<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, 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: 5,261,111 shares outstanding as of November
10, 1998.
Page 1 of 22
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including the
Corporation's consolidated financial statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and in documents
incorporated into this document by reference that are not historical facts,
including, without limitation, statements of future expectations, projections of
results of operations and financial condition, statements of future economic
performance and other forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, are subject to known and
unknown risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of the Corporation and/or its subsidiaries
and other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "believe", and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of the Corporation's
efforts to implement its business strategy, (ii) changes in interest rates,
(iii) legislation or regulatory requirements adversely impacting the
Corporation's banking business and/or expansion strategy, (iv) adverse changes
in business conditions or inflation, (v) general economic conditions, either
nationally or regionally, which are less favorable than expected and that result
in, among other things, a deterioration in credit quality and/or loan
performance and collectability, (vi) competitive pressures among financial
institutions, (vii) changes in securities markets, (viii) actions of competitors
of the Corporation's banks and the Corporation's ability to respond to such
actions, (ix) the cost of the Corporation's capital, which may depend in part on
the Corporation's asset quality, prospects and outlook, (x) changes in
governmental regulation, tax rates and similar matters, (xi) "Year 2000"
computer, imbedded chip and data processing issues, and (xii) other risks
detailed in the Corporation's other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written or oral forward-looking
statements attributable to the Corporation or persons acting on its behalf are
expressly qualified in their entirety by the foregoing factors. Investors and
other interested parties are cautioned not to place undue reliance on such
statements, which speak as of the date of such statements. The Corporation
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of unanticipated events.
Item 1. Financial Statements:
Consolidated balance sheets - September 30, 1998 and December
31, 1997.
Consolidated statements of income - Three months and nine
months ended September 30, 1998 and 1997.
Consolidated statements of changes in stockholders' equity -
Nine months ended September 30, 1998 and 1997.
Consolidated statements of cash flows - Nine months ended
September 30, 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 22
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 40,912 $ 29,860
Interest-bearing deposits with banks 240 260
Federal funds sold 107,355 62,650
------------ ------------
Cash and cash equivalents 148,507 92,770
Loans held for resale 19,051 11,426
Investment securities:
Available for sale, carried at market value 65,810 62,253
Held for long-term investment, carried at
amortized cost which approximates market value 2,290 2,217
------------ ------------
Total investment securities 68,100 64,470
Portfolio loans:
Commercial 539,414 395,938
Real estate mortgage 72,927 66,630
Installment 49,942 40,187
------------ ------------
Total portfolio loans 662,283 502,755
Less allowance for loan losses (8,092) (6,229)
------------ ------------
Net portfolio loans 654,191 496,526
Premises and equipment 10,032 7,579
Accrued interest income 5,138 4,116
Excess of cost over net assets of acquired subsidiaries 2,232 2,154
Other assets 15,467 11,515
------------ ------------
TOTAL ASSETS $ 922,718 $ 690,556
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 104,489 $ 83,487
Interest-bearing 714,285 520,920
------------ ------------
Total deposits 818,774 604,407
Debt obligations 4,000
Accrued interest on deposits and other liabilities 7,409 5,971
------------ ------------
Total liabilities 830,183 610,378
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,246 24,126
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 19,815 11,020
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
issued and outstanding: 1998 - 5,261,111 shares
1997 - 5,198,380 shares 51,521 50,312
Retained earnings (2,593) (4,553)
Market value adjustment (net of tax effect) for
investment securities available for sale 416 143
------------ ------------
49,344 45,902
Less unallocated ESOP shares (870) (870)
------------ ------------
Total stockholders' equity 48,474 45,032
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 922,718 $ 690,556
============ ============
</TABLE>
Page 3 of 22
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $15,556 $11,118 $42,524 $30,326
Loans held for resale 335 192 970 377
Taxable investment securities 958 965 2,841 2,585
Federal funds sold 1,517 733 3,701 1,973
Other interest 35 4 88 8
Dividends on investment securities 29 27 78 182
------- ------- ------- -------
Total interest income 18,430 13,039 50,202 35,451
Interest expense:
Demand deposits 1,975 1,062 4,965 2,850
Savings deposits 382 402 1,114 1,164
Time deposits 6,745 4,882 18,423 13,151
Debt obligations and other 617 336 1,854 468
------- ------- ------- -------
Total interest expense 9,719 6,682 26,356 17,633
------- ------- ------- -------
Net interest income 8,711 6,357 23,846 17,818
Provision for loan losses 800 476 2,458 1,442
------- ------- ------- -------
Net interest income after
provision for loan losses 7,911 5,881 21,388 16,376
Noninterest income:
Service charges on deposit accounts 330 239 875 614
Trust fee income 114 86 317 244
Realized gains on sale of investment
securities available for sale 13 2 30
Other 524 158 1,364 814
------- ------- ------- -------
Total noninterest income 968 496 2,558 1,702
Noninterest expense:
Salaries and employee benefits 3,560 2,300 9,453 6,204
Occupancy 637 380 1,663 1,009
Equipment rent, depreciation and maintenance 800 548 2,135 1,437
Deposit insurance premiums 35 22 92 64
Other 1,534 849 5,080 3,201
------- ------- ------- -------
Total noninterest expense 6,566 4,099 18,423 11,915
------- ------- ------- -------
Income before federal income taxes 2,313 2,278 5,523 6,163
Federal income taxes 803 802 1,996 2,105
------- ------- ------- -------
NET INCOME $ 1,510 $ 1,476 $ 3,527 $ 4,058
======= ======= ======= =======
NET INCOME PER SHARE -- Note D:
Basic $ 0.29 $ 0.28 $ 0.68 $ 0.80
======= ======= ======= =======
Diluted $ 0.28 $ 0.28 $ 0.66 $ 0.78
======= ======= ======= =======
</TABLE>
Page 4 of 22
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 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>
Nine Months Ended September 30, 1997
- -----------------------------------------------
Balances at January 1, 1997 $ 34,972 $ 5,150 $ 37 $ 0 $ 40,159
Cash dividends paid (1,352) (1,352)
Issuance of 158,107 shares of common stock
upon exercise of warrants 1,292 1,292
Issuance of 60,176 shares of common stock
upon exercise of stock options 554 (1,015) (461)
Components of comprehensive income:
Market value adjustment for investment
securities available for sale 133 133
Net income for the period 4,058 4,058
------------
Comprehensive income for the period 4,191
------------ ----------- ----------- ----------- ------------
BALANCES AT SEPTEMBER 30, 1997 $ 36,818 $ 7,856 $ 170 $ (1,015) $ 43,829
============ =========== =========== =========== ============
Nine Months Ended September 30, 1998
- -----------------------------------------
Balances at January 1, 1998 $ 50,312 $ (4,553) $ 143 $ (870) $ 45,032
Cash dividends paid (1,567) (1,567)
Issuance of 35,060 shares of common stock
upon exercise of stock options 464 464
Issuance of 27,671 shares of common stock
in exchange for minority interest in
majority-owned subsidiary 745 745
Components of comprehensive income:
Market value adjustment for investment
securities available for sale 273 273
Net income for the period 3,527 3,527
------------
Comprehensive income for the period 3,800
------------ ----------- ----------- ----------- ------------
BALANCES AT SEPTEMBER 30, 1998 $ 51,521 $ (2,593) $ 416 $ (870) $ 48,474
============ =========== =========== =========== ============
</TABLE>
Page 5 of 22
<PAGE> 6
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,527 $ 4,058
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 2,458 1,442
Depreciation of premises and equipment 1,357 872
Amortization of goodwill and other intangibles 42 145
Net amortization of investment security
premiums (accretion of discount) (93) (260)
Gain on sale of premises and equipment 4 501
Originations and purchases of loans held for resale (226,085) (98,145)
Proceeds from sales of loans held for resale 218,460 94,894
Increase in accrued interest income
and other assets (5,119) (3,268)
Increase in accrued interest and other
liabilities 1,438 339
---------------- ----------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (4,011) 578
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 500 3,481
Proceeds from maturities of investment securities 36,506 26,061
Purchases of investment securities (40,125) (42,714)
Net increase in portfolio loans (160,123) (104,009)
Proceeds from sales of premises and equipment 151 380
Purchases of premises and equipment (3,965) (3,119)
---------------- ----------------
NET CASH USED BY INVESTING ACTIVITIES (167,056) (119,920)
FINANCING ACTIVITIES
Net borrowings from debt obligations 4,000 5,325
Resources provided by minority interest in consolidated subsidiaries 9,540 5,087
Net proceeds from issuance of common stock 464 1,846
Cash dividends paid (1,567) (1,352)
Increase in demand deposits, NOW
accounts and savings accounts 108,517 41,798
Increase in certificates of deposit 105,850 85,344
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 226,804 138,048
---------------- ----------------
INCREASE IN CASH AND CASH EQUIVALENTS 55,737 18,706
Cash and cash equivalents at beginning of period 92,770 63,333
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 148,507 $ 82,039
================ ================
</TABLE>
Page 6 of 22
<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 nine-month period ended September 30,
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 September 30, 1998. Components of
comprehensive income and total comprehensive income are included in the
consolidated statements of changes in stockholders' equity.
Note C - New Banks
Kent Commerce Bank, a de novo bank located in Grand Rapids, Michigan,
was formed in early January 1998. Kent Commerce Bank is 51% owned by the
Corporation and, accordingly, is consolidated for financial reporting purposes
with corresponding accounting recognition given to applicable minority interest.
On May 20, 1998 Camelback Community Bank, a de novo commercial bank,
commenced operations in Phoenix, Arizona. The Bank was capitalized with $4.2
million, of which $2.1 million was invested by Sun Community Bancorp Limited
("Sun") with the remainder invested by individuals and other entities primarily
located in the Phoenix area. Southern Arizona Community Bank, a de novo bank
located in Tucson, Arizona, commenced operations on August 17, 1998. The Bank
was capitalized with $4.6 million, of which $2.3 million was invested by
Page 7 of 22
<PAGE> 8
Sun with the remainder invested by individuals and other entities primarily
located in the Tucson area. These new banks are 51% owned by Sun and,
accordingly, are consolidated with Sun for financial reporting purposes. Sun is
consolidated with the Corporation for financial reporting purposes due to 51%
ownership by Capitol Bancorp Ltd.
Note D - Net Income Per Share
The computations of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator--net income for the period (in $1,000s) $ 1,510 $ 1,476 $ 3,527 $ 4,058
========== ========== ========== ==========
Denominator:
Weighted average number of common shares outstanding
(denominator for basic earnings per share) 5,250,440 5,195,513 5,224,773 5,078,553
Effect of dilutive securities -- stock options 119,705 150,612 130,716 122,108
---------- ---------- ---------- ----------
Denominator for diluted net income per share--
Weighted average number of common shares and potential
dilution 5,370,145 5,346,125 5,355,489 5,200,661
========== ========== ========== ==========
Basic Net Income Per Share $ 0.29 $ 0.28 $ 0.68 $ 0.80
========== ========== ========== ==========
Diluted Net Income Per Share $ 0.28 $ 0.28 $ 0.66 $ 0.78
========== ========== ========== ==========
</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.
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective for the
Corporation in 2000 and, because the Corporation has not typically entered into
derivative
Page 8 of 22
<PAGE> 9
contracts either to hedge existing risks or for speculative purposes, is not
expected to have a material effect on its financial statements.
The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position 98-1, "Costs of Computer Software Developed or Obtained
for Internal Use". It requires capitalization of certain costs in development of
software and is not expected to have a material effect on the Corporation's
financial statements when implemented in 1999.
The AICPA has also 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.
Note F - Pending Stock Split
On November 9, 1998, the Corporation announced a 20% stock split (one
additional share for each five shares of common stock outstanding prior to the
split) for shareholders of record as of December 4, 1998. The additional shares
will be distributed on or about December 18, 1998. Upon issuance of the
additional shares of common stock, all historical share and per share data
appearing in the Corporation's financial statements will be restated to reflect
the stock split as if it had occurred at the beginning of the periods presented.
The accompanying consolidated financial statements of the Corporation as of and
for the period ended September 30, 1998 have not been adjusted for the pending
stock split.
Page 9 of 22
<PAGE> 10
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $922.7 million at September 30, 1998. The
consolidated balance sheets include the Corporation and its majority-owned
banking subsidiaries.
During the nine months ended September 30, 1998, three de novo banks
were 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. Kent Commerce Bank is 51% owned by the Corporation
and, accordingly, this new bank is consolidated for financial reporting purposes
with corresponding accounting recognition given to applicable minority interest.
On May 20, 1998 Camelback Community Bank, a de novo commercial bank,
commenced operations in Phoenix, Arizona. The Bank was capitalized with $4.2
million, of which $2.1 million was invested by Sun Community Bancorp Limited
("Sun") with the remainder invested by individuals and other entities primarily
located in the Phoenix area. Southern Arizona Community Bank, a de novo bank
located in Tucson, Arizona, commenced operations on August 17, 1998. The Bank
was capitalized with $4.6 million, of which $2.3 million was invested by Sun
with the remainder invested by individuals and other entities primarily located
in the Tucson area. These new banks are 51% owned by Sun and, accordingly, are
consolidated with Sun for financial reporting purposes. Sun is consolidated with
the Corporation for financial reporting purposes due to 51% ownership by Capitol
Bancorp Ltd.
Asset growth for the nine months ended September 30, 1998 approximated
$232 million, or an annualized growth rate of 45%. Of this asset growth, $40
million was attributable to de novo banks which commenced operations in 1998,
$46 million was derived from banks formed in 1997 (an annualized growth rate of
138%) and $41 million came from banks started in 1996 (an annualized growth rate
of 66%). $107.5 million of this asset growth was achieved by the Corporation's
more mature banks, an annualized growth rate of more than 25%.
Portfolio loans increased during the 1998 nine-month period by
approximately $160 million. The majority of 1998 portfolio loan growth occurred
in commercial loans, which increased approximately $143 million, consistent with
the banks' emphasis on commercial lending activities.
The allowance for loan losses at September 30, 1998 approximated $8.1
million or 1.22% of total portfolio loans, a slight decrease from the year-end
1997 ratio of 1.24%. Provisions for loan losses have been maintained at a higher
level in 1998 ($2,458,000) relative to 1997 ($1,442,000) commensurate with
portfolio growth, levels of delinquent and other nonperforming loans and other
factors. The allowance ratio is slightly less in 1998 due to the addition of de
novo banks which maintain a lower relative allowance for loan losses because of
the unseasoned nature of their loan portfolios.
Page 10 of 22
<PAGE> 11
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>
1998 1997
-------- --------
<S> <C> <C>
Allowance for loan losses at January 1 $ 6,229 $ 4,578
Loans charged-off:
Commercial 680 474
Real estate mortgage 58 76
Installment 64 17
-------- --------
Total charge-offs 802 567
Recoveries:
Commercial 180 281
Real estate mortgage 6
Installment 27 18
-------- --------
Total recoveries 207 305
-------- --------
Net charge-offs 595 262
Additions to allowance charged to expense 2,458 1,442
-------- --------
Allowance for loan losses at September 30 $ 8,092 $ 5,758
======== ========
Average total portfolio loans for period ended September 30 $577,814 $406,096
======== ========
Ratio of net charge-offs to average portfolio loans outstanding 0.10% 0.06%
======== ========
</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>
September 30, 1998 December 31, 1997
----------------------- -----------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
--------- ---------
<S> <C> <C> <C> <C>
Commercial $ 3,830 0.58% $ 2,875 0.57%
Real estate mortgage 139 0.02 103 0.02
Installment 257 0.04 185 0.04
Unallocated 3,866 0.58 3,066 0.61
--------- --------- --------- ---------
Total allowance for loan losses $ 8,092 1.22% $ 6,229 1.24%
========= ========= ========= =========
Total portfolio
loans outstanding $ 662,283 $ 502,755
========== =========
</TABLE>
Page 11 of 22
<PAGE> 12
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 September 30, 1998, total loans
under this program approximated $23.5 million. Reserves related to these loans,
which are represented by earmarked funds on deposit at certain of the bank
subsidiaries, approximated $2 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 1997 and through
September 30, 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 September 30, 1998 amounted to $4.5 million
compared with $4 million at December 31, 1997 as summarized in the following
table (in thousands):
<TABLE>
<CAPTION>
Sept 30 Dec 31
1998 1997
------- --------
<S> <C> <C>
Nonaccrual loans:
Commercial $3,230 $2,570
Real estate 240 59
Installment 65 59
------ ------
Total nonaccrual loans 3,535 2,688
Past due (>90 days) loans:
Commercial 662 897
Real estate 241 401
Installment 84 25
------ ------
Total past due loans 987 1,323
------ ------
Total nonperforming loans $4,522 $4,011
====== ======
</TABLE>
Nonperforming loans increased approximately $500,000 during the
nine-month period ended September 30, 1998. Exclusive of approximately $1
million relating to one customer, most of the nonaccrual loans are a small
number of loans in various stages of resolution. Management believes such loans
to be adequately collateralized or otherwise appropriately considered 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 $300,000 and $135,000 would have been recorded for
the nine months ended September 30,
Page 12 of 22
<PAGE> 13
1998 and 1997, respectively. Interest income recognized on loans in nonaccrual
status for the period approximated $37,000 and $42,000, respectively.
Other real estate owned (generally real estate acquired through
foreclosure or a deed in lieu of foreclosure and classified as a component of
other assets) approximated $461,000 at September 30, 1998 compared to the
year-end 1997 level of $165,000.
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>
Total Allowance for Nonperforming Allowance as a Percentage
Portfolio Loans Loan Losses Loans of Total Portfolio Loans
--------------------- ------------------ ------------------ ------------------------
Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
1998 1997 1998 1997 1998 1997 1998 1997
--------- -------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $146,118 $115,882 $ 1,973 $ 1,564 $ 641 $ 913 1.35% 1.35%
Brighton Commerce Bank(1) 28,009 13,817 281 139 -- -- 1.00 1.01
Capitol National Bank 99,286 94,400 1,376 1,270 702 760 1.39 1.35
Grand Haven Bank 49,854 35,770 597 427 123 32 1.20 1.19
Kent Commerce Bank(1) 17,017 n/a 171 n/a 15 n/a 1.00 n/a
Macomb Community Bank(1) 35,333 19,546 354 196 -- -- 1.00 1.00
Muskegon Commerce Bank(1) 19,809 1,610 199 17 -- -- 1.00 1.06
Oakland Commerce Bank 62,323 58,091 754 686 2,300 744 1.21 1.18
Paragon Bank & Trust 62,912 59,184 722 663 171 660 1.15 1.12
Portage Commerce Bank 86,693 72,115 1,108 950 570 902 1.28 1.32
Sun Community Bancorp Limited:
Bank of Tucson(1) 33,901 23,406 357 235 -- -- 1.05 1.00
Camelback Community Bank(1) 1,776 n/a 18 n/a -- n/a 1.01 n/a
Southern Arizona Community Bank(1) 910 n/a 9 n/a -- n/a 1.00 n/a
Valley First Community Bank(1) 17,236 7,830 173 82 -- -- 1.00 1.05
Other, net 1,106 1,104 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- -------
Consolidated $662,283 $502,755 $ 8,092 $ 6,229 $ 4,522 $ 4,011 1.22% 1.24%
======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
n/a Not applicable
(1) As a condition of charter approval, bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years of
operations.
Noninterest-bearing deposits approximated 12.8% of total deposits at
September 30, 1998, a slight decrease from the December 31, 1997 level of 13.8%.
Levels of noninterest-bearing deposits fluctuate based on customers' transaction
activity.
[The remainder of this page intentionally left blank]
Page 13 of 22
<PAGE> 14
Results of Operations
Earnings for the three months ended September 30, 1998 approximated
$1.5 million, slightly more than the corresponding 1997 period. Net income for
the nine months ended September 30, 1998 amounted to $3.5 million, a decrease
from the $4.1 million earned during the corresponding period of 1997, primarily
due to the previously mentioned loss accruals recorded in the first quarter of
1998.
Operating results (in thousands) were as follows:
<TABLE>
<CAPTION>
Nine months ended September 30
------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
-------------------- ------------------ ----------------- -----------------
Sept 30 Dec 31
1998 1997 1998 1997 1998 1997 1998 1997
-------- --------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $181,257 $138,390 $ 1,563 $ 1,425 21.35% 28.55% 1.37% 1.66%
Brighton Commerce Bank(2) 35,925 23,853 (103) (399) n/a n/a n/a n/a
Capitol National Bank 121,790 126,552 1,498 1,327 22.46 22.07 1.68 1.65
Grand Haven Bank 60,175 45,320 436 237 15.54 11.24 1.09 .82
Kent Commerce Bank(4) 24,986 n/a (293) n/a n/a n/a n/a n/a
Macomb Community Bank(1) 65,744 41,010 194 (101) 7.36 n/a .50 n/a
Muskegon Commerce Bank(2) 26,467 7,885 (184) n/a n/a n/a n/a n/a
Oakland Commerce Bank 101,780 81,839 614 644 14.09 15.80 .88 1.13
Paragon Bank & Trust 90,026 72,332 565 526 13.88 15.64 .93 1.07
Portage Commerce Bank 108,658 91,759 993 873 21.75 22.19 1.30 1.40
Sun Community Bancorp Limited:(3)
Bank of Tucson (1) 57,806 41,605 571 12 14.07 .31 1.36 .06
Camelback Community Bank(4) 6,797 n/a (197) n/a n/a n/a n/a n/a
Southern Arizona Community Bank(4) 8,536 n/a (63) n/a n/a n/a n/a n/a
Valley First Community Bank(2) 28,362 12,826 (78) (119) n/a n/a n/a n/a
Mortgage banking 2,890 2,913 (96) (282) n/a n/a n/a n/a
Other, net 1,519 4,272 (1,893) (85) n/a n/a n/a n/a
-------- --------- -------- ------- ------- ------- ------- -------
Consolidated $922,718 $ 690,556 $ 3,527 $ 4,058 10.44% 13.47% .58% .97%
======== ========= ======== ======= ======= ======= ======= =======
</TABLE>
n/a Not applicable
(1) Bank of Tucson and Macomb Community Bank, de novo banks, commenced
operations in June and September 1996, respectively.
(2) Brighton Commerce Bank, 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 and acquired a 100%
ownership interest in Bank of Tucson (previously 51% owned by the
Corporation).
(4) Kent Commerce Bank, Camelback Community Bank and Southern Arizona Community
Bank, de novo banks, commenced operations in January, May and August 1998,
respectively.
Net interest income increased 33.8% during the nine-month 1998 period
versus the corresponding period of 1997. Asset growth and earnings growth do not
occur on a parallel basis. Generally, growth in assets (which is funded
primarily from interest-bearing liabilities) will contribute to future earnings
potential. Such future earnings potential will depend upon how such funds are
deployed into interest-earning assets.
Earnings performance of the Corporation's more mature banks has been
strong, on a combined basis, for the 1998 periods. The annualized rate of return
on average assets for banks formed prior to 1996 approximated 1.37% for the
three months ended September 30, 1998 and 1.24% for the nine-month 1998 period.
Earnings of banks formed in 1996 also favorably impacted consolidated operating
results with an annualized rate of return on average assets of 1.15% for the
three months ended September 30, 1998 and .99% for the nine-month period. De
novo banks formed in 1997 and 1998 reported operating losses, as expected, as
those banks continue to evolve. Two of the de novo banks formed in 1997 achieved
their first quarterly period of profitability in the period ended September 30,
1998.
Page 14 of 22
<PAGE> 15
Noninterest income increased in 1998 to $2,558,000 for the nine-month
period, as compared with $1,702,000 for the corresponding 1997 period. Fees from
origination and sale of mortgage loans increased significantly from $191,000 in
1997 to $990,000 in the 1998 period Service charge income increased 43% and fee
income from trust services increased 30%.
Provisions for loan losses approximated $2,458,000 for the nine months
ended September 30, 1998 compared to $1,442,000 during the corresponding 1997
period. Exclusive of the previously mentioned March 31, 1998 $300,000 provision
relating to one customer, the increase in the provision for loan losses relates
primarily to portfolio growth.
Noninterest expense for the nine months ended September 30, 1998
approximated $18.4 million compared with $11.9 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
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $214 million for the nine month
1998 period, compared to $127 million in 1997. Such growth occurred in all
deposit categories, with the majority coming from time deposits. The
Corporation's banks generally do not rely on brokered deposits as a key funding
source; brokered deposits approximated $20 million as of September 30, 1998
compared to $21.2 million as of December 31, 1997.
Interim 1998 deposit growth was deployed primarily into commercial
loans, consistent with the banks' emphasis on commercial lending activities.
Pending future deployment into loans, cash and cash equivalents increased $55.7
million during the nine months ended September 30, 1998.
Cash and cash equivalents approximated $148.5 million or 16.1% of total
assets at September 30, 1998 as compared with $93 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
September 30, 1998 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, 1998 and December 31, 1997, the Corporation
had investment securities of approximately $66 million and $62 million,
respectively, 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 $4 million and additional
borrowing capacity approximated $9.5 million at September 30, 1998.
Page 15 of 22
<PAGE> 16
At September 30, 1998, the Corporation had unused lines of credit from
an unrelated financial institution aggregating $5 million.
In November 1998, the Corporation's Board of Directors announced a
fourth quarter cash dividend of $.10 per share (payable December 1, 1998 to
shareholders of record as of November 2, 1998), following cash dividends of $.10
per share paid March 1, June 1 and September 1, 1998.
On November 9, 1998, the Corporation announced a 20% stock split (one
additional share for each five shares of common stock outstanding prior to the
split) for shareholders of record as of December 4, 1998. The additional shares
will be distributed on or about December 18, 1998. Upon issuance of the
additional shares of common stock, all historical share and per share data
appearing in the Corporation's financial statements will be restated to reflect
the stock split as if it had occurred at the beginning of the periods presented.
The accompanying consolidated financial statements of the Corporation as of and
for the period ended September 30, 1998 have not been adjusted for the pending
stock split.
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.
Stockholders' equity, as a percentage of total assets, approximated
5.25% at September 30, 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 $92.5 million
or 10% of total assets at September 30, 1998. The Corporation and each of its
banking subsidiaries continue to exceed regulatory capital requirements as shown
on the following page (dollars in thousands):
[The remainder of this page intentionally left blank]
Page 16 of 22
<PAGE> 17
<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 Bank(1) Bank(1) Bank(1) Bank Trust
----------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $ 181,257 $ 35,602 $ 121,790 $ 60,146 $ 24,810 $ 65,740 $ 26,361 $ 101,778 $ 90,065
Total Assets for Risk-Based
Capital Purposes 183,230 35,883 123,166 60,671 24,981 66,094 26,560 102,532 90,787
Risk-Weighted Assets 139,998 29,881 93,433 41,574 18,566 38,644 20,905 72,638 70,404
Tier I Capital 12,294 2,866 9,536 4,434 3,471 5,309 2,328 6,507 6,317
Allowable Tier II Capital 1,753 281 1,170 521 171 354 199 754 722
Tier I and Allowable Tier II
Capital, Combined 14,047 3,147 10,706 4,955 3,642 5,663 2,527 7,261 7,039
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.78% 9.59% 10.21% 10.67% 18.70% 13.74% 11.14% 8.96% 8.97%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.03% 10.53% 11.46% 11.92% 19.62% 14.65% 12.09% 10.00% 10.00%
Leverage Ratio 6.78% 8.05% 7.83% 7.37% 13.99% 8.08% 8.83% 6.39% 7.01%
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% 4.00% 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 $ 108,614 $ 102,592 $ 74,577 $ 922,718
Total Assets for Risk-Based
Capital Purposes 109,722 103,004 71,265 927,334
Risk-Weighted Assets 84,364 67,149 70,849 678,807
Tier I Capital 7,380 22,745 45,827 87,309
Allowable Tier II Capital 1,055 557 24,818 10,297
Tier I and Allowable Tier II
Capital, Combined 8,435 23,302 70,645 97,606
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.75% 33.87% 64.68% 12.86%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.00% 34.70% 99.71% 14.38%
Leverage Ratio 6.79% 22.17% 61.45% 9.46%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 4.00% 4.00% 3.00% 4.00%
</TABLE>
(1) 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 operation.
Page 17 of 22
<PAGE> 18
As of September 30, 1998, applications were pending for the formation
of de novo banks in Arizona (Mesa and Phoenix) and Michigan (Detroit). Mesa Bank
commenced operations in October 1998 and is majority-owned by Sun Community
Bancorp Limited. Management anticipates the Detroit de novo bank will commence
operations in 1998 and will be majority-owned by the Corporation and, as to the
Arizona de novo bank (expected to open in late 1998 or early 1999), by its
majority-owned subsidiary, Sun Community Bancorp Limited.
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 September
30, 1998 to be adequate to fund existing operations, future growth and
expansion.
Year 2000
Bank regulatory agencies, other regulatory bodies and the media have
focused on business continuity issues associated with computer systems and the
year 2000. Often described as the `Y2K' issue, financial institutions are
collectively being closely monitored for their plans to eliminate potential
computer processing problems on January 1, 2000. Regulatory agencies are
concerned about financial institution readiness with their internal systems to
accommodate the year 2000 transition. Specifically, financial institutions are
required to adopt a Y2K compliance plan which will be reviewed by bank
regulatory agencies.
The Corporation and its banks are subject to the requirements as
outlined by the Federal Financial Institutions Examination Council (FFIEC). As
such, the measures that have been taken follow those guidelines regarding the
Awareness, Assessment, Renovation, Validation (testing) and Implementation
phases as more fully defined and described in various interagency publications.
Year 2000 issues and plan status updates are communicated under these same
guidelines to the various boards of directors of the Corporation and its bank
subsidiaries. Further, periodic Year 2000 review is performed by various banking
regulatory agencies and the Corporation's internal audit staff.
At the present time both mission-critical and non mission-critical
programs and systems are being addressed in an attempt to avoid unnecessary
business interruptions. The review is comprehensive and covers a variety of
third party providers as well as internal systems. The vast majority of programs
in use are "packaged" or "turn key" in nature, upon which the Corporation will
primarily rely on its vendors for resolution of Year 2000 issues. Following the
guidelines as set forth by the FFIEC, changes, modifications or replacements to
those programs will be made in conjunction with test results. Except for its
reliance on certain software and hardware vendors for Year 2000 solutions, the
Corporation and its banks have minimal dependence on other vendors on which the
century date change is expected to have a material impact.
Page 18 of 22
<PAGE> 19
Certain key milestone dates, for the Renovation and Implementation
phases have been established by the FFIEC. The Corporation and its bank
subsidiaries are working towards compliance in each of these phases. The
Awareness, Assessment and Validation phases have been completed.
The efforts of the Corporation and its banks on this issue are
significant and ongoing. During the fourth calendar quarter of 1998, certain of
the Corporation's and the banks' systems and software will be tested for Year
2000 compliance. Other key planning and testing efforts will occur throughout
calendar 1999, consistent with the FFIEC's guidance and other regulatory
requirements.
Contingency plans, intended to address alternative courses of action in
the event that certain systems and software cannot be made Year 2000 compliant,
are in the process of development. Timing and development of those contingency
plans are currently evolving and will largely depend upon the results of systems
and software testing, in accordance with the FFIEC's guidance and other
regulatory requirements.
The Corporation's and its banks' risk of Year 2000 problems principally
center around the ability of various systems and software to continue processing
transactions and accurately account for activity and balances after the century
date change. Even with the extensive testing methodologies being implemented by
the Corporation and its banks, until the century date change actually occurs and
it is determined that such systems properly process data after that date, there
can be no assurance that such systems will function properly, despite adequate
and appropriate planning, testing and remediation efforts. Based on management's
preliminary assessment, exposure to non information-technology problems
regarding the century date change is minimal.
Bank regulatory and other agencies have also encouraged banks to inform
their customers on the Year 2000 issue. Letters and informational brochures are
being sent to customers notifying them of the banks' efforts at addressing the
Year 2000 issue, while block messages are being included on customers' account
statements. The Corporation and its banks are also following regulatory mandates
that require an assessment of their customers' Year 2000 readiness efforts. Each
bank has distributed questionnaires requesting the status of certain customers'
Year 2000 readiness.
As previously disclosed, the Corporation estimates its costs to address
the Year 2000 issue will approximate $250,000 in 1998. These costs principally
relate to added personnel costs, external consultants and software upgrades.
Such costs are difficult to estimate. Management expects to incur a similar
amount of such costs on this matter in 1999.
The Corporation and its banks, in their on-going effort to competently
address evolving Y2K issues, will continue to devote both human and financial
resources to this issue.
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
Page 19 of 22
<PAGE> 20
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.
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective for the
Corporation in 2000 and, because the Corporation has not typically entered into
derivative contracts either to hedge existing risks or for speculative purposes,
is not expected to have a material effect on its financial statements.
The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position 98-1, "Costs of Computer Software Developed or Obtained
for Internal Use". It requires capitalization of certain costs in development of
software and is not expected to have a material effect on the Corporation's
financial statements when implemented in 1999.
The AICPA 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 20 of 22
<PAGE> 21
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 September
30, 1998.
Page 21 of 22
<PAGE> 22
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
----------------------------------
Senior Vice President and
Chief Financial Officer
Date: November 12, 1998
Page 22 of 22
<PAGE> 23
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 40,912
<INT-BEARING-DEPOSITS> 240
<FED-FUNDS-SOLD> 107,355
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,100
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 681,334
<ALLOWANCE> 8,092
<TOTAL-ASSETS> 922,718
<DEPOSITS> 818,774
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 7,409
<LONG-TERM> 0
0
0
<COMMON> 51,521
<OTHER-SE> (2,593)
<TOTAL-LIABILITIES-AND-EQUITY> 922,718
<INTEREST-LOAN> 43,494
<INTEREST-INVEST> 2,919
<INTEREST-OTHER> 3,789
<INTEREST-TOTAL> 50,202
<INTEREST-DEPOSIT> 24,502
<INTEREST-EXPENSE> 26,356
<INTEREST-INCOME-NET> 23,846
<LOAN-LOSSES> 2,458
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 18,423
<INCOME-PRETAX> 5,523
<INCOME-PRE-EXTRAORDINARY> 3,527
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,527
<EPS-PRIMARY> .68
<EPS-DILUTED> .66
<YIELD-ACTUAL> 0
<LOANS-NON> 3,535
<LOANS-PAST> 987
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,229
<CHARGE-OFFS> 802
<RECOVERIES> 207
<ALLOWANCE-CLOSE> 8,092
<ALLOWANCE-DOMESTIC> 8,092
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,866
</TABLE>
