<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 JUNE 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: 3,976,807 shares outstanding as of July
31, 1996.
Page 1 of 17
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets - June 30, 1996 and December 31,
1995.
Consolidated statements of income - Three months and six
months ended June 30, 1996 and 1995.
Consolidated statements of cash flows - Six months ended June
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 17
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
------------------- ------------------
(in thousands)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 16,521 $ 14,715
Interest-bearing deposits with banks 74 16
Federal funds sold 26,150 30,600
------------------- ------------------
Cash and cash equivalents 42,745 45,331
Loans held for resale 14,457 7,030
Investment securities:
Available for sale, carried at market value 33,206 34,546
Held for long-term investment, carried at
amortized cost which approximates market value 2,103 1,783
------------------- ------------------
Total investment securities 35,309 36,329
Portfolio loans:
Commercial 251,756 222,161
Real estate mortgage 49,407 48,954
Installment 14,599 12,356
------------------- ------------------
Total portfolio loans 315,762 283,471
Less allowance for loan losses (4,123) (3,687)
------------------- ------------------
Net portfolio loans 311,639 279,784
Investment in and advances to Amera Mortgage Corporation 2,969 3,077
Premises and equipment 2,606 2,438
Accrued interest income 2,654 2,634
Excess of cost over net assets of acquired subsidiaries 2,444 2,540
Other assets 5,527 4,907
------------------- ------------------
TOTAL ASSETS $ 420,350 $ 384,070
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 45,817 $ 43,797
Interest-bearing 323,266 296,490
------------------- ------------------
Total deposits 369,083 340,287
Accrued interest on deposits and
other liabilities 4,369 3,815
Debt obligations 7,062 8,712
------------------- ------------------
Total liabilities 380,514 352,814
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 3,040 391
STOCKHOLDERS' EQUITY
Common stock, no par value: 10,000,000
shares authorized;
issued and outstanding: 1996 - 3,938,629
1995 - 3,395,288 26,961 22,150
Retained earnings 10,033 8,414
Market value adjustment (net of tax effect) for
investment securities available for sale (86) 413
------------------- ------------------
36,908 30,977
Less note payable by ESOP (112) (112)
------------------- ------------------
Total stockholders' equity 36,796 30,865
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 420,350 $ 384,070
=================== ==================
</TABLE>
Page 3 of 17
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 1996 and 1995
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 7,637 $ 6,358 $ 14,858 $ 12,292
Loans held for resale 324 45 449 89
Taxable investment securities 523 537 1,041 1,007
Federal funds sold 255 406 576 631
Interest-bearing deposits with banks 9 8 25 12
Other interest income 7 10
Dividends on investment securities 17 15 301 30
------------ ------------- ------------ ------------
Total interest income 8,772 7,369 17,260 14,061
Interest expense:
Demand deposits 544 84 1,091 628
Savings deposits 337 797 655 1,121
Time deposits 3,180 2,764 6,326 4,955
Debt obligations 193 125 376 257
------------ ------------- ------------ ------------
Total interest expense 4,254 3,770 8,448 6,961
------------ ------------- ------------ ------------
Net interest income 4,518 3,599 8,812 7,100
Provision for loan losses 260 301 477 440
------------ ------------- ------------ ------------
Net interest income after
provision for loan losses 4,258 3,298 8,335 6,660
Noninterest income:
Service charges on deposit accounts 189 142 368 254
Trust fee income 68 56 132 105
Mortgage loan origination fee income and
net servicing income 265
Gain on sale of investment securities
available for sale 80 80
Other 74 34 115 81
------------ ------------- ------------ ------------
Total noninterest income 411 232 695 705
Noninterest expense:
Salaries and employee benefits 1,423 1,129 2,837 2,495
Occupancy 216 208 426 446
Equipment rent, depreciation and maintenance 309 201 424 410
Deposit insurance premiums 33 162 65 321
Other 906 772 1,874 1,762
------------ ------------- ------------ ------------
Total noninterest expense 2,887 2,472 5,626 5,434
------------ ------------- ------------ ------------
Income before federal income taxes 1,782 1,058 3,404 1,931
Federal income taxes 634 394 1,155 730
------------ ------------- ------------ ------------
NET INCOME $ 1,148 $ 664 $ 2,249 $ 1,201
============ ============= ============ ============
NET INCOME PER SHARE $ .31 $ .20 $ .61 $ .36
============ ============= ============ ============
</TABLE>
Page 4 of 17
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,249 $ 1,201
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 477 440
Depreciation of premises and equipment 282 263
Amortization of mortgage servicing rights 101
Amortization of excess of cost over net
assets of acquired subsidiaries 96 142
Net amortization of investment securities
premiums (accretion of discount) (12) 60
Gain (loss) on sale of premises and equipment 6 (4)
Originations and purchases of loans held for resale (108,089) (28,925)
Proceeds from sales of loans held for resale 100,662 26,415
Decrease (increase) in accrued interest income
and other assets (295) 2,360
Increase in accrued interest and
other liabilities 165 108
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (4,459) 2,161
INVESTING ACTIVITIES
Proceeds from sale of 51% interest in mortgage subsidiary 250
Proceeds from sales of investment securities
available for sale 3,966
Proceeds from maturities of investment securities 10,031 4,293
Purchases of investment securities (13,701) (7,446)
Net increase in portfolio loans (32,332) (19,809)
Proceeds from sales of premises and equipment 10 21
Purchases of premises and equipment (467) (346)
------------------ ------------------
NET CASH USED BY INVESTING ACTIVITIES (32,493) (23,037)
FINANCING ACTIVITIES
Net payments (borrowings) on debt obligations (1,650) 1,150
Net proceeds from issuance of common stock upon
exercise of stock options and warrants 4,811 1,124
Cash dividends paid (630) (464)
Resources provided by minority interest 3,040
Increase (decrease) in demand deposits, NOW
accounts and savings accounts 4,647 (4,516)
Increase in certificates of deposit 24,148 42,222
------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,366 39,516
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,586) 18,640
Cash and cash equivalents at beginning of period 45,331 24,211
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,745 $ 42,851
================== ==================
</TABLE>
Page 5 of 17
<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 six-month period ended June 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. 122, "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
June 30, 1996.
Note C - Bank of Tucson
Effective June 27, 1996 Bank of Tucson, a de novo commercial, bank was
formed in Tucson, Arizona. Bank of Tucson was capitalized with $5.4 million of
which $2.7 million was invested by the Corporation (funded primarily by
proceeds from exercise of warrants and related issuance of common stock) and
the remainder was invested by individuals and other
6 of 17
<PAGE> 7
entities primarily located in the Tucson community. The Corporation owns 51%
of the common stock of Bank of Tucson and, accordingly, the Bank is included
for financial reporting purposes as a consolidated subsidiary with
corresponding accounting recognition given to 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 $1.26 million ($.38 per share) for the six months ended
June 30, 1995.
Note E - Prospective Impact of New Accounting Standards Not Yet Adopted
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.
A variety of proposed or otherwise potential accounting standards are
currently under study by the accounting profession 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.
7 of 17
<PAGE> 8
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets amounted to $420.3 million at June 30, 1996, an increase
of $36.2 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, Bank of Tucson (51% owned). The financial
statements also include a mortgage subsidiary, previously consolidated, for
which a majority interest was sold effective March 31, 1995.
Effective June 27, 1996 Bank of Tucson, a de novo commercial bank, was
formed in Tucson, Arizona. Bank of Tucson was capitalized with $5.4 million of
which $2.7 million was invested by the Corporation (funded primarily by
proceeds from exercise of warrants and related issuance of common stock) and
the remainder was invested by individuals and other entities primarily located
in the Tucson community. The Corporation owns 51% of the common stock of Bank
of Tucson and, accordingly, the Bank is included for financial reporting
purposes as a consolidated subsidiary with corresponding accounting recognition
given to minority interest.
The net increase in portfolio loans for the six-month period
approximated $32 million. Loan growth was funded primarily by higher levels of
time deposits coupled with proceeds from maturities of investment securities.
The majority of portfolio loan growth occurred in commercial loans which
increased approximately $29.6 million, consistent with the Corporation's banks'
emphasis on commercial lending activities.
Loans held for resale increased approximately $7.4 million. This
increase was funded through lower levels of federal funds sold and bank
borrowings from secured lines of credit.
The allowance for loan losses at June 30, 1996 approximated $4.1
million or 1.31% of total portfolio loans, a slight increase from the year-end
1995 ratio of 1.30%. For the first half of 1996, net loan charge-offs
approximated $41,000, as compared to $264,000 for the corresponding 1995
period. Provisions for loan losses have been maintained at a higher level in
1996 ($477,000) relative to 1995 ($440,000) 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 in the second half of 1996 to
be higher than amounts for the first six months.
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
8 of 17
<PAGE> 9
experience, current economic conditions, loan commitments outstanding and other
factors.
The table below summarizes portfolio loan balances and activity in the
allowance for 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 64 477
Installment 24 13
------------ ------------
Total charge-offs 88 490
Recoveries:
Commercial 42 210
Real estate 1 1
Installment 4 15
------------- -------------
Total recoveries 47 226
------------- ------------
Net charge-offs 41 264
Additions to allowance charged to expense 477 440
------------ ------------
Allowance for loan losses at June 30 $ 4,123 $ 3,396
============ ============
Average total portfolio loans for period ended June 30 $ 297,952 $ 250,224
============ ============
Ratio of net charge-offs to average portfolio loans outstanding 0.01% 0.11%
============ ============
</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>
June 30
-----------------------------------------------------
1996 1995
----------------------- -------------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
--------- ---------
<S> <C> <C> <C> <C>
Commercial $ 2,060 .65% $ 1,775 .68%
Real estate mortgage 72 .02 105 .04
Installment 68 .02 54 .02
Unallocated 1,923 .62 1,462 .56
---------- --------- ----------- ---------
Total allowance for loan losses $ 4,123 1.31% $ 3,396 1.30%
---------- ========= ----------- =========
Total portfolio
loans outstanding $ 315,762 $ 261,128
========== ===========
</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 June 30, 1996, total loans
under this program approximated $13.4 million. Reserves related to these
loans, which are represented by earmarked funds on deposit at the
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<PAGE> 10
banks, approximated $1.4 million and are not included in the recorded allowance
for loan losses.
Impaired loans (i.e., loans for which there is a reasonable
probability that borrowers would be unable to repay all principal and interest
due under the contractual terms of the loan documents) were not material in
1995 and through June 30, 1996. Nonperforming loans (i.e., loans which are 90
days or more past due and loans on nonaccrual status) at June 30, 1996 amounted
to $1.93 million compared with $1.34 million at December 31, 1995 as summarized
in the following table:
<TABLE>
<CAPTION>
June 30 Dec 31
1996 1995
--------- ---------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 802 $ 438
Real estate 145 115
Installment 52 28
--------- ---------
Total nonaccrual loans 999 581
Past due (>90 days) loans:
Commercial 710 379
Real estate 111 299
Installment 114 82
--------- ----------
Total past due loans 935 760
--------- ----------
Total nonperforming loans $ 1,934 $ 1,341
========= ==========
</TABLE>
Nonperforming loans increased approximately $600,000 during the six
months ended June 30, 1996 of which $380,000 occurred during the second fiscal
quarter relating to three loans. Most of the 1996 increase relates to
nonaccrual loans for which management believes the loans to be adequately
collateralized or otherwise appropriately recorded in management's
determination of the adequacy of the allowance for loan losses and are in
various stages of resolution.
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the period,
additional interest income of $43,000 and $94,000 would have been recorded for
the six months ended June 30, 1996 and 1995, respectively. Interest income
recognized on loans in nonaccrual status for the period approximated $21,000
and $10,000, 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 $488,000 at June 30, 1996, a decrease of $484,000
from the year-end 1995 level of $972,000.
The following comparative analysis summarizes each bank's total
portfolio loans, allowance for loan losses, nonperforming assets and certain
ratios (dollars in thousands):
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<PAGE> 11
<TABLE>
<CAPTION>
Allowance as a
Percentage of
Total Allowance for Nonperforming Total
Portfolio Loans Loan Losses Loans Portfolio Loans
------------------------ ----------------------- ----------------------- ---------------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
1996 1995 1996 1995 1996 1995 1996 1995
----------- ---------- --------- ------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 68,916 $ 58,869 $ 907 $ 765 $ 357 $ 147 1.32% 1.30%
Bank of Tucson --- n/a --- n/a --- n/a --- n/a
Capitol National Bank 77,963 75,468 1,090 1,058 564 396 1.40 1.40
Grand Haven Bank 21,134 14,630 233 155 --- --- 1.10 1.06
Oakland Commerce Bank 49,717 46,146 607 552 431 448 1.22 1.20
Paragon Bank & Trust 43,255 41,288 532 494 30 --- 1.23 1.20
Portage Commerce Bank 53,624 45,870 754 663 552 350 1.41 1.45
Other, net 1,153 1,200 --- --- --- --- --- ---
---------- ---------- --------- ------- --------- -------- ------ -------
Consolidated $ 315,762 $ 283,471 $ 4,123 $ 3,687 $ 1,934 $ 1,341 1.31% 1.30%
========== ========== ========= ======= ========= ======== ====== =======
n/a - Not applicable
</TABLE>
Noninterest-bearing deposits approximated 12.4% of total deposits at
June 30, 1996, a slight 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.
Results of Operations
Net income for the six months ended June 30, 1996 amounted to
$2,249,000 ($.61 per share), a significant increase over the $1,201,000 ($.36
per share) earned during the corresponding period of 1995. Net income for the
three months ended June 30, 1996 approximated $1,148,000 ($.31 per share), as
compared to $664,000 ($.20 per share) for the same period of 1995. Net income
for interim 1996 periods has been favorably impacted by higher interest margins
and fees, dividend income and lower deposit insurance premiums. Operating
results (in thousands) were as follows:
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<PAGE> 12
<TABLE>
<CAPTION>
Six months ended June 30
-------------------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
------------------------ -------------------- --------------------- --------------------
June 30 Dec 31
1996 1995 1996 1995 1996 1995 1996 1995
---------- ---------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 88,829 $ 75,954 $ 545 $ 349 22.14% 17.03% 1.38% 1.14%
Bank of Tucson (2) 5,782 n/a 10 n/a .61 n/a .59 n/a
Capitol National Bank 96,409 97,622 747 549 20.65 17.04 1.57 1.21
Grand Haven Bank (1) 26,728 20,930 102 16 7.69 n/a .87 n/a
Oakland Commerce Bank 72,645 61,469 430 246 16.57 8.91 1.29 .88
Paragon Bank & Trust 52,756 56,064 346 188 13.65 9.20 1.26 .71
Portage Commerce Bank 69,059 64,019 526 420 22.26 20.73 1.61 1.48
--------- --------- ------- ------- -------- -------- --------- --------
Total Banks 412,208 376,058 2,706 1,768 18.16 13.49 1.40 1.11
Mortgage Banking (3) 2,969 3,077 (58) (106) n/a n/a n/a n/a
Other, net 5,173 4,935 (399) (461) n/a n/a n/a n/a
--------- --------- ------- ------- -------- -------- --------- ---------
Consolidated $ 420,350 $ 384,070 $ 2,249 $ 1,201 14.57% 9.34% 1.14% 0.70%
========= ========= ======= ======= ======== ======== ========= ========
</TABLE>
n/a - Not applicable.
(1) - Grand Haven Bank (85% owned and formerly a branch of Paragon Bank &
Trust) commenced operations effective May 1, 1995.
(2) - The Corporation made a 51% investment in the common stock of Bank of
Tucson, a de novo bank, effective June 27, 1996.
(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 24.1% during the six-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. In addition, 1996
results include the operations of Grand Haven Bank (formerly a branch of the
Paragon Bank & Trust subsidiary), which has contributed favorably to earnings
and was included for only a portion of 1995. Bank of Tucson, because of its
brief period of inclusion, had no impact on earnings for the 1996 period.
Noninterest income decreased in 1996 to $695,000 for the six-month
period, as compared with $705,000 for the corresponding 1995 period, primarily
due to inclusion of the mortgage unit's revenues for the first quarter of 1995.
Service charge income and trust fee income increased 44% and 25%, respectively,
primarily due to a larger number of accounts.
The provision for loan losses amounted to $477,000 for the six-month
1996 period as compared to $440,000 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 six months ended June 30, 1996 approximated
$5.6 million compared with $5.4 million in 1995. The increase in noninterest
expense is associated with increases in general operating costs and is net of
significantly lower costs of deposit insurance premiums.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $42.7 million or 10.2% of total
assets at June
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<PAGE> 13
30, 1996 as compared with $45.3 million or 11.8% of total assets at December
31, 1995. The change is primarily the result of funds deployed into commercial
portfolio loans. Liquidity levels vary continuously based on customer
activities and, accordingly, amounts of cash and cash equivalents can vary
widely at any point in time. Management believes the Corporation's liquidity
position at June 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 June 30, 1996 and December 31, 1995, the Corporation
had approximately $33 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 June 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 June 30, 1996 ($5.6 million
at December 31, 1995). During the six months ended June 30, 1996, borrowings
thereunder were reduced as proceeds from exercise of warrants and stock options
exceeded current cash needs. Future funding needs for formation of new banks
(to the extent not otherwise funded by internal capital reserves) 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 in nature and are reviewed annually for
continuance.
In addition, Oakland Commerce Bank had borrowings outstanding of $3
million and $8.4 million of additional availability at June 30, 1996 in the
form of secured lines of credit from the Federal Home Loan Bank.
Certain recent transactions have increased the Corporation's capital
and stockholders' equity in 1996.
In conjunction with the 1994 merger of Paragon Bank & Trust and its
parent, Financial Center Corporation, approximately 743,000 warrants were
issued. 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
the period ended June 30, 1996, approximately 458,000 warrants were exercised,
resulting in proceeds to the Corporation of $4,114,000. In addition, the
exercise of 69,938 stock options resulted in additional proceeds during the
period of $444,000. At June 30, 1996, 170,000 warrants relating to the 1994
merger transaction remained outstanding. Those warrants expire on June 30,
1997. If all remaining warrants were exercised, the Corporation would receive
additional cash and capital approximating $1.5 million and issue 170,000 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 September 1, 1996 to shareholders of record as of
August 1, 1996 following prior dividends of $.09 per share paid on March 1,
1996 and June 1, 1996. The dividend amounts in 1996 represent an increase over
the dividends of $.07 per share paid quarterly in 1995.
13 of 17
<PAGE> 14
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 $499,000 for the six months ended June 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 8.8% at June 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 Oakland
Commerce of National Haven Commerce
Bank Tucson (1) Bank Bank (1) Bank
---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $88,829 $ 5,782 $96,409 $26,728 $72,645
Total Assets for Risk-Based
Capital Purposes 89,673 5,782 97,560 26,771 73,271
Risk-Weighted Assets 64,611 1,375 72,339 19,291 53,284
Tier I Capital 5,675 5,373 7,609 2,498 5,431
Allowable Tier II Capital 809 --- 1,090 233 607
Tier I and Allowable Tier II
Capital, Combined 6,484 5,373 8,699 2,731 6,038
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.78% 390.76% 10.52% 12.95% 10.19%
Ratio of Combined Tier I and
Tier II Capital to Risk-
Weighted Assets 10.04% 390.76% 12.03% 14.16% 11.33%
Leverage Ratio 6.39% 92.93% 7.89% 9.35% 7.48%
Ratios Required:
Tier I 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%
Leverage Ratio 4.00% 8.00% 4.00% 8.00% 4.00%
<CAPTION>
Paragon Portage Capitol
Bank & Commerce Bancorp
Trust Bank Ltd. Consolidated
-------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Financial Position:
Total Assets $52,756 $69,059 $42,763 $420,350
Total Assets for Risk-Based
Capital Purposes 53,207 69,773 39,074 420,666
Risk-Weighted Assets 41,868 52,540 38,403 314,343
Tier I Capital 5,126 5,000 33,872 36,912
Allowable Tier II Capital 523 658 (567) 3,353
Tier I and Allowable Tier II
Capital, Combined 5,649 5,658 33,305 40,265
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 12.24% 9.52% 88.20% 11.74%
Ratio of Combined Tier I and
Tier II Capital to Risk-
Weighted Assets 13.49% 10.77% 86.73% 12.81%
Leverage Ratio 9.72% 7.24% 79.21% 8.78%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 4.00% 4.00% 3.00% 4.00%
</TABLE>
(1) Conditional to their commercial bank charters, Grand Haven Bank and
Bank of Tucson 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.
Effective June 27, 1996, the Corporation made a 51% investment ($2.7
million) in the common stock of Bank of Tucson, a de novo bank. This new bank
is discussed more fully elsewhere herein and in the notes to the consolidated
financial statements.
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. On this basis,
management is 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
14 of 17
<PAGE> 15
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.
Subsequent to June 30, 1996, the Corporation filed applications with
certain regulatory agencies for permission to acquire a majority interest in a
de novo bank to be formed in Macomb County, Michigan, a suburb of metropolitan
Detroit. Additionally, 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 June 30,
1996 to be adequate to fund existing operations, future growth and expansion.
Impact of New Accounting Standards
Financial Accounting Standards Board Statement No. 122, "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
June 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.
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.
15 of 17
<PAGE> 16
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.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed
during the quarter ended June 30, 1996.
16 of 17
<PAGE> 17
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: July 31, 1996
- -----------------------------------
17 of 17
<PAGE> 18
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
11 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 Six Months Ended
June 30 June 30
------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Primary Net Income Per Share:
Weighted average number of common shares outstanding 3,600,354 3,323,656 3,538,616 3,316,962
Net effect of dilutive stock options and warrants--
based on the treasury stock method or modified
treasury stock method, as applicable 111,740 61,397 116,020 58,140
-------------- -------------- -------------- ---------------
Total 3,712,094 3,385,053 3,654,636 3,375,102
============== ============== ============== ===============
Net income for the period $ 1,148,151 $ 663,919 $ 2,249,185 $ 1,201,315
============== ============== ============== ===============
Net income per share $ .31 $ .20 $ .61 $ .36
============== ============== ============== ===============
Fully Diluted Net Income Per Share (A) $ .31 $ .20 $ .61 $ .36
============== ============== ============== ===============
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,521
<INT-BEARING-DEPOSITS> 74
<FED-FUNDS-SOLD> 26,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,309
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 330,219
<ALLOWANCE> 4,123
<TOTAL-ASSETS> 420,350
<DEPOSITS> 369,083
<SHORT-TERM> 3,112
<LIABILITIES-OTHER> 4,369
<LONG-TERM> 3,950
0
0
<COMMON> 26,961
<OTHER-SE> 9,947
<TOTAL-LIABILITIES-AND-EQUITY> 420,350
<INTEREST-LOAN> 15,307
<INTEREST-INVEST> 1,943
<INTEREST-OTHER> 10
<INTEREST-TOTAL> 17,260
<INTEREST-DEPOSIT> 8,072
<INTEREST-EXPENSE> 8,448
<INTEREST-INCOME-NET> 8,812
<LOAN-LOSSES> 477
<SECURITIES-GAINS> 80
<EXPENSE-OTHER> 5,626
<INCOME-PRETAX> 3,404
<INCOME-PRE-EXTRAORDINARY> 2,249
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,249
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
<YIELD-ACTUAL> 0
<LOANS-NON> 999
<LOANS-PAST> 935
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,687
<CHARGE-OFFS> 88
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 4,123
<ALLOWANCE-DOMESTIC> 4,123
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,923
</TABLE>
