<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 MARCH 31, 1998
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: 5,201,718 shares outstanding as of
April 30, 1998.
Page 1 of 18
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets - March 31, 1998 and December 31,
1997.
Consolidated statements of income - Three months ended
March 31, 1998 and 1997.
Consolidated statements of changes in stockholders' equity -
Three months ended March 31, 1998 and 1997.
Consolidated statements of cash flows - Three months ended
March 31, 1998 and 1997.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
Page 2 of 18
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------ ------------
(in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 28,783 $ 29,860
Interest-bearing deposits with banks 123 260
Federal funds sold 79,750 62,650
--------- ---------
Cash and cash equivalents 108,656 92,770
Loans held for resale 23,358 11,426
Investment securities:
Available for sale, carried at market value 62,620 62,253
Held for long-term investment, carried at
amortized cost which approximates market value 2,192 2,217
--------- ---------
Total investment securities 64,812 64,470
Portfolio loans:
Commercial 435,621 395,938
Real estate mortgage 66,415 66,630
Installment 41,956 40,187
--------- ---------
Total portfolio loans 543,992 502,755
Less allowance for loan losses (7,018) (6,229)
--------- ---------
Net portfolio loans 536,974 496,526
Premises and equipment 7,709 7,579
Accrued interest income 4,349 4,116
Excess of cost over net assets of acquired subsidiaries 2,106 2,154
Other assets 12,785 11,515
--------- ---------
TOTAL ASSETS $ 760,749 $ 690,556
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 95,036 $ 83,487
Interest-bearing 567,014 520,920
--------- ---------
Total deposits 662,050 604,407
Debt obligations 5,900
Accrued interest on deposits and other liabilities 7,207 5,971
--------- ---------
Total liabilities 675,157 610,378
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,136 24,126
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 16,294 11,020
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
issued and outstanding: 1998 - 5,201,718 shares
1997 - 5,198,380 shares 50,362 50,312
Retained earnings (4,440) (4,553)
Market value adjustment (net of tax effect) for
investment securities available for sale 110 143
--------- ---------
46,032 45,902
Less unallocated ESOP shares (870) (870)
--------- ---------
Total stockholders' equity 45,162 45,032
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 760,749 $ 690,556
========= =========
</TABLE>
Page 3 of 18
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months Ended March 31, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Interest income:
Portfolio loans (including fees) $ 12,742 $ 9,066
Loans held for resale 206 78
Taxable investment securities 920 768
Federal funds sold 1,104 599
Other interest 21
Dividends on investment securities 23 23
-------- -------
Total interest income 15,016 10,534
Interest expense:
Demand deposits 1,333 834
Savings deposits 372 370
Time deposits 5,572 3,922
Debt obligations 593 40
-------- -------
Total interest expense 7,870 5,166
-------- -------
Net interest income 7,146 5,368
Provision for loan losses 825 454
-------- -------
Net interest income after
provision for loan losses 6,321 4,914
Noninterest income:
Service charges on deposit accounts 255 169
Trust fee income 92 77
Realized gain on sale of investment
securities available for sale 10
Other 346 578
-------- -------
Total noninterest income 693 834
Noninterest expense:
Salaries and employee benefits 2,856 1,978
Occupancy 533 295
Equipment rent, depreciation and maintenance 645 424
Deposit insurance premiums 30 21
Other 1,919 1,140
-------- -------
Total noninterest expense 5,983 3,858
-------- -------
Income before federal income taxes 1,031 1,890
Federal income taxes 398 628
-------- -------
NET INCOME $ 633 $ 1,262
======== =======
NET INCOME PER SHARE -- Note D:
Basic $ 0.12 $ 0.25
======== =======
Diluted $ 0.12 $ 0.25
========= =======
</TABLE>
Page 4 of 18
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Market Value
Adjustment for
Investment
Securities Unallocated
Common Retained Available ESOP
Stock Earnings for Sale Shares Total
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1997
Balances at January 1, 1997 $ 34,972 $ 5,150 $ 37 $ 0 $ 40,159
Cash dividends paid (451) (451)
Net proceeds from issuance of common stock 375 375
Components of comprehensive income:
Market value adjustment for investment
securities available for sale (226) (226)
Net income for the period 1,262 1,262
--------
Comprehensive income for the period 1,036
-------- -------- ------ ------ --------
BALANCES AT MARCH 31, 1997 $ 35,347 $ 5,961 $ (189) $ 0 $ 41,119
======== ======== ====== ====== ========
Three Months Ended March 31, 1998
Balances at January 1, 1998 $ 50,312 $ (4,553) $ 143 $ (870) $ 45,032
Cash dividends paid (520) (520)
Net proceeds from issuance of common stock 50 50
Components of comprehensive income:
Market value adjustment for investment
securities available for sale (33) (33)
Net income for the period 633 633
--------
Comprehensive income for the period 600
-------- -------- ------ ------ --------
BALANCES AT MARCH 31, 1998 $ 50,362 $ (4,440) $ 110 $ (870) $ 45,162
======== ======== ====== ====== ========
</TABLE>
Page 5 of 18
<PAGE> 6
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 633 $ 1,262
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 825 454
Depreciation of premises and equipment 437 261
Amortization of goodwill and other intangibles 58 48
Net amortization of investment security
premiums (accretion of discount) (24) (117)
Gain on sale of premises and equipment 494
Originations and purchases of loans held for resale (64,190) (23,854)
Proceeds from sales of loans held for resale 52,258 25,086
Increase in accrued interest income
and other assets (1,489) (420)
Increase in accrued interest and
other liabilities 1,236 100
--------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (10,256) 3,314
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 1,482
Proceeds from maturities of investment securities 12,793 10,208
Purchases of investment securities (13,157) (16,105)
Net increase in portfolio loans (41,274) (32,794)
Proceeds from sales of premises and equipment 9 195
Purchases of premises and equipment (576) (615)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES (42,205) (37,629)
FINANCING ACTIVITIES
Net borrowings from debt obligations 5,900 2,050
Resources provided by minority interest in consolidated subsidiaries 5,274 935
Net proceeds from issuance of common stock 50 375
Cash dividends paid (520) (451)
Increase in demand deposits, NOW
accounts and savings accounts 22,891 15,887
Increase in certificates of deposit 34,752 28,684
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 68,347 47,480
--------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 15,886 13,165
Cash and cash equivalents at beginning of period 92,770 63,333
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 108,656 $ 76,498
========= ========
</TABLE>
Page 6 of 18
<PAGE> 7
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 three-month period ended March 31,
1998 are not necessarily indicative of the results to be expected for the year
ending December 31, 1998.
The consolidated balance sheet as of December 31, 1997 was derived from
audited consolidated financial statements as of that date. Certain 1997 amounts
have been reclassified to conform to the 1998 presentation.
Note B - Implementation of New Accounting Standards
Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income" requires presentation of all components of
"comprehensive income" and total comprehensive income. This new standard became
effective for the Corporation January 1, 1998. Implementation of this new
accounting standard had no impact on the Corporation's financial position or
results of operations for the period ended March 31, 1998. Components of
comprehensive income and total comprehensive income are included in the
consolidated statements of changes in stockholders' equity.
Note C - New Bank
Kent Commerce Bank, a de novo bank located in Grand Rapids, Michigan,
was formed in early January 1998. The Corporation owns 51% of the common stock
of Kent Commerce Bank. This new bank is consolidated for financial reporting
purposes with corresponding accounting recognition given to applicable minority
interest.
Page 7 of 18
<PAGE> 8
Note D - Net Income Per Share
The computations of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Numerator--net income for the period $ 633,203 $ 1,262,280
=========== ===========
Denominator:
Weighted average number of common shares outstanding
(denominator for basic earnings per share) 5,200,656 4,975,510
Effect of dilutive securities:
Warrants -- 55,723
Stock options
185,479 117,072
----------- -----------
Potential dilution
185,479 172,795
----------- -----------
Denominator for diluted net income per share --
Weighted average number of common shares and potential dilution 5,386,135 5,148,305
=========== ===========
Basic Net Income Per Share $0.12 $0.25
=========== ===========
Diluted Net Income Per Share $0.12 $0.25
=========== ===========
</TABLE>
Note E - Prospective Impact of New Accounting Standards Not Yet Adopted
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 as of December 31, 1998 and thereafter
and will require restatement of prior period information.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". It requires start-up costs and organizational costs to be charged
to expense when incurred. The initial application of the statement will require
a cumulative effect adjustment for those companies that have previously
capitalized start-up and organization costs and will be effective in 1999.
Management has not completed its analysis of this new accounting standard.
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.
Page 8 of 18
<PAGE> 9
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $760.7 million at March 31, 1998, an increase
of $70.1 million from the December 31, 1997 level of $690.6 million. The
consolidated balance sheets include the Corporation and its majority-owned
banking subsidiaries.
During the three months ended March 31, 1998, one de novo bank was
added. Kent Commerce Bank, in Grand Rapids, Michigan, was formed in early
January 1998 and was capitalized with $3.9 million of which $2 million was
invested by the Corporation. The Corporation owns 51% of the common stock of
Kent Commerce Bank and, accordingly, this new bank is consolidated for financial
reporting purposes with corresponding accounting recognition given to applicable
minority interest.
Portfolio loans increased during the three-month period by
approximately $41 million. Loan growth was funded primarily by higher levels of
time deposits. The majority of portfolio loan growth occurred in commercial
loans, which increased approximately $40 million, consistent with the banks'
emphasis on commercial lending activities.
The allowance for loan losses at March 31, 1998 approximated $7 million
or 1.29% of total portfolio loans, an increase from the year-end 1997 ratio of
1.24%. The increase in the allowance ratio is temporary and relates, in part, to
a $300,000 provision recorded at March 31, 1998 relating to impaired loans of
one bank customer.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including volume, amount and composition, potential
impairment of individual loans and concentrations of credit), past loss
experience, current economic conditions, loan commitments outstanding and other
factors.
The table on the next page summarizes portfolio loan balances and
activity in the allowance for loan losses for the interim periods (in
thousands):
Page 9 of 18
<PAGE> 10
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allowance for loan losses at January 1 $ 6,229 $ 4,578
Loans charged-off:
Commercial 82 226
Installment 12 1
--------- --------
Total charge-offs 94 227
Recoveries:
Commercial 57 143
Installment 1 8
--------- --------
Total recoveries 58 151
--------- --------
Net charge-offs (recoveries) 36 76
--------- --------
Additions to allowance charged to expense 825 454
--------- --------
Allowance for loan losses at March 31 $ 7,018 $ 4,956
========= ========
Average total portfolio loans for period ended March 31 $ 522,992 $371,211
========= ========
Ratio of net charge-offs to average portfolio loans outstanding 0.01% 0.02%
========= ========
</TABLE>
The allowance for loan losses is a general allowance for the
Corporation's loan portfolio. For internal purposes, management allocates the
allowance to all loan classifications. The amounts allocated in the following
table (in thousands), which includes all loans for which, based on the
Corporation's loan rating system management has concerns, should not be
interpreted as an indication of future charge-offs. In addition, amounts
allocated are not intended to reflect the amount that may be available for
future losses, since the allowance is a general allowance.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------------- -------------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
----- -----
<S> <C> <C> <C> <C>
Commercial $ 3,379 .62% $ 2,875 .57%
Real estate mortgage 167 .03 103 .02
Installment 192 .04 185 .04
Unallocated 3,280 .60 3,066 .61
----------- ---- ----------- ----
Total allowance for loan losses $ 7,018 1.29% $ 6,229 1.24%
=========== ==== =========== ====
Total portfolio
loans outstanding $ 543,992 $ 502,755
=========== ==========
</TABLE>
In addition to the allowance for loan losses, certain loans are
enrolled in a state government loan program and have additional reserves
established to provide for loss protection. At March 31, 1998, total loans under
this program approximated $20.5 million. Reserves related to these loans, which
are represented by earmarked funds on deposit at certain of the bank
subsidiaries, approximated $1.9 million and are not included in the recorded
allowance for loan losses.
Page 10 of 18
<PAGE> 11
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 1997 and through
March 31, 1998. Impaired loans include amounts owed to one of the Corporation's
banks relating to a customer's checks drawn on uncollected funds which arose in
early February 1998. The total of the customer's overdrafts at the bank
subsidiary approximated $1.5 million. Management subsequently became aware that
larger overdrafts occurred at other, unaffiliated, financial institutions
(certain of which subsequently filed suit against the bank subsidiary). Based on
management's analysis of the customer's loan collateral and amounts owing the
bank by that customer, an estimated loss accrual and write-off of $600,000 was
recorded at March 31, 1998 relating to the advances arising from uncollected
funds. In addition, the bank increased its interim provision for loan losses at
March 31, 1998 by $300,000 relating to that customer.
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) at March 31, 1998 amounted to $4.6 million compared
with $4.0 million at December 31, 1997 as summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
March 31 Dec 31
1998 1997
---- ----
<S> <C> <C>
Nonaccrual loans:
Commercial $ 3,193 $ 2,570
Real estate 58 59
Installment 60 59
--------- ----------
Total nonaccrual loans 3,311 2,688
Past due (>90 days) loans:
Commercial 788 897
Real estate 292 401
Installment 176 25
--------- ----------
Total past due loans 1,256 1,323
--------- ----------
Total nonperforming loans $ 4,567 $ 4,011
========= ==========
</TABLE>
Nonperforming loans increased approximately $556,000 during the
three-month period ended March 31, 1998 primarily due to the
previously-mentioned occurrence of checks drawn on uncollected funds by a bank
customer in early February 1998. Most of the nonaccrual loans are a small number
of loans in various stages of resolution which management believes to be
adequately collateralized or otherwise appropriately recorded in its
determination of the adequacy of the allowance for loan losses.
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the period,
additional interest income of $82,800 and $35,500 would have been recorded for
the three months ended March 31, 1998 and 1997, respectively. Interest income
recognized on loans in nonaccrual status for the period approximated $1,400 and
$4,400, respectively.
Other real estate owned (generally real estate acquired through
foreclosure or a deed in lieu of foreclosure and classified as a component of
other assets) approximated $290,000 at March 31, 1998 an increase of $125,000
from the year-end 1997 level of $165,000 due to the acquisition of one property.
Page 11 of 18
<PAGE> 12
The following comparative analysis summarizes each bank's total
portfolio loans, allowance for loan losses, nonperforming assets and certain
ratios (dollars in thousands):
<TABLE>
<CAPTION>
Allowance as a
Percentage of
Total Allowance for Nonperforming Total
Portfolio Loans Loan Losses Loans Portfolio Loans
--------------- ----------- ----- ---------------
March 31 Dec 31 March 31 Dec 31 March 31 Dec 31 March 31 Dec 31
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 122,710 $ 115,882 $ 1,657 $ 1,564 $ 582 $ 913 1.35% 1.35%
Brighton Commerce Bank 17,118 13,817 172 139 --- --- 1.00 1.01
Capitol National Bank 96,566 94,400 1,326 1,270 628 760 1.37 1.35
Grand Haven Bank 40,549 35,770 477 427 8 32 1.18 1.19
Kent Commerce Bank 6,464 n/a 65 n/a --- n/a 1.01 n/a
Macomb Community Bank 23,274 19,546 233 196 --- --- 1.00 1.00
Muskegon Commerce Bank 5,742 1,610 58 17 --- --- 1.01 1.06
Oakland Commerce Bank 60,415 58,091 1,022 686 1,606 744 1.69 1.18
Paragon Bank & Trust 60,051 59,184 670 663 982 660 1.12 1.12
Portage Commerce Bank 74,345 72,115 980 950 761 902 1.32 1.32
Sun Community Bancorp
Limited:
Bank of Tucson 25,497 23,406 255 235 --- --- 1.00 1.00
Valley First Community
Bank 10,158 7,830 103 82 --- --- 1.01 1.05
Other, net 1,103 1,104 --- --- --- --- --- ---
--------- --------- ------- -------- --------- -------- ---- ----
Consolidated $ 543,992 $ 502,755 $ 7,018 $ 6,229 $ 4,567 $ 4,011 1.29% 1.24%
========= ========= ======== ======== ========= ======== ==== ====
n/a - Not applicable
</TABLE>
Noninterest-bearing deposits approximated 14.4% of total deposits at
March 31, 1998, a decrease from the December 31, 1997 level of 13.8%. Levels of
noninterest-bearing deposits fluctuate based on customers' transaction activity.
Page 12 of 18
<PAGE> 13
Results of Operations
Net income for the three months ended March 31, 1998 amounted to
$633,000 ($.12 per share), a decrease from the $1,262,000 ($.25 per
share) earned during the corresponding period of 1997. Operating results (in
thousands) were as follows:
<TABLE>
<CAPTION>
Three months ended March 31
--------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
------------ ---------- ---------------- --------------
March 31 Dec 31
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 142,294 $ 138,390 $ 504 $ 591 20.65% 35.80% 1.42% 2.27%
Brighton Commerce Bank (2) 34,086 23,853 (38) (123) n/a n/a n/a n/a
Capitol National Bank 117,279 126,552 500 390 22.47 19.47 1.69 1.45
Grand Haven Bank 51,065 45,320 114 59 12.19 8.47 .95 .68
Kent Commerce Bank(4) 10,709 n/a (144) n/a n/a n/a n/a n/a
Macomb Community Bank (1) 48,303 41,010 19 (41) 2.17 n/a .17 n/a
Muskegon Commerce Bank(2) 10,235 7,885 (78) n/a n/a n/a n/a n/a
Oakland Commerce Bank 92,148 81,839 34 161 2.34 11.88 .16 .90
Paragon Bank & Trust 77,359 72,332 172 149 12.68 13.28 .92 .94
Portage Commerce Bank 98,083 91,759 294 241 19.34 18.36 1.24 1.24
Sun Community Bancorp
Limited: (3)
Bank of Tucson (1) 56,888 41,605 157 (57) 11.62 n/a 1.17 n/a
Valley First Community
Bank (2) 16,563 12,826 (62) n/a n/a n/a n/a n/a
Mortgage banking 3,083 2,913 (60) (73) n/a n/a n/a n/a
Other, net 2,654 4,272 (779) (35) n/a n/a n/a n/a
--------- --------- --------- -------- ------ ------ ----- -----
Consolidated $ 760,749 $690,556 $ 633 $ 1,262 5.62% 12.57% .34% 1.00%
========= ========= ========= ======== ====== ======= ====== ======
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, Valley First Community Bank and Muskegon Commerce Bank, de novo banks, commenced operations in
January, June and December 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.
(4) Kent Commerce Bank, a de novo bank, commenced operations in January 1998.
</TABLE>
Net interest income increased 33.1% during the three-month 1998 period
versus the corresponding period of 1997.
Noninterest income decreased in 1998 to $693,000 for the three-month
period, as compared with $834,000 in 1997. Service charge income increased 51%
and trust fee income increased 19%.
Provisions for loan losses approximated $825,000 for the three months
ended March 31, 1998 compared to $454,000 during the corresponding 1997 period.
The increase in the provision for loan losses relates primarily to growth in the
banks' loan portfolios, in addition to the previously discussed $300,000
provision recorded in 1998 relating to one customer.
Noninterest expense for the three months ended March 31, 1998
approximated $6 million compared with $3.9 million in 1997. The increase in
noninterest expense is associated with newly formed banks, growth and increases
in general operating costs.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $108.7 million or 14.3% of total
assets at March 31, 1998 as compared with $92.8 million or 13.4% of total assets
at December 31, 1997. 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 March
31, 1998 is adequate to fund loan demand and meet depositor needs.
Page 13 of 18
<PAGE> 14
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 March 31, 1998 and December 31, 1997, the Corporation had
approximately $63 million and $62 million, respectively, of investment
securities classified as available for sale which can be utilized to meet
various liquidity needs as they arise.
Two of the Corporation's banks, (Oakland Commerce Bank and Ann Arbor
Commerce Bank) have secured lines of credit with the Federal Home Loan Bank of
Indianapolis. Borrowings thereunder approximated $5 million and additional
borrowing capacity approximated $5.4 million at March 31, 1998.
At March 31, 1998, the Corporation had unused lines of credit from an
unrelated financial institution aggregating $5 million.
The Corporation's Board of Directors recently approved a second quarter
cash dividend of $.10 per share (payable June 1, 1997 to shareholders of record
as of May 1, 1998), following a cash dividend of $.10 per share paid March 1,
1998.
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.
Capital, as a percentage of total assets, approximated 5.9% at March
31, 1998, a decrease from the beginning of the year ratio of 6.5%. Total capital
funds (the Corporation's stockholders' equity, plus minority interest in
consolidated subsidiaries plus guaranteed preferred beneficial interests in the
Corporation's subordinated debentures) aggregated $85.6 million or 11.25% of
total assets at March 31, 1998. The Corporation and each of its banking
subsidiaries continue to exceed regulatory capital requirements as shown on the
following page (dollars in thousands):
Page 14 of 18
<PAGE> 15
<TABLE>
<CAPTION>
Ann Arbor Brighton Capitol Grand Kent Macomb Muskegon Oakland Paragon
Commerce Commerce National Haven Commerce Community Commerce Commerce Bank &
Bank Bank(1) Bank Bank(1) Bank(1) Bank(1) Bank(1) Bank Trust
----------- ---------- ---------- --------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $ 142,294 $ 33,794 $ 117,279 $ 51,065 $ 10,635 $ 48,208 $ 10,181 $ 92,145 $ 77,359
Total Assets for Risk-Based
Capital Purposes 143,951 33,966 118,605 51,446 10,700 48,441 10,239 93,167 78,029
Risk-Weighted Assets 114,054 20,853 90,984 34,401 7,247 25,981 6,523 69,416 62,495
Tier I Capital 10,325 2,715 9,137 4,087 3,695 3,898 2,485 6,069 5,580
Allowable Tier II Capital 1,429 172 1,140 431 65 233 58 870 670
Tier I and Allowable Tier II
Capital, Combined 11,754 2,887 10,277 4,518 3,760 4,131 2,543 6,939 6,250
Ratios Based of Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 9.05% 13.02% 10.04% 11.88% 50.99% 15.00% 38.10% 8.74% 8.93%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.31% 13.84% 11.30% 13.13% 51.88% 15.90% 38.99% 10.00% 10.00%
Leverage Ratio 7.26% 8.03% 7.79% 8.00% 34.74% 8.09% 24.41% 6.59% 7.21%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 4.00% 8.00% 4.00% 8.00% 8.00% 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 $ 98,083 $ 74,465 $ 70,814 $ 760,749
Total Assets for Risk-Based
Capital Purposes 99,063 74,445 67,590 764,165
Risk-Weighted Assets 72,619 44,697 64,952 551,381
Tier I Capital 6,362 18,347 42,946 78,487
Allowable Tier II Capital 909 358 24,670 10,598
Tier I and Allowable Tier II
Capital, Combined 7,271 18,705 67,616 89,085
Ratios Based of Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.76% 41.05% 66.12% 14.23%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.01% 41.85% 104.10% 16.16%
Leverage Ratio 6.49% 24.64% 60.65% 10.32%
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%
(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.
</TABLE>
Page 15 of 18
<PAGE> 16
As of March 31, 1998, applications were pending for the formation of de
novo banks in Arizona (Phoenix and North Tucson) and Michigan (Detroit).
Management anticipates those de novo banks will commence operations in 1998 and
will be majority owned by the Corporation or, as to Arizona de novo banks, its
majority-owned subsidiary, Sun Community Bancorp Ltd.
The Corporation's operating strategy continues to be focused on the
ongoing growth and maturity of its existing banks, coupled with de novo bank
expansion in selected markets as opportunities arise. Management continues to be
actively engaged in the ongoing process of exploring opportunities for future
growth which includes de novo bank formation and other growth strategies.
Accordingly, the Corporation may invest in or otherwise add additional banks in
future periods, subject to economic conditions and other factors, although the
timing of such additional banking units, if any, is uncertain. Such future de
novo banks and/or additions of other operating units could be either
wholly-owned, majority-owned or otherwise controlled by the Corporation.
Management believes the Corporation's capital resources at March 31,
1998 to be adequate to fund existing operations, future growth and expansion.
Impact of New Accounting Standards
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 as of December 31, 1998 and
thereafter and will require restatement of prior period information.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". It requires start-up costs and organizational costs to be charged
to expense when incurred. The initial application of the statement will require
a cumulative effect adjustment for those companies that have previously
capitalized start-up and organization costs and will be effective in 1999.
Management has not completed its analysis of this new accounting standard.
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.
Page 16 of 18
<PAGE> 17
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:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed
during the quarter ended
March 31, 1998.
Page 17 of 18
<PAGE> 18
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: May 14, 1998
Page 18 of 18
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 28,783
<INT-BEARING-DEPOSITS> 123
<FED-FUNDS-SOLD> 79,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,812
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 567,350
<ALLOWANCE> 7,018
<TOTAL-ASSETS> 760,749
<DEPOSITS> 662,050
<SHORT-TERM> 5,900
<LIABILITIES-OTHER> 7,207
<LONG-TERM> 0
0
0
<COMMON> 50,362
<OTHER-SE> (4,440)
<TOTAL-LIABILITIES-AND-EQUITY> 760,749
<INTEREST-LOAN> 12,948
<INTEREST-INVEST> 943
<INTEREST-OTHER> 1,125
<INTEREST-TOTAL> 15,016
<INTEREST-DEPOSIT> 7,277
<INTEREST-EXPENSE> 7,870
<INTEREST-INCOME-NET> 7,146
<LOAN-LOSSES> 825
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,983
<INCOME-PRETAX> 1,031
<INCOME-PRE-EXTRAORDINARY> 633
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 633
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<YIELD-ACTUAL> 0
<LOANS-NON> 3,311
<LOANS-PAST> 1,256
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,229
<CHARGE-OFFS> 94
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 7,018
<ALLOWANCE-DOMESTIC> 7,018
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,280
</TABLE>
