<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
For the transition period from to
-------------- -----------
Commission file number 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2761672
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common stock, No par value: 4,723,194 shares
outstanding as of October 31, 1997.
Page 1 of 21
<PAGE> 2
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets - September 30, 1997 and December 31, 1996.
Consolidated statements of income - Three months and nine months ended
September 30, 1997 and 1996.
Consolidated statements of cash flows - Nine months ended September 30,
1997 and 1996.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
</TABLE>
SIGNATURES
Page 2 of 21
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,443 $ 20,928
Interest-bearing deposits with banks 145 55
Federal funds sold 59,450 42,350
--------- ---------
Cash and cash equivalents 82,038 63,333
Loans held for resale 10,000 6,749
Investment securities:
Available for sale, carried at market value 60,140 46,622
Held for long-term investment, carried at
amortized cost which approximates market value 2,217 2,103
--------- ---------
Total investment securities 62,357 48,725
Portfolio loans:
Commercial 365,400 283,461
Real estate mortgage 62,755 53,712
Installment 33,216 20,450
--------- ---------
Total portfolio loans 461,371 357,623
Less allowance for loan losses (5,758) (4,578)
--------- ---------
Net portfolio loans 455,613 353,045
Investment in and advances to Amera Mortgage Corporation 2,787 2,831
Premises and equipment 6,787 5,421
Accrued interest income 3,963 3,107
Excess of cost over net assets of acquired subsidiaries 2,203 2,347
Other assets 8,078 6,705
--------- ---------
TOTAL ASSETS $ 633,826 $ 492,263
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 66,908 $ 62,766
Interest-bearing 496,400 373,400
--------- ---------
Total deposits 563,308 436,166
Debt obligations 11,825 6,500
Accrued interest on deposits and other liabiliites 5,047 4,708
--------- ---------
Total liabilities 580,180 447,374
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 9,817 4,730
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
issued and outstanding 1997 - 4,723,194 shares
1996 - 4,504,911 shares 36,818 34,972
Retained earnings 7,856 5,150
Market value adjustment (net of tax effect) for
investment securities available for sale 170 37
--------- ---------
44,844 40,159
Less note receivable from ESOP (1,015)
--------- ---------
Total stockholders' equity 43,829 40,159
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 633,826 $ 492,263
========= =========
</TABLE>
Page 3 of 21
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1997 1996 1997 1996
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 11,118 $ 8,004 $ 30,326 $ 22,862
Loans held for resale 192 207 377 656
Taxable investment securities 965 575 2,585 1,616
Federal funds sold 733 449 1,973 1,025
Interest-bearing deposits with banks 4 10 8 35
Dividends on investment securities and other 27 26 182 337
------- ------- ------- -------
Total interest income 13,039 9,271 35,451 26,531
Interest expense:
Demand deposits 1,062 592 2,850 1,683
Savings deposits 402 359 1,164 1,014
Time deposits 4,882 3,502 13,151 9,828
Debt obligations and other 336 95 468 471
------- ------- ------- -------
Total interest expense 6,682 4,548 17,633 12,996
------- ------- ------- -------
Net interest income 6,357 4,723 17,818 13,535
Provision for loan losses 476 274 1,442 751
------- ------- ------- -------
Net interest income after
provision for loan losses 5,881 4,449 16,376 12,784
Noninterest income:
Service charges on deposit accounts 239 171 614 539
Trust fee income 86 67 244 199
Gain on sale of investment securities
available for sale 13 2 30 82
Other realized gains 495
Other 158 249 319 364
------- ------- ------- -------
Total noninterest income 496 489 1,702 1,184
Noninterest expense:
Salaries and employee benefits 2,300 1,558 6,204 4,395
Occupancy 380 228 1,009 654
Equipment rent, depreciation and maintenance 548 262 1,437 686
Deposit insurance premiums 22 350 64 415
Other 849 800 3,201 2,674
------- ------- ------- -------
Total noninterest expense 4,099 3,198 11,915 8,824
------- ------- ------- -------
Income before federal income taxes 2,278 1,740 6,163 5,144
Federal income taxes 802 562 2,105 1,717
------- ------- ------- -------
NET INCOME $ 1,476 $ 1,178 $ 4,058 $ 3,427
======= ======= ======= =======
NET INCOME PER SHARE:
Primary $ 0.30 $ 0.26 $ 0.85 $ 0.82
======= ======== ======== ========
Fully Diluted $ 0.30 $ 0.26 $ 0.83 $ 0.81
======= ======== ======== ========
</TABLE>
Page 4 of 21
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 4,058 $ 3,427
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 1,442 751
Depreciation of premises and equipment 872 437
Amortization of excess of cost over net
assets of acquired subsidiaries 145 145
Net amortization of investment security
premiums (accretion of discount) (260) (114)
Gain on sale of premises and equipment 501 6
Originations and purchases of loans held for resale (98,145) (153,960)
Proceeds from sales of loans held for resale 94,894 153,315
Increase in accrued interest income
and other assets (3,268) (252)
Increase (decrease) in accrued interest on deposits
and other liabilities 339 (25)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 578 3,730
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 3,481 4,460
Proceeds from maturities of investment securities 26,061 26,911
Purchases of investment securities (42,714) (38,834)
Net increase in portfolio loans (104,010) (49,126)
Proceeds from sales of premises and equipment 380 13
Purchases of premises and equipment (3,119) (1,267)
-------- ---------
NET CASH USED BY INVESTING ACTIVITIES (119,921) (57,843)
FINANCING ACTIVITIES
Net borrowings (payments) on debt obligations 5,325 (1,650)
Resources provided by minority interest in consolidated subsidiaries 5,087 4,966
Net proceeds from issuance of common stock upon
exercise of stock options and warrants 1,846 4,902
Cash dividends paid (1,352) (988)
Increase in demand deposits, NOW
accounts and savings accounts 41,798 15,988
Increase in certificates of deposit 85,344 35,670
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 138,048 58,888
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 18,705 4,775
Cash and cash equivalents at beginning of period 63,333 45,331
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,038 $ 50,106
======== =========
</TABLE>
Page 5 of 21
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CAPITOL BANCORP LTD.
Note A - Basis of Presentation
The accompanying condensed consolidated financial statements of Capitol
Bancorp Ltd. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-Q. Accordingly, they do not include all information
and footnotes necessary for a fair presentation of consolidated financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which the
Corporation considers necessary for a fair presentation of the interim periods.
The results of operations for the nine-month period ended September 30,
1997 are not necessarily indicative of the results to be expected for the year
ending December 31, 1997.
The consolidated balance sheet as of December 31, 1996 was derived from
audited consolidated financial statements as of that date. Certain 1996
amounts have been reclassified to conform to the 1997 presentation.
Note B - Implementation of New Accounting Standards
Financial Accounting Standards Board Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", establishes new guidelines for accounting for certain
transactions, such as sales of loans and loan participations. This new
standard became effective for the Corporation January 1, 1997. Implementation
of this new accounting standard had no impact on the Corporation's financial
position or results of operations for the period ended September 30, 1997.
Note C - New Operating Units
In a stock-for-stock exchange transaction effective May 22, 1997, Bank of
Tucson (previously a 51% owned consolidated bank subsidiary) became a
wholly-owned subsidiary of a newly formed bank holding company, Sun Community
Bancorp Limited ("Sun"). As a result of the exchange transaction, Sun became a
51% owned, second-tier subsidiary bank holding company of the Corporation.
Sun was formed for the purpose of facilitating future expansion opportunities
in the southwestern portion of the United States and related data processing,
operations support and other ancillary services and functions for Bank of
Tucson and future banks.
In June 1997, Sun completed a $4.5 million offering of 250,000 shares of
common stock including $2.3 million invested by the Corporation, maintaining
its 51% interest in Sun. Proceeds from the offering are expected to be used in
Sun's expansion activities, primarily de novo bank development.
6 of 21
<PAGE> 7
On June 30, 1997, Valley First Community Bank, a de novo bank, commenced
operations in Scottsdale, Arizona. The Bank was capitalized with $4.5 million,
of which $2.3 million was invested by Sun with the remainder invested by
individuals and other entities primarily located in the Scottsdale and Phoenix
area. Valley First Community Bank is 51% owned by Sun and, accordingly, is
consolidated with Sun for financial reporting purposes.
Because of the Corporation's majority interest in Sun, Sun's consolidated
financial position and results of operations are included in the Corporation's
consolidated financial statements with corresponding accounting recognition of
applicable minority interest.
Brighton Commerce Bank, a de novo bank located in Brighton, Michigan, was
formed in early January 1997. The Corporation's investment in this new bank
($1.6 million) was funded primarily from proceeds from exercise of stock
options and borrowings. The Corporation owns 59% of the common stock of
Brighton Commerce Bank and the Bank is consolidated for financial reporting
purposes with corresponding accounting recognition given to applicable minority
interest.
Note D - Prospective Impact of New Accounting Standards Not Yet Adopted
The Financial Accounting Standards Board ("FASB") has issued certain new
standards which affect accounting and financial reporting.
FASB Statement No. 128, "Earnings per Share", will revise the computation
and reporting of earnings per share. This new standard is intended to simplify
the basis upon which per-share amounts are determined, replacing "primary"
earnings per share with "basic" earnings per share. "Fully diluted" earnings
per share will be replaced by "diluted" earnings per share. The Statement will
become effective for the Corporation's year end 1997 consolidated financial
statements and will result in restatement of per-share amounts for prior
periods. Early adoption of the new standard is not permitted. Based on
management's preliminary analysis of the new accounting standard and related
computational requirements, a comparative summary of earnings per share
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
As originally reported:
Primary $ .30 $.26 $.85 $ .82
======= ====== ===== =====
Fully Diluted .30 .26 .83 .81
======= ====== ===== =====
As restated:
Basic earnings per share .31 .27 .88 .85
======= ====== ===== =====
Diluted earnings per share .30 .26 .86 .85
======= ====== ===== =====
<CAPTION>
Year Ended December 31
--------------------------------------------------------
1996 1995 1994 1993
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
As originally reported:
Primary $1.09 $.79 $.64 $.40
====== ====== ====== =======
Fully diluted 1.04 .77 .64 .40
====== ====== ====== =======
As restated:
Basic earnings per share 1.11 .84 .68 .41
====== ====== ====== =======
Diluted earnings per share $1.10 $ .82 $.67 $ .41
====== ====== ====== =======
</TABLE>
Page 7 of 21
<PAGE> 8
FASB Statement No. 129, "Disclosure of Information about Capital
Structure", clarifies the extent and nature of disclosures relating to an
entity's capital structure. It requires nonpublic companies to disclose
information which has been required for public companies in the past. This new
standard will become effective for the Corporation's year end 1997 consolidated
financial statements and, upon implementation, is not expected to have a
material impact.
FASB Statement No. 130, "Reporting of Comprehensive Income" addresses the
reporting and display of 'comprehensive income' and its components (revenue,
expenses, gains and losses) in a full set of financial statements. Under this
standard, comprehensive income is defined as the change in equity (net assets)
of a business enterprise during a reporting period from transactions and other
events and circumstances from non equity-holder sources. Thus, the term
comprehensive income includes all elements of net income under current
generally accepted accounting principles with adjustments for certain other
items, such as unrealized gains and losses on investment securities available
for sale. Management has not completed its analysis of this new accounting
standard. The new standard will become effective for the Corporation in 1998
and will require restatement of prior year comparative information.
FASB Statement No. 131, "Disclosures About Segments of An Enterprise and
Related Information" revises reporting of information about operating segments
in annual and interim financial statements. This statement sets revised
standards for disclosure about products and services, geographic areas and
major customers. It is intended to promote a more practical approach to
segment reporting by requiring presentation of information on the basis which
is used internally by management for evaluating segment performance and
allocation of resources to segments of the enterprise. Management has not
completed its analysis of this new accounting standard. The new standard will
be effective for the Corporation's financial statements in 1998 and thereafter
and will require restatement of prior period information.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such
proposed standards would be material to the Corporation's financial statements.
Note E - Upcoming Stock Dividend
On November 5, 1997, the Corporation announced a 10% stock dividend (one
share for each ten shares held) for shareholders of record as of December 1,
1997 to be distributed on or about December 15, 1997. Upon issuance, the
Corporation's earnings per share will be retroactively restated to give effect
to the stock dividend.
Page 8 of 21
<PAGE> 9
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $634 million at September 30, 1997, an increase
of $142 million from the December 31, 1996 level of $492 million. The
consolidated balance sheets include the Corporation and its majority-owned
subsidiaries.
During the nine months ended September 30, 1997, two de novo banks and a
second tier bank holding company were added. Effective May 22, 1997, Sun
Community Bancorp Limited ("Sun"), a bank holding company, was formed in
Tucson, Arizona for the purpose of acquiring a 100% ownership interest in Bank
of Tucson (a 51% owned de novo bank formed in June 1996) in a stock for stock
exchange transaction with the Bank of Tucson shareholders. As a result of the
exchange transaction, Sun was capitalized at $4.5 million, of which $2.3
million is attributable to the Corporation.
In June 1997, Sun completed a $4.5 million offering of 250,000 shares of
common stock including $2.3 million invested by the Corporation (funded
primarily by proceeds from exercise of warrants and borrowings) maintaining its
51% interest in Sun. Proceeds from the offering are expected to be used in
Sun's expansion activities, primarily de novo bank development.
On June 30, 1997 Valley First Community Bank, a de novo commercial bank,
commenced operations in Scottsdale, Arizona. The Bank was capitalized with
$4.5 million, of which $2.3 million was invested by Sun with the remainder
invested by individuals and other entities primarily located in the
Scottsdale/Phoenix areas. Valley First Community Bank is 51% owned by Sun and,
accordingly, is consolidated with Sun for financial reporting purposes.
Because of the Corporation's majority interest in Sun, Sun's consolidated
financial position and results of operations are included in the Corporation's
consolidated financial statements with corresponding accounting recognition of
applicable minority interest.
Brighton Commerce Bank, in Brighton, Michigan, was formed in early January
1997 and was capitalized with $2.7 million of which $1.6 million was invested
by the Corporation. The Corporation's investment in this new bank was funded
primarily from proceeds from exercise of stock options and borrowings. The
Corporation owns 59% of the common stock of Brighton Commerce Bank and,
accordingly, it is consolidated for financial reporting purposes with
corresponding accounting recognition given to applicable minority interest.
Portfolio loans increased during the 1997 nine-month period by
approximately $104 million, more than double the corresponding net volume in
1996. Of the interim 1997 loan growth, $28 million occurred at Ann Arbor
Commerce Bank, resulting from its significant asset and deposit growth during
the period, with the remainder occurring at the Corporation's other mature
banks and
Page 9 of 21
<PAGE> 10
de novo banks. Loan growth was generally funded by higher levels of
interest-bearing deposits. The majority of 1997 portfolio loan growth occurred
in commercial loans, which increased approximately $82 million, consistent with
the banks' emphasis on commercial lending activities.
The allowance for loan losses at September 30, 1997 approximated $5.8
million or 1.25% of total portfolio loans, slightly less than the year-end 1996
ratio of 1.28%. The 1997 decrease in the ratio of the allowance for loan
losses to total portfolio loans relates primarily to loan origination
activities of de novo banks for which, because of absence of prior loss
experience, a lower allowance ratio is appropriate. Provisions for loan losses
have been maintained at a higher level in 1997 ($1,442,000) relative to 1996
($751,000) commensurate with portfolio growth, levels of delinquent and other
nonperforming loans and other factors.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on evaluation of the
portfolio (including volume, amount and composition, potential impairment of
individual loans and concentrations of credit), past loss experience, current
economic conditions, loan commitments outstanding and other factors.
The following table summarizes portfolio loan balances and activity in the
allowance for loan losses for the interim periods (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Allowance for loan losses at January 1 $ 4,578 $ 3,687
Loans charged-off:
Commercial 474 186
Real estate mortgage 76
Installment 17 45
-------- --------
Total charge-offs 567 231
Recoveries:
Commercial 281 43
Real estate mortgage 6 6
Installment 18 5
-------- --------
Total recoveries 305 54
-------- --------
Net charge-offs 262 177
Additions to allowance charged to expense 1,442 751
-------- --------
Allowance for loan losses at September 30 $ 5,758 $ 4,261
======== ========
Average total portfolio loans for period ended September 30 $406,096 $306,735
======== ========
Ratio of net charge-offs to average portfolio loans
outstanding 0.06% 0.06%
======== ========
</TABLE>
Page 10 of 21
<PAGE> 11
The allowance for loan losses is a general allowance for the loan
portfolio. For internal purposes, management allocates the allowance to all
loan classifications. The amounts allocated in the following table (in
thousands), which includes all loans for which, based on the Corporation's loan
rating system, management has concerns, should not be interpreted as an
indication of future charge-offs. In addition, amounts allocated are not
intended to reflect the amount that may be available for future losses, since
the allowance is a general allowance.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
--------------------------- --------------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
--------- ---------
<S> <C> <C> <C> <C>
Commercial $ 2,702 .59% $ 2,281 .64%
Real estate mortgage 77 .02 67 .02
Installment 160 .03 100 .03
Unallocated 2,819 .61 2,130 .59
-------- -------- -------- --------
Total allowance for loan losses $ 5,758 1.25% $ 4,578 1.28%
======== ======== ======== ========
Total portfolio
loans outstanding $461,371 $357,623
======== ========
</TABLE>
In addition to the allowance for loan losses, certain loans are enrolled
in a Michigan state government loan program and have additional reserves
established to provide for loss protection. At September 30, 1997, total loans
under this program approximated $15.6 million. Reserves related to these
loans, which are represented by earmarked funds on deposit at certain of the
bank subsidiaries, approximated $1.7 million and are not included in the
recorded allowance for loan losses.
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under
the contractual terms of the loan documents) were not material in 1996 and
through September 30, 1997. Nonperforming loans (i.e., loans which are 90 days
or more past due and loans on nonaccrual status) at September 30, 1997 amounted
to $3.8 million compared with $2.7 million at December 31, 1996 as summarized
in the following table (in thousands):
<TABLE>
<CAPTION>
Sept 30 Dec 31
1997 1996
--------- ----------
<S> <C> <C> <C>
Nonaccrual loans:
Commercial $ 2,239 $ 928
Real estate 205 107
Installment 21 22
--------- ----------
Total nonaccrual loans 2,465 1,057
Past due (>90 days) loans:
Commercial 1,032 1,009
Real estate 214 549
Installment 118 84
--------- ----------
Total past due loans 1,364 1,642
--------- ----------
Total nonperforming loans $ 3,829 $ 2,699
========= ==========
</TABLE>
Page 11 of 21
<PAGE> 12
The interim 1997 increase in nonperforming loans relates to a small number
of loans (primarily in nonaccrual status as of September 30, 1997). Such
increase is deemed by management to be consistent with the seasoned status of
the Corporation's more mature banks' portfolios (certain of which had minimal
levels of nonperforming loans previously) and peer trends. All of such loans
are in varying stages of resolution and are believed to be adequately secured
by collateral (primarily real estate) or have other loss protection in the form
of governmental guarantees or other credit enhancements.
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the period,
additional interest income of $135,000 and $73,000 would have been recorded
for the nine months ended September 30, 1997 and 1996, respectively. Interest
income recognized on loans in nonaccrual status for the period approximated
$42,000 and $23,000, respectively.
Other real estate owned (generally real estate acquired through
foreclosure or a deed in lieu of foreclosure and classified as a component of
other assets) was less than $500,000 at September 30, 1997 and December 31,
1996.
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming assets and certain ratios
(dollars in thousands):
<TABLE>
<CAPTION>
Allowance as a
Percentage of
Total Allowance for Nonperforming Total
Portofolio Loans Loan Losses Loans Portofolio Loans
--------------------- ------------------ ------------------- ----------------
Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
1997 1996 1997 1996 1997 1996 1997 1996
--------- ---------- -------- -------- --------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $107,401 $ 79,463 $1,428 $1,088 $ 398 $ 304 1.33% 1.37%
Brighton Commerce Bank 10,425 n/a 105 n/a --- n/a 1.01 n/a
Capitol National Bank 88,811 80,749 1,219 1,076 893 797 1.37 1.33
Grand Haven Bank 32,727 26,162 386 303 189 --- 1.18 1.16
Macomb Community Bank 16,457 5,821 165 59 5 --- 1.00 1.01
Oakland Commerce Bank 56,650 54,569 664 655 860 1,227 1.17 1.20
Paragon Bank & Trust 56,564 46,680 639 563 734 44 1.13 1.21
Portage Commerce Bank 68,727 58,177 925 785 750 327 1.35 1.35
Sun Community Bancorp Limited:
Bank of Tucson 19,324 4,850 194 49 --- --- 1.00 1.01
Valley First Community Bank 3,180 n/a 33 n/a --- n/a 1.04 n/a
Other, net 1,105 1,152 --- --- --- --- --- ---
-------- -------- ------ ------ ------ ------ ---- ----
Consolidated $461,371 $357,623 $5,758 $4,578 $3,829 $2,699 1.25% 1.28%
======== ======== ====== ====== ====== ====== ==== ====
n/a - Not applicable
</TABLE>
Noninterest-bearing deposits approximated 11.88% of total deposits at
September 30, 1997, a decrease from the December 31, 1996 level of 14.4%.
Levels of noninterest-bearing deposits fluctuate based on customers'
transaction activity.
Page 12 of 21
<PAGE> 13
Results of Operations
Net income for the nine months ended September 30, 1997 amounted to $4.1
million, an increase over the $3.4 million earned during the corresponding
period of 1996. Operating results (in thousands) were as follows:
<TABLE>
<CAPTION>
Nine months ended September 30
-------------------------------------------------
Return on
Total Assets Net Income Beginning Equity
------------------------- --------------------- ------------------------
Sept 30 Dec 31
1997 1996 1997 1996 1997 1996
----------- ----------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $128,269 $105,651 $ 1,425 $ 841 28.55% 22.80%
Brighton Commerce Bank (2) 14,277 n/a (399) n/a n/a n/a
Capitol National Bank 113,035 104,254 1,327 1,125 22.07 20.74
Grand Haven Bank 42,691 32,731 237 159 11.24 8.02
Macomb Community Bank (1) 39,748 15,123 (101) (18) n/a n/a
Oakland Commerce Bank 87,731 71,095 644 430 15.80 11.04
Paragon Bank & Trust 68,743 63,752 526 475 15.64 12.51
Portage Commerce Bank 85,875 73,769 873 805 22.19 22.69
Sun Community Bancorp Limited: (3)
Bank of Tucson (1) 38,574 17,276 12 (59) .31 n/a
Valley First Community Bank (2) 7,986 n/a (119) n/a n/a n/a
Mortgage banking 2,787 2,831 (282) (93) n/a n/a
Other, net 4,110 5,781 (85) (238) n/a n/a
-------- -------- ------- ------- ------ ------
Consolidated $633,826 $492,263 $ 4,058 $ 3,427 13.47% 14.80%
======== ======== ======= ======= ====== =======
<CAPTION>
Nine months ended September 30
--------------------------------
Return on
Average Assets
--------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Ann Arbor Commerce Bank 1.66% 1.35%
Brighton Commerce Bank (2) n/a n/a
Capitol National Bank 1.65 1.56
Grand Haven Bank .82 .85
Macomb Community Bank (1) n/a n/a
Oakland Commerce Bank 1.13 .83
Paragon Bank & Trust 1.07 1.16
Portage Commerce Bank 1.40 1.59
Sun Community Bancorp Limited: (3)
Bank of Tucson (1) .06 n/a
Valley First Community Bank (2) n/a n/a
Mortgage banking n/a n/a
Other, net n/a n/a
--------- --------
Consolidated .97% 1.11%
======== ========
n/a - Not applicable.
(1) - Bank of Tucson and Macomb Community Bank, de novo banks, commenced operations in June and September 1996, respectively.
(2) - Brighton Commerce Bank and Valley First Community Bank, de novo banks, commenced operations in January and June 1997,
respectively.
(3) - Effective May 22, 1997, Sun Community Bancorp Limited, a bank holding company 51% owned by the Corporation, was formed in
Tucson, Arizona and acquired a 100% ownership interest in Bank of Tucson.
</TABLE>
Net interest income increased 31.6% during the nine month 1997 period
versus the corresponding period of 1996, primarily due to increased loans and
deposits.
Noninterest income increased in 1997 to $1.7 million for the nine month
period, as compared with $1.2 million for the corresponding 1996 period. The
increase related primarily to a nonrecurring gain from the sale of a bank
building and land parcel in the first quarterly period of 1997. Service charge
income increased 14% and trust fee income increased 23% in 1997 compared to
interim 1996 periods.
The provision for loan losses amounted to $1.4 million for the nine month
1997 period compared to $751,000 for the corresponding period of 1996. The
increased interim provision for loan losses relates primarily to portfolio
growth. The provision for loan losses is based on management's analysis of the
loan portfolio as discussed elsewhere herein.
Noninterest expense for the nine months ended September 30, 1997
approximated $11.9 million compared with $8.8 million in 1996. The increase in
noninterest expense is associated with newly formed banks, growth and increases
in general operating costs.
Liquidity and Capital Resources
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $127 million for the nine
month 1997 period, compared to $52 million in 1996. Such growth occurred in
all deposit categories, with the majority coming from time
Page 13 of 21
<PAGE> 14
deposits. The Corporation's banks generally do not rely on brokered deposits
as a key funding source; brokered deposits approximated $22.5 million as of
September 30, 1997.
Cash and cash equivalents amounted to $82 million at September 30, 1997 as
compared with $63 million at December 31, 1996, 13% of total assets. As
liquidity levels vary continuously based on customer activities, amounts of
cash and cash equivalents can vary widely at any given point in time.
Management believes the Corporation's liquidity position at September 30, 1997
is adequate to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity
is the Corporation's marketable investment securities. The Corporation's
liquidity requirements have not historically necessitated the sale of
investments in order to meet liquidity needs. It also has not engaged in
active trading of its investments and has no intention of doing so in the
foreseeable future. At September 30, 1997 and December 31, 1996, the
Corporation had approximately $62 million and $49 million, respectively, of
investment securities classified as available for sale which can be utilized to
meet various liquidity needs as they arise. In the interim 1997 period,
maturities from investment securities available for sale were deployed, in
part, to fund higher yielding commercial bank growth.
At September 30, 1997, the Corporation had lines of credit from an
unrelated financial institution aggregating $10 million. Under this credit
facility, borrowings outstanding approximated $8.8 million at September 30,
1997 ($3.5 million at December 31, 1996). Proceeds from 1997 borrowings have
been deployed in de novo bank formation and other expansion opportunities.
Under the terms of the credit agreement, $8 million is convertible into
long-term notes; $2 million of the lines of credit are revolving and are
reviewed annually for continuance.
Future funding for formation of new banks (to the extent not otherwise
funded by internal capital resources) or other needs may be met by additional
future borrowings or other sources. Subsequent to September 30, 1997, the
Corporation negotiated an increase of $3 million in facilities with its primary
lender.
Two of the Corporation's banks, (Oakland Commerce Bank and Ann Arbor
Commerce Bank) have secured lines of credit with a Federal Home Loan Bank.
Borrowings thereunder approximated $3 million and additional borrowing capacity
approximated $23.5 million at September 30, 1997.
The Corporation recently announced a fourth quarterly cash dividend of
$.10 per share (payable December 1, 1997 to shareholders of record as of
November 1, 1997). The dividend amounts in 1997 represent an increase over the
dividends of $.0825 per share paid quarterly in 1996.
On November 5, 1997, the Corporation announced a 10% stock dividend (one
share for each ten shares held) for shareholders of record as of December 1,
1997 to be distributed on or about December 15, 1997. Upon issuance, the
Corporation's earnings per share will be retroactively restated to give effect
to the stock dividend.
As discussed previously, certain investment securities are designated as
"available for sale" and, accordingly, are adjusted to market value at the
balance sheet date (net of
Page 14 of 21
<PAGE> 15
corresponding tax effect). Changes in market values of investment securities
at their respective balance sheet dates marginally increased stockholders'
equity during the nine months ended September 30, 1997.
The Corporation and its banks are subject to complex regulatory capital
requirements which require maintaining certain minimum capital ratios. These
ratio measurements, in addition to certain other requirements, are used by
regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. The Corporation and each of its
banks are in compliance with the regulatory requirements and management expects
to maintain such compliance in the foreseeable future.
Shareholders' equity, as a percentage of total assets, approximated 6.9%
at September 30, 1997, a decrease from the beginning of the year ratio of 8.2%.
Total capital funds, the Corporation's stockholders' equity and minority
interest in consolidated subsidiaries, approximated 8.5% of total assets at
September 30, 1997. The Corporation and each of its banking subsidiaries
continue to exceed regulatory capital requirements as shown on the following
page (dollars in thousands).
Page 15 of 21
<PAGE> 16
<TABLE>
<CAPTION>
Ann Arbor Brighton Capitol Grand Macomb Oakland Paragon
Commerce Commerce National Haven Community Commerce Bank &
Bank Bank(1) Bank Bank(1) Bank(1) Bank Trust
------------ ------------ --------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $128,269 $14,277 $113,035 $42,691 $39,748 $87,731 $68,743
Total Assets for Risk-Based
Capitol Purposes 129,689 14,382 114,249 43,069 39,906 88,391 69,329
Risk-Weighted Assets 99,382 11,525 83,518 27,683 19,533 59,958 57,118
Tier I Capital 8,802 2,101 8,662 3,395 3,487 5,682 5,227
Allowable Tier II Capital 1,236 105 1,047 386 165 664 639
Tier I and Allowable Tier II
Capital, Combined 10,038 2,206 9,709 3,781 3,652 6,346 5,866
Ratios Based of Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.86% 18.23% 10.37% 12.26% 17.85% 9.48% 9.15%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.10% 19.14% 11.63% 13.66% 18.70% 10.58% 10.27%
Leverage Ratio 6.86% 14.72% 7.66% 8.23% 8.77% 6.48% 7.60%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 4.00% 8.00% 4.00% 8.00% 8.00% 4.00% 4.00%
<CAPTION>
Sun
Portage Community Capitol
Commerce Bancorp Bancorp
Bank Limited Ltd. Consolidated
-------- --------- ------- ------------
<S> <C> <C> <C> <C>
Financial Position:
Total Assets $85,875 $46,903 $54,380 $633,826
Total Assets for Risk-Based
Capitol Purposes 86,785 46,754 50,215 635,419
Risk-Weighted Assets 65,286 27,375 49,974 454,242
Tier I Capital 5,973 11,391 41,457 51,242
Allowable Tier II Capital 817 227 (777) 4,509
Tier I and Allowable Tier II
Capital, Combined 6,790 11,618 40,680 55,751
Ratios Based of Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 9.15% 41.61% 82.96% 11.28%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.40% 42.44% 81.40% 12.27%
Leverage Ratio 6.96% 20.53% 82.15% 7.05%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 4.00% 3.00% 3.00% 4.00%
</TABLE>
(1) As a condition of bank charter approval, de novo banks are generally
required to maintain Tier I leverage capital-to-assets ratios of not
less than 8% for the first three full years of operations.
Page 16 of 21
<PAGE> 17
During the nine months ended September 30, 1997 the Corporation issued
218,283 shares of previously unissued common stock upon exercise of stock
options and warrants, yielding proceeds of $1.9 million. Proceeds from
exercise of warrants ($1.2 million) relate to a 1994 merger transaction from
which such warrants expired June 30, 1997.
Additionally, the Corporation entered into a transaction with its employee
stock ownership plan ("ESOP") whereby the ESOP purchased 60,176 shares of
previously unissued common stock, payable to the Corporation in the form of a
note in the amount of $1 million. Such note receivable from the ESOP is
classified as a deduction from stockholders' equity and will be funded by
future ESOP contributions to be made by the Corporation and participating
subsidiaries.
As of September 30, 1997, applications for regulatory approval to form de
novo banks in the Michigan communities of Muskegon and Grand Rapids were
pending which, if approved and subject to other contingencies, would be
majority-owned by the Corporation.
The Corporation's operating strategy is focused on continuing development
of de novo banks and the ongoing growth of its existing banks, coupled with the
efficiencies from consolidation of bank operations. Management continues to be
actively engaged in the ongoing process of exploring opportunities for future
growth (which includes de novo bank formation and other growth strategies).
Accordingly, the Corporation may invest in or otherwise add additional banks in
future periods, subject to economic conditions and other factors, although the
timing of such additional banking units, if any, is uncertain. Such future de
novo banks and/or additions of other operating units could be either
wholly-owned, majority-owned or otherwise controlled by the Corporation.
Management believes the Corporation's capital resources at September 30,
1997 to be adequate to fund existing operations, future growth and expansion of
existing banks.
Impact of New Accounting Standards
The Financial Accounting Standards Board ("FASB") has issued certain new
standards which affect accounting and financial reporting.
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", establishes new
guidelines for accounting for certain transactions, such as sales of loans and
loan participations. This new standard became effective for the Corporation
January 1, 1997. Implementation of this new accounting standard had no impact
on the Corporation's financial position or results of operations for the period
ended September 30, 1997.
FASB Statement No. 128, "Earnings per Share", will revise the computation
and reporting of earnings per share. This new standard is intended to simplify
the basis upon which per-share amounts are determined, replacing "primary"
earnings per share with "basic" earnings per share. "Fully diluted" earnings
per share will be replaced with "diluted" earnings per share.
Page 17 of 21
<PAGE> 18
The Statement will become effective for the Corporation's year end 1997
consolidated financial statements and will result in restatement of per-share
amounts for prior periods. Early adoption of the new standard is not
permitted. Management has completed its preliminary analysis of this new
accounting standard and a comparative analysis of the impact of its
computations is set forth in Note D of the accompanying Notes to Financial
Statements, which is incorporated herein by reference.
FASB Statement No. 129, "Disclosure of Information about Capital
Structure", clarifies the extent and nature of disclosures relating to an
entity's capital structure. It requires nonpublic companies to disclose
information which has been required for public companies in the past. This new
standard will become effective for the Corporation's year end 1997 consolidated
financial statements and, upon implementation, is not expected to have a
material impact.
FASB Statement No. 130, "Reporting of Comprehensive Income" addresses the
reporting and display of 'comprehensive income' and its components (revenue,
expenses, gains and losses) in a full set of financial statements. Under this
standard, comprehensive income is defined as the change in equity (net assets)
of a business enterprise during a reporting period from transactions and other
events and circumstances from non equity-holder sources. Thus, the term
comprehensive income includes all elements of net income under current
generally accepted accounting principles with adjustments for certain other
things, such as unrealized gains and losses on investment securities available
for sale. Management has not completed its analysis of this new accounting
standard. The new standard will become effective for the Corporation in 1998
and will require restatement of prior year comparative information.
FASB Statement No. 131, "Disclosures About Segments of An Enterprise and
Related Information" revises reporting of information about operating segments
in annual and interim financial statements. This statement sets revised
standards for disclosure about products and services, geographic areas and
major customers. It is intended to promote a more practical approach to
segment reporting by requiring presentation of information on the basis which
is used internally by management for evaluating segment performance and
allocation of resources to segments of the enterprise. Management has not
completed its analysis of this new accounting standard. The new standard will
be effective for the Corporation's financial statements in 1998 and thereafter
and will require restatement of prior period information.
At any time, there are a number of proposed new accounting standards under
consideration by standard-setting bodies, bank regulatory agencies and other
entities. Because of the fluid status of such proposals, the potential impact
thereof on the Corporation's financial statements is unclear.
Page 18 of 21
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries are parties to certain
ordinary, routine litigation incidental to their business. In the
opinion of management, liabilities arising from such litigation would
not have a material effect on the Corporation's consolidated financial
position or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
(11) Statement regarding computation of per share
earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter ended September 30, 1997.
Page 19 of 21
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL BANCORP LTD.
(Registrant)
\s\ Joseph D. Reid
--------------------------------------
Chairman, President and CEO
(duly authorized to sign on behalf
of the registrant)
\s\ Lee W. Hendrickson
--------------------------------------
Vice President and
Chief Financial Officer
Date: November 14, 1997
- ------------------------
Page 20 of 21
<PAGE> 21
EXHIBIT INDEX
Exhibit No. Description
----------- ---------------------
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
Page 21 of 21
<PAGE> 1
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
CAPITOL BANCORP LTD.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1997 1996 (A) 1997 1996 (A)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Computation of number of common shares and common
stock equivalents for primary net income per share:
Weighted average number of common shares outstanding 4,723,194 4,374,598 4,616,866 4,054,358
Net effect of dilutive stock options and warrants --
based on the treasury stock method 207,455 132,003 168,193 120,284
---------- ---------- ---------- ----------
Weighted average number of common shares and common
stock equivalents for primary net income per share 4,930,649 4,506,601 4,785,059 4,174,642
========== ========== ========== ==========
Computation of number of common shares and common
stock equivalents for fully diluted net income per share:
Weighted average number of common shares outstanding 4,723,194 4,374,598 4,616,866 4,054,358
Net effect of dilutive stock options and warrants --
based on the treasury stock method 268,520 195,533 268,520 191,689
---------- ---------- ---------- ----------
Weighted average number of common shares and common
stock equivalents for fully diluted net income per share 4,991,714 4,570,131 4,885,386 4,246,047
========== ========== ========== ==========
Net income for the period $1,475,476 $1,177,700 $4,057,887 $3,426,885
========== ========== ========== ==========
Primary Net Income Per Share $ 0.30 $ 0.26 $ 0.85 $ 0.82
========== ========== ========== ==========
Fully Diluted Net Income Per Share $ 0.30 $ 0.26 $ 0.83 $ 0.81
========== ========== ========== ==========
</TABLE>
(A) As adjusted to reflect the Corporation's 1996 10% stock dividend as if
it had occurred at the beginning of the period.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,443
<INT-BEARING-DEPOSITS> 145
<FED-FUNDS-SOLD> 59,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,357
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 471,371
<ALLOWANCE> 5,758
<TOTAL-ASSETS> 633,826
<DEPOSITS> 563,308
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 5,047
<LONG-TERM> 8,825
0
0
<COMMON> 36,818
<OTHER-SE> 7,011
<TOTAL-LIABILITIES-AND-EQUITY> 633,826
<INTEREST-LOAN> 30,703
<INTEREST-INVEST> 4,740
<INTEREST-OTHER> 8
<INTEREST-TOTAL> 35,451
<INTEREST-DEPOSIT> 17,165
<INTEREST-EXPENSE> 17,633
<INTEREST-INCOME-NET> 17,818
<LOAN-LOSSES> 1,442
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 11,915
<INCOME-PRETAX> 6,163
<INCOME-PRE-EXTRAORDINARY> 4,058
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,058
<EPS-PRIMARY> .85
<EPS-DILUTED> .83
<YIELD-ACTUAL> 0
<LOANS-NON> 2,465
<LOANS-PAST> 1,364
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,578
<CHARGE-OFFS> 567
<RECOVERIES> 305
<ALLOWANCE-CLOSE> 5,758
<ALLOWANCE-DOMESTIC> 5,758
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,819
</TABLE>
