<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1996 or
( ) TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-24728C
CAPITOL BANCORP LTD.
(Name of Small Business Issuer in its Charter)
MICHIGAN 38-2761672
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
ONE BUSINESS & TRADE CENTER
200 WASHINGTON SQUARE NORTH
LANSING, MICHIGAN 48933
(Address of principal executive offices)
Issuer's telephone number, including area code: (517) 487-6555
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON
STOCK, NO PAR VALUE
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_____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year:
$38,184,161
As of February 17, 1997, 4,522,066 shares of the Registrant's Common
Stock, no par value, were outstanding. Based upon the published closing price
for the Registrant's common stock on February 17, 1997, the aggregate market
value of the Registrant's common stock held by nonaffiliates on that day was
$51,718,990.
Transitional Small Business Disclosure Format (Check One)
YES_____; NO X
DOCUMENTS INCORPORATED BY REFERENCE
See Cross-Reference Sheet
<PAGE> 2
CAPITOL BANCORP LTD
Form 10-KSB
Fiscal Year Ended: December 31, 1996
CROSS REFERENCE SHEET
ITEM OF FORM 10-KSB INCORPORATION BY REFERENCE FROM:
- - ------------------- ----------------------------------
Part I
------
Item 1, Description of Business Pages 18-19, 25, 27, 32-33 and 35,
Annual Report
Item 2, Description of Property Pages 15-17 and 28, Annual Report
Part II
-------
Item 5, Market for Common Equity and Pages 11-12, 28-30 and 36, Annual
Related Stockholder Matters Report
Item 6, Management's Discussion Pages 13-19, Annual Report
and Analysis of Financial
Condition and Results of
Operations
Item 7, Financial Statements Pages 20-35, Annual Report
Part III
--------
Item 9, Directors, Executive Pages 2-5, Proxy Statement,
Officers, Promoters and and Page 36, Annual Report
Control Persons; Compliance
with Section 16(a) of the
Exchange Act
Item 10, Executive Compensation Pages 7-9, Proxy Statement
Item 11, Security Ownership of Pages 1-5 and Page 7, Proxy
Certain Beneficial Statment
Owners and Management
Item 12, Certain Relationships Pages 7-9, Proxy Statement
and Related Transactions
Item 13, Exhibits and Reports on Pages 20-35, Annual Report
Form 8-K - Index to
Financial Statements
and Schedules
KEY:
"Annual Report" means the 1996 Annual Report of the Registrant provided to
Stockholders and the Commission pursuant to Rule 14a-3(b).
"Proxy Statement" means the Proxy Statement of the Registrant on Schedule 14A
to be filed pursuant to Rule 14a-101. It is expected that
the Proxy Statement will be filed within 120 days after the
end of the fiscal year covered by this Form 10-KSB.
Note: The page number references herin are based on the paper version of
the Annual Report and Proxy Statement. Accordingly, those page
number references may differ from the electronically filed versions
of those documents.
-2-
<PAGE> 3
CAPITOL BANCORP LTD.
1996 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
ITEM 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 16
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 17
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 17
ITEM 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 17
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . 18
ITEM 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 13. Exhibits and Reports on Form 8-K - Index to Financial Statements and Schedules . . . . . . . . . 19
</TABLE>
-3-
<PAGE> 4
PART I
Item 1, Description of Business.
A. Business Development:
Incorporated by reference from Page 25, Annual Report, under the caption
"Note A--Significant Accounting Policies" and the subcaption thereunder,
"Nature of Operations, Basis of Presentation and Principles of Consolidation"
and Page 27, Annual Report under the caption "Note B--Changes in Consolidated
Group".
B. Business of Issuer:
Incorporated by reference from Page 25, Annual Report, under the caption
"Note A--Significant Accounting Policies" and the subcaption thereunder,
"Nature of Operations, Basis of Presentation and Principles of Consolidation"
and Page 27, Annual Report, under the caption "Note B--Changes in Consolidated
Group" and Pages 18 and 19, Annual Report, under the caption "Trends Affecting
Operations".
The Corporation and its subsidiaries are engaged in a single business
activity--banking. Certain agencies have, however, suggested that bank holding
companies engaged in certain related activities, such as mortgage banking, are
engaged in more than one business "segment" for financial reporting purposes,
even though such activities are deemed by other regulatory agencies as being
not a separate or distinct segment. Financial information regarding the
Corporation's activities is incorporated herein by reference from Page 35,
Annual Report, under the caption "Note P--Composition of Business Activities".
At December 31, 1996, the Corporation and its subsidiaries employed 137
full time equivalent employees.
C. Incorporated by reference from Pages 32 and 33, Annual Report, under the
caption "Note N -- Dividend Limitations of Subsidiaries and Other Capital
Requirements".
D. The following tables (Tables A to H, inclusive), present certain
statistical information regarding the Corporation's business.
-4-
<PAGE> 5
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A)
CAPITOL BANCORP LTD.
Net interest income, the primary component of earnings, represents the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Net interest income depends upon the
volume of interest-earning assets and interest-bearing liabilities and the
rates earned or paid on them. This table sets forth the daily average balances
for the major asset and liability categories and the actual related interest
income and expense (in thousands) and average yield/cost for the years ended
December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
-------------------------------------- ----------------------------------
Interest (1) Interest (1)
Average Income/ Average Average Income/ Average
Balance Expense Yield/Cost Balance Expense Yield/Cost
-------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury and government agencies $39,549 $2,234 5.65% $35,136 $2,016 5.74%
States and political subdivisions (2) 207 18 8.70% 271 10 3.69%
Other 2,510 372 14.82% 2,752 208 7.56%
Interest-bearing deposits with banks 474 42 8.86% 339 10 2.95%
Federal funds sold 32,318 1,541 4.77% 24,758 1,453 5.87%
Loans held for resale 10,737 818 7.62% 4,605 300 6.51%
Portfolio loans (3) 318,491 31,454 9.88% 264,919 25,916 9.78%
--------- --------- ------ -------- ------- ------
Total Interest-Earning
Assets/Interest Income 404,286 36,479 9.02% 332,780 29,913 8.99%
Allowance for loan losses (deduct) (4,095) (3,441)
Cash and due from banks 14,149 10,960
Mortgage servicing rights, net 459
Premises and equipment, net 3,188 2,500
Other assets 12,734 10,290
--------- --------
Total Assets $430,262 $353,548
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $35,288 $1,384 3.92% $32,684 $1,248 3.82%
Time deposits under $100,000 160,502 9,555 5.95% 129,698 7,700 5.94%
Time deposits of $100,000 or more 66,106 3,935 5.95% 54,096 3,316 6.13%
Other interest-bearing deposits 69,818 2,418 3.46% 60,649 2,297 3.79%
Debt obligations 8,625 496 5.75% 7,193 492 6.84%
Other 12 26
--------- --------- ------ -------- ------- ------
Total Interest-Bearing
Liabilities/Interest Expense 340,339 17,800 5.23% 284,320 15,079 5.30%
Noninterest-bearing demand deposits 44,727 36,868
Accrued interest on deposits and
other liabilities 4,166 2,969
Minority interest in consolidated
subsidiaries 2,439 261
Stockholders' equity 38,591 29,130
--------- --------
Total Liabilities and
Stockholders' Equity $430,262 $353,548
========= --------- ======== -------
Net Interest Income $18,679 $14,834
========= =======
Interest Rate Spread (4) 3.79% 3.69%
====== ======
Net Yield on Interest-Earning Assets (5) 4.62% 4.46%
====== ======
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.19 X 1.17 X
========== ==========
<CAPTION>
Year Ended December 31
1994
-------------------------------------
Interest (1)
Average Income/ Average
Balance Expense Yield/Cost
----------- ---------- -------------
<S> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury and government agencies $23,426 $1,278 5.46%
States and political subdivisions (2) 275 10 3.64%
Other 3,322 246 7.41%
Interest-bearing deposits with banks 469 22 4.69%
Federal funds sold 16,059 679 4.23%
Loans held for resale 9,183 358 3.90%
Portfolio loans (3) 203,924 18,887 9.26%
---------- --------- -------
Total Interest-Earning
Assets/Interest Income 256,658 21,480 8.37%
Allowance for loan losses (deduct) (2,859)
Cash and due from banks 9,727
Mortgage servicing rights, net 3,220
Premises and equipment, net 2,265
Other assets 7,940
----------
Total Assets $276,951
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $33,876 $1,090 3.22%
Time deposits under $100,000 90,079 4,443 4.93%
Time deposits of $100,000 or more 28,745 1,372 4.77%
Other interest-bearing deposits 58,517 1,880 3.21%
Debt obligations 6,965 517 7.42%
Other 95
---------- --------- -------
Total Interest-Bearing
Liabilities/Interest Expense 218,182 9,397 4.31%
Noninterest-bearing demand deposits 33,228
Accrued interest on deposits and
other liabilities 3,578
Minority interest in consolidated
subsidiaries
Stockholders' equity 21,963
--------
Total Liabilities and
Stockholders' Equity $276,951
======== --------
Net Interest Income $12,083
========
Interest Rate Spread (4) 4.06%
======
Net Yield on Interest-Earning Assets (5) 4.71%
======
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.18 X
==========
</TABLE>
(1) Average yield/cost is determined by dividing the actual interest
income/expense by the daily average balance of the asset or liability
category.
(2) Tax equivalent yield.
(3) Average balance of loans includes non-accrual loans.
(4) Interest rate spread represents the average yield on interest-earning
assets less the average cost of interest-bearing liabilities.
(5) Net yield is based on net interest income as a percentage of average total
interest-earning assets.
-5-
<PAGE> 6
CHANGES IN NET INTEREST INCOME (TABLE B)
CAPITOL BANCORP LTD.
The following table summarizes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Corporation's net interest income during the
periods indicated. The change in interest attributable to volume is calculated
by multiplying the annual change in volume by the prior year's rate. The
change in interest attributable to rate is calculated by multiplying the annual
change in rate by the current year's average balance. Any variance
attributable jointly to volume and rate changes has been allocated to each
category based on the percentage of each to the total change in both
categories.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------
1996 compared to 1995 1995 compared to 1994
---------------------------- ---------------------------
Volume Rate Net Total Volume Rate Net Total
------ ------ --------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) In Interest Income:
Investment securities:
U.S. Treasury and government agencies $253 ($35) $218 $640 $98 $738
States and political subdivisions (2) 10 8
Other (18) 182 164 (42) 4 (38)
Interest-bearing deposits with banks 4 28 32 (6) (6) (12)
Federal funds sold 444 (356) 88 368 406 774
Loans held for resale 399 119 518 (178) 120 (58)
Portfolio loans 5,239 299 5,538 5,651 1,378 7,029
------- ----- ------ ------ ------ ------
Total 6,319 247 6,566 6,433 2,000 8,433
Increase (Decrease) In Interest Expense
On Deposits:
Savings 99 37 136 (38) 196 158
Time deposits under $100,000 1,830 25 1,855 1,948 1,309 3,257
Time deposits of $100,000 or more 736 (117) 619 1,209 735 1,944
Other interest-bearing deposits 348 (227) 121 66 351 417
Debt obligations 98 (94) 4 17 (42) (25)
Other (14) (14) (69) (69)
------- ----- ------ ------ ------ ------
Total 3,097 (376) 2,721 3,133 2,549 5,682
======= ===== ====== ====== ====== ======
Increase (Decrease) in Net
Interest Income $3,222 $623 $3,845 $3,300 ($549) $2,751
====== ==== ====== ====== ==== ======
<CAPTION>
Year Ended December 31
----------------------------
1994 compared to 1993
----------------------------
Volume Rate Net Total
------ ------ ---------
<S> <C> <C> <C>
Increase (Decrease) In Interest Income:
Investment securities:
U.S. Treasury and government agencies $537 $2 $539
States and political subdivisions 1 1
Other (78) 55 (23)
Interest-bearing deposits with banks (17) 2 (15)
Federal funds sold 9 201 210
Loans held for resale (883) (308) (1,191)
Portfolio loans 3,542 688 4,230
------ ----- -------
Total 3,111 640 3,751
Increase (Decrease) In Interest Expense
On Deposits:
Savings 88 27 115
Time deposits under $100,000 307 (115) 192
Time deposits of $100,000 or more 312 98 410
Other interest-bearing deposits 481 35 516
Debt obligations 126 116 242
Other (149) (149)
------ ----- -------
Total 1,165 161 1,326
====== ===== =======
Increase (Decrease) in Net
Interest Income $1,946 $479 $2,425
====== ===== =======
</TABLE>
-6-
<PAGE> 7
INVESTMENT PORTFOLIO (TABLE C)
CAPITOL BANCORP LTD.
The following table sets forth the amortized cost and market value of
investment securities as of December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------
1996 1995
------------------------------ ------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $46,162 $46,221 $32,846 $33,559
States and political subdivisions 100 100 250 250
Other:
Corporate bonds 301 300 739 737
Federal Reserve Bank stock 116 116 116 116
Federal Home Loan Bank Stock 984 984 664 664
Corporate stock (1) 1,003 1,003 1,003 1,003
--------- ---------- --------- ---------
Total Other Securities 2,404 2,403 2,522 2,520
--------- ---------- --------- ---------
Total Investments $48,666 $48,724 $35,618 $36,329
========= ========== ========= =========
<CAPTION>
1994
------------------------
Amortized Market
Cost Value
----------- ----------
<S> <C> <C>
U.S. Treasury and government agencies $31,787 $30,691
States and political subdivisions 275 268
Other:
Corporate bonds 1,182 1,156
Federal Reserve Bank stock 116 116
Federal Home Loan Bank Stock 664 664
Corporate stock (1) 907 907
-------- --------
Total Other Securities 2,869 2,843
-------- --------
Total Investments $34,931 $33,802
======== ========
</TABLE>
(1) Consists primarily of investment in the common stock of Access BIDCO,
Incorporated.
The following table sets forth the amortized cost, relative maturities and
weighted average yields of investment securities at December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
U.S. Treasury and States and Political Other
Government Agencies Subdivisions Securities
-------------------------- --------------------------- ------------------------
Weighted Weighted Weighted Total
Amortized Average Amortized Average Amortized Average Carrying
Cost Yield Cost Yield Cost Yield Amount
--------- ---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturity:
Due in one year or less $14,598 6.78% $100 3.75% $301 5.73% $14,999
Due after one year but within
five years 27,085 6.10% 27,085
Due after five years but within
ten years 4,365 6.57% 4,365
Due after ten years 114 7.23% 114
Without stated maturities 2,103 * 2,103
------- ------ ------- -------
Total $46,162 $100 $2,404 $48,666
======= ====== ======= =======
</TABLE>
* Investment securities which do not have stated maturities (corporate stock,
Federal Reserve Bank and Federal Home Loan Bank stock) do not have stated
yields or rates of return and such rates of return vary from time to time.
Following is a summary of average maturities of investment securities
(exclusive of securities without stated maturities) at December 31, 1996:
<TABLE>
<S> <C> <C>
U.S. Treasury securities 1 year 5 months
U.S. Agencies 2 years 7 months
States and Political subdivisions 10 months
Other 1 month
</TABLE>
-7-
<PAGE> 8
LOAN PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D)
CAPITOL BANCORP LTD.
Portfolio Loans outstanding as of the end of each period are shown in the
following table according to type of loan (in thousands):
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial - real estate $180,310 50.42% $140,462 49.55% $99,330 41.12%
Commercial - other 103,151 28.84% 81,699 28.82% 83,391 34.52%
--------- ------- -------- ------- -------- -------
Total Commercial Loans 283,461 79.26% 222,161 78.37% 182,721 75.63%
Real estate mortgage 53,712 15.02% 48,954 17.27% 47,260 19.56%
Installment 20,450 5.72% 12,356 4.36% 11,602 4.80%
--------- ------- -------- ------- -------- -------
Total Portfolio Loans $357,623 100.00% $283,471 100.00% $241,583 100.00%
========= ======= ======== ======= ======== =======
<CAPTION>
December 31
--------------------------------------------
1993 1992
-------------------- --------------------
<S> <C> <C> <C> <C>
Commercial - real estate $74,142 43.23% $54,992 34.70%
Commercial - other 51,513 30.03% 50,137 31.64%
-------- ------ -------- -------
Total Commercial Loans 125,655 73.26% 105,129 66.34%
Real estate mortgage 34,743 20.26% 41,552 26.22%
Installment 11,116 6.48% 11,788 7.44%
-------- ------ -------- -------
Total Portfolio Loans $171,514 100.00% $158,469 100.00%
======== ====== ======== =======
</TABLE>
The following table presents (in thousands) the remaining maturity of portfolio
loans outstanding at December 31, 1996 according to scheduled repayments of
principal. The amounts due after one year are classified according to
sensitivity to changes in interest rates.
Aggregate maturities of portfolio loan balances which are due:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
--------- --------- ---------
<S> <C> <C> <C>
In one year or less $82,439 $138,238 $220,677
After one year but within five years 127,620 4,008 131,628
After five years 2,227 2,034 4,261
Non-accrual loans (all of which are classified as variable rate) 1,057 1,057
--------- --------- ---------
Total $212,286 $145,337 $357,623
========= ========= =========
</TABLE>
The following summarizes, in general, the Corporation's various loan
classifications:
Commercial - Real Estate
Comprised of a broad mix of business use and multi-family housing
properties, including office, retail, warehouse and light industrial
uses. A typical loan size approximates $500,000, and at December 31,
1996, approximately 25% of such properties were owner-occupied.
Commercial - Other
Includes a range of business credit products, current asset lines of
credit and equipment term loans. These products bear higher inherent
economic risk than other types of lending activities. A typical loan
size approximates $250,000, and multiple account relationships serve
to reduce such risks.
Real Estate
Includes single family residential loans held for permanent
portfolio, and home equity lines of credit. Risks are nominal, borne
out by loss experience, housing economic data and loan-to-value
percentages.
Installment
Includes a broad range of consumer credit products, secured by
automobiles, boats, etc., with typical consumer credit risks.
All loans are subject to underwriting procedures commensurate with the loan
size, nature of collateral, industry trends, risks and experience factors.
Appropriate collateral is required for most loans, as is documented evidence of
debt repayment sources.
The aggregate amount of non-performing portfolio loans is set forth in the
following table. Non-performing loans comprise (a) loans accounted for on a
non-accrual basis, and (b) loans contractually past due 90 days or more as to
principal and interest payments (but not included in non-accrual loans in (a)
above) and consist primarily of commercial real estate loans. Non-performing
portfolio loans include all loans for which, based on the Corporation's loan
rating system, management has concerns. Loans are placed in non-accrual status
when, in management's opinion, there is a reasonable probability of not
collecting 100% of future principal and interest payments. In addition,
certain loans, although current based on the Corporation's rating criteria, are
placed in non-accrual status. Generally, loans are placed in non-accrual
status when they become 90 days delinquent; however, management may elect to
continue the accrual of interest in certain circumstances. When interest
accruals are discontinued, interest previously accrued (but unpaid) is
reversed. If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the year,
additional interest income of $112,000 would have been recorded in 1996.
Interest income recognized on loans in non-accrual status in 1996 operations
approximated $39,000. At December 31, 1996, there were no material amounts of
loans which were restructured or otherwise renegotiated as a concession to
troubled borrowers.
-8-
<PAGE> 9
TABLE D, CONTINUED
CAPITOL BANCORP LTD.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- ------------ -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing Loans:
Non-accrual loans: Commercial $928 $438 $1,121 $628 $3,286
Real estate 107 115 156 1,442
Installment 22 28 43 8 25
------- ------ ------- ------ --------
Total Non-accrual Loans 1,057 581 1,320 2,078 3,311
Past due loans: Commercial 1,009 379 146 447 437
Real estate 549 299 424 68 44
Installment 84 82 40 104 71
------- ------ ------- ------ --------
Total Past Due Loans 1,642 760 610 619 552
------- ------ ------- ------ --------
Total Non-performing Loans $2,699 $1,341 $1,930 $2,697 $3,863
======= ====== ======= ====== =======
Nonperforming Loans as a Percentage
of Total Portfolio Loans 0.75% 0.47% 0.80% 1.57% 2.44%
======= ====== ======= ====== =======
Nonperforming Loans as a Percentage
of Total Assets 0.55% 0.35% 0.61% 1.06% 1.72%
======= ====== ======= ====== =======
Allowance for Loan Losses as a
Percentage of Non-performing Loans 169.62% 274.94% 166.84% 92.70% 60.03%
======= ====== ======= ====== =======
</TABLE>
Nonperforming assets increased substantially in 1992 related to certain
commercial loans which had been made by United Savings Bank prior to its
conversion to become Oakland Commerce Bank. In subsequent periods, such
nonperforming loans were reduced as such loans were resolved.
The table below summarizes activity in other real estate owned, including
transfers to and from the loan portfolio and subsequent payments on or sales
of the property, for each period (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Other real estate owned at January 1 $972 $1,255 $1,364 $1,159 $0
Other real estate owned of acquired bank 897
Properties acquired in restructure
of loans or in lieu of foreclosure 1,635 1,658 712 1,362
Properties sold (520) (1,714) (1,455) (290) (1,037)
Payments received from borrowers or
tenants, credited to carrying amount (47) (300) (164) (63)
Other changes, net (92) (204) (12) (53)
---- ------ ------ ------ ------
Other Real Estate Owned at December 31 $313 $972 $1,255 $1,364 $1,159
==== ====== ====== ====== ======
Reserve for Other Real Estate Owned at January 1 $0 $64 $0 $0 $0
Net Charge-offs 64 64
---- ------ ------ ------ ------
Reserve for Other Real Estate Owned at December 31 $0 $0 $64 $0 $0
==== ====== ====== ====== ======
</TABLE>
Other real estate owned is valued at the lower of fair value or cost at the
date of transfer/acquisition. Management performs a periodic analysis of
estimated fair values to determine potential impairment of other real estate
owned.
-9-
<PAGE> 10
SUMMARY OF LOAN LOSS EXPERIENCE (TABLE E)
CAPITOL BANCORP LTD.
The table below summarizes portfolio loan balances, daily average loan
balances, changes in the allowance for possible loan losses arising from loans
charged-off and recoveries on loans previously charged-off, by loan category,
and additions to the allowance for possible loan losses through provisions
charged to expense, as of the end of each period.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at January 1 $3,687 $3,220 $2,500 $2,319 $1,254
Allowance of acquired bank 515 800
Loans charged-off:
Commercial 308 547 339 369 247
Real estate 35 9 24
Installment 94 47 36 122 103
-------- -------- -------- -------- --------
Total Charge-offs 437 594 384 515 350
Recoveries:
Commercial 119 178 106 73 47
Real estate 8 3 3 2
Installment 5 41 7 23 15
-------- -------- -------- -------- --------
Total Recoveries 132 222 116 98 62
-------- -------- -------- -------- --------
Net Charge-offs 305 372 268 417 288
Additions to allowance charged to expense 1,196 839 473 598 553
-------- -------- -------- -------- --------
Allowance for Loan Losses at December 31 $4,578 $3,687 $3,220 $2,500 $2,319
======== ======== ======== ======== ========
Total Portfolio Loans Outstanding at December 31 $357,623 $283,471 $241,583 $171,514 $158,469
======== ======== ======== ======== ========
Ratio of Allowance for Loan Losses to
Portfolio Loans Outstanding 1.28% 1.30% 1.33% 1.46% 1.46%
======== ======== ======== ======== ========
Average Total Portfolio Loans For the Year $318,491 $264,919 $203,924 $164,229 $134,247
======== ======== ======== ======== ========
Ratio of Net Charge-offs to Average
Portfolio Loans Outstanding 0.10% 0.14% 0.13% 0.25% 0.21%
======== ======== ======== ======== ========
</TABLE>
-10-
<PAGE> 11
TABLE E, CONTINUED
CAPITOL BANCORP LTD.
The allowance for loan losses has been established as a general allowance for
future losses on the loan portfolio. For internal purposes, management
allocates the allowance to all loan classifications. The amounts allocated in
the following table, 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 and the 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>
December 31
--------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial $2,281 $1,726 $1,831 $1,260 $1,350
Real estate mortgage 67 67 55 92 84
Installment 100 57 61 76 68
Unallocated 2,130 1,837 1,273 1,072 817
-------- -------- -------- -------- --------
Total Allowance for Loan Losses $4,578 $3,687 $3,220 $2,500 $2,319
======== ======== ======== ======== ========
Total Portfolio Loans Outstanding $357,623 $283,471 $241,583 $171,514 $158,469
======== ======== ======== ======== ========
Percent of Allowance to Portfolio Loans Outstanding 1.28% 1.30% 1.33% 1.46% 1.46%
======== ======== ======== ======== ========
</TABLE>
In addition to the Corporation's allowance for loan losses, certain commercial
loans participate in a loan program sponsored by State of Michigan. Under that
program, the governmental unit shares loss exposure on such loans by funding
reserves which are as deposits at the banks. Loans participating in this
program and related reserves approximated $13,901,000 and $1,551,000,
respectively at December 31, 1996. Such reserve amounts are separate and
excluded from the allowance for loan losses.
-11-
<PAGE> 12
AVERAGE DEPOSITS (TABLE F)
CAPITOL BANCORP LTD.
The following table presents the average balances of deposits (in thousands)
and the average rates of interest paid for the years ended December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- -------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 44,727 $ 36,868 $ 33,228
Savings deposits 35,288 3.92% 32,684 3.82% 33,876 3.22%
Time deposits under $100,000 160,502 5.95% 129,698 5.94% 90,079 4.93%
Time deposits of $100,000 or more 66,106 5.95% 54,096 6.13% 28,745 4.77%
Other interest-bearing deposits 69,818 3.46% 60,649 3.79% 58,517 3.21%
-------- -------- --------
Total Deposits $376,441 $313,995 $244,445
======== ======== ========
</TABLE>
The following table sets forth the amount of time certificates of deposit
issued in amounts of $100,000 or more, by time remaining until maturity, which
were outstanding at December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Three months or less $34,225
Three months to twelve months 33,092
Over 12 months 10,249
-------
$77,566
=======
</TABLE>
-12-
<PAGE> 13
INTEREST RATE SENSITIVITY (TABLE G)
CAPITOL BANCORP LTD.
The following table sets forth (in thousands, based on contractual maturities)
the interest rate sensitivity of the Corporation's interest-earning assets and
interest-bearing liabilities based both upon variable rate assets and
liabilities that reprice in relation to changes in interest rates, and upon
fixed rate assets and liabilities that mature within the specified period. The
amount by which interest sensitive assets exceed interest sensitive liabilities
at a particular point in time is referred to as a "gap". The gap is based on a
specific point in time and, accordingly, changes daily based on activity.
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------
Interest Interest Interest Interest
Sensitivity Sensitivity Sensitivity Sensitivity
0 to 3 months 4 to 12 months 1 to 5 Years Over 5 Years Total
------------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 42,350 $ 42,350
Interest bearing bank deposits 55 55
Investment securities 8,110 $ 6,896 $ 27,175 $ 6,544 48,725
Portfolio loans:
Commercial 151,134 31,619 99,864 844 283,461
Real estate mortgage 10,493 18,373 22,627 2,219 53,712
Installment 2,226 7,622 9,404 1,198 20,450
Loans held for resale 6,749 6,749
Notes Receivable - Amera Mortgage Corp. 2,831 2,831
Non-earning assets 33,930
-------- -------- -------- ------- --------
Total Assets $221,117 $ 64,510 $161,901 $10,805 $492,263
======== ======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Time deposits over $100,000 $ 34,225 $ 33,092 $ 10,249 $ 77,566
Time deposits under $100,000 41,414 96,947 38,221 $ 156 176,738
All other interest-bearing deposits 119,096 119,096
-------- -------- -------- ------- --------
Total Interest-bearing Deposits 194,735 130,039 48,470 156 373,400
Debt obligations 3,000 3,500 6,500
Noninterest-bearing liabilities 67,473
Minority interest in consolidated subsidiaries 4,731
Stockholders' equity 40,159
-------- -------- -------- ------- --------
Total Liabilities and Stockholders' Equity $194,735 $133,039 $ 51,970 $ 156 $492,263
======== ======== ======== ======= ========
Interest rate sensitive period gap $ 26,382 ($68,529) $109,931 $10,649
======== ======== ======== =======
Interest rate sensitive cumulative gap $ 26,382 ($42,147) $ 67,784 $78,433
======== ======== ======== =======
Period rate sensitive assets/period rate
sensitive liabilities 1.14 0.48 3.12 69.26
Cumulative rate sensitive assets/cumulative
rate sensitive liabilities 1.14 0.87 1.18 1.21
Cumulative gap to total assets 5.36 % (8.56)% 13.77 % 15.93 %
</TABLE>
-13-
<PAGE> 14
FINANCIAL RATIOS (TABLE H)
CAPITOL BANCORP LTD.
The following table shows the ratio of net income to average stockholders'
equity, average total assets and certain other ratios for the years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net Income as a percent of:
Average stockholders' equity 12.01% 10.55% 9.45%
Average total assets 1.08% 0.87% 0.75%
Average stockholders' equity as
a percent of average total assets 8.97% 8.24% 7.93%
Dividend payout ratio (cash dividends per share as a
percentage of net income per share) (1):
Primary 30.28% 31.65% 39.06%
Fully diluted 31.73% 32.47% 39.06%
</TABLE>
(1) As adjusted to reflect the Corporation's 1996 stock dividend as if it had
occurred at the beginning of periods presented.
-14-
<PAGE> 15
Item 2, Description of Property.
A. Office Locations:
The principal offices of Capitol Bancorp Ltd. (the "Corporation") and
Capitol National Bank ("Capitol National") are located at One Business &
Trade Center, 200 Washington Square North, Lansing, Michigan 48933. The
Corporation and Capitol National lease approximately 17,500 square feet
under operating leases which expire in 1998 and 2003, portions of which
are renewable for an additional 2 1/2 years. The building is owned by a
partnership which includes certain principals of the Corporation.
Management believes the terms of the leases are substantially similar to
those otherwise available in the community (see Item 12, "Certain
Relationships and Related Transactions"). Capitol National has a branch
at 4972 Marsh Road, Okemos, Michigan 48864 which is leased under an
operating lease which expires in 1998 and includes approximately 3,000
square feet. In addition, Capitol National has the option to extend the
branch facility lease for two consecutive three year periods.
Portage Commerce Bank's sole banking office is located at 6772 S.
Westnedge, Portage, Michigan (mailing address P.O. Box 727, Portage,
Michigan 49081-0727). Its premises (approximately 6,711 square feet) are
leased under an operating lease which expires in 1998 and provides for
three consecutive five-year renewal periods.
Ann Arbor Commerce Bank's main banking office is located at 2930
State Street South, Ann Arbor, Michigan 48104. Its premises
(approximately 5,300 square feet) were purchased in 1992. The Bank
operates a processing center located nearby at 3711 Plaza Drive, Ann
Arbor, where certain transactions from both Ann Arbor Commerce Bank and
Oakland Commerce Bank are processed. The processing facility
(approximately 1,600 square feet) is leased under an operating lease which
expires in 1997 and provides for a one-year renewal period.
Oakland Commerce Bank's office (approximately 4,000 square feet) is
located at 31731 Northwestern Highway, Farmington Hills, Michigan 48334
and is rented under an operating lease agreement which expires in 1997 and
management currently anticipates negotiating an additional renewal of this
lease.
Paragon Bank & Trust's banking office (approximately 9,400 square
feet) is located at 301 Hoover Boulevard (P.O. Box 1529), Holland,
Michigan 49423. Its bank building (approximately 13,300 square feet) were
purchased in 1996. Portions of the building not occupied by the Bank are
leased to unaffiliated tenants.
Grand Haven Bank's office is located at 15 South Second Street, Grand
Haven, Michigan 49417. Its premises (approximately 1,700 square feet) are
owned by the Bank.
Bank of Tucson's office is located at 4400 E. Broadway, Tucson,
Arizona (mailing address P.O. Box 12766, Tucson, Arizona 85732). Its
premises (approximately 6,500 square feet) are leased under an operating
lease which expires in 2006 and provides for two consecutive five-year
renewal periods.
Macomb Community Bank's premises are located at 16000 Hall Road,
Clinton Township, Michigan 48038. The Bank leases approximately 6,500
square feet under an operating lease agreement which expires in 2001 and
provides for two consecutive five-year renewal periods.
-15-
<PAGE> 16
Management believes the Corporation's offices and the offices of its
subsidiaries to be in good and adequate condition and adequately covered by
insurance.
B. Investment Policies:
The Corporation, as a bank holding company, and its banking
subsidiaries are subject to a wide array of rules, regulations and
policies promulgated by governmental agencies in addition to internal
policies as to loans and investments. The following information is
incorporated by reference hereunder regarding the Corporation's
consolidated assets:
Tables A-E, inclusive, as set forth in Item I of this Form 10-KSB.
Pages 15-16, Annual Report, under the caption "Asset Quality".
Pages 16-17, Annual Report, under the caption "Liquidity, Capital
Resources and Capital Adequacy".
Page 28, Annual Report, under the caption "Note C--Investment
Securities".
Page 28, Annual Report, under the caption "Note D--Loans".
Item 3, Legal Proceedings.
There are no material pending legal proceedings to which the Corporation
or its subsidiaries is a party or to which any of its property is subject,
except for proceedings which arise in the ordinary course of business. In the
opinion of management, pending legal proceedings will not have a material
effect on the consolidated financial position or results of operations of the
Corporation.
Item 4, Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 1996, no matters were submitted to a vote by
security holders.
-16-
<PAGE> 17
PART II
Item 5, Market for Common Equity and Related Stockholder Matters.
A. Market Information:
Incorporated by reference from Page 12, Annual Report, under the
caption "Information Regarding the Corporation's Common Stock", Page 29,
Annual Report, under the caption "Note I--Common Stock, Warrants and Stock
Options" and page 36, Annual Report, under the caption "Shareholder
Information".
B. Holders:
Incorporated by reference from first sentence of second paragraph on
Page 12, Annual Report, under the caption "Information Regarding the
Corporation's Common Stock".
C. Dividends:
Incorporated by reference from Page 11, Annual Report, under the
caption "Quarterly Results of Operations" and subcaption "Cash dividends
paid per share", Pages 28 and 29, Annual Report, under the caption "Note N
-- Dividend Limitations of Subsidiaries and Other Capital Requirements"
and the second full paragraph commencing on Page 30, Annual Report, under
the caption "Note K--Debt Obligations".
Item 6, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference from Pages 13-19, Annual Report.
Item 7, Financial Statements.
See Item 13 (under subcaption "A. Exhibits") of this Form 10-KSB for specific
description of financial statements incorporated by reference from Annual
Report.
Item 8, Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
-17-
<PAGE> 18
PART III
Item 9, Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Incorporated by reference from Pages 2-5, Proxy Statement, under the
caption "Election of Directors" and Page 36, Annual Report, under the caption
"Officers of the Corporation".
Item 10, Executive Compensation.
Incorporated by reference from Pages 6-9, Proxy Statement, under the
caption "Executive Compensation" and "Certain Relationships and Related
Transactions".
Item 11, Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from Page 1, Proxy Statement, under the caption
"Voting Securities and Principal Holders Thereof", Pages 2-5, Proxy Statement,
under the caption "Election of Directors" and Page 7, Proxy Statement, under
the caption "Employee Stock Ownership Plan".
Item 12, Certain Relationships and Related Transactions.
Incorporated by reference from Pages 7-9, Proxy Statement, under the
caption "Certain Relationships and Related Transactions".
-18-
<PAGE> 19
Item 13, Exhibits and Reports on Form 8-K.
A. Exhibits:
The following consolidated financial statements of Capitol Bancorp
Ltd. and Subsidiaries and report of independent auditors included on pages
20-35 of the Annual Report of the registrant to its stockholders for the
year ended December 31, 1996, are incorporated by reference in Item 7:
Independent auditors' report.
Consolidated balance sheets--December 31, 1996 and 1995.
Consolidated statements of income--Years ended December 31, 1996,
1995 and 1994.
Consolidated statements of changes in stockholders' equity--Years
ended December 31, 1996, 1995 and 1994.
Consolidated statements of cash flows--Years ended December 31, 1996,
1995 and 1994.
Notes to consolidated financial statements.
All financial statements and schedules have been incorporated by
reference from the Annual Report or are included in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
No schedules are included here because they are either not required, not
applicable or the required information is contained elsewhere.
B. Reports on Form 8-K:
During the fourth quarter of 1996, no reports on Form 8-K were filed by
the Registrant.
-19-
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CAPITOL BANCORP LTD.
Registrant
By: \s\ Joseph D. Reid By: \s\ Lee W. Hendrickson
----------------------- ------------------------
Joseph D. Reid Lee W. Hendrickson
Chairman, President and Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Financial and
Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant as Directors of the Corporation
on February 4, 1997.
<TABLE>
<S> <C>
\s\ Joseph D. Reid \s\ Robert C. Carr
- - ---------------------------------------- -------------------------------------------
Joseph D. Reid, Chairman, President Robert C. Carr, Executive Vice President
Chief Executive Officer and Director Treasurer and Director
\s\ David O'Leary \s\ Louis G. Allen
- - ---------------------------------------- -------------------------------------------
David O'Leary, Secretary and Director Louis G. Allen, Director
\s\ Paul R. Ballard \s\ David L. Becker
- - ---------------------------------------- -------------------------------------------
Paul R. Ballard, Executive David L. Becker, Director
Vice President and Director
\s\ Douglas E. Crist \s\ Richard G. Dorner
- - ---------------------------------------- -------------------------------------------
Douglas E. Crist, Director Richard G. Dorner, Director
\s\ Gary A. Falkenberg \s\Joel I Ferguson
- - ---------------------------------------- -------------------------------------------
Gary A. Falkenberg, Director Joel I. Ferguson, Director
\s\ Kathleen A. Gaskin \s\ H. Nicholas Genova
- - ---------------------------------------- -------------------------------------------
Kathleen A. Gaskin, Director H. Nicholas Genova, Director
\s\ L. Douglas Johns \s\ Michael L. Kasten
- - ---------------------------------------- -------------------------------------------
L. Douglas Johns, Director Michael L. Kasten, Director
\s\ James R. Kaye
- - ---------------------------------------- -------------------------------------------
James R. Kaye, Director Lyle W. Miller, Director
- - ----------------------------------------
Leonard Maas, Director
</TABLE>
- 20-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE NUMBER OR
INCORPORATED BY
EXHIBIT NO. DESCRIPTION REFERENCE FROM:
- - ----------- ----------- ---------------
<S> <C> <C> <C>
3 Articles of Incorporation and
Bylaws (1)
4 Instruments Defining the Rights
of Security Holders (common
stock certificate) (1)
10 Material Contracts:
(a) Joseph D. Reid Employment
Agreement (as amended effective
January 1, 1989) (2)
(b) Profit Sharing/401(K) Plan
(as amended and restated April 1, 1995)
(c) Lease Agreement with Business &
Trade Center, Ltd. (11)
(d) Employee Stock Ownership Plan
(as amended and restated February
10, 1994) (12)
(e) Employment Agreements with
Robert C. Carr, John C. Smythe,
and Charles J. McDonald (2)
(f) Executive Supplemental Income
Agreements with Robert C. Carr,
Paul R. Ballard, Richard G. Dorner,
James R. Kaye, Scott G. Kling,
John D. Groothuis, David K. Powers,
John C. Smythe and Charles J.
McDonald (13)
(g) Amendment to Employment Agreement
of Joseph D. Reid, dated October
2, 1989 (3)
(h) Consolidation Agreement between
the Corporation and Portage
Commerce Bank (4)
(i) Amendment to Employment Agreement
of Joseph D. Reid, dated
January 30, 1990 (5)
(j) Employment Agreements with
Paul R. Ballard and Richard G.
Dorner (6)
(k) Employment Agreement with
David K. Powers (7)
</TABLE>
-21-
<PAGE> 22
<TABLE>
<CAPTION>
PAGE NUMBER OR
INCORPORATED BY
EXHIBIT NO. DESCRIPTION REFERENCE FROM:
- - ----------- ----------- --------------
<S> <C> <C> <C>
10 Material Contracts--continued:
(l) Definitive Exchange Agreement and
Closing Memorandum between the
Registrant and United Savings
Bank, FSB (8)
(m) Employment Agreement with James
R. Kaye (9)
(n) Definitive Exchange Agreement
between the Registrant and
Financial Center Corporation (10)
11 Statement Re: Computation of
Per Share Earnings
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
</TABLE>
KEY:
(1) Form S-18, Reg. No. 33-24728C, filed September 15, 1988.
(2) Form S-1, Reg. No. 33-30492, filed August 14, 1989.
(3) Amendment No. 1 to Form S-1, Reg. No. 33-31323, filed November 20,
1989.
(4) Form S-1, Reg. No. 33-31323, filed September 29, 1989
(5) Originally filed as exhibit to Form 10-K for year ended December 31,
1989, filed March 30, 1990; refiled as exhibit to Form 10-KSB for
year ended December 31, 1995, filed March 14, 1996, due to time limit
for incorporation by reference pursuant to Regulation SB Item 10(f).
(6) Originally filed as exhibit to Form 10-K for year ended December 31,
1990, filed March 6, 1991; refiled as exhibit to Form 10-KSB for year
ended December 31, 1995, filed March 14, 1996, due to time limit for
incorporation by reference pursuant to Regulation SB Item 10(f).
(7) Form 10-K for year ended December 31, 1991, filed February 28, 1992.
(8) Form 8-K dated July 15, 1992, as amended under Form 8 on September 14,
1992.
(9) Form 10-KSB for year ended December 31, 1992, filed February 25, 1993.
(10) Form S-4, Reg. No. 33-73474, filed December 27, 1993.
(11) Form 10-KSB for year ended December 31, 1993, filed March 14, 1994.
(12) Form 10-KSB for year ended December 31, 1994, filed March 15, 1995.
(13) Form 10-KSB for the year ended December 31, 1995, filed March 14,
1996.
-22-
<PAGE> 1
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
CAPITOL BANCORP LTD.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Primary Net Income Per Share:(A)
Weighted average number of common shares outstanding 4,148,872 3,667,276 3,030,537
Net effect of dilutive stock options and warrants --
based on the treasury stock method or modified
treasury stock method, as applicable 91,679 550,524 366,498
----------- ---------- ----------
Total 4,240,551 4,217,800 3,397,035
=========== ========== ==========
Net income for the period $4,635,620 $3,072,559 $2,075,681
Adjustment for modified treasury stock method 0 239,244 108,407
----------- ---------- ----------
Adjusted earnings for purposes of computation
of per share earnings $4,635,620 $3,311,803 $2,184,088
=========== ========== ==========
Primary net income per share: $1.09 $.79 $.64
=========== ========== ==========
Fully Diluted Net Income Per Share: (A)
Weighted average number of common shares outstanding 4,148,872 3,667,276 3,030,537
Net effect of dilutive stock options and warrants --
based on the treasury stock method or modified
treasury stock method, as applicable 295,946 676,552 366,498
----------- ---------- ----------
Total 4,444,818 4,343,828 3,397,035
=========== ========== ==========
Net income for the period $4,635,620 $3,072,559 $2,075,681
Adjustment for modified treasury stock method 0 254,244 108,407
----------- ---------- ----------
Adjusted earnings for purposes of computation
of per share earnings $4,635,620 $3,326,803 $2,184,088
=========== ========== ==========
Fully diluted net income per share $1.04 $.77 $.64
=========== ========== ==========
</TABLE>
(A) As adjusted to reflect the Corporation's 1996 10% stock dividend as if
it had occurred at the beginning of the periods presented.
<PAGE> 1
EXHIBIT 13
EARNINGS PERFORMANCE
For the third consecutive year, the consolidated earnings of the Corporation
increased by 50% from the previous year. Net income for 1996 was $4.6 million
in contrast to $3.1 million reported in 1995. Net income per share (primary)
amounted to $1.09 compared to $.79 in 1995.
Over the past five years we have enjoyed an increase in net income in excess of
a 25% compound rate for each year. Consolidated assets grew 28% from the
preceding year. Similar to net income growth, assets have increased at an
annualized 25% compound growth rate over the past five years.
WE ARE A GROWTH COMPANY
The Corporation can easily be divided into two separate businesses. First, we
are a bank development business. Second, we are owner-operators of our
start-up banking businesses.
In 1996, we opened Bank of Tucson in Tucson, Arizona. Additionally, we opened
Macomb Community Bank in Clinton Township, Michigan. The Corporation owns 51%
of each of these two de novo banks.
Our current strategic plan calls for the formation of four additional de novo
banks in calendar year 1997. The first of these, Brighton Commerce Bank,
opened in Brighton, Michigan in January of this year. Next, we expect to open
Valley First Community Bank in Scottsdale, Arizona. In the latter part of the
year, we plan the opening of both Kent Commerce Bank in Grand Rapids, Michigan
and Muskegon Commerce Bank in Muskegon, Michigan.
Each bank, as is our practice, will open with a strong local identity. The
directors of each bank will be recruited from the community in which the bank
serves. Our bank directors have authority to determine matters such as
marketing plans, pricing and extensions of credit. The success of each of our
banks is driven by the strength of our bank directorship.
Our ambitious growth plan for 1997 is in keeping with our desire to maintain
the asset and income growth rates which have benefitted us in the past. Our
officers and directors over the years have developed vast experience in the
business of bank development. This experience has helped us in minimizing
pre-incorporation expenses and limiting early stage operating losses. We
believe that this experience is a significant, intangible off-balance-sheet
asset of Capitol Bancorp Ltd. and we intend to utilize it. Our growth will
continue to be focused both in Michigan and in the state of Arizona. While we
will consider opportunities for bank development elsewhere, in their absence,
we will follow our current plan.
We are a growth corporation. We intend to leverage our shareholder equity in
order to maximize performance, consistent with prudent banking practice. In
our current environment, the ability to obtain additional capital in order to
satisfy growth is realistic. Although mindful of the potential for significant
changes in the marketplace, we intend to maximize our ability to grow in this
currently optimistic marketplace.
1
<PAGE> 2
Our plan is flexible and can be modified at any time as market circumstances
dictate. Unlike merger and acquisition activity as a vehicle for growth, de
novo banking avoids cultural integration issues and post-merger surprises.
RELATIONSHIP BANKING
Each of our banks is focused on the importance of relationship banking. Not
relationship banking by self-proclamation, as we see among many of our
competitors; rather, relationship banking based upon genuine involvement of our
senior bank officers with their clients. We eschew branch banking. Our
delivery system is focused on the premise that a bank president occupies each
bank building which serves our clients. A branch bank tends to subvert
relationship banking.
We do recognize the need for convenience. Each of our banks has developed a
courier service. We have also successfully implemented telephone banking at
the election of our clients. Unlike large financial institutions which mine
their data processing systems in an effort to identify their customers' needs
and avail themselves of opportunities for product marketing, we know our
customers and their needs firsthand. While we can boast a strong relationship
orientation with our customer base, it comes at a price.
We cannot allow any of our banks to become too big. Each bank must avoid
outgrowing its market niche. Genuine relationship banking is based upon
genuine relationships. The larger the institution, the more difficult it is
for the senior officers to:
- Know their customers
- Service their customers
- Maintain appropriate relationships
Our significant growth will continue through new banks rather than pressure to
grow individual banks to a point where they no longer reflect the
characteristics of their emergence.
Although we need to continue to remind ourselves who we are, ie., each bank
being a small, branchless community-based bank, we do not take a back seat to
anyone in terms of growth. Our growth comes primarily through the addition of
community banks, not through expansion of existing community banks.
TECHNOLOGICAL SUPERIORITY
Although each of our banks is small, we can boast the greatest advances in
technological superiority available to larger institutions. This is because we
are able to pool our resources. In 1996 we successfully completed a major data
processing conversion. Later this year we will significantly enhance our
ability to service our customers with the following products:
- Account statements and checks in an enhanced image format
- More rapid response to customer information inquiries
- Additional electronic banking services
- Enhanced notifications and reports designed to better serve our borrowing
customers
2
<PAGE> 3
Our growth is not focused exclusively on asset size. To succeed in the 21st
century we must maintain a stance near the cutting edge of technological
change. Our new systems and our website on the Internet are designed to make
sure that we continue to maintain a strong competitive presence.
SAFETY AND SOUNDNESS
We are not unmindful of the attractiveness of the marketplace to the entire
banking industry. It is in these good times that we must prepare for a less
receptive marketplace. We have recently increased our internal audit staff and
added a new position in "risk management". Additionally, deliberative efforts
are underway in order to continue to assure that each of our banks maintain
prudent credit quality standards. It is our objective to be a performer even
in difficult economic times. We believe that our optimism for the future is
appropriately cautious.
THE FUTURE
Tenacious adherence to the characteristics of community banking including size,
management and decision-making can be married to the competitive environment of
electronic banking so long as our community banks continue to pool the
strengths of their affiliation while preserving the uniqueness of each bank's
personality in each community.
If conditions permit, we will continue to develop new banks which adhere to the
characteristics mentioned. Our current plan calls for growing to sixteen
banking institutions within the next few years. We have strategized this
growth so as not to unduly overburden the operating performance of Capitol
Bancorp Ltd. during this growth era.
We appreciate your investment in Capitol Bancorp Ltd. We hope that you share
our enthusiasm for the future.
Sincerely,
\s\ Joseph D. Reid
- - ---------------------------------
Joseph D. Reid
Chairman, President and Chief Executive Officer
3
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
ROBERT C. CARR
CAPITOL NATIONAL BANK President and CEO
Capitol National Bank
This past year has been another exciting one for Capitol National Bank, with a
record $1.57 million in net income and total assets exceeding $104 million. We were NAN ELIZABETH CASEY
able to attain this with a 12% increase in our net interest margin while maintaining Attorney at Law
operating expenses at less than 1% growth from the previous year. Casey & Boog, P.C.
We continue to be pleased with our performance and your acceptance of our community CHARLES J. CLARK
bank because this would not be possible without you, our customers. We are special President
as shown by our personal approach to individual and business needs along with Clark Construction Company
offering the flexibility of meeting those needs with local decision-making.
JAMES C. EPOLITO
Capitol National Bank staff members and directors are leaders in this area and President and CEO
dedicate themselves to our becoming a more competitive force by capitalizing on the The Accident Fund Company
inherent advantage of community banking with personalized service.
PATRICK F. HAYES
As we look into the future we have never had more opportunity for growth or better President
resources with which to serve you. We appreciate your continued trust and support. F.D. Hayes Electric
\s\ Robert C. Carr RICHARD A. HENDERSON
- - ---------------------------- President
Robert C. Carr Henderson, Miller & Robbins,
President and CEO P.C.
CHRISTOPHER HOLMAN
Publisher
Greater Lansing Business
Monthly
KEVIN A. KELLY
Managing Director
Michigan State Medical Society
MARK A. LATTERMAN
President
Latterman & Associates, P.C.
BRUCE J. MAGUIRE, III
Vice President and Treasurer
Spartan Oil Corporation
CHARLES J. MCDONALD
Vice President and Cashier
Capitol National Bank
JOHN O'LEARY
Personnel Manager
O'Leary Paint Company
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
JOHN C. SMYTHE
Executive Vice President
Capitol National Bank
OFFICERS
--------
JOSEPH D. REID
Chairman of the Board
MARK A. LATTERMAN
Vice Chairman
ROBERT C. CARR
President and CEO
DAVID O'LEARY
Secretary
JOHN C. SMYTHE
Executive Vice President
CHARLES J. MCDONALD
Vice President and Cashier
JOHN FARQUHAR
Vice President
Capitol National Bank
One Business and Trade Center
200 Washington Square North
Lansing, Michigan 48933
(517) 484-5080
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
PORTAGE COMMERCE BANK PAUL R. BALLARD
President and CEO
Portage Commerce Bank continued to grow and prosper in 1996. Total assets, at over Portage Commerce Bank
$73 million, were 15% higher than last year end. Net profits increased 20% and
surpassed the $1 million mark for the first time in the Bank's history. This level DAVID L. BECKER
of earnings represents a 22% return on average equity and a 1.58% return on average President
assets. These results compare very favorably with all banks in our peer group. Becker Insurance Agency, P.C.
Through an agreement with our affiliate in Holland, the Bank began offering trust THOMAS R. BERGLUND
services at our location. These new trust services will benefit both our personal Physician
and business customers. Professional Medical Center,
P.C.
The bank is planning to move to a new location nearby which will offer better access
and service to our customers. Construction is already underway for this new ROBERT C. CARR
building which will provide additional drive-in banking capabilities and a larger, President and CEO
more efficient facility. Plans for this move have been well received by the Capitol National Bank
community.
PATRICIA E. DOLAN
We look forward to 1997 and the opportunity to further serve our community. We Community Volunteer
appreciate the support of our stockholders and customers.
ALAN A. HALPERN
\s\ Paul R. Ballard Physician
- - ----------------------------- Michigan Orthopedic Surgery
Paul R. Ballard
President and CEO ROBERT L. JOHNSON
Vice President
Medallion Management, Inc.
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, LLC
PAUL M. LANE, PHD
Haworth College of Business
Western Michigan University
WILLIAM J. LONGJOHN
Vice President
Midwest Business Exchange
JOHN W. MARTENS
Certified Public Accountant
Yeo & Yeo, P.C.
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
OFFICERS
--------
JOSEPH D. REID
Chairman of the Board
WILLIAM J. LONGJOHN
Vice Chairman and Secretary
PAUL R. BALLARD
President and CEO
JAMES V. LUNARDE
Vice President
GARY T. ADAMS
Vice President
MARK K. MACLELLAN
Vice President
ALLAN T. REIFF
Vice President
Portage Commerce Bank
6772 South Westnedge
Portage, Michigan 49002
(616) 323-2200
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
ANN ARBOR COMMERCE BANK ROBERT C. CARR
President and CEO
1996 was a very good year for Ann Arbor Commerce Bank. Total assets for the first Capitol National Bank
time in our six year history exceeded one hundred million dollars, up over 39% from
year-end 1995. Net income exceeded $1,175,000. This is almost 40% more than earned MICHAEL J. DEVINE
in 1995. Our loan loss reserve was increased from 1.30% to 1.37% during a year in Attorney at Law
which our net charge-offs were less than $3,000.
RICHARD G. DORNER
These results occurred during a year in which two new community banks entered the President and CEO
Ann Arbor market. Combining a dynamic market with a great deal of concentrated Ann Arbor Commerce Bank
effort on the part of our directors, officers and staff continues to position us as
a driving force in community banking. 1997 will bring new opportunities and JAMES A. FAJEN
challenges to us. With the enhancement of Capitol Bancorp's operations and Attorney at Law
technological efforts we are ready and able to meet these challenges. Davis & Fajen, P.C.
Thanks to everyone, especially our customers, for helping make 1996 a very good JAMES W. FINN
year. Chairman and CEO
Finn's - JM&J Insurance
\s\ Richard G. Dorner
- - -------------------------------
Richard G. Dorner H. NICHOLAS GENOVA
President and CEO Chairman and CEO
Washtenaw News Co., Inc.
RICHARD M. GREENE
Consultant, Mortgage Banking
Richard Greene Point Training
MARILYN D. KATZ-PEK
Director
ACUMED
DAVID W. LUTTON
President/Owner
Charles Reinhart Company
Realtors
TIMOTHY P. NORTON
Senior Vice President
McDonald & Company
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
FRITZ SEYFERTH
Senior Associate Athletic
Director
University of Michigan
Athletic Dept.
CARL VAN APPLEDORN, M.D.
Urological Surgery Associates,
P.C.
WARREN E. WRIGHT
Chairman
Renosol Corporation
OFFICERS
--------
JOSEPH D. REID
Chairman of the Board
JAMES A. FAJEN
Vice Chair
WARREN E. WRIGHT
Secretary
RICHARD G. DORNER
President and CEO
BRIAN F. PICKNELL
Vice President
RICHARD G. TICE
Vice President
Ann Arbor Commerce Bank
2930 State Street South
Ann Arbor, Michigan 48104
(313) 995-3130
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
OAKLAND COMMERCE BANK DONALD A. BOSCO
President
During 1996 Oakland Commerce Bank continued its mission to deliver prudent growth, Bosco Building, Inc.
control operating expenses and ensure the highest level of customer satisfaction.
ROBERT C. CARR
We ended the year with $71 million in total assets which was a 16% increase for the President and CEO
year. This increase was primarily fueled by a 39% growth in our commercial loan Capitol National Bank
portfolio.
MARK B. CHURELLA
A significant event occurred during 1996 which negatively impacted our operating President and CEO
performance. At the close of the third quarter, federal legislation was passed to FDI Group
replenish the SAIF (Savings Association Insurance Fund) of which, by charter,
Oakland was a part. The Bank's one time assessment charge was $328,000. LEON S. COHAN
Counsel to the Firm
Without this expense, net income for 1996 would have been about $220,000 higher and Barris, Scott, Denn & Driker
record performance. The one-time charge to all SAIF-insured banks will benefit
future periods through substantially lower deposit insurance premiums. MICHAEL J. DEVINE
Attorney at Law
The staff of Oakland Commerce Bank is pleased to be a significant contributor to
overall profitability and growth of the Corporation and looks forward to meeting the JAMES R. KAYE
challenges 1997 will bring. President and CEO
Oakland Commerce Bank
\s\ James R. Kaye
- - ---------------------------
James R. Kaye DAVID F. LAU, J.D. CLU
President and CEO Chartered Financial Consultant
Lau & Lau Associates
JULIUS L. PALLONE
President
J.L. Pallone Associates
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
OFFICERS
--------
JOSEPH D. REID
Chairman of the Board
MICHAEL J. DEVINE
Vice Chair
JAMES R. KAYE
President and CEO
IKE J. KUCZER
Vice President
Oakland Commerce Bank
31731 Northwestern Hwy
Farmington Hills, Michigan
48116
(810) 855-0550
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
PARAGON BANK & TRUST PAUL R. BALLARD
President and CEO
Paragon Bank & Trust enjoyed the most successful year in its six year history. Portage Commerce Bank
Total assets of the bank grew 14%, ending the year at $63.7 million. This growth is
attributable to the referrals of our existing clients and the involvement of our DR. ROBERT J. BATES
board of directors and advisory board. Net income of $623,000 was a 49% improvement Physician
over prior year results. Western Mich. Urological
Assoc., P.C.
While we continue to believe that the Holland market is very competitive, the focus
of Paragon Bank & Trust to provide excellence in service to small businesses, JACK DEWITT
professionals and senior citizens has been successful. The team of employees at President
Paragon is dedicated to providing the best service to its clients through the use of Request Foods, Inc.
improved technology and local decision-making. Our trust business has also
continued to grow with the addition of a trust officer at Portage Commerce Bank and SCOTT DIEPENHORST
has realized a 30% growth in assets overall. Principal
SD & Associates
Paragon Bank & Trust looks forward to 1997 with continued growth expectations. With
the help of our clients, employees and directors, we will be able to meet and exceed PAUL ELZINGA
those expectations. Director of Business
Development
\s\Scott G. Kling Elzinga & Volkers, Inc.
- - ---------------------------
Scott G. Kling
President and CEO CRAIG T. HALL
President
Lee Shore Enterprises Ltd.
SUSAN K. HUTCHINSON
Owner
Hutchinson's Stores for
Children
GEORGE P. JULIUS, JR.
President and COO
Beverage America, Inc.
LAWRENCE D. KERKSTRA
President and CEO
Kerkstra Precast, Inc.
SCOTT G. KLING
President and CEO
Paragon Bank & Trust
LEONARD MAAS
President
Gillisse Construction Company
RICHARD L. MOLENHOUSE
Private Investor
MITCHELL PADNOS
Executive Vice President
Louis Padnos Iron & Metal
Company
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
RICHARD H. RUCH
Vice Chairman
Herman Miller, Inc.
RICHARD G. SWANEY
Attorney at Law
Swaney, Thomas & Moritz, P.C.
ROBERT J. TRAMERI
Vice Chairman
Paragon Bank & Trust
OFFICERS
--------
JOSEPH D. REID
Chairman of the Board
ROBERT J. TRAMERI
Vice Chair
SCOTT G. KLING
President and CEO
CHRISTOPHER J. HUGAR
Senior Vice President
ERIC J. HOOGSTRA
Vice President
Paragon Bank & Trust
301 Hoover Boulevard
Holland, Michigan 49423
(616) 394-9600
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
GRAND HAVEN BANK
PAUL R. BALLARD
Grand Haven Bank completed its first full year of operation in 1996 with total President and CEO
assets growing by 56% to over $32 million. The growth is the result of existing Portage Commerce Bank
customer referrals as well as our local directors letting others know of our
competitive products and friendly banking atmosphere. STANLEY L. BOELKINS
Owner/Appraiser
The focus of our Bank is, and will continue to be, on lending to small businesses. Boelkins & Associates
Our responsiveness combined with local, flexible decision-making has made us an
attractive option for local business as well as personal financing. Our board of PETER E. BOLLINE
directors was instrumental in the review and approval of over $10 million in loans Private Investor
made during the year in our local market.
BRAD J. FORTENBACHER
We are proud of the positive impact we have made in the Tri-Cities area and look President
forward to our building, technology and staffing expansion plans in 1997 that will Tri-Cast
help ensure a continued high level of customer service.
JOHN D. GROOTHUIS
\s\ John D. Groothuis President and CEO
- - ------------------------------- Grand Haven Bank
John D. Groothuis
President and CEO BARI STANTON JOHNSON
President
The Stanton Group
MARK A. KLEIST
Attorney at Law
Scholten and Fant, P.C.
STEVEN L. MAAS
Vice President
Gillisse Construction Company
CALVIN D. MEEUSEN
Certified Public Accountant
ARNOLD W. REDEKER, JR.
President
Redeker Ford, Inc.
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
DENNIS W. SWARTOUT
President
Duncan Consulting Services
ROBERT J. TRAMERI
Vice Chairman
Paragon Bank & Trust
JOHN P. VAN EENENAAM
Attorney at Law
Van Eenenaam & White
GERALD A. WITHERELL
President
Oakes Agency
OFFICERS
--------
JOSEPH D. REID
Chairman of the Board
JOHN P. VAN EENENAAM
Vice Chairman
ARNOLD W. REDEKER
Secretary
JOHN D. GROOTHUIS
President and CEO
Grand Haven Bank
15 South Second Street
Grand Haven, Michigan 49417
(616) 846-1930
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
BANK OF TUCSON MICHAEL J. DEVINE
Attorney at Law
Bank of Tucson completed an encouraging first six months of operation--three months
in temporary quarters, and the most recent three months at our permanent location, SLIVY EDMONDS COTTON
the Bank of Tucson Financial Center. Managing Director
Edmonds Group
Our year end financial results exceeded our expectations. Assets have grown to
$17,276,000, with $12,021,000 in deposits, $4,850,000 in outstanding loans and WILLIAM A. ESTES, JR.
$3,577,000 in loan commitments. Bank earnings for the year were predictably President
negative ($164,000), but performance exceeded original projections. We expect Estes Home Builders
positive income in the second quarter of 1997, ahead of initial expectations.
RICHARD N. FLYNN
Commercial lending is the main segment of our growth. Small business and SBA loans Corporate Consultant
have also grown steadily and have exceeded our original projections. As of December Tax Appeals
1996, we established a full service real estate department that provides permanent
as well as construction loans directed toward Tucson's custom home builders. MICHAEL F. HANNLEY
President
We continue to focus on our "Community Bank" identity. The board of directors has Bank of Tucson
been instrumental in business development and guidance toward our objectives. It is
important to acknowledge our fine employees who have worked tirelessly in creating a MICHAEL J. HARRIS
financial institution that would rival any de novo bank in the country. The Tucson Realty and Trust
dedication and professionalism they have exhibited will be realized for years to Company
come and will be the platform for our future success.
RICHARD IMWALLE
\s\ Michael F. Hannley Executive Vice President
- - -------------------------------- University of Arizona
Michael F. Hannley Foundation
President
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, LLC
BURT KINERK
Attorney at Law
Haralson, Kinerk & Morey
HUMBERTO LOPEZ
Certified Public Accountant
HSL Properties
LYN PAPANIKOLAS
Historian
Arizona Historical Society
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
OFFICERS
--------
JOSEPH D. REID
Chairman and CEO
RICHARD N. FLYNN
Secretary
MICHAEL F. HANNLEY
President
DAVID C. FOUST
Executive Vice President &
Chief Credit Officer
RANDY F. HOTCHKISS
Vice President
KATHERINE P. WAIT
Vice President and Controller
CHARLENE F. SCHUMAKER
Vice President
Bank of Tucson
4400 E Broadway
Tucson, Arizona 85711
(520) 321-4500
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS
------------------
MACOMB COMMUNITY BANK CHARLES B. BEER
Assistant Vice President
Macomb Community Bank opened for business on September 18, 1996. Local community First of Michigan
response and support for our new Bank has been exceptional. I am pleased to report
that Macomb Community Bank exceeded its initial growth expectations for 1996. Total ROBERT C. CARR
assets reached $15,123,000 and deposits rose to $11,487,000. Loan demand continues President and CEO
to increase dramatically, which reflects the Bank's phenomenal market area and Capitol National Bank
overall customer confidence in our experienced group of banking professionals.
Macomb County's own economic fortunes and resources are well ahead of the national CHRISTINA D'ALESSANDRO
and state economies, thus creating a healthy banking environment conducive to a Vice President/Owner
successful year in 1997. Villa Custom Homes, Inc.
Macomb Community Bank's team of dedicated employees and active local Board members RONALD G. FORSTER
are determined to consistently deliver highly personalized banking services and Owner
competitive technologies to all of our customers. We are committed to a philosophy Arkay Manufacturing, Inc.
of excellence, trust and community service which is proudly presented in our slogan,
"We put the community back in banking". WILLIAM HACKEL
Sheriff
As a community bank, our unique qualities provide the competitive advantage Macomb County Sheriff's
necessary to compete successfully in today's challenging financial markets. Department
\s\ Stephen C. Tarczy PHILLIP T. HERNANDEZ
- - ------------------------------- CEO
Stephen C. Tarczy Efficient Sanitation
President and CEO
JOHN H. JOHNSON
President
Johnson Consulting Group
DELIA RENDEN-MARTIN
Co-Owner
Martin Enterprises
DAVID A. MCKINNON
President
David A. McKinnon, P.C.
VITO MUNACO
Owner/Operator
WEMCO
JAMES A. PATRONA
President/Owner
Universal Press & Machinery,
Inc.
ROBERT R. PELEMAN
Head of Anesthesiology
Department
Macomb Anesthesia, P.C.
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
STEPHEN C. TARCZY
President and CEO
Macomb Community Bank
OFFICERS
--------
JOSEPH D. REID
Chairman of the Board
DAVID A. MCKINNON
Vice Chairman
STEPHEN C. TARCZY
President and CEO
SAM A. LOCRICCHIO
Vice President
Macomb Community Bank
16000 Hall Road, Suite 102
Clinton Township, Michigan
48038
(810) 228-1600
</TABLE>
11
<PAGE> 12
CAPITOL BANCORP LTD. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the Year Ended December 31
------------------------------------------------------------
1996(1) 1995(2) 1994(3) 1993 1992(4)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year
Interest income $ 36,479 $ 29,914 $ 21,480 $ 17,729 $ 15,263
Interest expense 17,800 15,079 9,397 8,071 7,356
Net interest income 18,679 14,835 12,083 9,658 7,907
Provision for loan losses 1,196 839 473 598 553
Noninterest income 1,705 1,272 2,189 1,070 953
Noninterest expense 12,307 10,460 10,563 8,643 5,972
Net income 4,636 3,073 2,076 1,055 1,600
Net income per share:(5)
Primary 1.09 .79 .64 .40 .64
Fully diluted 1.04 .77 .64 .40 .64
Cash dividends paid per share(5) .33 .25 .25 .19 .18
At end of year
Total assets $492,263 $384,070 $316,312 $253,683 $225,024
Total earning assets 455,502 357,446 292,817 237,927 209,709
Portfolio loans 357,623 283,471 241,583 171,514 158,469
Deposits 436,166 340,287 279,650 220,513 201,762
Debt obligations 6,500 8,712 7,924 11,023 3,839
Stockholders' equity 40,159 30,865 25,714 18,337 16,545
Quarterly Results of Operations
----------------------------------------------------------------------
First Second Third Fourth Total for
Quarter Quarter Quarter Quarter the year
----------------------------------------------------------------------
Year ended December 31, 1996(1)
- - -------------------------------
Interest income $ 8,488 $ 8,772 $ 9,271 $ 9,948 $ 36,479
Interest expense 4,194 4,254 4,548 4,804 17,800
Net interest income 4,294 4,518 4,723 5,144 18,679
Provision for loan losses 217 260 274 445 1,196
Income before income taxes 1,622 1,782 1,740 1,737 6,881
Net income 1,101 1,148 1,178 1,209 4,636
Net income per share:(5)
Primary .26 .28 .26 .26 1.09
Fully diluted .26 .28 .26 .26 1.04
Cash dividends paid per share(5) .0825 .0825 .0825 .0825 .33
Year ended December 31, 1995(2)
- - ----------------------------
Interest income $ 6,692 $ 7,369 $ 7,720 $ 8,133 $ 29,914
Interest expense 3,191 3,770 4,007 4,111 15,079
Net interest income 3,501 3,599 3,713 4,022 14,835
Provision for loan losses 139 301 219 180 839
Income before income taxes 873 1,058 1,323 1,554 4,808
Net income 537 664 848 1,024 3,073
Net income per share:(5)
Primary .15 .18 .21 .25 .79
Fully diluted .15 .18 .21 .25 .77
Cash dividends paid per share(5) .0625 .0625 .0625 .0625 .25
</TABLE>
(1) Includes Bank of Tucson and Macomb Community Bank, effective June 27, 1996
and September 18, 1996, respectively, both of which are 51% owned by the
Corporation.
(2) The Corporation formed and implemented Grand Haven Bank as a de novo bank
effective May 1, 1995 (formerly a branch of Paragon Bank & Trust which was
acquired in 1994 -- see Note 3). Effective March 31, 1995, the Corporation
sold a majority interest in Amera Mortgage Corporation (formerly Mortgage
Connection, Inc., acquired in 1992 -- see Note 4); for periods after March
31, 1995, the Corporation's remaining investment has been accounted for
under the equity method.
(3) Includes Paragon Bank & Trust for periods after the date of merger (June
30, 1994), which has been accounted for as a purchase.
(4) Includes Oakland Commerce Bank and Mortgage Connection, Inc. for periods
after the date of acquisition (July 6, 1992 and November 1, 1992,
respectively), which have been accounted for as purchases.
(5) As adjusted to reflect the Corporation's 1996 10% stock dividend as if it
had occurred at the beginning of the periods presented.
12
<PAGE> 13
INFORMATION REGARDING THE
CORPORATION'S COMMON STOCK
The Corporation's common stock is traded on the National Market tier of The
Nasdaq Stock MarketSM under the symbol "CBCL". Market quotations regarding the
range of high and low sales prices of the Corporation's common stock (without
adjustment for the Corporation's 1996 10% stock dividend), which reflect
inter-dealer prices without retail mark-up, mark-down or commissions, were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ -----------------------------
Low High Low High
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Quarter Ended:
March 31 $ 10.25 $ 11.00 $ 7.75 $ 9.25
June 30 9.75 11.00 8.00 9.50
September 30 9.75 12.75 8.42 11.00
December 31 11.63 17.25 9.50 11.00
</TABLE>
As of February 17, 1997, there were approximately 2,100 beneficial holders of
the Corporation's common stock, based on information supplied to the
Corporation from its stock transfer agent and other sources. At that date,
4,522,066 shares of common stock were outstanding. In addition to common
stock, there were 143,375 warrants outstanding. Each warrant enables the
warrant-holder to purchase one share of the Corporation's common stock at an
exercise price of $8.17272 and expires on June 30, 1997. The Corporation's
stock transfer agent is UMB Bank, n.a., 928 Grand Ave., P.O. Box 410064, Kansas
City, Missouri 64141-0064 (telephone (800) 884-4225).
The Corporation has a Shareholder Investment Program which offers a variety of
convenient features including dividend reinvestment, certain fee-free
transactions, certificate safekeeping and other benefits. For a copy of the
Program Prospectus, informational brochure and enrollment materials, contact
UMB Bank, n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555.
AVAILABILITY OF FORM 10-K
A copy of the Corporation's 1996 report on Form 10-KSB, without exhibits, is
available to stockholders without charge upon written request. Form 10-KSB
includes certain statistical and other information regarding the Corporation
and its business. Requests to obtain Form 10-KSB should be addressed to Linda
D. Pavona, Vice President, Capitol Bancorp Ltd., One Business & Trade Center,
200 Washington Square North, Lansing, Michigan 48933.
13
<PAGE> 14
CAPITOL BANCORP LTD.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This section of the Annual Report discusses the Corporation's results of
operations and financial condition and should be read in conjunction with the
consolidated financial statements appearing elsewhere herein. This discussion
also includes certain supplementary statistical and other data which are
described more fully in the Corporation's report on Form 10-KSB, copies of
which are available upon request, as indicated on page 12.
OVERVIEW
During 1996, the Corporation continued significant growth in earnings, assets
and the number of entities comprising the consolidated group.
Net income for 1996 amounted to $4.6 million, about 50% more than 1995
earnings. Similar percentage growth in earnings was realized in 1995 with net
income of $3.1 million compared to $2.1 million in 1994.
Net income per share (primary) amounted to $1.09 for 1996 compared to $.79 in
1995 and $.64 in 1994. These amounts have been restated to give effect to the
Corporation's year-end 1996 10% stock dividend. The percentage increase in
per-share earnings in 1996 (38%) differs from the increase in net income
because of a larger number of shares outstanding, coupled with the impact of
the significantly increased market value of the Corporation's common stock
during the year. On a fully diluted basis, net income per share for 1996
amounted to $1.04, compared with $.77 in 1995.
Consolidated total assets approximated $492 million at December 31, 1996.
Asset growth for the year, nearly $110 million or more than 25%, was
significant and another record. Total assets approximated $384 million at
year-end 1995.
The Corporation began 1996 with six bank subsidiaries. Two de novo banks were
added during the year and the Corporation's ninth bank commenced operations in
January 1997.
The remainder of this section of the Annual Report discusses, in greater
detail, the Corporation's results of operations and changes in financial
position and other related matters.
CONSOLIDATED RESULTS OF OPERATIONS
Total interest income for 1996 approximated $36.5 million compared with $29.9
million in 1995 and $21.5 million in 1994. Total interest income increased
21.9% in 1996 versus 39.3% in 1995. The 1996 growth in interest income
principally correlates with the 26% increase in the Corporation's consolidated
loan portfolio. The growth in interest income in 1995 was largely due to
higher rates and fees on loans as well as portfolio growth.
The ratio of net interest income to total interest income increased during
1996. This ratio approximated 51.2% in 1996 as compared with 49.6% in 1995 and
56.3% in 1994. This ratio improved in 1996 after decreasing significantly in
1995. The percentage relationship between net interest income and total
interest income decreased in 1995 due to compression occurring from changes in
interest rates, which decreased during 1995. In 1996, interest rates were
more stable.
The Corporation's provision for loan losses approximated $1.2 million in 1996
compared with $839,000 in 1995 and $473,000 in 1994. Generally, the size of
the provision for loan losses
14
<PAGE> 15
is determined by various factors considered by management in determining the
level of the allowance for loan losses, which are discussed in the "Asset
Quality" section of this portion of the Annual Report. The increases in the
provision for loan losses during 1995 and 1996, as compared with the 1994
level, are primarily due to the larger size of the consolidated loan portfolio.
Noninterest income increased in 1996 to $1.7 million versus $1.3 million in
1995 and $2.2 million in 1994. The 1996 increase was mainly due to higher
levels of service charges on deposit accounts and trust fee income coupled with
other income sources, offset by the reduction in mortgage banking net revenues.
The mortgage banking revenue decrease, representing the major reason for the
overall reduction in noninterest income from 1994 to 1995, is due to the sale
of a majority interest in the Corporation's mortgage banking unit effective
March 31, 1995.
Total noninterest expense increased 17.7% in 1996 to $12.3 million, as
compared with approximately $10.5 million in both 1995 and 1994. The increase
in 1996 is primarily due to the larger size of the Corporation in terms of
number of employees, number of banks and larger amount of total assets under
management.
Federal income tax expense approximated 33% of income before federal income
taxes in 1996 versus 36% in 1995 and 1994. The statutory federal income tax
rate applicable to the Corporation is 34%, which approximates the recorded
expense.
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Total assets increased approximately 28% during 1996. Asset growth in 1995
approximated $68 million, or 21%. About one third of the Corporation's 1996
asset growth came from the addition of two de novo banking units which
commenced operations during the year.
Bank of Tucson commenced operations in June in Tucson, Arizona and Macomb
Community Bank, located near metropolitan Detroit, commenced operations in
September. These two de novo banks are majority-owned by the Corporation
through its 51% ownership of those banks' common stock. The minority interests
in those banks ($4.7 million at December 31, 1996) is classified in the
consolidated balance sheet between liabilities and stockholders' equity.
15
<PAGE> 16
The remainder of asset growth in 1996 came from the Corporation's more mature
banks. The following table summarizes, comparatively, the total assets, net
income and related rates of return for each of the banks and on a consolidated
basis (dollar amounts in thousands):
<TABLE>
<CAPTION>
Total Assets Return On Return on
At December 31 Net Income Beginning Equity (1) Average Assets (1)
------------------ ----------------------- ------------------------ -----------------------
1996 1995 1996 1995 1994 1996 1995 1994 1996 1995 1994
------- ------ ------ ------ ----- -------- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $105,651 $ 75,954 $1,177 $ 841 $ 579 23.94% 20.52% 15.19% 1.36% 1.29% 1.16%
Bank of Tucson (2) 17,276 n/a (164) n/a n/a N/A n/a n/a N/A n/a n/a
Capitol National Bank 104,254 97,622 1,573 1,230 1,068 21.75 19.10 17.77 1.61 1.32 1.28
Grand Haven Bank (3) 32,731 20,930 220 71 n/a 8.31 4.26 n/a .83 .58 n/a
Macomb Community Bank (4) 15,123 n/a (120) n/a n/a N/A n/a n/a N/A n/a n/a
Oakland Commerce Bank 71,095 61,469 637 600 684 12.26 10.87 13.47 .91 1.04 1.17
Paragon Bank & Trust (5) 63,752 56,064 623 418 237 12.30 10.26 11.60 1.12 .80 .91
Portage Commerce Bank 73,769 64,019 1,091 905 751 23.08 22.31 19.44 1.58 1.52 1.48
-------- -------- ------ ------ ------ ------ ------ ----- ------ ----- ----
Total Banks 483,651 376,058 5,037 4,065 3,319 16.91 15.37 15.54 1.19 1.22 1.24
Mortgage banking (6) 2,831 3,077 (131) (229) (566) N/A n/a n/a N/A n/a n/a
Other, net 5,781 4,935 (270) (763) (677) N/A n/a n/a N/A n/a n/a
-------- -------- ------ ------ ------ ------ ------ ----- ------ ----- ----
Consolidated $492,263 $384,070 $4,636 $3,073 $2,076 15.02% 11.95% 11.32% 1.08% .87% .75%
======== ======== ====== ====== ====== ====== ===== ===== ====== ===== ====
</TABLE>
(1) Annualized, as applicable, to give effect to mergers, acquisitions and
formation of de novo banks.
(2) Bank of Tucson was formed and commenced operations in June 1996 and is 51%
owned by the Corporation.
(3) Grand Haven Bank (formerly a branch of Paragon Bank & Trust, acquired June
30, 1994) commenced operations effective May 1, 1995.
(4) Macomb Community Bank was formed and commenced operations in September
1996 and is 51% owned by the Corporation.
(5) Acquired effective June 30, 1994.
(6) 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.
n/a--Not applicable.
Of the consolidated growth in total assets in 1996, approximately $75 million
was deployed into loans. The Corporation's banks emphasize commercial lending
activities in their respective communities and commercial loans were
approximately 80% of total loans at year-end 1996 and 1995. The emphasis on
commercial lending is consistent with the banks' focus on meeting the financial
needs of entrepreneurs, professionals and other high net-worth individuals. As
a means to diversify the loan portfolio and to meet other customer needs,
residential real estate loans and other installment loans to individuals are
also made, which approximated about 20% of total portfolio loans.
A substantial portion of the Corporation's asset growth in 1996 and 1995 was
achieved through larger levels of bank deposits made by customers. The banks
offer a full range of depository services and have typically attracted
interest-bearing time deposits through maintaining a slight competitive pricing
advantage relative to peer. Interest-bearing deposits increased $76.9 million
in 1996 and $56.2 million in 1995.
Noninterest-bearing deposits, as a percentage of total deposits, increased to
14.4% in 1996, compared with 12.9% at year-end 1995. The ratio of
noninterest-bearing deposits to total deposits is important inasmuch as a
higher ratio has the beneficial effect of reducing the Corporation's
consolidated cost of funds. The ability to maintain higher levels of
noninterest-bearing accounts varies in the banks' respective markets.
ASSET QUALITY
Asset quality has been maintained at a strong level in 1996 and 1995.
Nonperforming loans have remained relatively low and at a manageable level
during these recent periods. Nonperforming loans are defined as loans which
are 90 days or more past due and loans on non-accrual status. Although
nonperforming loans increased in 1996, most of the increase related to a small
number of loans at Oakland Commerce Bank of which $400,000 was resolved in
January 1997.
16
<PAGE> 17
The following table summarizes total portfolio loans, the allowance for loan
losses and nonperforming loans for each of the Corporation's banks (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Allowance as a
Percentage of
Total Allowance for Nonperforming Total
Portfolio Loans Loan Losses Loans Portfolio Loans
---------------------- -------------------- ---------------------- ----------------------
1996 1995 1996 1995 1996 1995 1996 1995
---------- --------- ---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 79,463 $ 58,869 $ 1,088 $ 765 $ 304 $ 147 1.37% 1.30%
Bank of Tucson 4,850 n/a 49 n/a --- n/a 1.01 n/a
Capitol National Bank 80,749 75,468 1,076 1,058 797 396 1.33 1.40
Grand Haven Bank 26,162 14,630 303 155 --- --- 1.16 1.06
Macomb Community Bank 5,821 n/a 59 n/a --- n/a 1.01 n/a
Oakland Commerce Bank 54,569 46,146 655 552 1,227 448 1.20 1.20
Paragon Bank & Trust 46,680 41,288 563 494 44 --- 1.21 1.20
Portage Commerce Bank 58,177 45,870 785 663 327 350 1.35 1.45
Other, net 1,152 1,200 --- --- --- --- --- ---
--------- --------- -------- ------- -------- ------- ------ ------
Consolidated $ 357,623 $ 283,471 $ 4,578 $ 3,687 $ 2,699 $ 1,341 1.28% 1.30%
========= ========= ======== ======= ======== ======= ====== ======
n/a - Not applicable
</TABLE>
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the Corporation's loan portfolio. A
number of elements are considered in management's determination of the adequacy
of the allowance which include evaluation of recent loss experience, current
economic conditions, volume, amount and composition of the portfolio, loan
commitments outstanding and other factors.
Although provisions for loan losses have increased during each of the recent
periods, such increases are attributable to the larger size of the related loan
portfolios, coupled with the length of time the individual banks have been in
operation. Generally, de novo banks will not experience loan loss activity
until their portfolios have aged and, accordingly, their allowance for loan
losses as a percentage of total portfolio loans tends to be less in their
earlier years of operation. For the periods presented, impaired loans (as
defined by Financial Accounting Standards Board Statement No. 114) were not
material.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
Cash and cash equivalents approximated 13% of total assets at year-end 1996, a
slight increase over the 12% level at December 31, 1995. This level of
liquidity varies daily based on customers' transactions and, accordingly,
amounts of cash and federal funds sold can vary widely at any particular point
in time.
In order to balance asset deployment with liquidity requirements, funds are
deployed into other liquid assets consisting of marketable investment
securities. The Corporation has not engaged in securities trading activities,
derivatives or other speculative investments. Most of the investment
securities are classified as "available for sale", are generally of short-term
duration (typically, maturity of two years or less) and are carried at current
market value in the consolidated balance sheet. The market value adjustment is
reflected as an adjustment to stockholders' equity, for balance sheet purposes,
net of the related tax effect. While management has no plans or intentions to
sell those investments, the amount of such investments represents a significant
source of liquidity, when needed, to meet additional loan demand or depositors'
needs.
One of the Corporation's banks purchases loan participations on a temporary
basis from the 49% owned mortgage affiliate until those loans are delivered
into the secondary market. Such loans held for resale approximated $6.7
million at December 31, 1996 ($7 million at December 31,
17
<PAGE> 18
1995). During 1996, purchases and sales of loans held for resale approximated
$193 million, significantly higher than the approximate $82 million level in
1995. The 1996 volume increase was due to higher levels of loan origination
activity at the mortgage affiliate.
Sometimes financial institutions are compared by the ratio of loans to
deposits. The Corporation has typically maintained a relatively high ratio of
loans to deposits as a means of maximizing higher-yielding loans and related
interest margins. This ratio excludes loans held for resale. Optimally,
management seeks to maintain a loan to deposit ratio of 80% or more. At
December 31, 1996, the ratio of loans to deposits approximated 82%, a slight
decrease from the 83% level at year-end 1995 and a decrease from the year-end
1994 level of 86%. The change in the ratio in 1995 and 1996 is the result of
management's efforts to maintain that ratio more closely to the 80% level.
Most of the banks' various funding needs are met through obtaining customer
deposits. The banks emphasize time certificates of deposit and other
interest-bearing accounts. Because of the typical customer profile
(professionals, entrepreneurs and other high net-worth individuals) as well as
other sources of time deposits, the banks have consistently maintained
relatively large amounts of time deposits in denominations of $100,000 or more.
Such time deposits aggregated $77.6 million at December 31, 1996 and $60.2
million at December 31, 1995 or 17.8% and 15.9% of total deposits,
respectively. Most of those deposits mature within a one-year time frame. The
banks' experience is that, generally, time deposits are renewed at market rates
and do not present a liquidity concern. Management believes the Corporation's
and the banks' liquidity to be adequate to meet loan demand and depositor
needs.
The Corporation and two of its bank subsidiaries have certain secured lines of
credit with unaffiliated entities. At December 31, 1996, amounts outstanding
under those credit facilities approximated $6.5 million and $20.1 million was
available for future borrowings. The credit facilities are reviewed
periodically for continuance.
During the periods of 1994 through 1996 several transactions have significantly
increased the Corporation's capital and stockholders' equity. In 1994, the
Corporation consummated a merger transaction (acquisition of Paragon Bank &
Trust) involving the issuance of common stock and warrants for the purchase of
common stock. The value ascribed to common stock with respect to that 1994
acquisition approximated $6.7 million, relating to the approximately 743,000
shares of common stock issued.
In conjunction with that transaction, an equal number of warrants for the
future purchase of the Corporation's common stock were also issued, of which
three fourths were scheduled to expire by June 30, 1996 and the remainder on
June 30, 1997. During 1996, approximately 505,000 warrants were exercised,
generating proceeds to the Corporation of approximately $4.5 million and
issuance of approximately 505,000 shares of additional common stock. At
December 31, 1996, approximately 162,000 warrants relating to the 1994 merger
transaction remain outstanding. If all such warrants are exercised, the
Corporation would potentially receive approximately $1.3 million in additional
capital and issue approximately 162,000 additional shares of common stock;
however, there is no assurance such warrants will be exercised.
The Corporation received proceeds from the exercise of stock options which
amounted to approximately $1.5 million in 1996 and $1.2 million in 1995. At
year-end 1996, a total of 504,000 stock options were outstanding which have
varying expiration dates through 2003 and, if exercised, would generate
proceeds approximating $5 million; however, there is no assurance such options
will be exercised.
18
<PAGE> 19
On December 31, 1996 the Corporation issued a 10% stock dividend. All per-share
information included in the financial statements has been restated to give
effect to the 1996 stock dividend as if it had occurred at the beginning of the
periods presented.
In 1996, 1995 and 1994, the Corporation paid quarterly cash dividends. A
quarterly cash dividend of $.09 per share was paid in 1996, or an annual payout
rate of $0.36 per share. Restated for the recent stock dividend, the 1996
payout rate would have been $0.33 per share. The Corporation recently
announced a quarterly dividend of $0.10 per share payable in the first quarter
of 1997.
At December 31, 1996, the Corporation's book value of common stock amounted to
$8.91 per share as compared to a level of $8.26 per share at the beginning of
the year, as restated to give effect to the aforementioned stock dividend.
The Corporation and its banks are subject to a number of complex regulatory
requirements which require maintaining certain capital ratios. Additionally,
such capital ratio measurements and related requirements are used by regulatory
agencies to determine the level of regulatory intervention and enforcement
applied to financial institutions. Failure to comply with the regulatory
capital requirements can result in severe regulatory action and other adverse
consequences. The Corporation and each of its banks are in compliance with the
regulatory capital requirements and management expects to maintain such
compliance in the foreseeable future.
Those regulatory capital requirements are also used to classify institutions
into certain categories which are used to determine the level of regulatory
involvement and rates of deposit insurance premiums. All of the Corporation's
banks are classified as "well capitalized" under the current regulatory capital
framework. A more detailed presentation of the various capital ratios for each
bank and on a consolidated basis is set forth in Note N to the consolidated
financial statements appearing on page 32 of this Annual Report.
The Corporation's stockholders' equity approximated 8.16% of total assets at
December 31, 1996, a slight increase from the level of 8.04% at December 31,
1995. Management considers an approximate 8% ratio of shareholder equity to
total assets to be adequate to facilitate growth. As discussed previously, the
Corporation's 1996 de novo bank additions are majority-owned with the
Corporation making a 51% investment in the common stock of those banks.
Inasmuch as those banks are not wholly-owned by the Corporation, the related
minority interests, which approximated $4.7 million at December 31, 1996, are
classified in the consolidated balance sheet between liabilities and
stockholders' equity. On a combined basis, stockholders' equity and minority
interest in consolidated subsidiaries approximated $44.9 million at December
31, 1996, or 9.1% of total assets. This last ratio of total capital to total
consolidated assets measures the total extent to which all capital funds
deployed are leveraged.
As discussed more fully elsewhere herein, the Corporation has additional
expansion plans which involve formation of and investment in de novo banks.
Management's strategy is to form de novo banks with initially minimal
capitalization funded via a majority ownership from the Corporation, with
remaining capital invested by individuals and other entities within the de novo
bank's community. The Corporation's future investments in de novo banks is
expected to be funded from a combination of internally generated capital
resources, proceeds from exercise of warrants and stock options and borrowings.
Management believes the Corporation's capital levels to be adequate and that
capital resources are adequate to facilitate growth.
19
<PAGE> 20
TRENDS AFFECTING OPERATIONS
Trends in interest rates have a significant impact on results of operations.
Rapid changes in interest rates, either up or down, can have either a positive
or negative impact on net interest income, depending upon the direction and
timing of such changes.
Management endeavors to maintain a balanced position of interest rate-sensitive
assets and liabilities. In these most recent periods of lower interest rates,
the banks strive to emphasize variable rate loans and time deposits to the
extent possible in a competitive environment; however, competitive influences
often result in making fixed rate loans, although the banks seek to limit the
duration of such loans. Similarly, low interest rates generally make
competition more intense for deposits, since loan demand will increase during
periods of lower rates and, accordingly, result in higher interest costs on
deposits, adversely impacting interest margins. Future interest rates and the
impact on earnings are difficult to predict.
In recent periods, economic conditions nationally and in the banks' local
environment, have been relatively stable and positive. Local economic
conditions, and to some extent national economic conditions, have a significant
impact on levels of loan demand as well as the ability of borrowers to repay
loans and the availability of funds for customers to make deposits. Throughout
1996 and 1995, the generally positive economic environment has contributed
favorably to earnings and asset quality. Future economic conditions, and their
effect on asset quality and earnings, are difficult to predict.
Continuing consolidation of the banking industry on a national basis, and in
the respective markets of the Corporation's banks, has presented opportunities
for growth. More specifically, the consolidation of the banking industry,
coupled with the closure of branch locations by larger institutions, has had
the effect of displacing customer relationships. For retail customers, banking
services have become a commodity in an environment that is dominated by larger
"mass merchandising" megabanks. For the professional, entrepreneur and other
customers seeking a more service-oriented, customized banking relationship, the
Corporation's banks fill that need through their focus on single-location banks
with full local decision-making authority. In those markets in which the
Corporation's banks are located, the banks focus on service delivery and
keeping the banks' size at an appropriate level; only a modest market share of
deposits and loan activity is necessary in order to achieve profitability and
reasonable earnings performance.
The banking consolidation environment further presents opportunities for
expansion of de novo banking activities in numerous markets. Plans are
currently underway for expansion into additional banking markets in 1997, which
include formation of new banks in Grand Rapids and Muskegon, Michigan and
Scottsdale, Arizona (a de novo bank was opened in Brighton, Michigan in early
January 1997). Other markets are under study and evaluation for formation of
new banks which could either accelerate or slow the current plan, depending
upon opportunities and other matters. Future expansion is dependent on
opportunities and circumstances at the time, all of which are always in motion
and subject to change.
During 1996, the Corporation implemented the concept of forming "partnership de
novo banks" in which newly formed banks would be co-owned by the Corporation
and local investors within the community of the new bank. The Corporation
currently intends to pursue that concept further with its near-term de novo
banking expansion into new markets. In early January 1997, an additional
majority-owned de novo bank, Brighton Commerce Bank, was added in Brighton,
Michigan based on this concept.
De novo banks generally incur operating losses during their early periods of
operation. In 1996, net operating losses of the new banking units added in
June and September approximated
20
<PAGE> 21
$284,000. On a consolidated basis, however, such operating losses reduced net
income by the pro rata share of the Corporation's percentage ownership of those
banks (51%). Those banks are expected to become profitable in 1997 and,
accordingly, their earnings will be similarly included in consolidated net
income to the extent of the Corporation's ownership percentage in them. The
formation of additional de novo banks is expected to similarly impact future
operating results.
Financial institutions are subject to significant regulatory requirements which
impact current and future operations. In addition to the extent of regulatory
interaction with financial institutions (extensive rules and regulations
governing lending activities, deposit gathering and capital adequacy, to name a
few), the cost of financial institution regulation are significant. Such costs
include, but are not limited to, the significant amount of management time and
expense which is incurred maintaining compliance and developing systems for
compliance with those rules and regulations as well as the costs of
examinations, audits and other compliance activities.
Premiums for insurance of deposits by the Federal Deposit Insurance Corporation
(FDIC) are also significant costs of doing business as financial institutions.
Costs of those insurance premiums during 1994 through 1996 on a consolidated
basis have aggregated between $400,000 and $540,000 annually. The 1996 expense
of $425,000 is significantly higher than what would have been incurred based on
legislation in effect for periods prior to September 30, 1996.
On September 30, 1996, legislation was signed into law recapitalizing the
Savings Association Insurance Fund (SAIF), the FDIC fund covering insured
deposits of savings institutions. One of the Corporation's banks (Oakland
Commerce Bank, which was a federally chartered savings bank prior to its 1992
acquisition by the Corporation) has SAIF-insured deposits and, accordingly, was
charged a one-time assessment in the amount of approximately $330,000 for
resolution of the SAIF Fund. Without this assessment net income for 1996 would
have been approximately $220,000 higher than reported.
The SAIF assessment and other related aspects of that legislation are intended
to reduce insurance premiums paid by SAIF-insured banks and to bring those
premium rates more in line with rates that are charged to other banks. For
1995 and 1996, the Corporation's other banks have enjoyed relatively low FDIC
insurance premiums, largely because of the health of the FDIC's bank insurance
fund and because the banks thus far have been classified into the so-called
"well capitalized" category under which the lowest cost FDIC insurance premiums
are assessed. Other recent legislative changes to FDIC insurance will have the
impact of increasing deposit insurance premiums for all commercial banks in the
future, although the amount of premiums will depend on several factors (such as
the health of the banking industry and the economy in general) and are
difficult to predict.
The future of financial institution regulation, including FDIC insurance
premiums and other aspects and costs of regulation, is uncertain and difficult
to predict.
NEW ACCOUNTING STANDARDS
Certain new accounting standards became applicable to the Corporation during
1996. A new accounting standard governing the accounting and reporting for
stock-based compensation was implemented. This new accounting standard
provides alternative accounting treatment for stock options. Inasmuch as the
Corporation elected to implement the additional disclosure requirements of that
accounting standard, as opposed to the expense recognition alternative,
implementation of that standard had no impact on the Corporation's results of
operations for 1996. The additional disclosure requirements of the new
accounting standard are set forth in the notes to the financial statements.
21
<PAGE> 22
A recently issued accounting standard regarding "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" will become
effective for the Corporation in 1997. Based on management's preliminary
analysis of the new accounting standard, it is not expected to have a
significant impact on the Corporation's financial position or results of
operations.
Numerous other potential changes in accounting standards are under study by the
accounting standard-setting entities, regulatory agencies and others at any
point in time. Because of the fluid state of those potential accounting
standard changes, it is difficult to predict what impact they might have on the
Corporation's consolidated financial statements.
22
<PAGE> 23
Capitol Bancorp Ltd.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Corporation's management is responsible for the preparation of the
consolidated financial statements and all other information appearing in this
Annual Report. The financial statements have been prepared in accordance with
generally accepted accounting principles.
The Corporation's management is also responsible for establishing and
maintaining the internal control structure of the Corporation. The general
objectives of the internal control structure are to provide management with
reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition, and that transactions are executed in accordance with
management's authorization and recorded properly to permit the preparation of
financial statements in accordance with generally accepted accounting
principles. In fulfilling this objective, management has various control
procedures in place which include, but are not limited to, review and approval
of transactions, a code of ethical conduct for employees, internal auditing and
an annual audit of the Corporation's consolidated financial statements
performed by a qualified independent audit firm. Management believes the
internal control structure of the Corporation to be adequate and that there are
no material weaknesses in internal control.
23
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Capitol Bancorp Ltd.
We have audited the accompanying consolidated balance sheets of Capitol Bancorp
Ltd. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capitol Bancorp
Ltd. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
\s\ BDO Seidman, LLP
- - ----------------------------
Grand Rapids, Michigan
January 31, 1997
24
<PAGE> 25
CONSOLIDATED BALANCE SHEETS
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
1996 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,928,051 $ 14,714,534
Interest-bearing deposits with banks 55,267 16,294
Federal funds sold 42,350,000 30,600,000
--------------- ---------------
Cash and cash equivalents 63,333,318 45,330,828
Loans held for resale 6,748,776 7,029,622
Investment securities--Note C:
Available for sale, carried at market value 46,621,416 34,545,812
Held for long-term investment, carried at
amortized cost which approximates market value 2,103,264 1,783,164
--------------- ---------------
Total investment securities 48,724,680 36,328,976
Portfolio loans--Note D:
Commercial 283,460,601 222,161,206
Real estate mortgage 53,712,381 48,953,782
Installment 20,450,216 12,356,383
--------------- ---------------
Total portfolio loans 357,623,198 283,471,371
Less allowance for loan losses (4,578,000) (3,687,000)
--------------- ---------------
Net portfolio loans 353,045,198 279,784,371
Investment in and advances to Amera Mortgage
Corporation--Note B 2,830,761 3,076,984
Premises and equipment--Note E 5,421,308 2,437,719
Accrued interest income 3,107,496 2,634,417
Excess of cost over net assets of acquired subsidiaries 2,347,256 2,540,163
Other assets 6,704,551 4,906,645
--------------- ---------------
TOTAL ASSETS $ 492,263,344 $ 384,069,725
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 62,765,786 $ 43,797,199
Interest-bearing--Note H 373,400,277 296,490,261
--------------- ---------------
Total deposits 436,166,063 340,287,460
Debt obligations--Note K 6,500,000 8,711,877
Accrued interest on deposits and other liabilities 4,708,188 3,813,689
--------------- ---------------
Total liabilities 447,374,251 352,813,026
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES--Note B 4,730,553 391,372
STOCKHOLDERS' EQUITY--Notes B, I, J and N:
Common stock, no par value,
10,000,000 shares authorized;
issued and outstanding:
1996--4,504,911 shares
1995--3,395,288 shares 34,971,523 22,149,593
Retained earnings 5,150,066 8,414,189
Market value adjustment (net of tax effect) for
investment securities available for sale 36,951 413,422
--------------- ---------------
40,158,540 30,977,204
Less note payable by ESOP--Note K (111,877)
--------------- ---------------
Total stockholders' equity 40,158,540 30,865,327
--------------- ---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 492,263,344 $ 384,069,725
=============== ===============
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
CONSOLIDATED STATEMENTS OF INCOME
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $31,454,120 $25,915,949 $18,887,230
Loans held for resale 818,344 300,032 357,754
Taxable investment securities 2,262,341 2,084,624 1,384,960
Federal funds sold 1,540,920 1,452,849 679,349
Interest-bearing deposits with banks and other 60,137 10,415 35,297
Dividends on investment securities 343,143 149,669 135,318
------------ ------------ -------------
Total interest income 36,479,005 29,913,538 21,479,908
Interest expense:
Demand deposits 2,417,599 2,297,240 1,880,409
Savings deposits 1,384,479 1,247,865 1,089,652
Time deposits 13,489,577 11,016,206 5,813,961
Debt obligations 495,679 492,271 517,043
Other 12,487 25,505 95,537
------------ ------------ -------------
Total interest expense 17,799,821 15,079,087 9,396,602
------------ ------------ -------------
Net interest income 18,679,184 14,834,451 12,083,306
Provision for loan losses--Note D 1,195,757 838,830 473,383
------------ ------------ -------------
Net interest income after
provision for loan losses 17,483,427 13,995,621 11,609,923
Noninterest income:
Service charges on deposit accounts 746,108 569,240 429,526
Trust fee income 262,043 207,000 46,496
Realized gain (loss) on sale of loans 11,739 (137,638)
Realized gain (loss) on sale of investment
securities available for sale 82,171 1,574 (723)
Mortgage banking net revenues--Note B 299,520 1,434,203
Other 614,834 182,648 417,220
------------ ------------ -------------
Total noninterest income 1,705,156 1,271,721 2,189,084
Noninterest expense:
Salaries and employee benefits 6,387,715 5,104,244 5,037,137
Occupancy 923,771 868,234 816,801
Equipment rent, depreciation and maintenance 1,010,975 817,054 756,542
Deposit insurance premiums 425,115 401,014 538,761
Other 3,560,387 3,269,237 3,414,085
------------ ------------ ------------
Total noninterest expense 12,307,963 10,459,783 10,563,326
------------ ------------ ------------
Income before federal income taxes 6,880,620 4,807,559 3,235,681
Federal income taxes--Note F 2,245,000 1,735,000 1,160,000
------------ ------------- ------------
NET INCOME $ 4,635,620 $ 3,072,559 $ 2,075,681
============ ============ ============
NET INCOME PER SHARE:
Primary $ 1.09 $ 0.79 $ 0.64
============ ============ ============
Fully diluted $ 1.04 $ 0.77 $ 0.64
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Market Value
Adjustment for
Investment
Common Retained Securities
Stock Earnings Available for Sale
-------------- ------------- ------------------
<S> <C> <C> <C>
Balances at January 1, 1994 $ 13,500,780 $ 4,970,276 $ 94,626
Issuance of 742,980 shares of common stock in conjunction
with acquisition of Financial Center Corporation--Note B 6,679,390
Issuance of 33,080 shares of common stock upon exercise of
stock options 228,392
Purchase of 10,000 shares of common stock by ESOP,
financed by long-term debt
Principal payment on note payable by ESOP
Cash dividends paid ($.25 per share) (771,058)
Market value adjustment for investment securities
available for sale (net of tax effect) (840,020)
Net income for 1994 2,075,681
------------ ----------- ----------
BALANCES AT DECEMBER 31, 1994 20,408,562 6,274,899 (745,394)
Issuance of 58,922 shares of common stock upon
exercise of warrants 529,709
Issuance of 173,693 shares of common stock upon
exercise of stock options 1,157,825
Issuance of 5,095 shares of common stock pursuant
to Shareholder Investment Plan 53,497
Principal payment on note payable by ESOP
Cash dividends paid ($.25 per share) (933,269)
Market value adjustment for investment securities
available for sale (net of tax effect) 1,158,816
Net income for 1995 3,072,559
------------ ----------- ----------
BALANCES AT DECEMBER 31, 1995 22,149,593 8,414,189 413,422
Issuance of 505,372 shares of common stock upon
exercise of warrants 4,543,294
Issuance of 177,881 shares of common stock upon
exercise of stock options 1,548,937
Issuance of 16,967 shares of common stock pursuant to
Shareholder Investment Plan 179,251
Issuance of 409,403 shares of common stock upon
payment of 10% stock dividend 6,550,448 (6,552,961)
Principal payment on note payable by ESOP
Cash dividends paid ($.33 per share) (1,346,782)
Market value adjustment for investment securities
available for sale (net of tax effect) (376,471)
Net income for 1996 4,635,620
------------ ----------- ----------
BALANCES AT DECEMBER 31, 1996 $ 34,971,523 $ 5,150,066 $ 36,951
============ =========== ==========
<CAPTION>
Note
Payable
by ESOP Total
------------- -------------
<S> <C> <C>
Balances at January 1, 1994 $ (228,654) $ 18,337,028
Issuance of 742,980 shares of common stock in conjunction
with acquisition of Financial Center Corporation--Note B 6,679,390
Issuance of 33,080 shares of common stock upon exercise of
stock options 228,392
Purchase of 10,000 shares of common stock by ESOP,
financed by long-term debt (92,504) (92,504)
Principal payment on note payable by ESOP 97,403 97,403
Cash dividends paid ($.25 per share) (771,058)
Market value adjustment for investment securities
available for sale (net of tax effect) (840,020)
Net income for 1994 2,075,681
------------- -------------
BALANCES AT DECEMBER 31, 1994 (223,755) 25,714,312
Issuance of 58,922 shares of common stock upon
exercise of warrants 529,709
Issuance of 173,693 shares of common stock upon
exercise of stock options 1,157,825
Issuance of 5,095 shares of common stock pursuant
to Shareholder Investment Plan 53,497
Principal payment on note payable by ESOP 111,878 111,878
Cash dividends paid ($.25 per share) (933,269)
Market value adjustment for investment securities
available for sale (net of tax effect) 1,158,816
Net income for 1995 3,072,559
------------- -------------
BALANCES AT DECEMBER 31, 1995 (111,877) 30,865,327
Issuance of 505,372 shares of common stock upon
exercise of warrants 4,543,294
Issuance of 177,881 shares of common stock upon
exercise of stock options 1,548,937
Issuance of 16,967 shares of common stock pursuant to
Shareholder Investment Plan 179,251
Issuance of 409,403 shares of common stock upon
payment of 10% stock dividend (2,513)
Principal payment on note payable by ESOP 111,877 111,877
Cash dividends paid ($.33 per share) (1,346,782)
Market value adjustment for investment securities
available for sale (net of tax effect) (376,471)
Net income for 1996 4,635,620
------------- -------------
BALANCES AT DECEMBER 31, 1996 $ 0 $ 40,158,540
============= =============
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
---------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,635,620 $ 3,072,559
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 1,195,757 838,830
Depreciation of premises and equipment 652,703 520,963
Amortization of mortgage servicing rights 100,905
Amortization of excess of cost over net assets of acquired subsidiaries 192,907 251,596
Net amortization of investment security premiums (accretion of discount) (266,610) 9,240
Gain (loss) on sale of premises and equipment 7,394 (12,130)
Deferred income taxes (550,000) (240,000)
Originations and purchases of loans held for resale (192,642,846) (84,430,817)
Proceeds from sales of loans held for resale 192,923,692 81,069,303
Increase in accrued interest income and other assets (1,301,151) (171,994)
Increase (decrease) in accrued interest on deposits and other liabilities 503,127 789,785
-------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,350,593 1,798,240
INVESTING ACTIVITIES
Cash and cash equivalents of acquired subsidiaries
Proceeds from sale of 51% interest in Amera Mortgage Corporation 250,000
Proceeds from sales of investment securities available for sale 4,460,571 251,400
Proceeds from maturities of investment securities available for sale 39,742,019 14,207,785
Purchases of investment securities available for sale (56,881,766) (15,239,503)
Net increase in portfolio loans (74,456,584) (42,259,737)
Proceeds from sales of premises and equipment 12,757 33,481
Purchases of premises and equipment (3,656,443) (657,565)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (90,779,446) (43,414,139)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 43,901,957 387,423
Net increase in certificates of deposit 51,976,646 60,249,566
Net proceeds from (payments on) debt obligations (2,100,000) 900,000
Resources provided by minority interest 4,730,553 391,372
Net proceeds from issuance of common stock 6,271,482 1,741,031
Cash dividends paid and payments in lieu of
fractional shares (1,349,295) (933,269)
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 103,431,343 62,736,123
------------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 18,002,490 21,120,224
Cash and cash equivalents at beginning of year 45,330,828 24,210,604
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 63,333,318 $ 45,330,828
============= ============
<CAPTION>
Year Ended December 31
1994
-------------
<S> <C>
OPERATING ACTIVITIES
Net income $ 2,075,681
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 473,383
Depreciation of premises and equipment 519,322
Amortization of mortgage servicing rights 399,289
Amortization of excess of cost over net assets of acquired subsidiaries 243,443
Net amortization of investment security premiums (accretion of discount) 89,439
Gain (loss) on sale of premises and equipment (9,337)
Deferred income taxes (178,000)
Originations and purchases of loans held for resale (91,138,172)
Proceeds from sales of loans held for resale 119,311,816
Increase in accrued interest income and other assets (967,749)
Increase (decrease) in accrued interest on deposits and other liabilities (945,944)
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,873,171
INVESTING ACTIVITIES
Cash and cash equivalents of acquired subsidiaries 1,027,266
Proceeds from sale of 51% interest in Amera Mortgage Corporation
Proceeds from sales of investment securities available for sale 48,398
Proceeds from maturities of investment securities available for sale 9,978,763
Purchases of investment securities available for sale (13,505,475)
Net increase in portfolio loans (33,568,525)
Proceeds from sales of premises and equipment 14,708
Purchases of premises and equipment (369,342)
-------------
NET CASH USED BY INVESTING ACTIVITIES (36,374,207)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (6,197,695)
Net increase in certificates of deposit 19,645,361
Net proceeds from (payments on) debt obligations (3,093,981)
Resources provided by minority interest
Net proceeds from issuance of common stock 228,392
Cash dividends paid and payments in lieu of
fractional shares (771,058)
-------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,811,019
-------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,309,983
Cash and cash equivalents at beginning of year 20,900,621
-------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,210,604
=============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
Capitol Bancorp Ltd. (the "Corporation") is a multibank holding company.
Consolidated banking subsidiaries consist of the following:
<TABLE>
<CAPTION>
Percentage Year Formed
Bank Location Owned or Acquired
----------------------- -------------------------- ---------- -----------
<S> <C> <C> <C>
Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990
Bank of Tucson Tucson, Arizona 51% 1996
Capitol National Bank Lansing, Michigan 100% 1982
Grand Haven Bank Grand Haven, Michigan 85% 1995
Macomb Community Bank Clinton Township, Michigan 51% 1996
Oakland Commerce Bank Farmington Hills, Michigan 100% 1992
Paragon Bank & Trust Holland, Michigan 100% 1994
Portage Commerce Bank Portage, Michigan 100% 1990
</TABLE>
. . . . . . . . . . . . . .
The banks provide a full range of banking services to individuals, businesses
and other customers located in their respective communities. Each of the banks
generally operates from a single location and focuses its activities on meeting
the various credit and other banking needs of entrepreneurs, professionals and
other high net-worth individuals. A variety of deposit products are offered,
including checking, savings, money market, individual retirement accounts and
certificates of deposit. In addition, trust services are offered through
Paragon Bank & Trust. The principal markets for the banks' financial services
are the communities in which they are located and the areas immediately
surrounding those communities. In addition to commercial banking units,
mortgage banking activities are offered through Amera Mortgage Corporation, a
49% owned affiliate (effective March 31, 1995--see Note B), previously a
wholly-owned subsidiary (formerly Mortgage Connection, Inc.).
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after elimination of intercompany accounts
and transactions, and after giving effect to applicable minority interest.
Banks formed or otherwise acquired during 1994, 1995 and 1996 are included in
the consolidated financial statements for periods after joining the
consolidated group (see Note B). Certain 1995 and 1994 amounts have been
reclassified to conform to the 1996 presentation.
ESTIMATES: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
LOANS HELD FOR RESALE: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the lower of cost or market.
INVESTMENT SECURITIES: Investment securities "available for sale" (generally
most debt securities investments of the Corporation), are carried at market
value with unrealized gains and losses reported as a separate component of
stockholders' equity, net of tax effect. All other investment securities are
classified as held for long-term investment and are carried at amortized cost
which approximates market value (see Note C). Investments are classified at
the date of purchase based on management's analysis of liquidity and other
factors. The adjusted cost of the specific securities sold is used to compute
realized gains or losses. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried
at their principal balance based on management's intent and ability to hold
such loans for the foreseeable future until maturity or repayment. Credit risk
arises from making loans and loan commitments in the ordinary course of
business. Substantially all portfolio loans are made to borrowers in the
banks' geographic areas. Consistent with the banks' emphasis on business
lending, there are concentrations of credit in loans secured by commercial real
estate, equipment and other business assets. The maximum potential credit risk
to the Corporation, without regard to underlying collateral and guarantees, is
the total of loans and loan commitments outstanding. Management reduces the
Corporation's exposure to losses from credit risk by requiring collateral
and/or guarantees for loans granted and monitoring concentrations of credit, in
addition to recording provisions for loan losses and maintaining an allowance
for loan losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on evaluation of the
portfolio (including potential impairment of individual loans and
concentrations of credit), past loss experience, current economic conditions,
volume, amount and composition of the loan portfolio, loan commitments
outstanding and other factors. The allowance is increased by provisions
charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of loans
approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral
is sufficient to cover the principal balance and accrued interest and the loan
is in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of
cost. Depreciation is computed principally by the straight-line method based
upon estimated useful lives of the respective assets. Leasehold improvements
are generally depreciated over the respective lease term.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED SUBSIDIARIES: Goodwill, which
relates primarily to acquisitions in 1994 and 1992, is amortized on a
straight-line basis over various periods not to exceed 15 years. Management
periodically reviews long-lived assets, including associated goodwill, for
potential impairment based upon projected undiscounted net cash flows, when
applicable, and the related amortization periods.
OTHER REAL ESTATE: Other real estate (included as a component of other assets
and which, at December 31, 1996 and 1995 approximated $313,000 and $972,000,
respectively) comprises properties acquired through a foreclosure proceeding or
acceptance of a deed in lieu of foreclosure. These properties held for sale
are carried at the lower of cost or estimated fair value (net of estimated
selling cost) at the date acquired and are periodically reviewed for subsequent
impairment.
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon
granting of stock options, because such stock options are accounted for under
the provisions of Accounting Principles Board Opinion 25. Pro forma disclosure
of alternative accounting recognition is made elsewhere herein.
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on
deposit, held in a fiduciary or agency capacity by the Corporation's banks is
not included in the consolidated balance sheet because such property is not an
asset of the banks or the Corporation. Trust fee income is recorded on the
accrual method.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
FEDERAL INCOME TAXES: The Corporation and subsidiaries owned 80% or more by the
Corporation file a consolidated federal income tax return. Deferred income
taxes are recognized for the tax consequences of temporary differences by
applying enacted tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred income taxes of a change in tax laws
or rates is recognized in income in the period that includes the enactment
date.
NET INCOME PER SHARE: Primary net income per share is based on the weighted
average number of common shares outstanding and common stock equivalents
(4,240,551 in 1996, 4,217,800 in 1995 and 3,397,035 in 1994, as restated for
the Corporation's 1996 10% stock dividend--see Note I), using the treasury
stock or modified treasury stock method, as applicable. Fully diluted net
income per share for 1996 and 1995 is similarly based on the weighted average
income of common shares and common stock equivalents, as adjusted for the
additional dilutive effect of applying the closing share price at year end, if
higher than the average for the year (fully diluted share base was 4,444,818 in
1996 and 4,343,828 in 1995).
NOTE B--CHANGES IN CONSOLIDATED GROUP
During 1996, two de novo banks became majority-owned subsidiaries of the
Corporation. Bank of Tucson commenced operations on June 27, 1996 with total
capitalization of $5.4 million, of which $2.7 million was invested by the
Corporation. Macomb Community Bank commenced operations on September 18, 1996
with total capitalization of $4 million, of which $2 million was invested by
the Corporation.
Effective May 1, 1995, the Corporation formed Grand Haven Bank, an 85% owned de
novo subsidiary engaged in commercial banking in Grand Haven, Michigan. The
Bank was previously operated as a branch of Paragon Bank & Trust. Grand Haven
Bank was capitalized with $2.5 million.
On June 30, 1994, the Corporation completed a merger transaction with Financial
Center Corporation ("FCC"), based in Holland, Michigan. Under the terms of the
merger agreement, FCC became a wholly-owned subsidiary of Capitol Bancorp Ltd.
in an exchange of Capitol Bancorp common stock and warrants for all of the
outstanding common stock of FCC. FCC's principal operating unit consisted of
Paragon Bank & Trust, a community bank also based in Holland, with a branch
location in neighboring Grand Haven. Total assets of FCC approximated $50
million at the merger date. The FCC merger transaction has been accounted for
under the purchase method of accounting. Accordingly, its operations are
included in the Corporation's consolidated financial statements for periods
after the effective date of the merger.
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 for a combination of cash
($250,000) and notes approximating $1,200,000. The amount of the notes due
from the purchaser is in addition to the Corporation's investment in and
advances to the mortgage unit ($2,831,000 at December 31, 1996). Under the
terms of the sale transaction, the majority owner of the mortgage unit
(subsequently its President and CEO) appoints a majority of its board of
directors. Under certain circumstances, the majority owner and the Corporation
each have the right to purchase the other party's interest in the mortgage
company.
MCI subsequently changed its name to Amera Mortgage Corporation. For periods
after March 31, 1995, the Corporation's remaining investment in Amera Mortgage
Corporation (49%) is accounted for under the equity method for the pro rata
share of the mortgage company's net income or loss.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE C--INVESTMENT SECURITIES
Investment securities consisted of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
----------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
Available for sale:
United States Treasury securities $18,370,254 $18,472,498 $17,527,687 $17,876,320
United States government
agency securities 27,791,852 27,748,332 15,317,683 15,682,563
States and political subdivisions 100,000 100,118 250,000 249,896
Corporate bonds 300,543 300,468 739,075 737,033
----------- ----------- ----------- -----------
46,562,649 46,621,416 33,834,445 34,545,812
Held for long-term investment:
Federal Reserve Bank stock 115,900 115,900 115,900 115,900
Federal Home Loan Bank stock 984,100 984,000 664,000 664,000
Corporate stock 1,003,264 1,003,000 1,003,264 1,003,000
----------- ----------- ----------- -----------
2,103,264 2,102,900 1,783,164 1,782,900
----------- ----------- ----------- -----------
$48,665,913 $48,724,316 $35,617,609 $36,328,712
=========== =========== =========== ===========
</TABLE>
At December 31, 1996, securities with a market value approximating $5,004,000
were pledged to secure public and trust deposits and for other purposes as
required by law.
Gross unrealized gains and losses of investment securities available for sale
were as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
------------------------- -----------------------
Gains Losses Gains Losses
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
United States Treasury securities $ 125,666 $ 23,422 $ 353,937 $ 5,304
United States government agency securities 60,062 103,582 411,339 46,459
States and political subdivisions 118 94 198
Corporate bonds and other 75 973 3,015
--------- --------- --------- ---------
$ 185,846 $ 127,079 $ 766,343 $ 54,976
========= ========= ========= =========
</TABLE>
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE C--INVESTMENT SECURITIES--CONTINUED
Scheduled maturities of investment securities held as of December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 14,998,724 $ 15,006,297
After one year, through five years 27,085,270 27,175,028
After five years, through ten years 4,365,189 4,330,781
After ten years 113,466 109,310
Securities held for long-term
investment, without stated maturities 2,103,264 2,102,900
------------ ------------
$ 48,665,913 $ 48,724,316
============ ============
</TABLE>
NOTE D--LOANS
Transactions in the allowance for loan losses are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 $ 3,687,000 $ 3,220,000 $ 2,500,000
Allowance of acquired bank 515,000
Provision charged to operations 1,195,757 838,830 473,383
Loans charged off (deduction) (437,648) (594,073) (384,783)
Recoveries 132,891 222,243 116,400
----------- ----------- -----------
Balance at December 31 $ 4,578,000 $ 3,687,000 $ 3,220,000
=========== =========== ===========
</TABLE>
Certain commercial loans are enrolled in a loan program sponsored by the State
of Michigan. Under that program, the governmental unit shares loss exposure on
such loans by funding reserves which are placed as deposits at the banks.
Loans participating in this program and related reserves approximated
$13,901,000 and $1,551,000, respectively, at December 31, 1996 ($11,891,000 and
$1,153,000, respectively, at December 31, 1995). Such reserve amounts are
separate and excluded from the allowance for loan losses.
At December 31, 1996 and 1995, 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.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE E--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
----------- -----------
<S> <C> <C>
Land, buildings and improvements $ 2,596,775 $ 1,094,409
Leasehold improvements 1,051,938 514,529
Equipment and furniture 4,569,380 3,113,143
----------- -----------
8,218,093 4,722,081
Less accumulated depreciation (2,796,785) (2,284,362)
----------- -----------
$ 5,421,308 $ 2,437,719
=========== ===========
</TABLE>
The Corporation and certain subsidiaries rent office space under operating
leases. Rent expense (net of sublease income) under these lease agreements
approximated $614,000, $559,000 and $590,000 (including rent expense of
$222,000, $209,000 and $272,000 under leases with related parties) for the
years ended December 31, 1996, 1995 and 1994, respectively. Future minimum
rental payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1996
aggregate $2,504,000 due as follows: $564,000 in 1997, $375,000 in 1998,
$289,000 in 1999, $297,000 in 2000, $236,000 in 2001 and $743,000 thereafter.
NOTE F--INCOME TAXES
Federal income taxes consist of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current $2,795,000 $1,975,000 $1,338,000
Deferred credit (550,000) (240,000) (178,000)
---------- ---------- ----------
$2,245,000 $1,735,000 $1,160,000
========== ========== ==========
</TABLE>
Federal income taxes paid during 1996, 1995 and 1994 approximated $2,451,000,
$1,831,000 and $902,000, respectively.
Differences between federal income tax expense recorded and amounts computed
using the statutory tax rate are reconciled below:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Federal income tax computed at
statutory rate of 34% $ 2,339,000 $ 1,635,000 $ 1,100,000
Tax effect of:
Amortization of goodwill 66,000 86,000 83,000
Other (160,000) 14,000 (23,000)
------------ ----------- -----------
$ 2,245,000 $ 1,735,000 $ 1,160,000
============ =========== ===========
</TABLE>
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE F--INCOME TAXES--CONTINUED
Net deferred income tax assets consisted of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
---------- ----------
<S> <C> <C>
Allowance for loan losses $1,374,000 $1,001,000
Deferred compensation 274,000 207,000
Market value adjustment for investment
securities available for sale (20,000) (242,000)
Other, net 158,000 76,000
---------- ----------
$1,786,000 $1,042,000
========== ==========
</TABLE>
NOTE G--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Corporation's banking subsidiaries make
loans to officers and directors of the Corporation and its subsidiaries
including their immediate families and companies in which they are principal
owners. At December 31, 1996 and 1995, total loans to these persons
approximated $14,727,000 and $9,932,000, respectively. During 1996,
$10,725,000 of new loans were made to these persons and repayments totalled
$5,930,000. Such loans are made at the banking subsidiaries' normal credit
terms.
Such officers and directors of the Corporation (and their associates, family
and/or affiliates) are also depositors of the banking subsidiaries. Such
deposits are similarly made at the banks' normal terms as to interest rate,
term and deposit insurance.
NOTE H--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated
$77,566,000, and $60,196,000 as of December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of such time deposits were as
follows:
<TABLE>
<S> <C>
1997 $67,317,000
1998 6,569,000
1999 2,444,000
2000 547,000
2001 and thereafter 689,000
-----------
Total $77,566,000
===========
</TABLE>
Interest paid approximates amounts charged to operations on an accrual basis
for the periods presented.
NOTE I--COMMON STOCK, WARRANTS AND STOCK OPTIONS
On December 31, 1996, the Corporation issued a 10% stock dividend. All
per-share data has been restated to reflect the stock dividend as if it had
occurred at the beginning of the periods presented.
At December 31, 1996, 162,244 warrants were outstanding which were issued in
conjunction with a 1994 merger transaction (see Note B). Each warrant enables
the holder thereof to purchase one share of common stock at $8.17272 per share
(as adjusted for the 1996 stock dividend) and expires on June 30, 1997.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE I--COMMON STOCK, WARRANTS AND STOCK OPTIONS--CONTINUED
Stock options have been granted to three executive officers which provide for
the purchase of shares of common stock. Generally, stock options are granted
at an exercise price equal to the fair value of common stock on the grant date,
expire seven years after grant, and are currently exercisable. Under the terms
of an employment agreement with a certain director and executive officer of the
Corporation, options granted thereunder shall be increased when the Corporation
issues additional shares so that such options granted equal 15% of outstanding
shares prior to exercise. In addition, certain other stock options resulted
from a 1994 merger transaction. Stock option activity is summarized as
follows:
<TABLE>
<CAPTION>
Number of
Options Weighted Average
Outstanding Exercise Price Range Exercise Price
-------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995 615,731 $ .36 to $ 9.50 $ 7.07
Granted in 1995 41,941 8.25 to 10.50 9.68
Exercised in 1995 (173,693) .36 to 7.14 5.27
------------
Outstanding at December 31, 1995 483,979 6.28 to 10.50 7.91
Granted in 1996 198,251 10.19 to 16.25 13.01
Exercised in 1996 (177,881) 6.28 to 7.27 6.87
Expired in 1996 (280) 7.14 7.14
------------
Outstanding at December 31, 1996 504,069 6.49 to 16.25 10.28
============
</TABLE>
As of December 31, 1996, stock options outstanding had a weighted average
remaining contractual life of 4.9 years.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", establishes a fair value method of accounting for
stock options whereby compensation expense is recognized based on the computed
fair value of the options on the grant date. However, as permitted by SFAS No.
123, the Corporation has elected to continue to account for its stock options
under the earlier accounting standard, and therefore, has not recognized
compensation expense. By electing this alternative, certain pro forma
disclosures of the expense recognition provisions are required. Under the fair
value method of accounting, 1996 net income and fully diluted earnings per
share would have been $4.1 million and $.92, respectively. The fair value of
the options was estimated at the grant dates using an option pricing model with
the following weighted average assumptions: risk-free interest rate of 6.4%,
dividend yield of 3.0%, stock price volatility of .32 and an expected option
life of 7 years. The pro forma effect of applying the fair value method was
not material to 1995 reported results.
NOTE J--EMPLOYEE RETIREMENT PLANS
The Corporation has a contributory employee retirement savings 401(k) plan
which covers substantially all full-time employees of the Corporation and 80%
or more owned subsidiaries over age 21. The Plan provides for contributions by
the Corporation in amounts determined annually by the board of directors.
Eligible employees may also make voluntary contributions to the Plan.
Contributions to the Plan charged to expense for the years ended December 31,
1996, 1995 and 1994 were $88,000, $84,000 and $33,500, respectively.
The Corporation also has a defined contribution employee stock ownership plan
("ESOP") which covers substantially all employees
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE J--EMPLOYEE RETIREMENT PLANS-- CONTINUED
of the Corporation and 80% or more owned subsidiaries. Common stock purchases
by the ESOP were financed by long-term debt (debt retired in 1996). ESOP
contributions charged to expense in 1996, 1995 and 1994 approximated $131,000,
$130,000 and $116,000 (including ESOP note payable interest of $8,400, $19,000
and $19,000), respectively.
NOTE K--DEBT OBLIGATIONS
Debt obligations consisted of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
---------- ----------
<S> <C> <C>
Short-term borrowings from Federal Home Loan Bank $3,000,000 $3,000,000
Notes payable to unaffiliated bank 3,500,000 5,600,000
ESOP note payable to unaffiliated bank 111,877
---------- ----------
$6,500,000 $8,711,877
========== ==========
</TABLE>
Short-term borrowings from Federal Home Loan Bank represent advances secured by
certain portfolio residential real estate mortgage loans. These borrowings
bear interest at various rates (5.84% at December 31, 1996) and are due at
varying dates in 1997.
Notes payable to unaffiliated bank represent borrowings under lines of credit
aggregating up to $10 million. Under the terms of these credit facilities, up
to $8 million is convertible into a term loan due in quarterly principal
installments based on an eight-year amortization (plus interest at 7.5%). The
remaining $2 million facility is a one-year revolving credit agreement which
bears interest at prime rate (8.25% at December 31, 1996), payable quarterly.
These credit facilities require the Corporation, among other things, to
maintain certain minimum levels of capital, rates of return on assets and other
ratios or requirements and are secured by the common stock of certain bank
subsidiaries. Interest paid under these credit facilities approximated
$342,000 in 1996, $474,000 in 1995 and $376,000 in 1994.
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE L--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION> December 31
1996 1995
-------------------------- -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 63,333 $ 63,333 $ 45,331 $ 45,331
Loans held for resale 6,749 6,749 7,030 7,030
Investment securities:
Available for sale 46,622 46,622 34,546 34,546
Held for long-term investment 2,103 2,103 1,783 1,783
---------- ---------- ---------- ----------
48,725 48,725 36,329 36,329
Portfolio loans:
Fixed rate 212,286 212,341 152,301 152,702
Variable rate 145,337 145,330 131,170 132,908
--------- --------- ---------- ---------
Total portfolio loans 357,623 357,671 283,471 285,610
Less allowance for loan losses (4,578) (4,578) (3,687) (3,687)
---------- ---------- ----------- ----------
Net portfolio loans 353,045 353,093 279,784 281,923
Financial liabilities:
Deposits:
Noninterest-bearing deposits 62,766 62,766 43,797 43,797
Interest-bearing deposits:
Demand accounts 119,096 119,415 93,780 94,291
Time certificates of deposit less
than $100,000 176,738 176,733 142,514 143,827
Time certificates of deposit of
$100,000 or more 77,566 77,579 60,196 60,471
--------- --------- --------- ---------
Total interest-bearing deposits 373,400 373,727 296,490 298,589
--------- --------- --------- ---------
Total deposits 436,166 436,493 340,287 342,386
Debt obligations 6,500 6,500 8,712 8,712
</TABLE>
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates on financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest unless quoted market values or
other fair value information is more readily available. Such estimates of fair
value are not intended to represent market value or portfolio liquidation
value, and only represent an estimate of fair values based on current financial
reporting requirements.
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE M--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of bank customers. Such loan commitments
include stand-by letters of credit, lines of credit, and various commitments
for other commercial, consumer and mortgage loans. Stand-by letters of credit,
when issued, commit the bank to make payments on behalf of customers when
certain specified future events occur and are used infrequently by the banks
($6,338,000 and $3,493,000 outstanding at December 31, 1996 and 1995,
respectively). Other loan commitments outstanding consist of unused lines of
credit and approved, but unfunded, specific loan commitments ($83,565,000 and
$59,646,000 at December 31, 1996 and 1995, respectively). These loan
commitments (stand-by letters of credit and unfunded loans) generally expire
within one year and are reviewed periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the banks' normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
The Corporation's banking subsidiaries are required to maintain average reserve
balances in the form of cash on hand and balances due from the Federal Reserve
Bank and certain correspondent banks. The amount of reserve balances required
as of December 31, 1996 and 1995 were $1,463,000 and $1,044,000, respectively.
NOTE N--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to the Corporation in the form of cash dividends, loans or
advances. Subject to various regulatory capital requirements, bank
subsidiaries' current and retained earnings are available for distribution as
dividends to the Corporation (and other bank shareholders, as applicable)
without prior approval from regulatory authorities. Substantially all of the
remaining net assets of the subsidiaries are restricted as to payments to the
Corporation.
Each bank and the Corporation are subject to certain other capital
requirements. Federal financial institution regulatory agencies have
established certain risk-based capital guidelines for banks and bank holding
companies. Those guidelines require all banks and bank holding companies to
maintain certain minimum ratios and related amounts based on `Tier I' and `Tier
II' capital and `risk-weighted assets' as defined and periodically prescribed
by the respective regulatory agencies. Failure to meet these capital
requirements can result in severe regulatory enforcement action or other
adverse consequences for a depository institution and, accordingly, could have
a material impact on the Corporation's consolidated financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve
quantitative measures of assets, liabilities and certain off-balance-sheet
items calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgements by regulatory
agencies with regard to components, risk weighting and other factors.
As of December 31, 1996, the most recent notifications received by the banks
from regulatory agencies have advised that the banks are classified as "well
capitalized" as defined by the applicable agencies. There are no conditions or
events since those notifications that management believes would change the
regulatory classification of the banks.
Management believes, as of December 31, 1996, that the Corporation and the
banks meet all capital adequacy requirements to which the entities are subject.
The following table summarizes the amounts (in thousands) and related ratios of
the individual banks' and consolidated regulatory capital position as of
December 31, 1996 and 1995:
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE N--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
<TABLE>
<CAPTION>
Ann Arbor Bank Capitol Grand Macomb Oakland Paragon
Commerce of National Haven Community Commerce Bank &
Bank Tucson Bank Bank Bank Bank Trust
---------- --------- -------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996
- - -----------------
Total Capital to Total Assets:
Actual Amount $ 6,655 $5,189 $ 8,020 $2,809 $3,587 $5,434 $4,484
Ratio 6.30% 30.04% 7.69% 8.58% 23.73% 7.64% 7.03%
Minimum Required Amount >$ 4,226 >$1,382 > $ 4,170 >$2,618 > $1,210 >$2,844 >$2,550
- - - - - - -
Ratio(1) > 4.00% > 8.00% > 4.00% > 8.00% > 8.00% > 4.00% > 4.00%
- - - - - - -
Tier I Capital to Risk-Weighted
Assets:
Actual Amount $ 6,657 $5,199 $8,035 $2,638 $3,588 $5,438 $4,414
Ratio 8.79% 67.12% 10.37% 11.82% 49.73% 10.10% 8.88%
Minimum Required Amount >$ 3,028 >$ 310 > $3,100 >$ 893 > $ 289 >$2,154 >$1,988
- - - - - - -
Ratio > 4.00% > 4.00% > 4.00% > 4.00% > 4.00% > 4.00% > 4.00%
- - - - - - -
Combined Tier I and Tier II Capital
To Risk-Weighted Assets:
Actual Amount $ 7,605 $5,248 $9,005 $2,940 $3,647 $6,093 $4,977
Ratio 10.05% 67.76% 11.62% 13.18% 50.55% 11.32% 10.01%
Minimum Required Amount >$ 6,057 >$ 620 > $6,200 >$1,785 > $ 577 >$4,308 >$3,977
- - - - - - -
Ratio > 8.00% > 8.00% > 8.00% > 8.00% > 8.00% > 8.00% > 8.00%
- - - - - - -
Amount Required to Meet
"Well-Capitalized" Category >$ 7,571 >$ 775 > $7,751 >$2,231 $ 722 >$5,384 >$4,971
- - - - - -
Ratio > 10.00% > 10.00% > 10.00% > 10.00% > 10.00% > 10.00% > 10.00%
- - - - - - -
<CAPTION>
Portage Capitol
Commerce Bancorp
Bank Ltd. Consolidated
---------- ---------- ------------
<S> <C> <C> <C>
December 31, 1996
- - -----------------
Total Capital to Total Assets:
Actual Amount $ 5,248 $40,159 $40,159
Ratio 7.11% 87.98% 8.16%
Minimum Required Amount >$ 2,951 >$1,826 >$19,691
- - -
Ratio(1) > 4.00% > 4.00% > 4.00%
- - -
Tier I Capital to Risk-Weighted
Assets:
Actual Amount $ 5,265 $37,775 $42,506
Ratio 9.56% 90.15% 11.91%
Minimum Required Amount >$ 2,204 >$1,676 >$14,178
- - -
Ratio > 4.00% > 4.00% > 4.00%
- - -
Combined Tier I and Tier II Capital
To Risk-Weighted Assets:
Actual Amount $ 5,955 $36,715 $45,645
Ratio 10.81% 87.62% 12.88%
Minimum Required Amount >$ 4,407 >$3,352 $28,356
- -
Ratio > 8.00% > 8.00% > 8.00%
- - -
Amount Required to Meet
"Well-Capitalized" Category >$ 5,509 > n/a >$35,446
- - -
Ratio > 10.00% > n/a > 10.00%
- - -
<CAPTION>
Ann Arbor Bank Capitol Grand Macomb Oakland Paragon
Commerce of National Haven Community Commerce Bank &
Bank Tucson Bank Bank Bank Bank Trust
---------- --------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995
- - -----------------
Total Capital to Total Assets:
Actual Amount $ 4,981 n/a $7,234 $2,647 n/a $5,192 $5,068
Ratio 6.46% n/a 7.39% 11.59% n/a 8.46% 9.11%
Minimum Required Amount >$ 3,038 n/a > $3,905 >$1,674 n/a >$2,459 >$2,243
- - - - -
Ratio(1) > 4.00% n/a > 4.00% > 8.00% n/a > 4.00% > 4.00%
- - - - -
Tier I Capital to Risk-Weighted
Assets:
Actual Amount $ 4,905 n/a $7,212 $2,426 n/a $5,201 $5,110
Ratio 8.78% n/a 10.11% 16.69% n/a 11.48% 12.00%
Minimum Required Amount >$ 2,234 n/a > $2,854 >$ 582 n/a >$1,812 >$1,703
- - - - -
Ratio > 4.00% n/a > 4.00% > 4.00% n/a > 4.00% > 4.00%
- - - - -
Combined Tier I and Tier II Capital
To Risk-Weighted Assets:
Actual Amount $ 5,603 n/a $8,270 $2,581 n/a $5,753 $5,604
Ratio 10.03% n/a 11.59% 17.75% n/a 12.70% 13.16%
Minimum Required Amount >$ 4,469 n/a > $5,707 >$1,163 n/a >$3,624 >$3,406
- - - - -
Ratio > 8.00% n/a > 8.00% > 8.00% n/a > 8.00% > 8.00%
- - - - -
Amount Required to Meet
"Well-Capitalized" Category >$ 5,586 n/a > $7,134 >$1,454 n/a >$4,530 >$4,257
- - - - -
Ratio > 10.00% n/a > 10.00% > 10.00% n/a > 10.00% > 10.00%
- - - - -
<CAPTION>
Portage Capitol
Commerce Bancorp
Bank Ltd. Consolidated
---------- ---------- ------------
<S> <C> <C> <C>
December 31, 1995
- - -----------------
Total Capital to Total Assets:
Actual Amount $ 4,729 $30,865 $30,865
Ratio 7.38% 72.27% 7.16%
Minimum Required Amount >$ 2,561 >$ 1,522 >$15,363
- - -
Ratio(1) > 4.00% > 4.00% > 4.00%
- - -
Tier I Capital to Risk-Weighted
Assets:
Actual Amount $ 4,723 $27,492 $27,492
Ratio 10.20% 80.02% 9.80%
Minimum Required Amount >$ 1,853 >$ 1,374 >$11,224
- - -
Ratio > 4.00% > 4.00% > 4.00%
- - -
Combined Tier I and Tier II Capital
To Risk-Weighted Assets:
Actual Amount $ 5,302 $27,071 $30,607
Ratio 11.45% 78.79% 10.91%
Minimum Required Amount >$ 3,706 >$ 2,749 >$22,448
- - -
Ratio > 8.00% > 8.00% > 8.00%
- - -
Amount Required to Meet
"Well-Capitalized" Category >$ 4,632 > n/a >$28,060
- - -
Ratio > 10.00% > n/a > 10.00%
- - -
</TABLE>
(1) As a condition of charter approval, certain de novo banks (Bank of Tucson,
Grand Haven Bank and Macomb Community Bank) are required to maintain a ratio of
capital to total assets of not less than 8% for the first three years of
operations.
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE O--PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary banks $ 8,980 $ 70,249
Money market funds on deposit with subsidiary banks 323,178 167,460
Investment securities held for long-term investment 293,264 293,264
Investment in subsidiaries 36,641,909 29,337,602
Notes receivable 1,152,500 1,200,000
Investment in and advances to Amera Mortgage
Corporation 2,830,761 3,076,984
Equipment and furniture, net 138,317 123,500
Excess of cost over net assets of acquired subsidiaries 2,347,256 2,540,163
Other assets 1,911,447 1,230,345
------------- -------------
TOTAL ASSETS $ 45,647,612 $ 38,039,567
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other
liabilities $ 1,989,072 $ 1,462,363
Debt obligations payable to unaffiliated entities 3,500,000 5,711,877
Total liabilities ------------ ------------
5,489,072 7,174,240
Stockholders' equity 40,158,540 30,865,327
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$ 45,647,612 $ 38,039,567
============ ============
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 2,690,000 $ 2,375,000 $ 1,175,000
Intercompany fees 2,045,901 1,415,760 1,184,100
Interest 182,127 173,460 73,812
Other 312,197 (91,419) 19,297
------------- ------------ -------------
Total income 5,230,225 3,872,801 2,452,209
Expenses:
Interest 386,145 485,865 431,885
Salaries and employee benefits 1,546,195 1,005,238 987,230
Occupancy 109,469 97,809 100,985
Amortization, equipment rent and depreciation 707,779 525,204 382,267
Other 653,273 485,801 372,173
------------- ------------ ------------
Total expenses 3,402,861 2,599,917 2,274,540
------------- ------------ ------------
1,827,364 1,272,884 177,669
Equity in undistributed net earnings of consolidated
subsidiaries 2,479,256 1,503,675 1,558,012
Federal income taxes (credit) (329,000) (296,000) (340,000)
------------- ------------ ------------
NET INCOME $ 4,635,620 $ 3,072,559 $ 2,075,681
============= ============ ============
</TABLE>
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE O--PARENT COMPANY FINANCIAL INFORMATION--CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $4,635,620 $ 3,072,559 $ 2,075,681
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in undistributed net earnings of subsidiaries (2,479,256) (1,503,675) (1,558,012)
Depreciation and amortization 255,202 280,967 188,923
Loss (gain) on sale of equipment and furniture 168 (8,394)
Decrease (increase) in notes and accounts receivable
due from subsidiaries 2,500,175 (152,947)
Decrease (increase) in other assets (681,101) (2,915,387) 194,379
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 526,709 884,980 (785,664)
------------ ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 2,257,342 2,311,225 (37,640)
INVESTING ACTIVITIES
Net cash investment in subsidiaries (5,201,523) (2,369,784) (1,575,439)
Proceeds from sale of 51% interest in Amera Mortgage Corporation 250,000
Net decrease in note receivable due from Amera
Mortgage Corporation 293,723
Purchases of investment securities (96,600)
Proceeds from sales of equipment and furniture 3,952 14,226 960
Purchases of equipment and furniture (81,232) (38,040) (21,879)
------------ ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (4,985,080) (2,240,198) (1,596,358)
FINANCING ACTIVITIES
Net proceeds from (payments on) debt obligations (2,100,000) (1,100,000) 2,049,734
Net proceeds from issuance of common stock 6,271,482 1,741,031 228,392
Cash dividends paid and payments in lieu of fractional shares (1,349,295) (933,269) (771,058)
------------ ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 2,822,187 (292,238) 1,507,068
------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 94,449 (221,211) (126,930)
Cash and cash equivalents at beginning of year 237,709 458,920 585,850
------------ ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 332,158 $ 237,709 $ 458,920
============ =========== ===========
</TABLE>
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE P--COMPOSITION OF BUSINESS ACTIVITIES
The Corporation and its subsidiaries are engaged in a single business--banking.
Certain agencies have, however, suggested that bank holding companies engaged
in certain related activities, such as mortgage banking, are engaged in more
than one business "segment" for financial reporting purposes, even though such
activities are deemed by other regulatory agencies as being not a separate or
distinct "segment". Selected financial data regarding the composition of the
Corporation's business activities are as follows:
<TABLE>
<CAPTION>
Business Activity
---------------------------------------------
Commercial Mortgage Corporate
Banking Banking(a) and Other Consolidated
--------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues--Interest and noninterest income:
1996 $ 37,869,240 $ (131,223) $ 446,144 $ 38,184,161
1995 31,052,123 466,351 (232,310) 31,286,164
1994 21,934,971 2,223,297 (89,987) 24,068,281
Operating income (loss) before amortization:
1996 7,601,377 (131,223) (396,627) 7,073,527
1995 6,226,453 (16,314) (1,050,079) 5,160,060
1994 5,047,395 (282,595) (886,387) 3,878,413
Income (loss) before income taxes:
1996 7,601,377 (131,223) (589,534) 6,880,620
1995 6,226,453 (145,371) (1,273,523) 4,807,559
1994 5,047,395 (794,492) (1,017,222) 3,235,681
Identifiable assets at December 31:
1996 483,651,036 2,830,761 5,781,547 492,263,344
1995 376,058,079 3,076,984 4,934,662 384,069,725
1994 309,513,210 5,479,016 1,320,216 316,312,442
Depreciation and amortization:
1996 590,408 255,202 845,610
1995 442,200 150,061 281,203 873,464
1994 375,442 596,273 190,339 1,162,054
Capital expenditures:
1996 3,575,211 81,232 3,656,443
1995 618,985 540 38,040 657,565
1994 329,224 19,199 20,919 369,342
</TABLE>
(a) 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 (see Note B).
43
<PAGE> 44
CAPITOL BANCORP LTD.
<TABLE>
<S><C>
BOARD OF DIRECTORS
OFFICERS OF THE CORPORATION
LOUIS G. ALLEN
Private Banker JOSEPH D. REID LEE W. HENDRICKSON
Bank of Bloomfield Hills Chairman, President and CEO Vice President
and Chief Financial Officer
PAUL R. BALLARD DAVID O'LEARY
President and CEO Secretary CHARLES J. MCDONALD
Portage Commerce Bank Vice President
ROBERT C. CARR
DAVID L. BECKER Executive Vice President LINDA D. PAVONA
President and Treasurer Vice President
Becker Insurance Agency, P.C.
PAUL R. BALLARD MARIE D. WALKER
ROBERT C. CARR Executive Vice President Vice President and Controller
President and CEO
Capitol National Bank DAVID K. POWERS FREDRICK H. WISSER
Senior Vice President Vice President
DOUGLAS E. CRIST
President JOHN C. SMYTHE
Developers of SW Florida, Inc. Senior Vice President
RICHARD G. DORNER
President and CEO SHAREHOLDER INFORMATION
Ann Arbor Commerce Bank CORPORATE OFFICE
One Business & Trade Center
GARY A. FALKENBERG, D.O. 200 Washington Square North
Physician Lansing, Michigan 48933
(517) 487-6555
JOEL I. FERGUSON
President ANNUAL MEETING
WLAJ TV 53, Inc. The 1997 Annual Meeting of Capitol Bancorp Ltd. will be held on
Thursday, May 1, 1997 at 4:00 p.m. at the Lansing Center, 333 E.
Michigan Avenue, Lansing, Michigan.
KATHLEEN A. GASKIN
Associate Broker/State Appraiser
Tomie Raines, Inc. Realtors SHAREHOLDER INVESTMENT PLAN
Capitol Bancorp Ltd. offers its shareholders an easy and affordable way to
invest in Capitol Bancorp Ltd. common stock through the Shareholder
Investment Program. The Program's benefits include features such as
H. NICHOLAS GENOVA reinvestment of dividends in additional common stock, direct deposit of
Chairman and CEO dividends, ability to purchase as little as $50 in common stock as
Washtenaw News Co., Inc. frequently as once a month, and the option to make transfers or gifts of
Capitol Bancorp Ltd. common stock to another person free of charge.
LEWIS D. JOHNS Participation in the Program is voluntary, and all shareholders are
President eligible. Purchases under the Program are not currently subject to any
Mid-Michigan Investment Company brokerage fees or commissions. For further information regarding the
Capitol Bancorp Ltd. Shareholder Investment Program or a copy of the Program
MICHAEL L. KASTEN prospectus, informational brochure and enrollment materials contact UMB
Managing Partner Bank, n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555.
Kasten Investments, L.L.C.
JAMES R. KAYE
President and CEO STOCK TRADING INFORMATION
Oakland Commerce Bank Common stock of Capitol Bancorp Ltd. trades on the Nasdaq National Market
tier of The Nasdaq Stock MarketSM under the trading symbol "CBCL".
LEONARD MAAS
President The following brokerage firms make a market in the common stock of Capitol
Gillisse Construction Company Bancorp Ltd.:
LYLE W. MILLER Robert W. Baird & Co., Inc. Howe Barnes Investments, Inc.
President Milwaukee, Wisconsin Chicago, Illinois
Servco, Inc.
EVEREN Securities, Inc. McDonald & Company Securities, Inc.
DAVID O'LEARY Chicago, Illinois Cleveland, Ohio
Chairman
O'Leary Paint Company First of Michigan Corporation Roney & Co. Inc.
Detroit, Michigan Detroit, Michigan
JOSEPH D. REID
Chairman, President and CEO Herzog, Heine, Geduld, Inc. Stifel, Nicolaus & Company, Inc.
Capitol Bancorp Ltd. Detroit, Michigan St. Louis, Missouri
TRANSFER AGENT
UMB Bank, n.a.
928 Grand Avenue
P.O. Box 410064
Kansas City, Missouri 64141-0064
(800) 884-4225
LEGAL COUNSEL
Strobl and Borda, P.C. Reid and Reid
Bloomfield Hills, Michigan Lansing, Michigan
INDEPENDENT AUDITORS
BDO Seidman, LLP
Grand Rapids, Michigan
</TABLE>
44
<PAGE> 1
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
CAPITOL BANCORP LTD.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION
NAME OF SUBSIDIARY OF INCORPORATION
- - ------------------ ----------------
<S> <C>
Consolidated Subsidiaries:
- - --------------------------
Capitol National Bank United States (national bank)
Portage Commerce Bank Michigan
Ann Arbor Commerce Bank Michigan
Oakland Commerce Bank Michigan
Grand Haven Bank (85% owned) Michigan
Paragon Bank & Trust Michigan
Bank of Tucson (51% owned) Arizona
Macomb Community Bank (51% owned) Michigan
Unconsolidated Subsidiary:
- - --------------------------
Amera Mortgage Corporation, Inc. Michigan
(49% owned equity method investee)
Inactive subsidiaries:
- - ----------------------
MOI, Inc. Michigan
(wholly-owned subsidiary of
Oakland Commerce Bank)
Financial Center Corporation Michigan
C.B. Services, Inc. Michigan
</TABLE>
The following summarizes regulatory agencies of the registrant and its
subsidiaries:
The Corporation's state-chartered banks located in Michigan (Portage Commerce
Bank, Ann Arbor Commerce Bank, Oakland Commerce Bank, Paragon Bank & Trust,
Grand Haven Bank and Macomb Community Bank) are regulated by the Financial
Institutions Bureau of the Michigan Department of Commerce. Capitol National
Bank, as a national bank, is regulated by the Office of the Comptroller of the
Currency. Bank of Tucson is regulated by the Arizona Corporation Division.
Each of the Corporation's banking subsidiaries, as federally-insured depository
institutions, are also regulated by the Federal Deposit Insurance Corporation.
As a bank holding company, Capitol Bancorp Ltd. is regulated by the Federal
Reserve Board which also regulates its nonbanking subsidiaries. In addition to
the bank regulatory agencies, the registrant and its subsidiaries are subject
to regulation by other state and federal agencies.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Capitol Bancorp Ltd.
Lansing, Michigan
We hereby consent to the incorporation by reference and use of our report dated
January 31, 1997, which appears on page 20 of Capitol Bancorp Ltd.'s Annual
Report to shareholders for the year ended December 31, 1996, in that
corporation's previously filed Form S-3 Registration Statement No. 33-71774 for
its Shareholder Investment Program.
BDO SEIDMAN, LLP
\s\ BDO Seidman, LLP
- - ---------------------
March 15, 1997
Grand Rapids, Michigan
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,928
<INT-BEARING-DEPOSITS> 55
<FED-FUNDS-SOLD> 42,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,725
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 364,372
<ALLOWANCE> 4,578
<TOTAL-ASSETS> 492,263
<DEPOSITS> 436,166
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 9,438
<LONG-TERM> 3,500
0
0
<COMMON> 34,972
<OTHER-SE> 5,187
<TOTAL-LIABILITIES-AND-EQUITY> 492,263
<INTEREST-LOAN> 32,272
<INTEREST-INVEST> 2,606
<INTEREST-OTHER> 1,601
<INTEREST-TOTAL> 36,479
<INTEREST-DEPOSIT> 17,292
<INTEREST-EXPENSE> 17,800
<INTEREST-INCOME-NET> 18,679
<LOAN-LOSSES> 1,196
<SECURITIES-GAINS> 82
<EXPENSE-OTHER> 12,307
<INCOME-PRETAX> 6,881
<INCOME-PRE-EXTRAORDINARY> 4,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,636
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 9.02
<LOANS-NON> 1,057
<LOANS-PAST> 1,642
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,687
<CHARGE-OFFS> 437
<RECOVERIES> 132
<ALLOWANCE-CLOSE> 4,578
<ALLOWANCE-DOMESTIC> 4,578
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,130
</TABLE>
