<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission file number 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2761672
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes. X No
---- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common stock, No par value: 4,723,194 shares outstanding as of July 31, 1997.
Page 1 of 19
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets - June 30, 1997 and December 31, 1996.
Consolidated statements of income - Three months and six months ended
June 30, 1997 and 1996.
Consolidated statements of cash flows - Three months and six months
ended June 30, 1997 and 1996.
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 June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
(in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 21,425 $ 20,928
Interest-bearing deposits with banks 155 55
Federal funds sold 40,250 42,350
---------- ----------
Cash and cash equivalents 61,830 63,333
Loans held for resale 7,521 6,749
Investment securities:
Available for sale, carried at market value 59,520 46,622
Held for long-term investment, carried at
amortized cost which approximates market value 2,217 2,103
---------- ----------
Total investment securities 61,737 48,725
Portfolio loans:
Commercial 334,697 283,461
Real estate mortgage 59,991 53,712
Installment 29,068 20,450
---------- ----------
Total portfolio loans 423,756 357,623
Less allowance for loan losses (5,347) (4,578)
---------- ----------
Net portfolio loans 418,409 353,045
Investment in and advances to Amera Mortgage Corporation 2,651 2,831
Premises and equipment 5,991 5,421
Accrued interest income 3,495 3,107
Excess of cost over net assets of acquired subsidiaries 2,251 2,347
Other assets 8,952 6,705
---------- ----------
TOTAL ASSETS $ 572,837 $ 492,263
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 66,729 $ 62,766
Interest-bearing 437,418 373,400
---------- ----------
Total deposits 504,147 436,166
Debt obligations 10,625 6,500
Accrued interest on deposits and other liabiliites 5,367 4,708
---------- ----------
Total liabilities 520,139 447,374
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 10,014 4,730
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
issued and outstanding: 1997 - 4,723,194 shares
1996 - 4,504,911 shares 36,832 34,972
Retained earnings 6,853 5,150
Market value adjustment (net of tax effect) for
investment securities available for sale 15 37
---------- ----------
43,700 40,159
Less note receivable from ESOP (1,016)
---------- ----------
Total stockholders' equity 42,684 40,159
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 572,837 $ 492,263
========== ==========
</TABLE>
Page 3 of 19
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 1997 and 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ------------------------------
1997 1996 1997 1996
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 10,142 $ 7,637 $ 19,208 $ 14,858
Loans held for resale 107 324 185 449
Taxable investment securities 852 523 1,620 1,041
Federal funds sold 641 255 1,240 576
Interest-bearing deposits with banks 4 9 4 25
Dividends on investment securities and other 132 24 155 311
--------- -------- ---------- ---------
Total interest income 11,878 8,772 22,412 17,260
Interest expense:
Demand deposits 954 544 1,788 1,091
Savings deposits 392 337 762 655
Time deposits 4,347 3,180 8,269 6,326
Debt obligations and other 92 193 132 376
--------- -------- ---------- ---------
Total interest expense 5,785 4,254 10,951 8,448
--------- -------- ---------- ---------
Net interest income 6,093 4,518 11,461 8,812
Provision for loan losses 512 260 966 477
--------- -------- ---------- ---------
Net interest income after
provision for loan losses 5,581 4,258 10,495 8,335
Noninterest income:
Service charges on deposit accounts 206 189 375 368
Trust fee income 81 68 158 132
Gain on sale of investment securities
available for sale 7 80 17 80
Other realized gains 495
Other 78 74 161 115
--------- -------- ---------- ---------
Total noninterest income 372 411 1,206 695
Noninterest expense:
Salaries and employee benefits 1,926 1,423 3,904 2,837
Occupancy 334 216 629 426
Equipment rent, depreciation and maintenance 465 309 889 424
Deposit insurance premiums 21 33 42 65
Other 1,212 906 2,352 1,874
--------- -------- ---------- ---------
Total noninterest expense 3,958 2,887 7,816 5,626
--------- -------- ---------- ---------
Income before federal income taxes 1,995 1,782 3,885 3,404
Federal income taxes 675 634 1,303 1,155
--------- -------- ---------- ---------
NET INCOME $ 1,320 $ 1,148 $ 2,582 $ 2,249
========= ======== ========== =========
NET INCOME PER SHARE:
Primary $ 0.28 $ 0.28 $ 0.55 $ 0.56
========= ======== ========== =========
Fully Diluted $ 0.28 $ 0.28 $ 0.55 $ 0.56
========= ======== ========== =========
</TABLE>
Page 4 of 19
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,582 $ 2,249
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 966 477
Depreciation of premises and equipment 503 282
Amortization of excess of cost over net
assets of acquired subsidiaries 96 96
Net amortization of investment security
premiums (accretion of discount) (190) (12)
Gain on sale of premises and equipment 501 6
Originations and purchases of loans held for resale (53,937) (108,089)
Proceeds from sales of loans held for resale 53,165 100,662
Increase in accrued interest income
and other assets (3,456) (295)
Increase (decrease) in accrued interest
and other liabilities 659 165
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 889 (4,459)
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 1,976 3,966
Proceeds from maturities of investment securities 16,099 10,031
Purchases of investment securities (30,933) (13,701)
Net increase in portfolio loans (66,331) (32,332)
Proceeds from sales of premises and equipment 302 10
Purchases of premises and equipment (1,876) (467)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (80,763) (32,493)
FINANCING ACTIVITIES
Net payments (borrowings) on debt obligations 4,125 (1,650)
Resources provided by minority interest 5,283 3,040
Net proceeds from issuance of common stock upon
exercise of stock options and warrants 1,861 4,811
Cash dividends paid (879) (630)
Increase in demand deposits, NOW
accounts and savings accounts 24,496 4,647
Increase in certificates of deposit 43,485 24,148
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 78,371 34,366
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,503) (2,586)
Cash and cash equivalents at beginning of period 63,333 45,331
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,830 $ 42,745
============= =============
</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-Q. Accordingly, they do not include all information
and footnotes necessary for a fair presentation of consolidated financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The statements do, however, include all adjustments of a normal
recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S- X) which
the Corporation considers necessary for a fair presentation of the interim
periods.
The results of operations for the six-month period ended June 30, 1997
are not necessarily indicative of the results to be expected for the year
ending December 31, 1997.
The consolidated balance sheet as of December 31, 1996 was derived
from audited consolidated financial statements as of that date. Certain 1996
amounts have been reclassified to conform to the 1997 presentation.
Note B - Implementation of New Accounting Standards
Financial Accounting Standards Board Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", establishes new guidelines for accounting for certain
transactions, such as sales of loans and loan participations. This new
standard became effective for the Corporation January 1, 1997. 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, 1997.
Note C - New Operating Units
In a stock-for-stock exchange transaction effective May 22, 1997, Bank
of Tucson (previously a 51% owned consolidated bank subsidiary) became a
wholly-owned subsidiary of a newly formed bank holding company, Sun Community
Bancorp Limited ("Sun"). As a result of the exchange transaction, Sun became a
51% owned, second-tier subsidiary bank holding company of the Corporation. Sun
was formed for the purpose of facilitating future expansion opportunities in
the southwestern portion of the United States and related data processing,
operations support and other ancillary services and functions for Bank of
Tucson and future banks.
In June 1997, Sun completed a $4.5 million offering of 250,000 shares
of common stock including $2.3 million invested by the Corporation, maintaining
its 51% interest in Sun.
Page 6 of 19
<PAGE> 7
Proceeds from the offering are expected to be used in Sun's expansion
activities, primarily de novo bank development.
On June 30, 1997 Valley First Community Bank, a de novo bank,
commenced operations in Scottsdale, Arizona. The Bank was capitalized with
$4.5 million, of which $2.3 million was invested by Sun with the remainder
invested by individuals and other entities primarily located in the Scottsdale
and Phoenix area. Valley First Community Bank is 51% owned by Sun and,
accordingly, is consolidated with Sun for financial reporting purposes.
Because of the Corporation's majority interest in Sun, Sun's
consolidated financial position and results of operations are included in the
Corporation's consolidated financial statements with corresponding accounting
recognition of applicable minority interest.
Brighton Commerce Bank, a de novo bank located in Brighton, Michigan,
was formed in early January 1997. The Corporation's investment in this new
bank ($1.6 million) was funded primarily from proceeds from exercise of stock
options and borrowings. The Corporation owns 59% of the common stock of
Brighton Commerce Bank and the Bank is consolidated for financial reporting
purposes with corresponding accounting recognition given to applicable minority
interest.
Note D - Prospective Impact of New Accounting Standards Not Yet Adopted
The Financial Accounting Standards Board ("FASB") has issued certain
new standards which affect accounting and financial reporting.
FASB Statement No. 128, "Earnings per Share", will revise the
computation and reporting of earnings per share. This new standard is intended
to simplify the basis upon which per-share amounts are determined, replacing
"primary" earnings per share with "basic" earnings per share. "Fully diluted"
earnings per share will be replaced by "diluted" earnings per share. The
Statement will become effective for the Corporation's year end 1997
consolidated financial statements and will result in restatement of per-share
amounts for prior periods. Early adoption of the new standard is not
permitted. Management has not completed its analysis of this new accounting
standard.
FASB Statement No. 129, "Disclosure of Information about Capital
Structure", clarifies the extent and nature of disclosures relating to an
entity's capital structure. This new standard will become effective for the
Corporation's year end 1997 consolidated financial statements and, upon
implementation, is not expected to have a material impact.
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 those proposed
standards, management has not determined whether implementation of such
proposed standards would be material to the Corporation's financial statements.
Page 7 of 19
<PAGE> 8
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets amounted to $572.8 million at June 30, 1997, an increase
of $80.5 million from the December 31, 1996 level of $492.3 million. The
consolidated balance sheets include the Corporation and its majority-owned
subsidiaries.
During the six months ended June 30, 1997, two de novo banks and a
second tier bank holding company were added. Effective May 22, 1997, Sun
Community Bancorp Limited ("Sun"), a bank holding company, was formed in
Tucson, Arizona for the purpose of acquiring a 100% ownership interest in Bank
of Tucson (a 51% owned de novo bank formed in June, 1996). Sun was capitalized
with $4.5 million, of which $2.3 million was invested by the Corporation
(funded primarily by proceeds from exercise of stock warrants and borrowings)
and the remainder was invested by individuals and other entities located in the
Tucson/Scottsdale area.
In June 1997, Sun completed a $4.5 million offering of 250,000 shares
of common stock including $2.3 million invested by the Corporation maintaining
its 51% interest in Sun. Proceeds from the offering are expected to be used in
Sun's expansion activities, primarily de novo bank development.
On June 30, 1997 Valley First Community Bank, a de novo commercial
bank, commenced operations in Scottsdale, Arizona. The Bank was capitalized
with $4.5 million, of which $2.3 million was invested by Sun with the remainder
invested by individuals and other entities primarily located in the Scottsdale
and Phoenix area. Valley First Community Bank is 51% owned by Sun and,
accordingly, is consolidated with Sun for financial reporting purposes.
Because of the Corporation's majority interest in Sun, Sun's
consolidated financial position and results of operations are included in the
Corporation's consolidated financial statements with corresponding accounting
recognition of applicable minority interest.
Brighton Commerce Bank, in Brighton, Michigan, was formed in early
January 1997 and was capitalized with $2.7 million of which $1.6 million was
invested by the Corporation. The Corporation's investment in this new bank was
funded primarily from proceeds from exercise of stock options and borrowings.
The Corporation owns 59% of the common stock of Brighton Commerce Bank and,
accordingly, it is consolidated for financial reporting purposes with
corresponding accounting recognition given to applicable minority interest.
Portfolio loans increased during the 1997 six-month period by
approximately $66 million, more than double the corresponding net volume in
1996. Of the interim 1997 loan growth, $20 million occurred at Ann Arbor
Commerce Bank, resulting from its significant asset
Page 8 of 19
<PAGE> 9
and deposit growth during the period. Loan growth was generally funded by
higher levels of interest-bearing deposits. The majority of 1997 portfolio
loan growth occurred in commercial loans, which increased approximately $51
million, consistent with the banks' emphasis on commercial lending activities.
The allowance for loan losses at June 30, 1997 approximated $5.3
million or 1.26% of total portfolio loans, approximating the year-end 1996
ratio of 1.28%. Provisions for loan losses have been maintained at a higher
level in 1997 ($966,000) relative to 1996 ($477,000) commensurate with
portfolio growth, levels of delinquent and other nonperforming loans and other
factors.
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 following table summarizes portfolio loan balances and activity in
the allowance for loan losses for the interim periods (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Allowance for loan losses at January 1 $ 4,578 $ 3,687
Loans charged-off:
Commercial 384 64
Real estate mortgage 70
Installment 10 24
---------- ----------
Total charge-offs 464 88
Recoveries:
Commercial 253 42
Real estate mortgage 2 1
Installment 12 4
---------- ----------
Total recoveries 267 47
---------- ----------
Net charge-offs (recoveries) 197 41
Additions to allowance charged to expense 966 477
---------- ----------
Allowance for loan losses at June 30 $ 5,347 $ 4,123
========== ==========
Average total portfolio loans for period ended June 30 $ 388,755 $ 297,952
========== ==========
Ratio of net charge-offs to average portfolio loans outstanding 0.05% 0.01%
========== ==========
</TABLE>
Page 9 of 19
<PAGE> 10
The allowance for loan losses is a general allowance for the 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, 1997 December 31, 1996
------------------------ -----------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
---------- ---------
<S> <C> <C> <C> <C>
Commercial $ 2,433 .57% $ 2,281 .64%
Real estate mortgage 75 .02 67 .02
Installment 140 .03 100 .03
Unallocated 2,699 .64 2,130 .59
---------- ------- ----------- ----
Total allowance for loan losses $ 5,347 1.26% $ 4,578 1.28%
========== ====== =========== ====
Total portfolio
loans outstanding $ 423,756 $ 357,623
========== ==========
</TABLE>
In addition to the allowance for loan losses, certain loans in
Michigan are enrolled in a state government loan program and have additional
reserves established to provide for loss protection. At June 30, 1997, total
loans under this program approximated $14.3 million. Reserves related to these
loans, which are represented by earmarked funds on deposit at certain of the
bank subsidiaries, approximated $1.6 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
1996 and through June 30, 1997. Nonperforming loans (i.e., loans which are 90
days or more past due and loans on nonaccrual status) at June 30, 1997 amounted
to $3.4 million compared with $2.7 million at December 31, 1996 as summarized
in the following table (in thousands):
<TABLE>
<CAPTION>
June 30 Dec 31
1997 1996
--------- ---------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 1,479 $ 928
Real estate 51 107
Installment 26 22
--------- ---------
Total nonaccrual loans 1,556 1,057
Past due (>90 days) loans:
Commercial 1,530 1,009
Real estate 228 549
Installment 87 84
--------- ---------
Total past due loans 1,845 1,642
-------- ---------
Total nonperforming loans $ 3,401 $ 2,699
========= =========
</TABLE>
Page 10 of 19
<PAGE> 11
Nonperforming loans increased approximately $700,000 during the
interim 1997 period. Most of this increase occurred in loans in nonaccrual
status and relates to a small number of real estate loans in various stages of
resolution. Of such increase, more than $300,000 relates to loans for which
additional loss protection is available from certain governmental guarantees or
other credit enhancements.
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the period,
additional interest income of $54,000 and $43,000 would have been recorded for
the six months ended June 30, 1997 and 1996, respectively. Interest income
recognized on loans in nonaccrual status for the period approximated $26,000
and $21,000, 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 $185,000 at June 30, 1997, a decrease of $128,000
from the year-end 1996 level of $313,000 due to the sale of one property.
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
------------------------- ---------------------- --------------------- --------------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
1997 1996 1997 1996 1997 1996 1997 1996
----------- ---------- --------- ------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 100,545 $ 79,463 $ 1,353 $ 1,088 $ 409 $ 304 1.35% 1.37%
Brighton Commerce Bank 5,212 n/a 53 n/a 5 n/a 1.02 n/a
Capitol National Bank 85,750 80,749 1,159 1,076 970 797 1.35 1.33
Grand Haven Bank 31,034 26,162 368 303 134 --- 1.19 1.16
Macomb Community Bank 12,406 5,821 125 59 --- --- 1.01 1.01
Oakland Commerce Bank 54,680 54,569 667 655 880 1,227 1.22 1.20
Paragon Bank & Trust 53,489 46,680 609 563 415 44 1.14 1.21
Portage Commerce Bank 67,015 58,177 887 785 588 327 1.32 1.35
Sun Community Bancorp
Limited:
Bank of Tucson 12,520 4,850 126 49 --- --- 1.01 1.01
Valley First Community
Bank --- n/a --- n/a --- n/a --- n/a
Other, net 1,105 1,152 --- --- --- --- --- ---
--------- --------- -------- ------- -------- ------- ------ -----
Consolidated $ 423,756 $ 357,623 $ 5,347 $ 4,578 $ 3,401 $ 2,699 1.26% 1.28%
========= ========= ======== ======= ======== ======= ====== =====
</TABLE>
n/a - Not applicable
Noninterest-bearing deposits approximated 13.2% of total deposits at
June 30, 1997, a decrease from the December 31, 1996 level of 14.4%. Levels of
noninterest-bearing deposits fluctuate based on customers' transaction
activity.
Page 11 of 19
<PAGE> 12
Results of Operations
Net income for the six months ended June 30, 1997 amounted to
$2,582,000 ($.55 per share), an increase over the $2,249,000 ($.56 per share)
earned during the corresponding period of 1996. Operating results (in
thousands) were as follows:
<TABLE>
<CAPTION>
Six months ended June 30
-------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
-------------------- ------------------- ------------------ ---------------
June 30 Dec 31
1997 1996 1997 1996 1997 1996 1997 1996
--------- --------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $118,070 $105,651 $ 996 $ 545 29.94% 22.14% 1.89% 1.38%
Brighton Commerce Bank (2) 7,897 n/a (258) n/a n/a n/a n/a n/a
Capitol National Bank 104,093 104,254 851 747 21.22 20.65 1.63 1.57
Grand Haven Bank 40,603 32,731 142 102 10.12 7.69 .87 .87
Macomb Community Bank (1) 26,795 15,123 ( 75) n/a n/a n/a n/a n/a
Oakland Commerce Bank 74,776 71,095 395 430 14.53 16.57 1.11 1.29
Paragon Bank & Trust 66,540 63,752 348 346 15.53 13.65 1.09 1.26
Portage Commerce Bank 87,318 73,769 541 526 20.61 22.26 1.47 1.61
Sun Community Bancorp
Limited: (3)
Bank of Tucson (1) 34,433 17,276 (44) 10 n/a .61 n/a .59
Valley First Community Bank (2) 4,792 n/a --- n/a n/a n/a n/a n/a
Mortgage Banking 2,651 2,831 (178) ( 58) n/a n/a n/a n/a
Other, net 4,869 5,781 (136) (399) n/a n/a n/a n/a
-------- -------- ------- ------- ----- ----- ---- ----
Consolidated $572,837 $492,263 $ 2,582 $ 2,249 12.57% 14.57% 1.00% 1.14%
======== ======== ======= ======= ===== ===== ==== ====
</TABLE>
n/a - Not applicable.
(1) - Bank of Tucson and Macomb Community Bank, de novo banks, commenced
operations in June and September 1996, respectively.
(2) - Brighton Commerce Bank and Valley First Community Bank, de novo
banks, commenced operations in January and June 1997, respectively.
(3) - Effective May 22, 1997, Sun Community Bancorp Limited, a bank holding
company 51% owned by the Corporation, was formed in Tucson, Arizona
and acquired a 100% ownership interest in Bank of Tucson.
Net interest income increased 30.1% during the six-month 1997 period
versus the corresponding period of 1996.
Noninterest income increased in 1997 to $1,206,000 for the six-month
period, as compared with $695,000 for the corresponding 1996 period. The 1997
increase related primarily to a nonrecurring gain from the sale of a bank
building and land parcel. Service charge income increased 2% and trust fee
income increased 20%.
The provision for loan losses amounted to $966,000 for the six-month
1997 period as compared to $477,000 for the corresponding period of 1996. The
increased interim provision for loan losses in 1997 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, 1997 approximated
$7.8 million compared with $5.6 million in 1996. The increase in noninterest
expense is associated with newly formed banks, growth and increases in general
operating costs.
Liquidity and Capital Resources
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $68 million for the six month
1997 period, compared to $29 million in 1996. Such growth occurred in all
deposit categories, with the majority coming from time
Page 12 of 19
<PAGE> 13
deposits. The Corporation's banks generally do not rely on brokered deposits
as a key funding source; brokered deposits approximated $24.3 million as of
June 30, 1997.
Cash and cash equivalents amounted to $61.8 million or 10.8% of total
assets at June 30, 1997 as compared with $63.3 million or 12.9% of total assets
at December 31, 1996. 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
June 30, 1997 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, 1997 and December 31, 1996, the Corporation
had approximately $62 million and $49 million, respectively, of investment
securities classified as available for sale which can be utilized to meet
various liquidity needs as they arise. In the interim 1997 period, maturities
from investment securities available for sale were deployed, in part, to fund
higher yielding commercial bank growth.
At June 30, 1997, the Corporation had lines of credit from an unrelated
financial institution aggregating $10 million. Under this credit facility,
borrowings outstanding approximated $7.6 million at June 30, 1997 ($3.5 million
at December 31, 1996). Proceeds from 1997 borrowings have been deployed in de
novo bank formation and other expansion opportunities. 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 $20.6 million at June 30, 1997.
The Corporation recently announced a third quarterly cash dividend of
$.10 per share (payable September 1, 1997 to shareholders of record as of
August 1, 1997). The dividend amounts in 1997 represent an increase over the
dividends of $.0825 per share paid quarterly in 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 marginally
decreased stockholders' equity during the six months ended June 30, 1997.
The Corporation and its banks are subject to complex regulatory capital
requirements which require maintaining certain minimum capital ratios. These
ratio measurements, in addition to certain other requirements, are used by
regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. The Corporation
Page 13 of 19
<PAGE> 14
and each of its banks are in compliance with the regulatory requirements and
management expects to maintain such compliance in the foreseeable future.
Shareholders' equity, as a percentage of total assets, approximated
7.5% at June 30, 1997, a decrease from the beginning of the year ratio of 8.2%.
Total capital funds, the Corporation's stockholders' equity and minority
interest in consolidated subsidiaries, approximated 9.2% of total assets at
June 30, 1997. The Corporation and each of its banking subsidiaries continue
to exceed regulatory capital requirements as shown on the following page
(dollars in thousands):
Page 14 of 19
<PAGE> 15
<TABLE>
<CAPTION>
Sun
Ann Arbor Brighton Capitol Grand Macomb Oakland Paragon Portage Community
Commerce Commerce National Haven Community Commerce Bank & Commerce Bancorp
Bank Bank(1) Bank Bank (1) Bank(1) Bank Trust Bank Limited
--------- -------- ------- -------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $118,070 $7,897 $104,093 $40,603 $26,795 $74,776 $66,540 $87,318 $ 39,280
Total Assets for Risk-Based
Capital Purposes 119,430 7,950 105,268 40,964 26,921 75,448 67,109 88,214 39,367
Risk-Weighted Assets 93,452 6,017 79,811 27,298 14,184 56,274 56,358 64,489 18,111
Tier I Capital 8,224 2,242 8,436 3,249 3,512 5,583 5,049 5,641 11,819
Allowable Tier II Capital 1,143 53 1,000 368 125 667 609 807 126
Tier I and Allowable Tier II
Capital, Combined 9,367 2,295 9,436 3,617 3,637 6,250 5,658 6,448 11,945
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.80% 37.26% 10.57% 11.90% 24.76% 9.92% 8.96% 8.75% 65.26%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.02% 38.14% 11.82% 13.25% 25.64% 11.11% 10.04% 10.00% 65.96%
Leverage Ratio 6.97% 28.39% 8.10% 8.00% 13.11% 7.47% 7.59% 6.46% 24.58%
Ratios Required:
Tier I 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%
Leverage Ratio 4.00% 8.00% 4.00% 8.00% 8.00% 4.00% 4.00% 4.00% 4.00%
<CAPTION>
Capitol
Bancorp
Ltd. Consolidated
--------- ------------
<S> <C> <C>
Financial Position:
Total Assets $52,384 $572,837
Total Assets for Risk-Based
Capital Purposes 48,222 574,022
Risk-Weighted Assets 48,124 419,345
Tier I Capital 40,419 50,400
Allowable Tier II Capital (881) 4,017
Tier I and Allowable Tier II
Capital, Combined 39,538 54,417
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 83.99% 12.02%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 82.16% 12.98%
Leverage Ratio 83.39% 7.63%
Ratios Required:
Tier I 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00%
Leverage Ratio 3.00% 4.00%
</TABLE>
(1) As a condition of bank charter approval, de novo banks are generally
required to maintain Tier I leverage capital-to-total-assets ratios of
not less than 8% for the first three full years of operations.
Page 15 of 19
<PAGE> 16
During the six months ended June 30, 1997 the Corporation issued
218,283 shares of previously unissued common stock upon exercise of stock
options and warrants, yielding proceeds of $1.9 million. Proceeds from
exercise of warrants ($1.2 million) relate to a 1994 merger transaction from
which such warrants expired June 30, 1997.
Additionally, the Corporation entered into a transaction with its
employee stock ownership plan ("ESOP") whereby the ESOP purchased 60,176 shares
of previously unissued common stock, payable to the Corporation in the form of
a note in the amount of $1 million. Such note receivable from the ESOP is
classified as a deduction from stockholders' equity and will be funded by
future ESOP contributions to be made by the Corporation and participating
subsidiaries.
As of June 30, 1997, applications for regulatory approval to form de
novo banks in the Michigan communities of Muskegon and Grand Rapids were
pending which, if approved and subject to other contingencies, would be
majority owned by the Corporation.
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. 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, majority-owned or otherwise controlled by the
Corporation.
Management believes the Corporation's capital resources at June 30,
1997 to be adequate to fund existing operations, future growth and expansion.
Impact of New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued certain
new standards which affect accounting and financial reporting.
FASB Statement No. 128, "Earnings per Share", will revise the
computation and reporting of earnings per share. This new standard is intended
to simplify the basis upon which per-share amounts are determined, replacing
"primary" earnings per share with "basic" earnings per share. "Fully diluted"
earnings per share will be replaced by "diluted" earnings per share. The
Statement will become effective for the Corporation's year end 1997
consolidated financial statements and will result in restatement of per-share
amounts for prior periods. Early adoption of the new standard is not
permitted. Management has not completed its analysis of this new accounting
standard.
FASB Statement No. 129, "Disclosure of Information about Capital
Structure", clarifies the extent and nature of disclosures relating to an
entity's capital structure. This new standard will become effective for the
Corporation's year end 1997 consolidated financial statements
Page 16 of 19
<PAGE> 17
and, upon implementation, is not expected to have a material impact.
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.
Page 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.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
ended June 30, 1997.
Page 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 the registrant)
\s\ Lee W. Hendrickson
-------------------------------------
Vice President and
Chief Financial Officer
Date: August 8, 1997
Page 19 of 19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------------------------------
<S> <C>
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
CAPITOL BANCORP LTD.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ---------------------------
1997 1996 (A) 1997 1996 (A)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Computation of number of common shares and common
stock equivalents for primary net income per share:
Weighted average number of common shares outstanding 4,601,996 3,960,389 4,562,821 3,892,477
Net effect of dilutive stock options and warrants --
based on the treasury stock method 149,978 114,807 146,494 130,060
------------- ------------- ------------- -------------
Weighted average number of common shares and common
stock equivalents for primary net income per share 4,751,974 4,075,196 4,709,315 4,022,537
============= ============= ============= =============
Computation of number of common shares and common
stock equivalents for fully diluted net income per share:
Weighted average number of common shares outstanding 4,601,996 3,960,389 4,562,821 3,892,477
Net effect of dilutive stock options and warrants --
based on the treasury stock method 173,950 114,807 173,950 130,060
------------- ------------- ------------- -------------
Weighted average number of common shares and common
stock equivalents for fully diluted net income per share 4,775,946 4,075,196 4,736,771 4,022,537
============= ============= ============= =============
Net income for the period $ 1,320,131 $ 1,148,151 $ 2,582,411 $ 2,249,185
============= ============= ============= =============
Primary Net Income Per Share $ 0.28 $ 0.28 $ 0.55 $ 0.56
============= ============= ============= =============
Fully Diluted Net Income Per Share $ 0.28 $ 0.28 $ 0.55 $ 0.56
============= ============= ============= =============
</TABLE>
(A) As adjusted to reflect the Corporation's 1996 10% stock dividend as if
it had occurred at the beginning of the period.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,425
<INT-BEARING-DEPOSITS> 155
<FED-FUNDS-SOLD> 40,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,737
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 431,277
<ALLOWANCE> 5,347
<TOTAL-ASSETS> 572,837
<DEPOSITS> 504,147
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 5,367
<LONG-TERM> 7,625
0
0
<COMMON> 36,832
<OTHER-SE> 5,852
<TOTAL-LIABILITIES-AND-EQUITY> 572,837
<INTEREST-LOAN> 19,393
<INTEREST-INVEST> 3,015
<INTEREST-OTHER> 4
<INTEREST-TOTAL> 22,412
<INTEREST-DEPOSIT> 10,819
<INTEREST-EXPENSE> 10,951
<INTEREST-INCOME-NET> 11,461
<LOAN-LOSSES> 966
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 7,816
<INCOME-PRETAX> 3,885
<INCOME-PRE-EXTRAORDINARY> 2,582
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,582
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<YIELD-ACTUAL> 0
<LOANS-NON> 1,556
<LOANS-PAST> 1,845
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,578
<CHARGE-OFFS> 464
<RECOVERIES> 267
<ALLOWANCE-CLOSE> 5,347
<ALLOWANCE-DOMESTIC> 5,347
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,699
</TABLE>
