<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number 33-24728C
CAPITOL BANCORP LTD.
(Exact name of issuer as specified in its charter)
MICHIGAN 38-2761672
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN
(Address of principal executive offices)
(517) 487-6555
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes. X No
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common stock, No par value: 3,986,536 shares outstanding as of
October 31, 1996.
Page 1 of 19
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets - September 30, 1996 and
December 31, 1995.
Consolidated statements of income - Three months and nine months
ended September 30, 1996 and 1995.
Consolidated statements of cash flows - Nine months ended
September 30, 1996 and 1995.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
Page 2 of 19
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
-------------- --------------
(in thousands)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 15,081 $ 14,715
Interest-bearing deposits with banks 1,550 16
Federal funds sold 33,475 30,600
------------- -------------
Cash and cash equivalents 50,106 45,331
Loans held for resale 7,674 7,030
Investment securities:
Available for sale, carried at market value 41,159 34,546
Held for long-term investment, carried at
amortized cost which approximates market value 2,103 1,783
------------- -------------
Total investment securities 43,262 36,329
Portfolio loans:
Commercial 265,141 222,161
Real estate mortgage 51,381 48,954
Installment 15,898 12,356
------------- -------------
Total portfolio loans 332,420 283,471
Less allowance for loan losses (4,261) (3,687)
------------- -------------
Net portfolio loans 328,159 279,784
Investment in and advances to Amera Mortgage Corporation 2,884 3,077
Premises and equipment 3,248 2,438
Accrued interest income 2,722 2,634
Excess of cost over net assets of acquired subsidiaries 2,395 2,540
Other assets 5,472 4,907
------------- -------------
TOTAL ASSETS $ 445,922 $ 384,070
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 46,822 $ 43,797
Interest-bearing 345,124 296,490
------------- -------------
Total deposits 391,946 340,287
Accrued interest on deposits and
other liabilities 4,180 3,815
Debt obligations 7,062 8,712
------------- -------------
Total liabilities 403,188 352,814
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 4,966 391
STOCKHOLDERS' EQUITY
Common stock, no par value: 10,000,000
shares authorized;
issued and outstanding: 1996 - 3,981,966 shares
1995 - 3,395,288 shares 27,051 22,150
Retained earnings 10,853 8,414
Market value adjustment (net of tax effect) for
investment securities available for sale (24) 413
------------- -------------
37,880 30,977
Less note payable by ESOP (112) (112)
------------- -------------
Total stockholders' equity 37,768 30,865
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 445,922 $ 384,070
============= =============
</TABLE>
Page 3 of 19
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 1996 and 1995
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 8,004 $ 6,656 $ 22,862 $ 18,948
Loans held for resale 207 90 656 179
Taxable investment securities 575 549 1,616 1,556
Federal funds sold 449 410 1,025 1,041
Interest-bearing deposits with banks 10 35 12
Dividends on investment securities and other 26 15 337 45
---------- ---------- ---------- ----------
Total interest income 9,271 7,720 26,531 21,781
Interest expense:
Demand deposits 592 590 1,683 1,710
Savings deposits 359 310 1,014 939
Time deposits 3,502 2,960 9,828 7,915
Debt obligations and other 95 147 471 404
---------- ---------- ---------- ----------
Total interest expense 4,548 4,007 12,996 10,968
---------- ---------- ---------- ----------
Net interest income 4,723 3,713 13,535 10,813
Provision for loan losses 274 219 751 659
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,449 3,494 12,784 10,154
Noninterest income:
Service charges on deposit accounts 171 153 539 407
Trust fee income 67 65 199 170
Gain on sale of investment securities
available for sale 2 82
Other 249 5 364 351
---------- ---------- ---------- ----------
Total noninterest income 489 223 1,184 928
Noninterest expense:
Salaries and employee benefits 1,558 1,210 4,395 3,705
Occupancy 228 216 654 662
Equipment rent, depreciation and maintenance 262 207 686 617
Deposit insurance premiums 350 24 415 345
Other 800 737 2,674 2,499
---------- ---------- ---------- ----------
Total noninterest expense 3,198 2,394 8,824 7,828
---------- ---------- ---------- ----------
Income before federal income taxes 1,740 1,323 5,144 3,254
Federal income taxes 562 475 1,717 1,205
---------- ---------- ---------- ----------
NET INCOME $ 1,178 $ 848 $ 3,427 $ 2,049
========== ========== ========== ==========
NET INCOME PER SHARE $ .29 $ .23 $ .90 $ .57
========== ========== ========== ==========
</TABLE>
Page 4 of 19
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,427 $ 2,049
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 751 659
Depreciation of premises and equipment 437 390
Amortization of mortgage servicing rights 101
Amortization of excess of cost over net
assets of acquired subsidiaries 145 213
Net amortization of investment security
premiums (accretion of discount) (114) 30
Gain (loss) on sale of premises and equipment 6 (4)
Originations and purchases of loans held for resale (153,960) (54,664)
Proceeds from sales of loans held for resale 153,315 50,770
Decrease (increase) in accrued interest income
and other assets (252) 2,392
Increase (decrease) in accrued interest
and other liabilities (25) 733
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,730 2,669
INVESTING ACTIVITIES
Proceeds from sale of 51% interest in mortgage subsidiary 250
Proceeds from sales of investment securities
available for sale 4,460 251
Proceeds from maturities of investment securities 26,911 7,115
Purchases of investment securities (38,834) (10,946)
Net increase in portfolio loans (49,126) (31,882)
Proceeds from sales of premises and equipment 13 22
Purchases of premises and equipment (1,267) (440)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (57,843) (35,630)
FINANCING ACTIVITIES
Net payments on debt obligations (1,650) (351)
Resources provided by minority interest 4,966
Net proceeds from issuance of common stock 4,902 1,156
Cash dividends paid (988) (697)
Increase (decrease) in demand deposits, NOW
accounts and savings accounts 15,988 (4,156)
Increase (decrease) in certificates of deposit 35,670 49,175
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 58,888 45,127
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 4,775 12,166
Cash and cash equivalents at beginning of period 45,331 24,211
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50,106 $ 36,377
========= =========
</TABLE>
Page 5 of 19
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CAPITOL BANCORP LTD.
Note A - Basis of Presentation
The accompanying condensed consolidated financial statements of Capitol
Bancorp Ltd. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-QSB. Accordingly, they do not include all information
and footnotes necessary for a fair presentation of consolidated financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which the
Corporation considers necessary for a fair presentation of the interim periods.
The results of operations for the nine-month period ended September 30,
1996 are not necessarily indicative of the results to be expected for the year
ending December 31, 1996.
The consolidated balance sheet as of December 31, 1995 was derived from
audited consolidated financial statements as of that date. Certain 1995
amounts have been reclassified to conform to the 1996 presentation.
Note B - Implementation of New Accounting Standards
Financial Accounting Standards Board Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", establishes new guidelines for accounting and measurement of potential
impairment of certain long-lived assets, including intangibles and goodwill,
among other things. This new standard became effective for the Corporation
January 1, 1996 and requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the Statement requires the use of estimates of
future cash flows and other estimates of fair value.
Implementation of this new accounting standard had no impact on the
Corporation's financial position or results of operations for the period ended
September 30, 1996.
Note C - New Banks
During the nine months ended September 30, 1996, two de novo banks have
been added. Bank of Tucson, in Tucson, Arizona, was formed effective June 27,
1996 and capitalized with $5.4 million of which $2.7 million was invested by
the Corporation. Macomb Community Bank commenced operations on September 18,
1996 in Clinton Township,
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<PAGE> 7
Michigan, and was capitalized with $4.0 million of which $2.0 million was
invested by the Corporation. The Corporation's investments in these new banks
were funded primarily from proceeds from exercise of warrants and related
issuance of common stock earlier in the year.
The Corporation owns 51% of the common stock of Bank of Tucson and Macomb
Community Bank and, accordingly, these new banks are consolidated for financial
reporting purposes with corresponding accounting recognition given to
applicable minority interest.
Note D - Sale of Majority Interest in Mortgage Banking Unit
Effective March 31, 1995, the Corporation sold a 51% interest in Mortgage
Connection, Inc. ("MCI", previously a wholly-owned mortgage banking subsidiary
acquired in 1992 and engaged in the origination, sale and servicing of
residential mortgage loans) to an individual. The purchase transaction
resulted in no gain or loss and, under certain circumstances, the majority
owner and the Corporation each have the right to purchase the other party's
interest in the mortgage company. The Corporation has retained a 49% interest
in the mortgage company and appoints two persons to its five-member board of
directors. The majority owner of the mortgage company (its current President
and CEO) appoints the other three board members.
Subsequent to March 31, 1995, MCI changed its name to Amera Mortgage
Corporation. For periods after March 31, 1995, the Corporation's remaining
investment in Amera Mortgage Corporation is accounted for under the equity
method of accounting for its pro rata share of the mortgage company's net
income or loss. If such sale had occurred at the beginning of 1995, net income
would have approximated $2.1 million ($.58 per share) for the nine months ended
September 30, 1995.
Note E - Prospective Impact of New Accounting Standards Not Yet Adopted
Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting for Stock-Based Compensation", revises the accounting recognition
of compensation expense for compensatory stock options and related disclosures.
This new standard permits alternative expense recognition using certain option
valuation models. For companies electing to continue past expense recognition
practices (which the Corporation expects to implement), certain expanded pro
forma disclosures of expense amounts and earnings are required using those
valuation models (as if the alternative expense methods had been implemented).
Management has not completed its analysis of this new accounting standard,
which is expected to result in expanded disclosures to be made for the
Corporation effective December 31, 1996.
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", provides additional
guidance for the accounting for transfers of financial assets. Management has
not completed its analysis of this new standard which will become effective
January 1, 1997.
A variety of proposed or otherwise potential accounting standards are
currently under
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<PAGE> 8
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 the Corporation's financial statements.
8 of 19
<PAGE> 9
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets amounted to $445.9 million at September 30, 1996, an increase
of $61.8 million from the December 31, 1995 level of $384.1 million. The
consolidated balance sheets include the Corporation and its banking
subsidiaries, Capitol National Bank, Portage Commerce Bank, Ann Arbor Commerce
Bank, Oakland Commerce Bank, Paragon Bank & Trust, Grand Haven Bank (85% owned)
and, effective June 27, 1996 and September 18, 1996, respectively, Bank of
Tucson and Macomb Community Bank (each 51% owned by the Corporation).
During the nine months ended September 30, 1996, two de novo banks have
been added. Bank of Tucson, in Tucson, Arizona, was formed effective June 27,
1996 and capitalized with $5.4 million of which $2.7 million was invested by
the Corporation. Macomb Community Bank commenced operations on September 18,
1996 in Clinton Township, Michigan, and was capitalized with $4.0 million of
which $2.0 million was invested by the Corporation. The Corporation's
investments in these new banks were funded primarily from proceeds from
exercise of warrants and related issuance of common stock earlier in the year.
The Corporation owns 51% of the common stock of Bank of Tucson and Macomb
Community Bank and, accordingly, these new banks are consolidated for financial
reporting purposes with corresponding accounting recognition given to
applicable minority interest.
Portfolio loans increased during the nine-month period by approximately
$49 million. Loan growth was funded primarily by higher levels of time
deposits. The majority of portfolio loan growth occurred in commercial loans
which increased approximately $43 million, consistent with the Corporation's
banks' emphasis on commercial lending activities.
The allowance for loan losses at September 30, 1996 approximated $4.3
million or 1.28% of total portfolio loans, a slight decrease from the year-end
1995 ratio of 1.30%. For the first three quarters of 1996, net loan
charge-offs approximated $177,000, as compared to $322,000 for the
corresponding 1995 period. Provisions for loan losses have been maintained at
a higher level in 1996 ($751,000) relative to 1995 ($659,000) commensurate with
portfolio growth, levels of delinquent and other nonperforming loans and other
factors. The timing of loan charge-offs generally differs from accrual of
provisions for loan losses. Management expects loan charge-offs for 1996 to be
consistent with the preceding year.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on evaluation of the
portfolio (including volume, amount and composition, potential impairment of
individual loans and concentrations of credit), past loss experience, current
economic conditions, loan commitments outstanding and other factors.
The table below summarizes portfolio loan balances and activity in the
allowance for
9 of 19
<PAGE> 10
loan losses for the interim periods (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Allowance for loan losses at January 1 $ 3,687 $ 3,220
Loans charged-off:
Commercial 186 537
Installment 45 45
-------- --------
Total charge-offs 231 582
Recoveries:
Commercial 43 235
Real estate 6 3
Installment 5 22
-------- --------
Total recoveries 54 260
-------- --------
Net charge-offs 177 322
Additions to allowance charged to expense 751 659
-------- --------
Allowance for loan losses at September 30 $ 4,261 $ 3,557
======== ========
Average total portfolio loans for period ended September 30 $306,735 $259,740
======== ========
Ratio of net charge-offs to average portfolio loans outstanding 0.06% 0.12%
======== ========
</TABLE>
The allowance for loan losses is a general allowance for the Corporation's
loan portfolio. For internal purposes, management allocates the allowance to
all loan classifications. The amounts allocated in the following table (in
thousands), which includes all loans for which, based on the Corporation's loan
rating system management has concerns, should not be interpreted as an
indication of future charge-offs. In addition, amounts allocated are not
intended to reflect the amount that may be available for future losses, since
the allowance is a general allowance.
<TABLE>
<CAPTION>
September 30
-------------------------------------------------------------------------------
1996 1995
---------------------------------- -------------------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
--------- ---------
<S> <C> <C> <C> <C>
Commercial $ 2,154 .65% $ 1,675 .61%
Real estate mortgage 122 .04 71 .03
Installment 76 .02 54 .02
Unallocated 1,909 .57 1,757 .64
--------- ------- --------- -------
Total allowance for loan losses $ 4,261 1.28% $ 3,557 1.30%
========= ======= ========= =======
Total portfolio
loans outstanding $ 332,420 $ 273,143
========= =========
</TABLE>
In addition to the allowance for loan losses, certain loans are enrolled
in a state government loan program and have additional reserves established to
provide for loss protection. At September 30, 1996, total loans under this
program approximated $14.3 million. Reserves related to these loans, which are
represented by earmarked funds on deposit at the banks, approximated $1.5
million and are not included in the recorded allowance for loan losses.
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<PAGE> 11
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under
the contractual terms of the loan documents) were not material in 1995 and
through September 30, 1996. Nonperforming loans (i.e., loans which are 90 days
or more past due and loans on nonaccrual status) at September 30, 1996 amounted
to $2.55 million compared with $1.34 million at December 31, 1995 as summarized
in the following table:
<TABLE>
<CAPTION>
Sept 30 Dec 31
1996 1995
--------- ---------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 776 $ 438
Real estate 145 115
Installment 26 28
------- -------
Total nonaccrual loans 947 581
Past due (>90 days) loans:
Commercial 1,385 379
Real estate 138 299
Installment 81 82
------- -------
Total past due loans 1,604 760
------- -------
Total nonperforming loans $ 2,551 $ 1,341
======= =======
</TABLE>
Nonperforming loans increased approximately $1.2 million during the
nine months ended September 30, 1996. Most of the increase relates to a small
number of loans in various stages of resolution which management believes to be
adequately collateralized or otherwise appropriately recorded in its
determination of the adequacy of the allowance for loan losses.
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the period,
additional interest income of $73,000 and $81,000 would have been recorded for
the nine months ended September 30, 1996 and 1995, respectively. Interest
income recognized on loans in nonaccrual status for the period approximated
$23,000 and $49,000, respectively.
Other real estate owned (generally real estate acquired through
foreclosure or a deed in lieu of foreclosure and classified as a component of
other assets) approximated $333,000 at September 30, 1996, a decrease of
$639,000 from the year-end 1995 level of $972,000.
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<PAGE> 12
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming assets and certain ratios
(dollars in thousands):
<TABLE>
<CAPTION>
Allowance as a
Percentage of
Total Allowance for Nonperforming Total
Portfolio Loans Loan Losses Loans Portfolio Loans
----------------------- --------------------- ------------------- ------------------
Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
1996 1995 1996 1995 1996 1995 1996 1995
--------- --------- ------- ------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 74,414 $ 58,869 $ 990 $ 765 $ 380 $ 147 1.33% 1.30%
Bank of Tucson 1,303 n/a 12 n/a --- n/a .92 n/a
Capitol National Bank 77,907 75,468 1,035 1,058 469 396 1.33 1.40
Grand Haven Bank 24,090 14,630 266 155 --- --- 1.10 1.06
Macomb Community Bank 549 n/a 6 n/a --- n/a 1.09 n/a
Oakland Commerce Bank 51,661 46,146 638 552 1,189 448 1.23 1.20
Paragon Bank & Trust 43,468 41,288 537 494 315 --- 1.24 1.20
Portage Commerce Bank 57,874 45,870 777 663 198 350 1.34 1.45
Other, net 1,154 1,200 --- --- --- --- --- ---
--------- --------- ------- ------- ------- ------- ---- ----
Consolidated $ 332,420 $ 283,471 $ 4,261 $ 3,687 $ 2,551 $ 1,341 1.28% 1.30%
========= ========= ======= ======= ======= ======= ==== ====
n/a - Not applicable
</TABLE>
Noninterest-bearing deposits approximated 11.9% of total deposits at
September 30, 1996, a decrease from the December 31, 1995 level of 12.9%. The
decline in the ratio of noninterest-bearing deposits in 1996 relates primarily
to escrow and custodial funds associated with mortgage servicing activities of
the mortgage affiliate placed on deposit at one of the Corporation's banks.
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<PAGE> 13
Results of Operations
Net income for the nine months ended September 30, 1996 amounted to
$3,427,000 ($.90 per share), a significant increase over the $2,049,000 ($.57
per share) earned during the corresponding period of 1995. Net income for the
three months ended September 30, 1996 approximated $1,178,000 ($.29 per share),
as compared to $848,000 ($.23 per share) for the same period of 1995. Net
income for interim 1996 periods has been favorably impacted by higher interest
margins and fees and dividend income. Operating results (in thousands) were as
follows:
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
---------------------- -------------------- ------------------- -------------------
Sept 30 Dec 31
1996 1995 1996 1995 1996 1995 1996 1995
--------- --------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 94,661 $ 75,954 $ 841 $ 579 22.80% 18.82% 1.35% 1.22%
Bank of Tucson (1) 11,440 n/a (59) n/a n/a n/a n/a n/a
Capitol National Bank 97,108 97,622 1,125 897 20.74 18.58 1.56 1.30
Grand Haven Bank (2) 29,647 20,930 159 42 8.02 n/a .85 n/a
Macomb Community Bank (1) 5,036 n/a (18) n/a n/a n/a n/a n/a
Oakland Commerce Bank 72,239 61,469 430 396 11.04 9.57 .83 .93
Paragon Bank & Trust 54,964 56,064 475 290 12.51 9.50 1.16 .75
Portage Commerce Bank 72,822 64,019 805 650 22.69 21.37 1.59 1.48
-------- -------- ------ ------ ----- ----- ----- -----
Total Banks 437,917 376,058 3,758 2,854 16.82 14.43 1.24 1.13
Mortgage Banking (3) 2,884 3,077 ( 93) (106) n/a n/a n/a n/a
Other, net 5,121 4,935 ( 238) (699) n/a n/a n/a n/a
-------- -------- ------ ------ ----- ----- ----- -----
Consolidated $445,922 $384,070 $3,427 $2,049 14.80% 10.63% 1.11% 0.79%
======== ======== ====== ====== ===== ===== ===== =====
</TABLE>
n/a - Not applicable.
(1) - Bank of Tucson and Macomb Community Bank, de novo banks, commenced
operations June 27, 1996 and September 18, 1996, respectively, and
are 51% owned by the Corporation.
(2) - Grand Haven Bank (85% owned and formerly a branch of Paragon Bank &
Trust) commenced operations effective May 1, 1995.
(3) - Effective March 31, 1995, the Corporation sold a majority interest
in Amera Mortgage Corporation (formerly Mortgage Connection, Inc.,
acquired in 1992); for periods after March 31, 1995, the
Corporation's remaining investment (49%) has been accounted for under
the equity method.
Net interest income increased 25.2% during the nine-month 1996 period
versus the corresponding period of 1995. The growth in net interest income was
primarily the result of margins associated with growth in loans and deposits in
addition to certain nonrecurring dividends in March 1996. Both Bank of Tucson
and Macomb Community Bank, because of their brief period of inclusion, had
minimal impact on earnings for the 1996 interim period.
Noninterest income increased in 1996 to $1.2 million for the nine-month
period, as compared with $928,000 for the corresponding 1995 period, primarily
due to inclusion of the mortgage unit's operations for the first quarter of
1995. Service charge income and trust fee income increased 32% and 17%,
respectively, mainly due to an increasing number of accounts.
The provision for loan losses amounted to $751,000 for the nine-month
1996 period as compared to $659,000 for the corresponding period of 1995. The
increased interim provision for loan losses in 1996 compared to the interim
1995 period relates primarily to portfolio growth. The provision for loan
losses is based on management's analysis of the loan portfolio as discussed
elsewhere herein.
Noninterest expense for the nine months ended September 30, 1996
approximated $8.8 million compared with $7.8 million in 1995. The increase in
noninterest expense is associated with normal growth and increases in general
operating costs. In addition, the increase reflects
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<PAGE> 14
an assessment accrued effective September 30, 1996 in the amount of $320,000 at
Oakland Commerce Bank related to recent legislation adjusting FDIC deposit
insurance premiums for certain financial institutions. This large assessment
amount will result in substantially lower FDIC insurance premiums for Oakland
Commerce Bank in the future while the Corporation's other banks will incur
slightly higher deposit insurance premiums.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $50.1 million or 11.2% of total
assets at September 30, 1996 as compared with $45.3 million or 11.8% of total
assets at December 31, 1995. As liquidity levels vary continuously based on
customer activities, amounts of cash and cash equivalents can vary widely at
any given point in time. Management believes the Corporation's liquidity
position at September 30, 1996 is adequate to fund loan demand and meet
depositor needs.
In addition to cash and cash equivalents, a source of long-term
liquidity is the Corporation's marketable investment securities. The
Corporation's liquidity requirements have not historically necessitated the
sale of investments in order to meet liquidity needs. It also has not engaged
in active trading of its investments and has no intention of doing so in the
foreseeable future. At September 30, 1996 and December 31, 1995, the
Corporation had approximately $41 million and $34 million, respectively, of
investment securities classified as available for sale which can be utilized to
meet various liquidity needs as they arise.
At September 30, 1996, the Corporation had lines of credit from an
unrelated financial institution aggregating $10 million. Under this credit
facility, borrowings outstanding approximated $4 million at September 30, 1996
($5.6 million at December 31, 1995). Borrowings were reduced during interim
1996 periods as proceeds from issuance of common stock upon exercise of
warrants and stock options exceeded current cash needs. Future funding for
formation of new banks (to the extent not otherwise funded by internal capital
resources) or other needs may be met by additional future borrowings. Under
the terms of the credit agreement, $8 million is convertible into long-term
notes; $2 million of the lines of credit are revolving and are reviewed
annually for continuance.
Two of the Corporation's banks, (Oakland Commerce Bank and Ann Arbor
Commerce Bank) have secured lines of credit with the Federal Home Loan Bank.
Borrowings thereunder approximated $3 million and additional borrowing capacity
approximated $9.1 million at September 30, 1996.
In 1994, approximately 743,000 warrants were issued in a merger
transaction. Each warrant enables the holder to purchase one share of the
Corporation's common stock at an exercise price of $8.99 per warrant. During
interim periods in 1996, approximately 488,000 warrants were exercised,
resulting in proceeds to the Corporation of $4,391,000. In addition, the
exercise of 81,334 stock options resulted in additional proceeds during the
period of $520,000. These and other transactions resulted in issuance of
586,678 shares of common stock during the nine months ended September 30, 1996.
At September 30, 1996, 164,000 warrants remained outstanding and expire on June
30, 1997. If all remaining warrants were exercised, the Corporation would
receive additional cash and capital approximating $1.5 million
14 of 19
<PAGE> 15
and issue 164,000 shares of previously unissued common stock, although there is
no assurance that such warrants will be exercised. Stockholders' equity also
increased in 1996 through net income, less dividends paid.
The Corporation's Board of Directors recently approved a cash dividend
of $.09 per share payable December 2, 1996 to shareholders of record as of
November 1, 1996 following prior 1996 dividends of $.09 per share paid on March
1, June 1, and September 1. The dividend amounts in 1996 represent an increase
over the dividends of $.07 per share paid quarterly in 1995. On October 30,
1996, the Corporation announced a 10% stock dividend distributable on December
31, 1996 to shareholders of record on December 2, 1996.
As discussed previously, certain investment securities are designated
as "available for sale" and, accordingly, are adjusted to market value at the
balance sheet date (net of corresponding tax effect). Changes in market values
of investment securities at their respective balance sheet dates decreased
stockholders' equity by $437,000 for the nine months ended September 30, 1996.
The Corporation and its banks are subject to complex regulatory capital
requirements which require maintaining minimum capital ratios. These ratio
measurements, in addition to certain other requirements, are used by regulatory
agencies to determine the level of regulatory intervention and enforcement
applied to financial institutions. The Corporation and each of its banks are
in compliance with the regulatory requirements and management expects to
maintain such compliance.
Capital, as a percentage of total assets, approximated 8.5% at
September 30, 1996, a slight increase from the beginning of the year ratio of
8.0%. The Corporation and each of its banking subsidiaries continue to exceed
regulatory capital requirements as shown below (dollars in thousands):
<TABLE>
<CAPTION>
Ann Arbor Bank Capitol Grand Macomb Oakland Paragon Portage Capitol
Commerce of National Haven Community Commerce Bank & Commerce Bancorp
Bank Tucson(1) Bank Bank(1) Bank(1) Bank Trust Bank Ltd. Consolidated
------- --------- --------- ------- --------- -------- ------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $94,661 $11,440 $97,108 $29,647 5,036 $72,239 $54,964 $72,822 $43,744 $445,922
Total Assets for Risk-Based
Capital Purposes 95,670 11,453 98,179 29,899 5,042 72,887 55,433 73,636 42,535 448,998
Risk-Weighted Assets 69,709 3,615 72,412 21,557 1,964 52,504 44,819 55,096 40,058 326,247
Tier I Capital 6,171 5,304 7,787 2,563 3,690 5,331 4,181 5,128 35,397 40,363
Allowable Tier II Capital 873 12 907 266 6 638 537 690 (1,097) 2,832
Tier I and Allowable Tier II
Capital, Combined 7,044 5,316 8,694 2,829 3,696 5,969 4,718 5,818 34,300 43,195
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.85% 146.73% 10.75% 11.80% 187.88% 10.15% 9.33% 9.31% 83.38% 12.28%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.10% 147.06% 12.01% 13.12% 188.19% 11.37% 10.53% 10.56% 85.62% 13.24%
Leverage Ratio 6.52% 46.36% 8.02% 8.69% 73.27% 7.38% 7.61% 7.04% 85.61% 9.10%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 4.00% 8.00% 4.00% 8.00% 8.00% 4.00% 4.00% 4.00% 3.00% 4.00%
</TABLE>
(1) Conditional to their commercial bank charters, Grand Haven Bank, Bank
of Tucson and Macomb Community Bank are required to maintain Tier
I leverage capital to total assets ratios of not less than 8% for the
first three full years of operations.
15 of 19
<PAGE> 16
The Corporation's operating strategy continues to be focused on the
ongoing growth and maturity of its existing banks, coupled with de novo bank
expansion in selected markets as opportunities arise. In the second and third
quarters of 1996, two new 51% owned banks (Bank of Tucson and Macomb Community
Bank, respectively) have been added to the Corporation's consolidated group.
Management continues to be actively engaged in the ongoing process of exploring
opportunities for future growth which includes de novo bank formation and other
growth strategies. Accordingly, the Corporation may invest in or otherwise add
additional banks in future periods, subject to economic conditions and other
factors, although the timing of such additional banking units, if any, is
uncertain. Such future de novo banks and/or additions of other operating units
could be either wholly-owned or majority-owned by the Corporation.
As of September 30, 1996, the Corporation has applications pending with
certain regulatory agencies for permission to acquire a majority interest in a
de novo bank to be formed in Brighton, Michigan.
Management believes the Corporation's capital resources at September
30, 1996 to be adequate to fund existing operations, future growth and
expansion.
Impact of New Accounting Standards
Financial Accounting Standards Board Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", establishes new guidance for accounting and measurement of potential
impairment of certain long-lived assets including intangibles and goodwill,
among other things. This new standard became effective for the Corporation
January 1, 1996 and requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the Statement requires the use of estimates of
future cash flows and other estimates of fair value.
Implementation of this new accounting standard had no impact on the
Corporation's financial position or results of operations for the period ended
September 30, 1996.
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation", revises the accounting recognition of compensation
expense for compensatory stock options and related disclosures. This new
standard permits alternative expense recognition using certain option valuation
models. For companies electing to continue past expense recognition practices
(which the Corporation expects to implement), certain expanded proforma
disclosures of expense amounts and earnings are required using those valuation
models (as if the alternative expense methods had been implemented).
Management has not completed its analysis of this new accounting standard,
which is expected to result in expanded disclosures to be made for the
Corporation effective December 31, 1996.
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", provides additional
guidance for the accounting for transfers of financial assets. Management has
not completed its analysis of this new standard which will become effective
January 1, 1997.
16 of 19
<PAGE> 17
At any time, there are a number of proposed new accounting standards
under consideration by standard-setting bodies, bank regulatory agencies and
other entities. Because of the fluid status of such proposals, the potential
impact thereof on the Corporation's financial statements is unclear.
17 of 19
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries are parties to certain
ordinary, routine litigation incidental to their business. In the
opinion of management, liabilities arising from such litigation would
not have a material effect on the Corporation's consolidated financial
position or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
(11) Statement regarding computation of per
share earnings.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter ended September 30, 1996.
18 of 19
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL BANCORP LTD.
(Registrant)
\s\ Joseph D. Reid
----------------------------------------
Chairman, President and CEO
(duly authorized to sign on behalf of
of the registrant)
\s\ Lee W. Hendrickson
----------------------------------------
Vice President and
Chief Financial Officer
Date: November 4, 1996
19 of 19
<PAGE> 20
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
PART II, ITEM 6(a)
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
CAPITOL BANCORP LTD.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary Net Income Per Share:
Weighted average number of common shares outstanding 3,976,908 3,329,941 3,685,780 3,321,335
Net effect of dilutive stock options and warrants--
based on the treasury stock method or modified
treasury stock method, as applicable 127,765 658,294 116,944 658,294
----------- ----------- ----------- -----------
Total 4,104,673 3,988,235 3,802,724 3,979,629
=========== =========== =========== ===========
Net income for the period $ 1,177,700 $ 847,907 $ 3,426,885 $ 2,049,222
Adjustment for modified treasury stock method 66,982 200,946
----------- ----------- ----------- -----------
Adjusted earnings for purposes of computation
of per share earnings $ 1,177,700 $ 914,889 $ 3,426,885 $ 2,250,168
=========== =========== =========== ===========
Net income per share $ .29 $ .23 $ .90 $.57
=========== =========== =========== ===========
Fully Diluted Net Income Per Share (A) $ .29 $ .23 $ .90 $.57
=========== =========== =========== ===========
</TABLE>
(A) Same as for primary net income per share since dilution is less than 3% or
is otherwise not applicable for the period.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,081
<INT-BEARING-DEPOSITS> 1,550
<FED-FUNDS-SOLD> 33,475
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,262
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 340,094
<ALLOWANCE> 4,261
<TOTAL-ASSETS> 445,922
<DEPOSITS> 391,946
<SHORT-TERM> 3,112
<LIABILITIES-OTHER> 4,180
<LONG-TERM> 3,950
0
0
<COMMON> 27,051
<OTHER-SE> 10,829
<TOTAL-LIABILITIES-AND-EQUITY> 445,922
<INTEREST-LOAN> 23,518
<INTEREST-INVEST> 3,013
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,531
<INTEREST-DEPOSIT> 12,525
<INTEREST-EXPENSE> 12,996
<INTEREST-INCOME-NET> 13,535
<LOAN-LOSSES> 751
<SECURITIES-GAINS> 82
<EXPENSE-OTHER> 8,824
<INCOME-PRETAX> 5,144
<INCOME-PRE-EXTRAORDINARY> 3,427
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,427
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
<YIELD-ACTUAL> 0
<LOANS-NON> 947
<LOANS-PAST> 1,604
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,687
<CHARGE-OFFS> 231
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 4,261
<ALLOWANCE-DOMESTIC> 4,261
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,909
</TABLE>
