31, 2002 and 2001, respectively). Other loan commitments outstanding consist of unused lines of credit and approved, but unfunded, specific loan commitments ($455.6 million and $398.9 million at December 31, 2002 and 2001, respectively). These loan commitments (stand-by letters of credit and unfunded loans) generally expire within one year and are reviewed periodically for continuance or renewal. All loan commitments have credit risk essentially the same as that involved in routinely making loans to customers and are made subject to the banks' normal credit policies. In making these loan commitments, collateral and/or personal guarantees of the borrowers are generally obtained based on management's credit assessment. The banking subsidiaries are required to maintain average reserve balances in the form of cash on hand and balances due from the Federal Reserve Bank and correspondent banks. The amount of reserve balances required as of December 31, 2002 and 2001 were $3.5 million and $2.4 million, respectively. Deposits at each of the banks are insured up to the maximum amount covered by FDIC insurance. Some of the banks have municipal government deposits which are guaranteed by Capitol ($16 million at December 31, 2002). Capitol has guaranteed up to $7.5 million of secured borrowings by Amera Mortgage Corporation, a less than 50%-owned affiliate. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE P--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS Current banking regulations restrict the ability to transfer funds from subsidiaries to their parent in the form of cash dividends, loans or advances. Subject to various regulatory capital requirements, bank subsidiaries' current and retained earnings are available for distribution as dividends to Capitol (and other bank shareholders, as applicable) without prior approval from regulatory authorities. Substantially all of the remaining net assets of the subsidiaries are restricted as to payments to Capitol. Each bank and Capitol are subject to certain other capital requirements. Federal financial institution regulatory agencies have established certain risk-based capital guidelines for banks and bank holding companies. Those guidelines require all banks and bank holding companies to maintain certain minimum ratios and related amounts based on `Tier 1' and `Tier 2' capital and `risk-weighted assets' as defined and periodically prescribed by the respective regulatory agencies. Failure to meet these capital requirements can result in severe regulatory enforcement action or other adverse consequences for a depository institution and, accordingly, could have a material impact on Capitol's consolidated financial statements. Under the regulatory capital adequacy guidelines and related framework for prompt corrective action, the specific capital requirements involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgements by regulatory agencies with regard to components, risk weighting and other factors. As a condition of their charter approval, DE NOVO banks are generally required to maintain a core capital (Tier 1) to average assets ratio of not less than 8% and an allowance for loan losses of not less than 1% for the first three years of operations. As of December 31, 2002, the most recent notifications received by the banks from regulatory agencies have advised that the banks are classified as `well capitalized' as defined by the applicable agencies. There are no conditions or events since those notifications that management believes would change the regulatory classification of the banks. Management believes, as of December 31, 2002, that Capitol and the banks meet all capital adequacy requirements to which the entities are subject. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE P--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS--CONTINUED The following table summarizes the amounts (in $1,000s) and related ratios of the individually significant subsidiaries (assets of $200 million or more) and consolidated regulatory capital position as of December 31, 2002 and 2001:
Ann Arbor Capitol Commerce National Bank Bank Consolidated ---- ---- ------------ December 31, 2002 Tier 1 capital to average total assets: Minimum required amount >=$ 12,445 >=$ 8,092 >=$ 89,405 Actual amount $ 23,512 $ 14,631 $ 216,965 Ratio 7.56% 7.23% 9.71% Tier 1 capital to risk-weighted assets: Minimum required amount(1) >=$ 10,707 >=$ 6,628 >=$ 82,506 Actual amount $ 23,512 $ 14,631 $ 216,965 Ratio 8.78% 8.83% 10.52% Combined Tier 1 and Tier 2 capital to risk- weighted assets: Minimum required amount(2) >=$ 21,413 >=$ 13,256 >=$ 165,011 Amount required to meet 'Well-Capitalized' category(3) $ 26,767 $ 16,569 $ 206,264 Actual amount $ 26,864 $ 16,705 $ 242,787 Ratio 10.04% 10.08% 11.77% December 31, 2001 Tier 1 capital to average total assets: Minimum required amount >=$ 10,860 >=$ 6,723 >=$ 74,096 Actual amount $ 20,970 $ 13,155 $ 189,555 Ratio 7.72% 7.83% 10.23% Tier 1 capital to risk-weighted assets: Minimum required amount(1) >=$ 9,165 >=$ 5,848 >=$ 71,970 Actual amount $ 20,970 $ 13,155 $ 189,555 Ratio 9.15% 9.00% 10.54% Combined Tier 1 and Tier 2 capital to risk- weighted assets: Minimum required amount(2) >=$ 18,329 >=$ 11,696 >=$ 143,941 Amount required to meet 'Well-Capitalized' category(3) $ 22,912 $ 14,620 $ 179,926 Actual amount $ 23,838 $ 14,984 $ 213,263 Ratio 10.40% 10.25% 11.85%
(1) The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%. (2) The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted assets is 8%. (3) In order to be classified as a 'well-capitalized' institution, the ratio of Tier 1 and Tier 2 capital to risk-weighted assets must be 10% or more. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE Q--PARENT COMPANY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS
- December 31 - 2002 2001 -------- -------- (in $1,000s) Assets Cash on deposit with subsidiary banks $ 1,642 $ 330 Money market funds on deposit with subsidiary banks 5,272 571 Time deposits with unaffiliated bank 110 107 Investment securities held for long-term investment 269 Investments in subsidiaries 197,851 140,447 Notes receivable 1,130 1,130 Investment in and advances to Amera Mortgage Corporation 889 1,459 Equipment and furniture, net 1,340 662 Goodwill and other intangibles 16,235 1,818 Other assets 7,073 5,514 -------- -------- Total assets $231,542 $152,307 ======== ======== Liabilities and Stockholders' Equity Accounts payable, accrued expenses and other liabilities $ 6,640 $ 3,732 Debt obligations payable to affiliates 4,900 Debt obligations payable to unaffiliated entities 12,500 14,100 Subordinated debentures 52,365 49,403 -------- -------- Total liabilities 71,505 72,135 Stockholders' equity 160,037 80,172 -------- -------- Total liabilities and stockholders' equity $231,542 $152,307 ======== ========
CONDENSED STATEMENTS OF INCOME
- Year Ended December 31 - 2002 2001 2000 -------- -------- -------- (in $1,000s) Income: Dividends from subsidiaries $ 10,755 $ 7,896 $ 7,018 Intercompany fees 9,722 6,130 6,362 Interest 253 200 182 Other 51 69 139 -------- -------- -------- Total income 20,781 14,295 13,701 Expenses: Interest 5,016 5,102 4,568 Salaries and employee benefits 7,662 4,997 4,154 Occupancy 590 399 333 Amortization, equipment rent and depreciation 963 1,086 1,212 Other 2,224 908 2,942 -------- -------- -------- Total expenses 16,455 12,492 13,209 -------- -------- -------- 4,326 1,803 492 Equity in undistributed net earnings of consolidated subsidiaries 9,861 6,496 5,232 Federal income taxes (credit) (2,466) (2,419) (2,311) -------- -------- -------- Net income $ 16,653 $ 10,718 $ 8,035 ======== ======== ========
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE Q--PARENT COMPANY FINANCIAL INFORMATION--CONTINUED CONDENSED STATEMENTS OF CASH FLOWS
- Year Ended December 31 - 2002 2001 2000 -------- -------- -------- (in $1,000s) OPERATING ACTIVITIES Net income $ 16,653 $ 10,718 $ 8,035 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net earnings of subsidiaries (9,861) (6,496) (5,232) Equity in net loss from Amera Mortgage Corporation 1,277 Depreciation and amortization 889 613 622 Loss on sale of premises and equipment 50 Decrease (increase) in amounts due from subsidiaries and other assets 48,978 (1,061) 6,182 Increase in accounts payable, accrued expenses and other liabilities 2,908 608 161 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 59,617 4,382 11,045 INVESTING ACTIVITIES Net cash investments in subsidiaries (47,543) (18,598) (8,107) Net payments from (advances to) Amera Mortgage Corporation 570 (213) (180) Purchases of investment securities (440) Proceeds from sales and maturities of securities 838 334 215 Proceeds from sales of equipment and furniture 100 1 5 Purchases of equipment and furniture (1,318) (268) (300) -------- -------- -------- NET CASH USED BY INVESTING ACTIVITIES (47,793) (18,744) (8,367) FINANCING ACTIVITIES Net payments on debt obligations (6,500) (8,050) (2,850) Net proceeds from issuance of common stock 2,301 1,753 3,011 Net proceeds from issuance of subordinated debentures 2,899 24,248 Cash dividends paid (4,508) (3,114) (2,534) -------- -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (5,808) 14,837 (2,373) -------- -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 6,016 475 305 Cash and cash equivalents at beginning of year 1,008 533 228 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,024 $ 1,008 $ 533 ======== ======== ========
53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE R--ACQUISITION OF MINORITY INTERESTS During 2002, several share-exchange transactions were completed, whereby certain previously majority-owned consolidated subsidiaries became wholly-owned. These share exchange transactions involved the issuance of previously unissued shares of Capitol's common stock for the minority interests of the following subsidiaries: Number of Common Entity Effective Date Shares Issued ------ -------------- ------------- Sun Community Bancorp Limited March 31, 2002 2,721,749 Sunrise Capital Corporation September 30, 2002 266,406 Indiana Community Bancorp Limited September 30, 2002 181,235 East Valley Community Bank December 31, 2002 37,827 Detroit Commerce Bank December 31, 2002 16,371 Had these acquisitions occurred at the beginning of 2002, consolidated net income would have approximated $17 million and diluted earnings per share would have been $1.20. Each of these acquisitions have been accounted for under the purchase method of accounting. During 2000, three banks which were previously majority-owned by Capitol (Brighton Commerce Bank, Kent Commerce Bank and Muskegon Commerce Bank) became wholly-owned, resulting from share exchange transactions with the banks' minority shareholders. Had those acquisitions of minority interests occurred at the beginning of 2000, consolidated net income would have approximated $7.9 million and diluted earnings per share would have been $1.04. NOTE S--PENDING AND PROPOSED SHARE EXCHANGE TRANSACTIONS As stated previously (see Note J), a share exchange proposal was pending at December 31, 2002 regarding Nevada Community Bancorp Limited which was approved by its shareholders in January 2003. For purposes of its consolidated balance sheet, Capitol has reflected the Nevada share exchange as if it occurred on December 31, 2002. In early 2003, Capitol and the boards of directors of Red Rock Community Bank, Desert Community Bank and Elkhart Community Bank (such banks being majority-owned by Capitol) approved separately a plan of share exchange for each bank. The share exchange proposals are subject to approval by the banks' respective shareholders (other than Capitol). If the share exchange proposals are approved, Capitol estimates it would issue approximately 623,000 shares of its common stock. 54 EX-21 7 ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT CAPITOL BANCORP LTD. DECEMBER 31, 2002 PAGE 1 OF 2
STATE OR OTHER JURISDICTION NAME OF SUBSIDIARY OF INCORPORATION - ------------------ ---------------- CONSOLIDATED SUBSIDIARIES: Ann Arbor Commerce Bank Michigan Brighton Commerce Bank Michigan Capitol National Bank United States (national bank) Detroit Commerce Bank Michigan Grand Haven Bank Michigan Kent Commerce Bank Michigan Macomb Community Bank Michigan Muskegon Commerce Bank Michigan Oakland Commerce Bank Michigan Paragon Bank & Trust Michigan Portage Commerce Bank Michigan Elkhart Community Bank (51% owned) Indiana Goshen Community Bank (51% owned) Indiana Bank of Tucson Arizona Valley First Community Bank Arizona Camelback Community Bank Arizona East Valley Community Bank Arizona Southern Arizona Community Bank Arizona Mesa Bank Arizona Arrowhead Community Bank (87% owned) Arizona Yuma Community Bank (51% owned) Arizona First California Northern Bancorp (51% owned): California Napa Community Bank (51% owned by First California Northern Bancorp) California Nevada Community Bancorp Limited (100% owned, after giving effect to January 2003 share exchange transaction): Nevada Black Mountain Community Bank (51% owned by Nevada Community Bancorp Limited) Nevada Desert Community Bank (51% owned by Nevada Community Bancorp Limited) Nevada Red Rock Community Bank (51% owned by Nevada Community Bancorp Limited) Nevada Bank of Las Vegas (51% owned by Nevada Community Bancorp Limited) Nevada Sunrise Bank of Arizona Arizona Sunrise Bank of Albuquerque (87% owned) New Mexico Sunrise Bank of San Diego (64% owned) California
EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT - CONTINUED: CAPITOL BANCORP LTD. DECEMBER 31, 2002 PAGE 2 OF 2
STATE OR OTHER JURISDICTION NAME OF SUBSIDIARY OF INCORPORATION - ------------------ ---------------- CONSOLIDATED SUBSIDIARIES - CONTINUED: Capitol Trust I Delaware Capitol Trust II Delaware Capitol Statutory Trust III Connecticut Capitol Trust IV Delaware UNCONSOLIDATED SUBSIDIARY: Amera Mortgage Corporation, Inc. Michigan (less than 50% owned equity method investee) INACTIVE SUBSIDIARIES: MOI, Inc. Michigan (wholly-owned subsidiary of Oakland Commerce Bank) Financial Center Corporation Michigan C.B. Services, Inc. Michigan
The following summarizes regulatory agencies of the registrant and its subsidiaries: The Corporation's state-chartered banks located in Michigan are regulated by the Office of Financial and Insurance Services, Department of Consumer & Industry Services of the State of Michigan. Capitol National Bank, as a national bank, is regulated by the Office of the Comptroller of the Currency. Bank subsidiaries located in the states of Arizona, Nevada, New Mexico, Indiana and California are state-chartered and are regulated by banking agencies of each of those states. Each of the banking subsidiaries which are not members of the Federal Reserve System, as federally-insured depository institutions, are also regulated by the Federal Deposit Insurance Corporation. Elkhart Community Bank and Goshen Community Bank are members of the Federal Reserve System and, accordingly, are regulated by the Federal Reserve Board. As a bank holding company, Capitol Bancorp Ltd. is regulated by the Federal Reserve Board, which also regulates its nonbanking subsidiaries. Nevada Community Bancorp Limited and First California Northern Bancorp are also regulated by the Federal Reserve Board. In addition to the bank regulatory agencies, the registrant and its subsidiaries are subject to regulation by other state and federal agencies. EX-23 8 ex23.txt CONSENT OF BDO SEIDMAN, LLP EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Capitol Bancorp Ltd. Lansing, Michigan We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 33-71774 for its Shareholder Investment Program) of Capitol Bancorp Ltd. of our report dated January 31, 2003, relating to the consolidated financial statements, which appears on page 26 in the Annual Report to shareholders (Financial Information Section), which is incorporated in the Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 31, 2003 relating to the financial statement schedules, which appear in this Form 10-K. BDO SEIDMAN, LLP /s/ BDO Seidman, LLP March 28, 2003 Grand Rapids, Michigan EX-99.1 9 ex99-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CHIEF EXECUTIVE OFFICER CERTIFICATION Pursuant to Section 906 of the Corporate Fraud Accountability Act of 2002 (18 U.S.C.ss.1350, as adopted), Joseph D. Reid, the Chief Executive Officer of Capitol Bancorp Ltd. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Annual Report on Form 10-K for the period ended December 31, 2002, and to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2003 /s/ Joseph D. Reid ---------------------------- Joseph D. Reid Chief Executive Officer EX-99.2 10 ex99-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CHIEF FINANCIAL OFFICER CERTIFICATION Pursuant to Section 906 of the Corporate Fraud Accountability Act of 2002 (18 U.S.C.ss. 1350, as adopted), Lee W. Hendrickson, the Chief Financial Officer of Capitol Bancorp Ltd. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Annual Report on Form 10-K for the period ended December 31, 2002, and to which this Certification is attached as Exhibit 99.2 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 28, 2003 /s/ Lee W. Hendrickson ---------------------------- Lee W. Hendrickson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----