<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to
Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the registrant [x]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use
of the Commission Only
(as permitted by Rule 14a-6(e) (2))
[x] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
CAPITOL BANCORP LTD.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
CAPITOL BANCORP LTD.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, If other than Registrant)
Payment of filing fee (Check the appropriate box):
[x] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-----------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
(1) Amount previously paid:
-----------------------------------------------------------------
(2) Form, schedule or registration statement no.:
-----------------------------------------------------------------
(3) Filing party:
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(4) Date filed:
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<PAGE> 2
[CAPITOL BANCORP LIMITED LETTERHEAD]
March 13, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Capitol Bancorp Ltd. to be held at the Lansing Center, 333 East Michigan
Avenue, Lansing, Michigan, on Thursday, April 30, 1998, at 4:00 p.m. Eastern
Time.
The attached Notice of the Annual Meeting and Proxy Statement describe
the formal business to be transacted at the Meeting. The Meeting is for the
purpose of considering and acting upon the election of directors of the
Corporation.
During the Meeting, we will also report on the operations of the
Corporation. Directors and officers of the Corporation, as well as a
representative of BDO Seidman, will be present to respond to any
appropriate questions that our stockholders may have.
Please sign, date and return the enclosed proxy card. If you attend
the Meeting, you may withdraw your proxy and vote in person, even if you have
previously mailed a proxy card.
Sincerely,
JOSEPH D. REID
-------------------------------
JOSEPH D. REID
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 3
CAPITOL BANCORP LTD.
One Business & Trade Center
200 Washington Square North
Lansing, Michigan 48933
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on Thursday, April 30, 1998
The 1998 Annual Meeting of the Stockholders (the "Meeting") of Capitol
Bancorp Ltd. (the "Corporation") will be held at the Lansing Center, 333 East
Michigan Avenue, Lansing, Michigan on Thursday, April 30, 1998 at 4:00 p.m.
Eastern Time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of 17 directors of the Corporation to
hold office for one year and until their successors
are elected and qualified and;
2. Such other matters as may properly come before the
Meeting or any adjournments thereof.
The Board of Directors is not aware of any other business to come
before the Meeting.
Action may be taken on any one of the foregoing proposals at the
Meeting on the date specified, or on any dates to which, by original or later
adjournment, the Meeting may be adjourned. Stockholders of record at the close
of business on March 6, 1998, are the Stockholders entitled to vote at the
Meeting and any adjournments thereof.
You are requested to fill in and sign the enclosed form of proxy which
is solicited by the Board of Directors and to mail it promptly in the enclosed
envelope. The proxy will not be used if you attend the Meeting, withdraw your
proxy and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS
DAVID O'LEARY
-----------------
DAVID O'LEARY
Secretary
Lansing, Michigan
March 13, 1998
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE CORPORATION THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. AN ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
<PAGE> 4
CAPITOL BANCORP LTD.
One Business & Trade Center
200 Washington Square North
Lansing, Michigan 48933
ANNUAL MEETING OF STOCKHOLDERS
April 30, 1998
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Capitol Bancorp Ltd. (the
"Corporation") to be used at the 1998 Annual Meeting of Stockholders of the
Corporation (the "Meeting") which will be held at the Lansing Center, 333 East
Michigan Avenue, Lansing, Michigan, on Thursday, April 30, 1998 at 4:00 p.m.
Eastern Time. The accompanying Notice of Meeting and this Proxy Statement are
being mailed to stockholders on or about March 13, 1998.
REVOCATION OF PROXIES
Stockholders who execute proxies retain the right to revoke them at
any time. Unless so revoked, the shares represented by such proxies will be
voted at the Meeting and all adjournments thereof. Proxies may be revoked by
written notice to the Secretary of the Corporation or by the filing of a later
proxy prior to a vote being taken on a particular proposal at the Meeting. A
proxy will not be voted if a particular stockholder attends the Meeting and
revokes his proxy by notifying the Secretary at the Meeting of his or her
intention to do so. Any stockholder who attends the Meeting and revokes his
proxy may vote in person. Proxies solicited by the Board of Directors of the
Corporation will be voted in accordance with the directions given therein.
Where no instructions are indicated, proxies will be voted FOR the nominees for
directors set forth below.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders of record as of the close of business on March 6, 1998
(the "Record Date"), are entitled to one vote for each share then held. As of
February 17, 1998, the Corporation had 5,201,380 shares of Common Stock issued
and outstanding.
The following table sets forth, as of February 17, 1998, certain
information as to each person (including any group as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934) who was known to be
the beneficial owner of more than 5% of the Corporation's Common Stock as of
that date, and as to the shares of Common Stock beneficially owned by all
executive officers and directors of the Corporation as a group.
<TABLE>
<CAPTION>
Name and Address of Shares of Percent of
Beneficial Owner Common Stock Common Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Joseph D. Reid 975,220(a) 17.23%
Capitol Bancorp Ltd.
One Business & Trade Center
200 Washington Square North
Lansing, Michigan 48933
All Directors and Executive 1,681,540(b) 29.31%
Officers as a group (26 persons)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes 456,996 options, each to purchase one share of Common Stock.
See "Executive Compensation".
(b) Includes 59,950 shares held by 9 persons who are executive officers
of the Corporation, but not directors, of which 24,654 are vested
shares held in the Capitol Bancorp Ltd. Employee Stock Ownership Plan.
Also includes 105,451 shares held by the Capitol Bancorp Ltd.
Directors' Deferred Compensation Plan and 535,489 options each to
purchase one share of Common Stock.
3
<PAGE> 5
ELECTION OF DIRECTORS
The Bylaws of the Corporation establish that the number of directors
shall be not less than five nor more than twenty-five.
The persons named in the enclosed Proxy intend to vote for the
election of the nominees named in this Proxy Statement unless it contains
instructions to the contrary, in which case it will be voted pursuant to such
instructions. All nominees are willing to be elected and to serve in such
capacity for one year and until their successors are elected and qualified. If
any of the nominees becomes unavailable for election, which is not anticipated,
the persons named in the Proxy will vote for such other nominee, if any, as may
be proposed by the Board of Directors. A majority of the Common Stock voting
at the Meeting is required for the election of nominees to the Board of
Directors.
Each of the nominees for election to the Board of Directors is
currently a member of the Corporation's Board of Directors and has been a
member of the Board of Directors of the Corporation since the year shown in the
table below (or, as to dates prior to 1988, Capitol National Bank).
The table below sets forth information regarding the Corporation's
Directors based on the data furnished by them. They have held the principal
occupations shown for at least the past five years unless otherwise indicated.
The shares in this table do not include the ESOP shares voted by Messrs. Reid,
O'Leary and Carr as trustees of the ESOP for which such trustees disclaim
beneficial ownership thereof except insofar as they are beneficiaries of the
ESOP trust. See "Executive Compensation".
<TABLE>
<CAPTION>
Name; Positions with the
Corporation or Principal
Occupations or Positions
During Past Five Years; Other
Directorships in Companies Shares of Common
With Securities Registered Stock of the
Pursuant to Section 12 Year First Corporation Owned Percent of Total
of the Securities Became A Beneficially At Common Stock At
Exchange Act of 1934 Age Director February 17, 1998(a) February 17, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joseph D. Reid 55 1982 975,220 (c) 17.23%
Chairman of the Board, President
and Chief Executive Officer of the
Corporation; Chairman of the Board
of certain of the Corporation's
subsidiaries(b); Chairman and Chief
Executive Officer, Access BIDCO,
Incorporated and Onset BIDCO,
Inc. (subsidiary of Access BIDCO, Inc.)
Robert C. Carr 58 1982 47,409(d) .91%
Treasurer and Executive Vice
President of the Corporation;
President and CEO, Capitol
National Bank
David O'Leary 67 1982 40,199 .77%
Secretary of the Corporation;
Chairman, O'Leary Paint Company
__________________________________
</TABLE>
(a) Includes all shares as to which the nominee has voting power and/or
investment power, including shares held by entities owned and
controlled, and shares held by children residing in the same household
or jointly with spouse. This total does not reflect stock purchased
through voluntary participation in the Capitol Bancorp Ltd. Directors'
Deferred Compensation Plan.
(b) Chairman of the Boards of Directors of the following subsidiary banks:
Ann Arbor Commerce Bank, Brighton Commerce Bank, Capitol National
Bank, Kent Commerce Bank, Macomb Community Bank and Muskegon Commerce
Bank. Also Chairman, President and CEO of Sun Community Bancorp
Limited and Chairman and CEO of its subsidiary banks, Bank of Tucson
and Valley First Community Bank.
(c) Includes 456,996 options, each to purchase one share of Common Stock.
See "Executive Compensation".
(d) Includes 23,000 options, each to purchase one share of Common Stock.
Also includes 9,662 vested shares held in the Capitol Bancorp Ltd.
Employee Stock Ownership Plan.
4
<PAGE> 6
<TABLE>
<CAPTION>
Name; Positions with the
Corporation or Principal
Occupations or Positions
During Past Five Years; Other
Directorships in Companies Shares of Common
With Securities Registered Stock of the
Pursuant to Section 12 Year First Corporation Owned Percent of Total
of the Securities Became A Beneficially At Common Stock At
Exchange Act of 1934 Age Director February 17, 1998(a) February 17, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Louis G. Allen 68 1989 488 .01%
Private Banker,
The Bank of Bloomfield Hills
Paul R. Ballard 48 1990 71,927(b) 1.38%
Executive Vice President of the
Corporation; President and
CEO, Portage Commerce Bank
David L. Becker 62 1990 42,800 .82%
President, Becker Insurance
Agency, P.C.; Managing Partner,
Portage Commerce Investors, L.L.C.
Douglas E. Crist 57 1982 46,713 .90%
President, Developers of
SW Florida, Inc.
Richard G. Dorner 52 1990 13,202(c) .25%
President and CEO, Ann
Arbor Commerce Bank
Gary A. Falkenberg 59 1982 33,189 .64%
Doctor of Osteopathic Medicine
Joel I. Ferguson 59 1982 35,338 .68%
Director, Lansing 53, Inc.;
General Partner, F & S
Development Co. (a real
estate development firm);
Director, Maxco, Inc.
Kathleen A. Gaskin 56 1982 25,651 .49%
Associate Broker/State Appraiser,
Tomie Raines, Inc. Realtors
(formerly, Associate Broker,
Moore-Jensen Associates, Inc.)
__________________________________
</TABLE>
(a) Includes all shares as to which the nominee has voting power and/or
investment power, including shares held by entities owned and
controlled, and shares held by children residing in the same household
or jointly with spouse. This total does not reflect stock purchased
through voluntary participation in the Capitol Bancorp Ltd. Directors'
Deferred Compensation Plan.
(b) Includes 18,000 options, each to purchase one share of Common Stock.
Also includes 7,169 vested shares held in the Capitol Bancorp Ltd.
Employee Stock Ownership Plan.
(c) Includes 1,000 options, each to purchase one share of Common Stock and
5,447 vested shares held in the Capitol Bancorp Ltd. Employee Stock
Ownership Plan.
5
<PAGE> 7
<TABLE>
<CAPTION>
Name; Positions with the
Corporation or Principal
Occupations or Positions
During Past Five Years; Other
Directorships in Companies Shares of Common
With Securities Registered Stock of the
Pursuant to Section 12 Year First Corporation Owned Percent of Total
of the Securities Became A Beneficially At Common Stock At
Exchange Act of 1934 Age Director February 17, 1998(a) February 17, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
H. Nicholas Genova 58 1992 12,615 .24%
Chairman and CEO, Washtenaw
News Company, Inc.; President,
H. N. Genova Development Company
L. Douglas Johns 54 1982 80,134 1.54%
President, Mid-Michigan Investment
Company (real estate developments);
Michael L. Kasten 52 1990 46,983 .90%
Managing Partner, Kasten Investments,
LLC; Vice President, Kasten Insulation
Services, Inc. (formerly M. L. Kasten
Company); Managing Partner, Portage
Commerce Investors, LLC.
James R. Kaye 40 1992 7,781(b) .15%
President and CEO, Oakland Commerce
Bank
Leonard Maas 76 1995 70,504 1.36%
President, Gillisse Construction
Company (underground utility
construction); Honorary Trustee,
Hope College; Partner, CP Limited
Partnership; Director, Quincy Street,
Inc. (pork processors)
Lyle W. Miller 54 1982 35,944 .69%
President, SERVCO, Inc.(provider
of credit card enhancements and
services to the financial industry);
President, Northern Connections, LLC
(property leasing); President, Lansing
Ice & Gymnastics Center; President,
McMiller Holding (land holding
company; Executive Vice President,
NCCI (a division of Cendent, direct
marketing and member servicing)
__________________________________
</TABLE>
(a) Includes all shares as to which the nominee has voting power and/or
investment power, including shares held by entities owned and
controlled, and shares held by children residing in the same household
or jointly with spouse. This total does not reflect stock purchased
through voluntary participation in the Capitol Bancorp Ltd. Directors'
Deferred Compensation Plan.
(b) Includes 1,000 options, each to purchase one share of Common Stock.
Also includes 3,114 vested shares held in the Capitol Bancorp Ltd.
Employee Stock Ownership Plan.
6
<PAGE> 8
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors conducts its business through meetings of the
Board and through its committees. During 1997, the Board of Directors held
four meetings. No directors of the Corporation attended fewer than 75% of the
meetings of the Board of Directors and committee meetings on which such Board
member served during this period.
Directors who are not employees of the Corporation or its subsidiaries
are entitled to receive an annual directors' fee ($6,000 in 1997). Directors
entitled to receive such fee may either receive the amount currently or elect
to defer the amount pursuant to a deferred compensation plan. See "Directors'
Deferred Compensation Plan". Members of the Corporation's Audit Committee and
Compensation Committee receive a fee of $300 for each committee meeting
attended.
COMMITTEES OF THE BOARD OF DIRECTORS
The Corporation's Board of Directors has several committees, including
an executive committee, an audit committee and a compensation committee.
EXECUTIVE COMMITTEE
The Executive Committee, composed of Messrs. Reid, Carr, O'Leary,
Ballard, Ferguson and Johns, meets for the purpose of monitoring current
operating strategy and implementation of the Corporation's business plan.
During 1997, the Executive Committee met eleven times.
AUDIT COMMITTEE
The members of the Audit Committee are Messrs. Genova and Kasten and
its Chairman, Dr. Falkenberg.
The Audit Committee reviews the results of the independent auditors'
audit of the Corporation's consolidated financial statements and evaluates
policies, procedures and results relating to the internal audit function and
recommends to the Corporation's Board of Directors the selection of
independent auditors. During 1997, the Audit Committee met seven times.
COMPENSATION COMMITTEE
The Compensation Committee consists of three directors, Mr. Kasten,
Ms. Gaskin and its Chairman, Mr. Miller, who are not employed by the
Corporation and are not eligible to participate in any of the Corporation's
benefit plans other than the Capitol Bancorp Ltd. Directors Deferred
Compensation Plan.
The Compensation Committee meets for the purpose of reviewing
compensation and benefit levels for the Corporation's management and making
related recommendations to the Corporation's Board of Directors. During
1997, four meetings of the Compensation Committee were held.
7
<PAGE> 9
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
The Corporation's executive compensation structure and policies have
been established to attract, retain and motivate quality managerial talent
necessary to lead the Corporation while attaining its business objectives and
maximizing shareholder value. Because of the Corporation's evolution, it has
not been necessary, in the opinion of the Compensation Committee, to utilize
external compensation consultants for the purpose of determining compensation
levels for executive officers and other employees of the Corporation. The
Compensation Committee does, however, review reports of various compensation
surveys (including surveys which are specifically applicable to compensation in
the banking industry). In the opinion of the Committee, the Corporation's
compensation levels are appropriate and competitive insofar as is consistent
with the objective stated above.
Compensation of executive officers of the Corporation include the
following elements:
1. Salary.
2. Incentive compensation in the form of discretionary bonuses
payable in cash and Common Stock based on meeting certain
performance criteria applicable to subsidiary and corporate-wide
performance.
3. Discretionary awards of stock options.
4. An Executive Supplemental Income Program offered to certain key
senior officers of the Corporation and subsidiaries.
5. Participation in other benefit plans offered to employees,
including ESOP, 401(k), health insurance and similar programs.
6. Other fringe benefits, such as company-provided vehicles.
BASE SALARIES
Annual salaries for the Corporation's CEO and next four most highly
compensated executive officers for 1997, 1996 and 1995 are shown on page 11.
In each of the years presented, annual salary amounts for the named
executive officers (including the Corporation's CEO) have increased. During
those periods, the Corporation's growth in earnings and total assets (which are
the principal measures upon which executive compensation is based) have
increased at a rate higher than the increase in compensation paid to those
named executives. The Corporation's size, past performance and ongoing
evolution, in the opinion of the Compensation Committee, do not justify a
linear relationship between the Corporation's financial performance and
executive compensation.
Amounts of annual salary and bonuses have been determined for the CEO on
a discretionary basis, consistent with the factors discussed in the 'overview'
section above. In lieu of a 1997 bonus, the Compensation Committee considered
increasing the CEO's base salary in future periods.
The CEO's compensation for 1997 was determined by the Compensation
Committee's review of qualitative factors which included, but were not limited
to, enhanced shareholder value, expansion of the number of banking
subsidiaries, growth in earnings, growth in assets, asset quality and other
factors. Although many of those factors have quantitative bases, the
Committee's review and consideration of CEO compensation is primarily
subjective and, hence, qualitative.
Amounts of annual salary and bonuses paid to the other named executive
officers were determined by the Compensation Committee after reviewing
recommendations made to the Committee by the Corporation's CEO. Compensation
amounts for the other named executive officers, including salary and bonuses,
were determined subjectively, similarly to the qualitative factors described
above regarding determination of CEO compensation amounts.
Compensation Committee
Lyle W. Miller, Chairman
Michael L. Kasten
Kathleen A. Gaskin
8
<PAGE> 10
EMPLOYEE STOCK OWNERSHIP PLAN
The Employee Stock Ownership Plan ("ESOP') provides substantially all
full-time employees of the Corporation and certain subsidiaries with an equity
interest in the company. All employees of the Corporation and certain
subsidiaries, subject to meeting certain eligibility criteria, are entitled to
participate in the ESOP, excepting only Mr. Reid. Contributions to the ESOP
are determined at the discretion of the Corporation's Board of Directors.
ESOP contributions charged to expense in 1997, 1996 and 1995 approximated
$180,000, $131,000 and $130,000, respectively.
The ESOP trust held 177,216 shares of the Corporation's Common Stock at
February 17, 1998. The ESOP shares are voted by eligible participants of the
ESOP, including officers and directors of the Corporation, insofar as such
shares are allocated to participants' accounts (120,024 at February 17, 1998).
ESOP shares which have not been allocated to participants' accounts (57,192 at
February 17, 1998) are voted by Messrs. Reid, Carr and O'Leary. ESOP shares
voted by officers of the Corporation who are also participants in the ESOP at
December 31, 1997 are included in the "Voting Securities and Principal Holdings
Thereof" section of the Proxy Statement.
EMPLOYEE RETIREMENT 401(K) PLAN
The Corporation has a contributory employee retirement savings 401(k)
plan which covers substantially all full-time employees of the Corporation and
certain subsidiaries over age 21. The Plan provides for contributions in
amounts determined annually by the Board of Directors. Eligible employees may
also make voluntary contributions to the Plan. The Corporation's contributions
to the Plan charged to expense for the years 1997, 1996 and 1995 were $
111,000, $88,000 and $84,000, respectively.
At February 17, 1998 6,379 shares of Common Stock were held in the
participants' accounts of the Plan. Such shares are voted by the Plan Trustee
pursuant to instructions provided by the Plan participants.
9
<PAGE> 11
STOCK PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR CUMULATIVE
TOTAL RETURN AMONG CAPITOL BANCORP LTD., NASDAQ
MARKET INDEX, AND SNL $500M-$1B BANK ASSET-SIZE INDEX
Set forth below is a graph which summarizes the cumulative return
experienced by the Corporation's shareholders over the last five years compared
to the SNL $500 M - $1 B Bank Asset-Size Index(a) and the cumulative total
return on the NASDAQ Market Value Index(b) ("Broad Market Index"). Such
presentation assumes that the value of the investment in the Corporation's
Common Stock and each index was $100 on December 31, 1992 and that subsequent
cash dividends were reinvested.
[LINE GRAPH]
<TABLE>
<CAPTION>
PERIOD ENDING
-----------------------------------------------------------------------
INDEX 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capitol Bancorp Ltd. 100.00 118.90 126.23 144.20 243.98 552.89
NASDAQ - Total US (b) 100.00 114.80 112.21 158.70 195.19 239.53
SNL $500M-$1B Bank Index(a) 100.00 125.46 133.93 177.82 222.29 361.35
</TABLE>
(a) Represents composite cumulative returns relating to a universe of banks and
bank holding companies with total assets of $500 million to $1 billion as
compiled by SNL Securities, Inc.
(b) Represents composite cumulative returns relating to the universe of
NASDAQ-listed securities which includes financial institutions and non-
financial institution entities.
10
<PAGE> 12
EXECUTIVE COMPENSATION
The following table sets forth compensation paid to the CEO and the next
four most highly compensated executive officers of the corporation for each of
the three years in the period ended December 31, 1997. The Corporation has
entered into written employment agreements with Joseph D. Reid and certain
officers of the corporation and its subsidiaries. SEE "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
Other
Name and Annual Restricted Number of All Other
Principal Compen- Stock Options/ LTIP Compen-
Position/Year Salary Bonus (a) sation (b) Award(s) SARs Payouts sation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph D. Reid (c)
Chairman, President
and CEO:
1997 300,100 -0- 13,766(d) -0- 122,363(e) -0- -0-
1996 255,798 255,534 3,779 -0- 198,251(e) -0- -0-
1995 213,165 25,440 250 -0- 41,941(e) -0- -0-
Robert C. Carr
Treasurer and Executive
Vice President of the
Corporation; President and
CEO, Capitol National Bank:
1997 154,327 33,500 2,280 -0- 3,000 -0- -0-
1996 150,000 27,000 2,252 -0- 10,000 -0- -0-
1995 130,000 20,215 2,382 -0- -0- -0- -0-
Paul R. Ballard
Executive Vice President of
the Corporation; President and
CEO, Portage Commerce Bank:
1997 133,846 30,000 4,320 -0- 3,000 -0- -0-
1996 130,000 23,000 3,685 -0- 10,000 -0- -0-
1995 104,000 20,140 3,726 -0- -0- -0- -0-
David K. Powers
Senior Vice President
1997 106,729 20,000 2,290 -0- 2,000 -0- -0-
1996 103,736 20,000 2,669 -0- -0- -0- -0-
1995 99,746 13,000 2,792 -0- -0- -0- -0-
John C. Smythe
Executive Vice President of
the Corporation; Executive
Vice President, Capitol National Bank:
1997 106,366 22,000 1,976 -0- 2,000 -0- -0-
1996 103,000 18,500 2,037 -0- -0- -0- -0-
1997 99,009 17,950 1,391 -0- -0- -0- -0-
</TABLE>
(a) Represents amounts pursuant to incentive compensation program.
(b) Represents allocated personal portion of value of automobile and life
insurance provided by the Corporation.
(c) See also "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
(d) Also includes certain expense allowances aggregating $10,800 provided
by Sun Community Bancorp Limited and its subsidiaries.
(e) Represents options granted pursuant to employment agreement. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
11
<PAGE> 13
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities % of Total Options/
Underlying SARs Granted to
Options/SARs Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/sh) Expiration Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joseph D. Reid 1,663 1.26% $15.375 2004
" " 3,022 2.28 15.875 2004
" " 3,386 2.56 15.625 2004
" " 2,169 1.64 14.875 2004
" " 28,268 21.36 16.875 2004
" " 59,391 44.87 30.125 2004
Robert C. Carr 3,000 2.27 15.90 2004
Paul R. Ballard 3,000 2.27 15.90 2004
John C. Smythe 2,000 1.51 15.90 2004
David K. Powers 2,000 1.51 15.90 2004
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year-End Option/SAR Values
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Nunber of Value of Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Fiscal Year-End Fiscal Year-End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable(b) Unexercisable(b)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Joseph D. Reid $ 577,990(a) 456,996(b) $ 7,789,167(c)
Robert C. Carr 23,000(b) 465,080(c)
Paul R. Ballard 18,000(b) 357,630(c)
</TABLE>
(a) Represents value realized upon transfer of stock options to ESOP.
Such value realized is based on approximate average market price per
share during month of transfer ($16.875) less exercise price of stock
options multiplied by number of stock options exercised.
(b) All outstanding options are currently exercisable.
(c) The Corporation's Common Stock is traded on The NASDAQ Stock Market SM
under the symbol "CBCL". Value is based on December 31, 1997 closing
price of $ 30.75 per share (which was based on market quotations
supplied to the corporation and reflects inter-dealer prices without
retail mark-up, mark-down or commissions).
DIRECTORS' DEFERRED COMPENSATION PLAN
Nonemployee directors of the Corporation may either receive directors'
fees currently or elect to defer such fees pursuant to a deferred compensation
plan (the "Plan"). Under the terms of the Plan, Directors' fees voluntarily
deferred are remitted to a trustee (the "Trustee", Paragon Bank & Trust,
Holland, Michigan) and such funds are invested in shares of Common Stock of the
Corporation in open market transactions. As of February 17, 1998, the Plan
held 105,451 shares of the Corporation's Common Stock. The Trustee has sole
voting power over the shares held by the Plan; accordingly, the shares held by
the Plan are not included in the shares attributed to each director in the
table included elsewhere in this Proxy Statement. However, shares held by the
Plan are included in the total of all shares held by directors and officers as
a group. Each director's participation in the Plan is voluntary and does not
affect the amount of his/her director fees.
12
<PAGE> 14
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation has entered into an Employment Agreement with Joseph
D. Reid under which, in addition to any other functions to be performed by him
as may be prescribed by the Board of Directors of the Corporation, he agreed to
serve as Chairman of the Board, President and Chief Executive Officer of the
Corporation. The term of the Employment Agreement is three years and is
automatically extended for an additional year each January 1 unless either
party gives written notice to the contrary. Mr. Reid's Employment Agreement
binds the Corporation to issue Mr. Reid certain options at the outset of the
Employment Agreement and additional options in the event of any new issue of
shares equal to 15% of the sum of the additional shares issued and the shares
subject to the options. The exercise price of such options is to be
established by the Board of Directors based on the fair market price of Common
Stock at the time of issuance of the option but not less than $7.27 per share.
Each option expires seven years after its date of issuance. At December 31,
1997, Mr. Reid held options to purchase up to 456,996 shares of Common Stock of
the Corporation at exercise prices ranging from $7.27 per share to $30.125 per
share.
Sun Community Bancorp Limited, a 51%-owned subsidiary of the
Corporation, entered into an Employment Agreement with Mr. Reid in November
1997 (effective January 1, 1998) under which he has agreed to serve as its
Chairman, President and CEO, which provides for an annual salary, discretionary
bonuses and stock options. The term of the agreement is three years and is
automatically renewed for an additional year each January 1 unless either party
gives written notice to the contrary.
In May 1997, the Corporation entered into an agreement ("Put
Agreement") whereby upon Mr. Reid's death, his estate may request the
Corporation to purchase from his estate up to $2.5 million of the Corporation's
Common Stock then held by the estate. The Corporation's obligation pursuant to
the Put Agreement is covered by company-owned life insurance.
The Corporation and/or its subsidiaries have entered into Employment
Agreements with certain executive officers and/or employee directors of the
corporation (including Messrs. Ballard, Carr, Powers, Smythe and others).
Except for the salaries, the terms of each agreement currently in force are
substantially identical. The term of each Employment Agreement is three years
and is extended automatically for one year each January 1 unless either party
gives written notice to the contrary. In addition to their salaries, each
employee is entitled to various fringe benefits and a discretionary bonus. All
employees are entitled to disability benefits under prescribed circumstances.
Similar Employment Agreements have been entered into by the Corporation's
subsidiaries with certain of their executive officers who are not executive
officers or directors of the Corporation.
The Corporation and/or its subsidiaries have entered into Executive
Supplemental Income Agreements with certain of those executive officers and/or
employee directors of the Corporation and similarly by the Corporation's
subsidiaries with certain of their executive officers who are not executive
officers or directors of the Corporation. The Agreements provide for the
payment to each employee or designated beneficiary an annual benefit which is
approximately equal to the annual base salary of each employee for a period of
fifteen years in the event of either the employee's retirement or the death of
the employee before attaining retirement age. In the event of a change in
control of the Corporation (as defined in the Agreements) which is not approved
by the Board of Directors, each employee can retire with full benefits at any
time after attaining the age of 55 without approval of the Board of Directors
as then constituted. The benefit liabilities under the Agreements are covered
by a funded insurance program by the Corporation and/or its subsidiaries.
The Corporation and Capitol National Bank paid rent of approximately
$285,000 during 1997 for their principal offices at One Business & Trade
Center, 200 Washington Square North, Lansing, Michigan to Business & Trade
Center Limited, a Michigan limited partnership ("Partnership"), under lease
agreements with expiration dates ranging from 1998 to 2003 and portions of
which are renewable for periods of 2 1/2 years. Joseph D. Reid and L. Douglas
Johns are partners of the Partnership. These two individuals abstained from
voting on any matters pertaining to the leases. Management believes that the
leases were made on substantially the same terms as those prevailing for
comparable transactions with unrelated third parties.
The Partnership engages Central Michigan Contractors, Inc. ("CMC") to
perform certain building maintenance and leasehold improvements. Generally,
payments to CMC have been less than $25,000 annually. In 1997, payments to CMC
approximated $150,000, which relate primarily to leasehold improvements.
Michael Reid (brother of Joseph D. Reid) is the principal owner of CMC.
13
<PAGE> 15
The Corporation's banking subsidiaries have, in the normal course of
business, made loans to certain directors and officers of the Corporation and
its subsidiaries, and to organizations in which certain directors and officers
have an interest. As of December 31, 1997, the outstanding principal balance
of such loans approximated $28,962,000 representing 64.3% of stockholders'
equity. In the opinion of management, such loans were made in the ordinary
course of business and were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated parties and did not involve more than the normal
risk of collectibility or present other unfavorable features. The Corporation
has a written policy that all loans to, and all transactions with, the
Corporation's officers, directors, affiliates and/or shareholders holding 10%
or more of the Corporation's stock will be made or entered into for bona fide
business purposes, on terms no less favorable than could be made to, or
obtained from, unaffiliated parties, and shall be approved by a majority of the
directors of the Corporation, including a majority of the independent
disinterested directors of the Corporation.
The Corporation and its subsidiaries on a consolidated basis own
approximately 20% of the outstanding common stock of Access BIDCO,
Incorporated, with an aggregate carrying value of $895,000 at December 31,
1997. During 1997, the Corporation and its subsidiaries received cash
dividends from Access BIDCO aggregating $134,250. Access BIDCO is a business
and industrial development corporation, regulated by the Michigan Financial
Institutions Bureau which is the same state agency which regulates
state-chartered commercial banks and other state-chartered financial
institutions. As a Michigan BIDCO, Access BIDCO is a non-depository financial
institution engaged in making loans and providing other financing and
management assistance to Michigan businesses as permitted under the Michigan
BIDCO Act.
Joseph D. Reid, Chairman and Chief Executive Officer of Access BIDCO,
Incorporated serves as a director of Access BIDCO and its majority-owned
subsidiary, Onset BIDCO. In his capacity as an executive officer of Access
BIDCO, Mr. Reid received cash compensation in 1997 in the form of a salary in
the amount of $122,187 (exclusive of a bonus of $24,937). Mr. Reid also owns
4.5% of the outstanding common stock of Access BIDCO. In addition to the
relationship between Mr. Reid and Access BIDCO, Senior Vice President and Chief
Financial Officer of Capitol Bancorp, Lee W. Hendrickson, serves as Vice
President, Chief Financial Officer, and a director of Access BIDCO and its
majority-owned subsidiary. Mr. Hendrickson received a salary from Access BIDCO
for his services as an executive officer of Access BIDCO. Cristin Reid
English, Vice President and General Counsel of Capitol Bancorp Ltd. is an
employee, officer and a director of Access BIDCO and is a director of its
majority-owned subsidiary. Ms. English, through Access BIDCO, performed
certain services for Capitol Bancorp Ltd. in 1997 relating to formation of de
novo banks and regulatory compliance. Ms. English is Mr. Reid's daughter.
In conjunction with its business financing activities, Access BIDCO
and Onset BIDCO have from time to time purchased loan participations from or
sold participations to the Corporation's banks and have engaged in business
financing transactions with such banks, consistent with efforts in engaging in
tandem financing of Michigan businesses with banks and other financial
institutions, including transactions with certain directors of the Corporation
and/or businesses in which they are principal owner(s), directors or
management. Any loans by Access BIDCO or Onset BIDCO purchased by the
Corporation's banks on a participating basis or otherwise are subject to the
banks' normal credit review and approval analysis procedures. Conversely,
loans of the Corporation's banks purchased by Access BIDCO or Onset BIDCO on a
participating basis or otherwise are subject to the normal credit review
analysis and approval of Access and Onset.
In addition to the foregoing, Access BIDCO leases office space from
the Corporation and certain subsidiaries on a month-to-month basis at
approximately $2,000 per month.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
BDO Seidman, LLP acted as independent auditors for the Corporation for
the year ended December 31, 1997. Representatives of BDO Seidman, LLP will be
present at the Meeting to respond to appropriate questions and will have the
opportunity to make a statement if they desire to do so.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matters should properly come before the Meeting,
including matters relating to the conduct of the Meeting, it is intended that
proxies in the accompanying form will be voted in respect thereof in accordance
with the judgment of those voting the proxies.
14
<PAGE> 16
MISCELLANEOUS
The cost of solicitation of proxies will be borne by the Corporation.
In addition to solicitations by mail, directors, officers and regular employees
of the Corporation may solicit proxies personally or by telephone without
additional compensation.
The Corporation's 1997 Annual Report to Stockholders ("Annual Report")
is being provided herewith. Any stockholder who does not receive a copy of the
Annual Report may obtain a copy by writing the Corporation. The Annual Report
is not to be treated as a part of the proxy solicitation material nor as having
been incorporated herein by reference.
FORM 10-K
A copy of the Corporation's 1997 Form 10-K, without exhibits, is
available to stockholders without charge upon written request to: Capitol
Bancorp Ltd., One Business & Trade Center, 200 Washington Square North,
Lansing, Michigan 48933, Attention: Linda D. Pavona, Vice President.
Form 10-K, and certain other periodic filings, are filed with
the Securities and Exchange Commission (the "Commission"). The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding companies which file
electronically (which includes the Corporation). The Commission's web site
address is http:\\www.sec.gov. The Corporation's filings with the Commission
can also be accessed through the Corporation's web site http:\\www.cbcl.com.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in the Corporation's proxy
material for next year's annual meeting of stockholders, any stockholder
proposal to take action at such meeting must be received at the Corporation's
main office at One Business & Trade Center, 200 Washington Square North,
Lansing, Michigan 48933, no later than November 23, 1998. Any such proposal
shall be subject to the requirements of the proxy rules adopted under the
Securities Exchange Act of 1934, as amended.
BY ORDER OF THE BOARD OF DIRECTORS
JOSEPH D. REID
---------------------
JOSEPH D. REID
CHAIRMAN OF THE BOARD
LANSING, MICHIGAN
MARCH 13, 1998
15
<PAGE> 17
CAPITOL BANCORP LTD.
PROXY
One Business & Trade Center
200 Washington Square North
Lansing, MI 48933
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Joseph D. Reid and David O'Leary as
Proxies, each with the power to appoint his substitute and hereby authorizes
them to represent and to vote as designated below, all the shares of Common
Stock of Capitol Bancorp Ltd. held of record by the undersigned on March 6, 1998
at the Annual Meeting of Shareholders to be held on April 30, 1998, or any
adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
<TABLE>
<S> <C>
1. Election of Directors:
[ ] For all nominees listed [ ] WITHHOLD AUTHORITY to vote for all nominees listed below
(except as marked to the contrary)
Louis G. Allen Richard G. Dorner H. Nicholas Genova Leonard Maas
Paul R. Ballard Gary A. Falkenberg Lewis D. Johns Lyle W. Miller
David L. Becker Joel I. Ferguson Michael L. Kasten David O'Leary
Robert C. Carr Kathleen A. Gaskin James R. Kaye Joseph D. Reid
Douglas E. Crist
</TABLE>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
- --------------------------------------------------------------------------------
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Meeting.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE> 18
This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this Proxy will be
voted "FOR" Proposal 1.
Please sign this proxy exactly as your
name appears on the books of the company.
Joint owners should each sign personally.
Trustees and other fiduciaries should
indicate the capacity in which they sign,
and where more than one name appears, a
majority must sign. If a corporation, this
signature should be that of an authorized
officer who should state his or her title.
Date ______________________________ , 1998
Signature _______________________________
Signature if held jointly _______________
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE INDICATE WHETHER YOU PLAN TO
ATTEND THE ANNUAL MEETING OF STOCKHOLDERS
[ ] WILL ATTEND
[ ] WILL NOT ATTEND
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX-13 ANNUAL REPORT
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $51,706,000 $38,184,000 $31,186,000
Net income 5,557,000 4,636,000 3,073,000
Per common share
Net income:
Basic 1.09 1.02 0.76
Diluted 1.05 0.99 0.75
Book value at year end 8.66 8.91 9.09
Market price at year end 30.75 15.25 10.25
At December 31:
Total assets 690,556,000 492,263,000 384,070,000
Stockholders' equity $ 45,032,000 $ 40,159,000 $ 30,865,000
Number of banks 11 8 6
</TABLE>
<PAGE> 2
[CAPITOL BANCORP LETTERHEAD]
REPORT TO SHAREHOLDERS
To Our Shareholders:
BANK DEVELOPMENT
Our newest bank, Kent Commerce Bank, located in the Grand Rapids, Michigan
market opened in January of 1998. This was the fourth new bank to open since our
last Annual Report to Shareholders.
In the previous report we noted that Capitol Bancorp intended to develop four
new banks during the course of the year. We have completed this objective. Each
of these banks is guided by a highly qualified president, drawn from the market
in which the bank serves, including Brighton Commerce Bank in Brighton,
Michigan, led by Gary Nickerson; Valley First Community Bank in Scottsdale,
Arizona, led by Gary Hickel; Muskegon Commerce Bank in Muskegon, Michigan, led
by Robert McCarthy; and, most recently, Kent Commerce Bank in Grand Rapids,
Michigan, led by David Veen. The board of directors of each of our new banks
meet the highest standards of community leadership and individual success which
has come to be the benchmark of directorship of our financial institutions.
The development of each new bank adds significantly to the asset growth rate
which Capitol Bancorp currently enjoys. For 1997, assets grew by approximately
40% (to $691 million), up from the 28% (total assets of $492 million) growth
rate for the preceding year. We expect that this rate of growth will continue in
calendar year 1998, moving Capitol Bancorp close to $1 billion in consolidated
assets.
Current growth is, in part, driven by the fact that six of our twelve
affiliated banks are less than 24 months old. In the early years, new bank
growth rates can exceed 100% in a given year. Additionally, significant growth
continues to emerge from our mature high-performance banks. Ann Arbor Commerce
2
<PAGE> 3
Bank, currently our largest financial institution, increased assets 31% from
$106 million in 1996 to $138 million in 1997.
We have targeted the development of three additional new affiliated banks for
calendar year 1998. This will serve to further growth. We presently have
applications pending to charter additional banks in Phoenix and Tucson, Arizona,
and in Detroit, Michigan. There is a reasonable likelihood that we will add to
this list before the end of this year.
EARNINGS PERFORMANCE
Earnings performance for 1997 increased 20% over the previous year. Under normal
circumstances, we would not be unduly impressed with this record in view of the
fact that the banking industry, in general, has out-performed several
industries. Indeed, banks and bank holding companies should have performed well
in 1997. However, Capitol Bancorp has delivered this performance with the
additional burden of developing six banks (including one in January 1998) which
are less than two years old. Typically, a de novo bank reports operating losses
in the first months and years of operation. These operating losses negatively
impact the consolidated operating results. Until a new bank reaches a level of
maturity, it is a burden on earnings performance. Noteworthy, two of the six
banks, Bank of Tucson, led by Michael Hannley, and Macomb Community Bank, led by
Stephen Tarczy, achieved profitability early in 1997.
The stellar performance of our mature banks has proven to be more than capable
of providing an income stream to support the Corporation. Capitol National Bank,
our original bank led by Robert Carr, reported earnings of $1.8 million, a
return on average equity (ROE) of 21% and a return on average assets (ROA) of
1.6%. Our second oldest bank, Portage Commerce Bank, led by Paul Ballard,
reported $1.2 million in earnings, an ROE of 21% and an ROA of 1.4%. Ann Arbor
Commerce Bank, our third oldest bank, formed in 1990 and led by Richard Dorner,
reported earnings of $1.9 million, an ROE of 23%, and an ROA of 1.6%. We expect
that the earnings performance of our mature banks will continue to provide a
platform for bank development.
OUR MISSION
3
<PAGE> 4
Capitol Bancorp maintains a strong commitment to providing a human interface
between our bank customers and the banking system. We are committed to the
development of banking institutions that are based on human relationships, not
on TV advertisements or gimmicks. In return for the banking relationship, we
strive to provide an extraordinary level of service to our customers.
Each of our affiliated financial institutions has complete authority to make all
decisions affecting credit, pricing and marketing. Capitol Bancorp does not
pretend to identify the nuances which exist in each community. We rely on the
president and board of directors of each bank to determine the best interests of
the bank within the community. This is not a novel concept but it differs
dramatically from the transaction-oriented, production-driven methodology of the
mega financial institutions of today.
There will always be bank customers who will seek out personalized financial
service from modestly sized local institutions. We intend to be there.
Sincerely,
\s\ Joseph D. Reid
Joseph D. Reid
Chairman, President and CEO
4
<PAGE> 5
[CAPITOL NATIONAL BANK LETTERHEAD]
CAPITOL NATIONAL BANK
It is a privilege this year to reflect on 15 years of continual growth and
progress at Capitol National Bank. This has been another year of major
accomplishment and we are thankful to the many people who have been part of our
achievements. It is our customers to whom we are most grateful because they help
create the policies and procedures through which our business is run and then
are implemented by a group of employees with a commitment to provide superior
service.
Today we live in a changing environment and it is important to adapt with new
products and services, improved risk management oversight, and an effective use
of technology. These are areas where we place our greatest attention in planning
to meet your needs in the future.
We have always believed the customer's definition of quality service is more
important than our own, and will continue to deliver on that commitment.
\s\ Robert C. Carr
Robert C. Carr - President and CEO
CAPITOL NATIONAL BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT END OF YEAR (IN THOUSANDS): 1997 1996 1995
- ----------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
TOTAL ASSETS $ 126,552 $ 104,254 $ 97,622
- ----------------------------------------- --------------- ---------------- --------------
PORTFOLIO LOANS 94,400 80,749 75,468
- ----------------------------------------- --------------- ---------------- --------------
DEPOSITS 116,746 95,468 89,725
- ----------------------------------------- --------------- ---------------- --------------
TOTAL CAPITAL 8,893 8,020 7,234
- ----------------------------------------- --------------- ---------------- --------------
</TABLE>
5
<PAGE> 6
[PORTAGE COMMERCE BANK LETTERHEAD]
PORTAGE COMMERCE BANK
The highlight of the year was the move to our newly constructed banking facility
at 800 E. Milham Road. The location of the two story brick building with three
drive-through lanes has greatly improved the accessibility of the Bank to our
community.
In addition to our physical expansion, the Bank grew in financial terms as well.
Assets of the Bank totaled over $91 million - 24% higher than last year. Income
increased to $1,168,000 for the year, another new record for the Bank.
Our courier service, which we implemented in 1997, is an extension of the high
level of personal service offered by our employees. Many of our customers
appreciate the friendly, helpful manner of our courier staff and use this
service daily.
In 1998, we will expand our services further by providing debit cards and an
automatic teller machine on the Bank's premises. We thank our customers for
their business and the stockholders for their support as we look forward to the
next year.
\s\ Paul R. Ballard
Paul R. Ballard - President and CEO
PORTAGE COMMERCE BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT END OF YEAR (IN THOUSANDS): 1997 1996 1995
- ----------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
TOTAL ASSETS $ 91,759 $ 73,769 $ 64,019
- ----------------------------------------- --------------- ---------------- --------------
PORTFOLIO LOANS 72,115 58,177 45,870
- ----------------------------------------- --------------- ---------------- --------------
DEPOSITS 85,358 68,273 59,124
- ----------------------------------------- --------------- ---------------- --------------
TOTAL CAPITAL 6,085 5,248 4,729
- ----------------------------------------- --------------- ---------------- --------------
</TABLE>
6
<PAGE> 7
[ANN ARBOR COMMERCE BANK LETTERHEAD]
ANN ARBOR COMMERCE BANK
In October, 1990 Ann Arbor Commerce Bank was established with six employees and
less than $4 million in assets. We were a small bank in a small building.
However, we were "big" on customer service. Over the last seven years we have
continued to grow, breaking though the seams of our current "well worn" building
and expanding into off-site space.
Last June construction began on the new Ann Arbor Commerce Bank building on the
same corner at State and Eisenhower. We know that our greatest challenge will be
"to remain a small bank in a large building". Our numbers have grown, but our
attitude toward the highest quality of customer service remains ever growing. We
look forward to maintaining and nurturing the relationships we have spent years
establishing with our customers.
\s\ Richard G. Dorner
Richard G. Dorner - President and CEO
ANN ARBOR COMMERCE BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT YEAR END (IN THOUSANDS): 1997 1996 1995
- ----------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
TOTAL ASSETS $ 138,390 $ 105,651 $ 75,954
- ----------------------------------------- --------------- ---------------- --------------
PORTFOLIO LOANS 115,882 79,463 58,869
- ----------------------------------------- --------------- ---------------- --------------
DEPOSITS 127,852 98,415 70,670
- ----------------------------------------- --------------- ---------------- --------------
TOTAL CAPITAL 9,759 6,655 4,918
- ----------------------------------------- --------------- ---------------- --------------
</TABLE>
7
<PAGE> 8
[OAKLAND COMMERCE BANK LETTERHEAD]
OAKLAND COMMERCE BANK
During 1997, Oakland Commerce Bank celebrated its five year anniversary. It
was time to reflect and recall the events that had paved the way to the current
levels of success that had been achieved. Interestingly enough, it became clear
that we simply followed our initial strategic plan which called for providing
the highest level of service to our customers. Every decision made and every
course charted revolved around this singular concept.
Furthermore, it offered us an opportunity to confirm that it is the dedication
and commitment of our staff, officers and directors that enable us to
continually improve upon our performance.
Oakland Commerce Bank appreciates the loyalty our customers have shown and we
will continue to work diligently to satisfy the future needs of our most
important asset - the customer.
\s\ James R. Kaye
James R. Kaye - President and CEO
OAKLAND COMMERCE BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT YEAR END (IN THOUSANDS): 1997 1996 1995
- ----------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
TOTAL ASSETS $ 81,839 $ 71,095 $ 61,469
- ----------------------------------------- --------------- ---------------- --------------
PORTFOLIO LOANS 58,091 54,569 46,146
- ----------------------------------------- --------------- ---------------- --------------
DEPOSITS 75,549 62,167 52,835
- ----------------------------------------- --------------- ---------------- --------------
TOTAL CAPITAL 5,811 5,434 5,192
- ----------------------------------------- --------------- ---------------- --------------
</TABLE>
8
<PAGE> 9
[PARAGON BANK & TRUST LETTERHEAD]
PARAGON BANK & TRUST
Through providing excellence in personal service to the Holland region, Paragon
Bank & Trust was able to achieve asset growth of 13% and net income growth of
12% in 1997. This growth has emanated from referrals from our existing clients,
advisory board and our board of directors, which is the highest form of
compliment. With the continuing consolidation of banks and entry of new banks
into the Holland market, Paragon Bank & Trust has focused on providing the best
service to small business, professional and senior citizen patrons. The trust
service also has been successful, with asset growth of 30% for the past two
years. The decision to implement a state-wide operation will be the trust
challenge for 1998.
Paragon Bank & Trust looks forward to 1998 with strong growth expectations. With
the continued support from our clients, employees and directors, we will be able
to meet those expectations.
\s\Scott G. Kling
Scott G. Kling - President and CEO
PARAGON BANK & TRUST FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT END OF YEAR (IN THOUSANDS): 1997 1996 1995
- ----------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
TOTAL ASSETS $ 72,332 $ 63,752 $ 56,064
- ----------------------------------------- --------------- ---------------- --------------
PORTFOLIO LOANS 59,184 46,680 41,288
- ----------------------------------------- --------------- ---------------- --------------
DEPOSITS 66,466 58,940 50,425
- ----------------------------------------- --------------- ---------------- --------------
TOTAL CAPITAL 5,426 4,484 5,068
- ----------------------------------------- --------------- ---------------- --------------
</TABLE>
9
<PAGE> 10
[GRAND HAVEN BANK LETTERHEAD]
GRAND HAVEN BANK
1997 marked a year of significant gain in the depth of Grand Haven Bank's
customer service delivery system. Staffing levels increased as residential and
consumer lenders were added to respond efficiently to loan requests. Building
and technical expansions completed during the year provide an excellent platform
on which to meet the needs of the community. Unique to the Tri-Cities area was
the implementation of our courier service which picks up business deposits. The
above, combined with our continued commitment to a high level of customer
service and responsive, local decision-making, provides us a competitive
advantage in our marketplace.
We are proud of the team of employees that has been put together and look
forward with great expectations for 1998 and beyond.
\s\ John D. Groothuis
John D. Groothuis - President and CEO
GRAND HAVEN BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT END OF YEAR (IN THOUSANDS): 1997 1996 1995
- ----------------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
TOTAL ASSETS $ 45,320 $ 32,731 $ 20,930
- ----------------------------------------- --------------- ---------------- --------------
PORTFOLIO LOANS 35,770 26,162 14,630
- ----------------------------------------- --------------- ---------------- --------------
DEPOSITS 41,298 29,728 18,129
- ----------------------------------------- --------------- ---------------- --------------
TOTAL CAPITAL 3,741 2,809 2,647
- ----------------------------------------- --------------- ---------------- --------------
</TABLE>
10
<PAGE> 11
[MACOMB COMMUNITY BANK LETTERHEAD]
MACOMB COMMUNITY BANK
Macomb Community Bank achieved early success during its first full year of
operation in 1997. By developing a community oriented culture, we are decisive
in our approach and can deliver a variety of affordable financial products,
together with user friendly innovative technologies relevant to `relationship'
banking.
Macomb Community Bank's team of talented professionals has a passion for
performance and the spirit to bring a high degree of personalized service to our
valued customers.
Macomb County's own economic indicators display many of the conditions favorable
to sustain growth and prosperity for both individual mobility and productive
business expansion in 1998.
Our philosophy will continue to focus on the ideals and values of traditional
community banking practices. We at Macomb Community are excited about our
success, and proud of the solid civic foundation being nurtured in the community
where we all live and work.
\s\ Stephen C. Tarczy
Stephen C. Tarczy - President and CEO
MACOMB COMMUNITY BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------- --------------- ----------------
AT END OF YEAR (IN THOUSANDS): 1997 1996
- ------------------------------------------------------- --------------- ----------------
<S> <C> <C>
TOTAL ASSETS $ 41,010 $ 15,123
- ------------------------------------------------------- --------------- ----------------
PORTFOLIO LOANS 19,546 5,821
- ------------------------------------------------------- --------------- ----------------
DEPOSITS 37,227 11,487
- ------------------------------------------------------- --------------- ----------------
TOTAL CAPITAL 3,412 3,587
- ------------------------------------------------------- --------------- ----------------
</TABLE>
11
<PAGE> 12
[BRIGHTON COMMERCE BANK LETTERHEAD]
BRIGHTON COMMERCE BANK
Our first year offered both excitement and new challenges. After opening in a
temporary facility on January 8, 1997, we moved into our permanent facility on
June 1, 1997. Due to the efforts of our staff and directors, as well as the
reception of the local community, we grew dramatically from that time through
year end.
As the only local community bank in Brighton, we offer highly personalized
service as a way to distinguish us from our competitors.
We want to thank our customers, stockholders, associates and directors for all
of their support this past year. We look forward to the new year with enthusiasm
and confidence. We anticipate another year of tremendous growth by servicing our
existing accounts, as well as establishing new relationships through
personalized service and local decision-making.
\s\ Gary T. Nickerson
Gary T. Nickerson - President and CEO
BRIGHTON COMMERCE BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT YEAR END (IN THOUSANDS): 1997
- ------------------------------------------------------------------------ ----------------
<S> <C>
TOTAL ASSETS $ 23,853
- ------------------------------------------------------------------------ ----------------
PORTFOLIO LOANS 13,817
- ------------------------------------------------------------------------ ----------------
DEPOSITS 21,518
- ------------------------------------------------------------------------ ----------------
TOTAL CAPITAL 1,921
- ------------------------------------------------------------------------ ----------------
</TABLE>
12
<PAGE> 13
[MUSKEGON COMMERCE BANK LETTERHEAD]
MUSKEGON COMMERCE BANK
Muskegon Commerce Bank opened for business on December 3, 1997 and has been
enthusiastically supported by our community. With the recent sales of two large
financial institutions within the area, we're now the only true local community
bank in Muskegon.
The Bank gained immediate credibility in the Muskegon market with the selection
of a well-known board of directors. We're fortunate to have three directors with
prior local bank board experience. The response has been excellent in terms of
both deposit and loan activity and we're well positioned to meet our growth
goals in 1998 and beyond. Like the more mature affiliated banks within Capitol
Bancorp, our main thrust will be to provide superior service in the commercial
lending and residential mortgage areas. We believe that this focus will ensure a
loyal and expanding customer base for the coming years.
With an energetic and well-rounded staff, we look forward with confidence to an
exciting and challenging year in 1998.
\s\ Robert. J. McCarthy
Robert J. McCarthy - President and CEO
MUSKEGON COMMERCE BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT END OF YEAR (IN THOUSANDS): 1997
- ------------------------------------------------------------------------- ---------------
<S> <C>
TOTAL ASSETS $ 7,885
- ------------------------------------------------------------------------- ---------------
PORTFOLIO LOANS 1,610
- ------------------------------------------------------------------------- ---------------
DEPOSITS 5,240
- ------------------------------------------------------------------------- ---------------
TOTAL CAPITAL 2,604
- ------------------------------------------------------------------------- ---------------
</TABLE>
13
<PAGE> 14
[KENT COMMERCE BANK LETTERHEAD]
KENT COMMERCE BANK
Kent Commerce is delighted to be the most recent "de novo" bank in the Capitol
Bancorp family beginning January 1998. We have built a team of outstanding local
banking professionals who are determined to deliver an unmatched level of
personalized service to small business and individual clients in the greater
Grand Rapids market. Our flexibility and responsiveness will set us apart and
ensure our success in a highly competitive banking environment.
We are fortunate to have assembled an impressive board of directors which has
been instrumental in helping to develop our initial customer base. We are
confident that Grand Rapids has a strong need for our style of community
banking.
We look forward to the exciting challenges of 1998!
\s.\ David E. Veen
David E. Veen - President & CEO
14
<PAGE> 15
[SUN COMMUNITY BANCORP LIMITED LETTERHEAD]
REPORT TO SHAREHOLDERS OF
SUN COMMUNITY BANCORP LIMITED
Dear Shareholders:
EVENTS OF THE YEAR
Calendar year 1997 marked a rapid series of events designed to foster the
development of an Arizona-based bank holding company. First was the development
of Sun Community Bancorp Limited and the conversion of stock in the Bank of
Tucson to stock in Sun Community Bancorp. This was completed in May.
Second, Sun Community Bancorp initiated and completed a $4.5 million private
offering of additional common stock at a price of $18.00 per share, also in May.
Third, Sun Community Bancorp completed the organization of Valley First
Community Bank in Scottsdale, Arizona, which opened in June.
Fourth, an application was filed to charter a new bank in the Biltmore area of
Phoenix, Arizona and successful efforts were initiated in August to attract
longtime banker Barbara Ralston to serve as the future bank's president.
Fifth, an application was filed to charter a new bank in the northwest Tucson
area. In September, senior banker John Lewis of Tucson agreed to serve as the
future bank's president.
Sixth, successful discussions resulted in the engagement of banker Patricia
Stone to serve as Senior Vice President in charge of credit administration. Ms.
Stone is familiar with both the Tucson and Phoenix markets and brings
significant credit expertise to the Corporation. Our rapid rate of growth as a
bank holding company cannot be successful without strict adherence to matters of
safety and soundness by our existing bank affiliates. Credit administration is
an important part of this responsibility.
15
<PAGE> 16
Finally, an additional private placement offering of Sun Community Bancorp
common stock was successfully completed in January 1998, adding approximately $7
million in capital at a price of $22.00 per share. This effort completes the
capital plan adopted by the board of directors, a necessary element in
fulfilling our accelerated effort to build an Arizona bank holding company.
PERFORMANCE
For the year ended December 1996, Bank of Tucson reported assets of $17 million.
Year end 1997 has resulted in Sun Community Bancorp Limited consolidated assets
of $55 million, representing a 218% increase in assets from the previous year.
Operating results for calendar year 1996 were a loss of $164,000 for our Tucson
affiliate, which at year end was six months old. Results of consolidated
operations for 1997 were a loss of $72,000. We expect that earnings for calendar
year 1998, unlike asset growth, will remain unspectacular. Growth of each of our
new banks will continue to impose a significant burden on the earning stream of
the Corporation. This should not detract from the stellar performance of the
Bank of Tucson which reported a profit for its first full calendar year of
operation.
During 1998 we expect to open the two new banks presently in organization. In
addition, we are working on the development of additional banks.
The performance and development of Sun Community Bancorp is on course. We expect
this relatively new entity to have a significant impact upon the Arizona banking
industry over the course of the coming year.
Sun is rising here in the West.
Sincerely,
\s\ Joseph D. Reid
Joseph D. Reid
Chairman, President and CEO
16
<PAGE> 17
[BANK OF TUCSON LETTERHEAD]
BANK OF TUCSON
Bank of Tucson's mission is to serve our clients - personally and
professionally. We are open Monday through Friday from 9:00 a.m. to 4:00 p.m.,
but if you need to transact business before or after hours, a friendly banker
will greet you.
Need a deposit picked up at your office? No problem. Our couriers will be there.
Where can you walk into a bank today and wave at the President, or even stop by
for a short chat? At Bank of Tucson!
We are technologically advanced with nationwide ATMs, 24-hour telephone banking,
and experienced commercial and real estate lenders. The staff is empowered to
make the right decision when you need one.
Our board of directors represents the fabric of Tucson's community and is
committed to providing the highest level of personal banking service "the
old-fashioned way".
\s\ Michael F. Hannley
Michael F. Hannley - President
BANK OF TUCSON FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT END OF YEAR (IN THOUSANDS): 1997 1996
- ----------------------------------------------------- ----------------- ----------------
<S> <C> <C>
TOTAL ASSETS $ 41,605 $ 17,276
- ----------------------------------------------------- ----------------- ----------------
PORTFOLIO LOANS 23,406 4,850
- ----------------------------------------------------- ----------------- ----------------
DEPOSITS 35,926 12,021
- ----------------------------------------------------- ----------------- ----------------
TOTAL CAPITAL 5,412 5,189
- ----------------------------------------------------- ----------------- ----------------
</TABLE>
17
<PAGE> 18
[VALLEY FIRST COMMUNITY BANK LETTERHEAD]
VALLEY FIRST COMMUNITY BANK
The community's response to and support of Valley First Community Bank's first
six months of operation has been very gratifying. Our growth reflects our
market's identification with our personalized service philosophy during a time
when our big bank competitors are promoting their electronic delivery systems.
Our "It's Business, It's Personal" slogan has caught the attention of the small
business community resulting in the Bank's loan demand exceeding expectations.
The phenomenal growth is indicative of customer confidence in our experienced
group of banking professionals as well as the concerted efforts of our board of
directors.
The dedication and professionalism the staff has exhibited is the platform on
which our future success rests.
\s\ Gary W. Hickel
Gary W. Hickel - President
VALLEY FIRST COMMUNITY BANK FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT END OF YEAR (IN THOUSANDS): 1997
- ----------------------------------------------------------------------- ----------------
<S> <C>
TOTAL ASSETS $ 12,826
- ----------------------------------------------------------------------- ----------------
PORTFOLIO LOANS 7,830
- ----------------------------------------------------------------------- ----------------
DEPOSITS 8,603
- ----------------------------------------------------------------------- ----------------
TOTAL CAPITAL 4,170
- ----------------------------------------------------------------------- ----------------
</TABLE>
18
<PAGE> 19
CAPITOL BANCORP LTD.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the Year Ended December 31
------------------------------------------------------------------
1997(1) 1996(2) 1995(3) 1994(4) 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year:
Interest income $ 49,549 $ 36,479 $ 29,914 $ 21,480 $ 17,729
Interest expense 24,852 17,800 15,079 9,397 8,071
Net interest income 24,697 18,679 14,835 12,083 9,658
Provision for loan losses 2,049 1,196 839 473 598
Noninterest income 2,157 1,705 1,272 2,189 1,070
Noninterest expense 16,361 12,307 10,460 10,563 8,643
Net income 5,557 4,636 3,073 2,076 1,055
Net income per share:(5)
Basic 1.09 1.02 .76 .62 .38
Diluted 1.05 .99 .75 .61 .37
Cash dividends paid per share(5) .36 .30 .23 .23 .17
At end of year:
Total assets $ 690,556 $492,263 $384,070 $316,312 $253,683
Total earning assets 641,561 455,502 357,446 292,817 237,927
Portfolio loans 502,755 357,623 283,471 241,583 171,514
Deposits 604,407 436,166 340,287 279,650 220,513
Debt obligations 6,500 8,712 7,924 11,023
Trust-preferred securities 24,126
Stockholders' equity 45,032 40,159 30,865 25,714 18,337
<CAPTION>
Quarterly Results of Operations
----------------------------------------------------------------
First Second Third Fourth Total for
Quarter Quarter Quarter Quarter the year
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997(1)
Interest income $ 10,534 $ 11,878 $ 13,039 $ 14,098 $ 49,549
Interest expense 5,166 5,785 6,682 7,219 24,852
Net interest income 5,368 6,093 6,357 6,879 24,697
Provision for loan losses 454 512 476 607 2,049
Income before income taxes 1,890 1,995 2,278 2,282 8,445
Net income 1,262 1,320 1,476 1,499 5,557
Net income per share:(5)
Basic .25 .26 .28 .29 1.09
Diluted .25 .26 .28 .28 1.05
Cash dividends paid per share(5) .09 .09 .09 .09 .36
Year ended December 31, 1996(2)
Interest income $ 8,488 $ 8,772 $ 9,271 $ 9,948 $ 36,479
Interest expense 4,194 4,254 4,548 4,804 17,800
Net interest income 4,294 4,518 4,723 5,144 18,679
Provision for loan losses 217 260 274 445 1,196
Income before income taxes 1,622 1,782 1,740 1,737 6,881
Net income 1,101 1,148 1,178 1,209 4,636
Net income per share:(5)
Basic .26 .26 .24 .25 1.02
Diluted .26 .26 .24 .24 .99
Cash dividends paid per share(5) .075 .075 .075 .075 .30
</TABLE>
(1) Includes Brighton Commerce Bank, effective January 1997, and Muskegon
Commerce Bank, effective December 1997, which are 59% and 51% owned by the
Corporation, respectively. Also includes Valley First Community Bank,
effective June 1997, which is 51% owned by Sun Community Bancorp Limited,
a second-tier bank holding company 51% owned by the Corporation and formed
in May 1997.
(2) Includes Bank of Tucson and Macomb Community Bank, effective June 1996 and
September 1996, respectively, both of which are 51% owned by the
Corporation (Bank of Tucson became a wholly-owned subsidiary of Sun
Community Bancorp Limited, which is 51% owned by the Corporation, in May
1997).
(3) The Corporation formed and implemented Grand Haven Bank as a de novo
bank effective May 1, 1995 (formerly a branch of Paragon Bank & Trust,
which was acquired in 1994 -- see Note 4). Effective March 31, 1995, the
Corporation sold a majority interest in Amera Mortgage Corporation
(formerly Mortgage Connection, Inc., acquired in 1992); for periods
after March 31, 1995, the Corporation's remaining investment has been
accounted for under the equity method.
(4) Includes Paragon Bank & Trust for periods after the date of merger (June
30, 1994), which has been accounted for as a purchase.
(5) As restated to reflect adoption of Financial Accounting Standards Board
Statement No. 128, "Earnings per Share" and/or adjusted to reflect the
Corporation's 1997 and 1996 10% stock dividends as if they had occurred at
the beginning of the periods presented.
19
<PAGE> 20
INFORMATION REGARDING THE CORPORATION'S COMMON STOCK
The Corporation's common stock is traded on the National Market Tier of The
Nasdaq Stock MarketSM under the symbol "CBCL". Market quotations regarding the
range of high and low sales prices of the Corporation's common stock (without
adjustment for the Corporation's 1997 and 1996 10% stock dividends), which
reflect inter-dealer prices without retail mark-up, mark-down or commissions,
were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- ---------------------
Low High Low High
----------------------- ---------------------
<S> <C> <C> <C> <C>
Quarter Ended:
March 31 $ 14.50 $ 16.25 $ 10.25 $ 11.00
June 30 13.75 18.00 9.75 11.00
September 30 17.25 26.50 9.75 12.75
December 31 24.125 33.00 11.63 17.25
</TABLE>
During 1997 and 1996, the Corporation paid quarterly cash dividends of $0.10 and
$0.09 per share, respectively.
As of February 17, 1998, there were approximately 2,400 beneficial holders of
the Corporation's common stock, based on information supplied to the Corporation
from its stock transfer agent and other sources. At that date, 5,201,380 shares
of common stock were outstanding. The Corporation's stock transfer agent is UMB
Bank, n.a., 928 Grand Ave., P.O. Box 410064, Kansas City, Missouri 64141-0064
(telephone (800) 884-4225).
The Corporation has a Shareholder Investment Program which offers a variety of
convenient features including dividend reinvestment, certain fee-free
transactions, certificate safekeeping and other benefits. For a copy of the
Program Prospectus, informational brochure and enrollment materials, contact UMB
Bank, n.a. at (800) 884-4225 or Capitol Bancorp Ltd.
at (517) 487-6555.
In addition to the Corporation's common stock, trust-preferred securities of
Capitol Trust I (a subsidiary of the Corporation) are also traded on the
National Market Tier of The Nasdaq Stock MarketSM under the symbol "CBCLP". Such
trust-preferred securities consist of 2,530,000, 8.5% cumulative preferred
securities, with a liquidation amount of $10 per preferred security, which are
guaranteed by the Corporation and mature in 2027, are callable after 2002 and
may be extended to 2036 if certain conditions are met.
AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS
A copy of the Corporation's 1997 report on Form 10-K, without exhibits, is
available to holders of the Corporation's common stock or trust-preferred
securities without charge, upon written request. Form 10-K includes certain
statistical and other information regarding the Corporation and its business.
Requests to obtain Form 10-K should be addressed to Linda D. Pavona, Vice
President, Capitol Bancorp Ltd., One Business & Trade Center, 200 Washington
Square North, Lansing, Michigan 48933.
Form 10-K, and certain other periodic reports, are filed with the Securities and
Exchange Commission ("the Commission"). The Commission maintains an internet web
site that contains reports, proxy and information statements and other
information regarding companies which file electronically (which includes the
Corporation). The Commission's web site address is http:\\www.sec.gov. The
Corporation's filings with the Commission can also be accessed through the
Corporation's web site http:\\www.cbcl.com.
20
<PAGE> 21
CAPITOL BANCORP LIMITED
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This Section of the Annual Report discusses the Corporation's results of
operations and financial condition and should be read in conjunction with the
consolidated financial statements appearing elsewhere herein. This discussion
also includes certain supplementary statistical and other data which are
described more fully in the Corporation's report on Form 10-K, copies of which
are available upon request, as indicated on page 18. With the exception of
historical data, information discussed herein includes forward-looking
statements which involve risks and uncertainties. Further, future operating
results will be affected by various trends and factors which are beyond the
Corporation's control. These include, among other factors, the competitive
banking environment in which the Corporation and its banks operate, risks
relating to the Corporation's concentration of commercial loans and emphasis on
commercial lending activities, changes in general economic conditions and
interest rates, rapid or unexpected changes in technologies or other uncertain
business conditions that may affect the Corporation's business and operating
units. Accordingly, past results and trends may not be reliable indicators of
future results or trends. The Corporation wishes to caution readers that a
number of important factors discussed herein could affect the Corporation's
actual results and cause actual results to differ materially from those in the
forward-looking statements.
OVERVIEW
The Corporation has achieved significant growth in earnings and assets in 1997.
Total assets at December 31, 1997 approximated $691 million, an increase of more
than 40% over the year end 1996 level of $492 million. Earnings for 1997
approximated $5.6 million ($1.05 per diluted share), compared to $4.6 million
($0.99 per diluted share) in 1996 and $3.1 million ($0.75 per diluted share) in
1995.
The Corporation is engaged in the sole business activity of banking.
CHANGES IN CONSOLIDATED GROUP
The number of affiliated units increased in 1997, consistent with the
Corporation's de novo growth strategy. Three de novo banks and a second-tier
bank holding company were added in 1997.
Sun Community Bancorp Limited ("Sun") became a second-tier subsidiary bank
holding company in May 1997. It became a 51%-owned subsidiary of the Corporation
upon its consummation of a share exchange agreement with Bank of Tucson, a de
novo bank formed in 1996 which was 51%-owned by the Corporation. As a result of
Sun's share exchange agreement, Bank of Tucson became a 100%-owned subsidiary of
Sun. Shortly after the share exchange transaction, Sun completed a $4.5 million
private offering of common stock (in which the Corporation invested $2.3
million, maintaining its 51% ownership of Sun), the proceeds of which will be
used for additional de novo bank expansion and other corporate purposes. Sun is
headquartered in Arizona and will facilitate further de novo banking activities
in the southwestern portion of the United States.
In June 1997, Valley First Community Bank in Scottsdale, Arizona was formed as a
de novo bank, 51%-owned by Sun. Initial capitalization of Valley First Community
Bank was $4.4 million.
Two de novo banks were also formed in Michigan (Brighton Commerce Bank in
January and Muskegon Commerce Bank in December) and are majority-owned (59% and
51%, respectively) subsidiaries of the Corporation. Initial capitalization of
these banks approximated $2.7 million and $2.8 million, respectively.
During 1996, two de novo banks (Bank of Tucson--see discussion above--and Macomb
Community Bank) became majority-owned subsidiaries of the Corporation. The
initial capitalization of those banks was $5.4 million and $4.0 million,
respectively. In 1995, the Corporation formed Grand Haven Bank, an 85%-owned de
novo bank previously operated as the Grand Haven branch of Paragon Bank & Trust.
Its initial capitalization was $2.5 million.
CONSOLIDATED RESULTS OF OPERATIONS
Net income approximated $5.6 million ($1.05 per diluted share) in 1997, $4.6
million ($0.99 per diluted share) in 1996 and $3.1 million ($0.75 per diluted
share) in 1995. Basic net income per share amounted to $1.09, $1.02 and $0.76 in
1997, 1996 and 1995, respectively.
Net income increased 20% in 1997. Net income also increased significantly in
1996 (51%) and 1995 (48%). The increase in net income per share (both basic and
diluted) was less than the increase in net income due to increases in the number
of common shares outstanding and the dilutive effect of stock options and
warrants. The rate of growth in net income in 1997 was less than the preceding
two years primarily due to recent additions of newly-formed de novo banks which
do not contribute to earnings in their early years of operations (at year end
1997, nearly half of the affiliated banks are less than two years old).
Additionally, the
21
<PAGE> 22
Corporation's significant growth in assets (see section herein
discussing changes in financial condition) generally contribute to earnings in
subsequent periods.
The following table summarizes individual bank operating performance and
consolidated operating results (dollar amounts in thousands):
22
<PAGE> 23
<TABLE>
<CAPTION>
Return On Return On
Net Income Average Equity Average Assets
-------------------------- ----------------------------- -----------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 1,869 $ 1,177 $ 841 23.36% 20.90% 18.86% 1.58% 1.36% 1.29%
Brighton Commerce Bank (1) (505) n/a n/a n/a n/a n/a n/a n/a n/a
Capitol National Bank 1,804 1,573 1,230 21.41 20.79 18.07 1.64 1.61 1.32
Grand Haven Bank (3) 341 220 71 10.53 8.10 2.77 .85 .83 .58
Macomb Community Bank (2) (83) (120) n/a n/a n/a n/a n/a n/a n/a
Muskegon Commerce Bank (1) (25) n/a n/a n/a n/a n/a n/a n/a n/a
Oakland Commerce Bank 917 637 600 16.39 11.88 11.99 1.18 .91 1.04
Paragon Bank & Trust 701 623 418 13.80 12.74 9.07 1.04 1.12 .80
Portage Commerce Bank 1,168 1,091 905 20.83 22.00 20.60 1.38 1.58 1.52
Sun Community Bancorp Ltd.:
Bank of Tucson (2) 150 (164) n/a 2.88 n/a n/a .47 n/a n/a
Valley First Community Bank (1) (245) n/a n/a n/a n/a n/a n/a n/a n/a
Other, net (4) (535) (401) (992) n/a n/a n/a n/a n/a n/a
----- ----- ----- ----- ----- ----- ---- ----- ----
Consolidated $ 5,557 $ 4,636 $ 3,073 13.28% 12.01% 10.47% .96% 1.08% .87%
======= ======= ======= ===== ===== ===== ==== ===== ====
</TABLE>
(1) Brighton Commerce Bank, which is 59% owned by the Corporation, commenced
operations in January 1997 and Muskegon Commerce Bank, 51% owned by the
Corporation, commenced operations in December 1997. Valley First Community
Bank commenced operations in June 1997 and is 51% owned by Sun Community
Bancorp Limited, a second-tier holding company owned 51% by the Corporation
and formed in May 1997.
(2) Bank of Tucson and Macomb Community Bank commenced operations in June 1996
and September 1996, respectively, both of which are 51% owned by the
Corporation (Bank of Tucson became a wholly-owned subsidiary of Sun
Community Bancorp Limited, which is 51% owned by the Corporation, in May
1997).
(3) The Corporation formed and implemented Grand Haven Bank as a de novo bank
effective May 1, 1995 (formerly a branch of Paragon Bank & Trust).
(4) Includes pro rata share of operating losses of Amera Mortgage Corporation, a
49%-owned mortgage banking affiliate.
n/a - not applicable
Total revenues for 1997 exceeded $50 million ($51.7 million), marking a
significant achievement in the Corporation's history. Total interest income
increased 36% in 1997, 22% in 1996 and 39% in 1995. For those periods, net
interest income increased 32%, 26% and 23%, respectively. The increase in
total interest income is attributable to growth in earning assets, primarily
loan growth. Increases in net interest income, however, differ from
increases in total interest income due to fluctuations in the cost of
deposits both in terms of market rates and product pricing strategies
deployed to achieve deposit growth in highly competitive markets.
Provisions for loan losses approximated $2.0 million in 1997, $1.2 million
in 1996 and $839,000 in 1995. Increases in the provisions for loan losses
relate primarily to management's efforts to increase the amount of allowance
for loan losses in concert with loan growth. Matters relating to the
allowance for loan losses are discussed in additional detail in the "Changes
in Consolidated Financial Position" section of this discussion.
Noninterest income has also increased significantly during the past three
years. In 1997, total noninterest income approximated $2.2 million, an
increase of 27% over the $1.7 million earned in 1996. In 1995, noninterest
income approximated $1.3 million. Increases in noninterest income relate
primarily to growth in service charges on deposit accounts, trust income and
other sources.
Noninterest expense has increased significantly from $10.5 million in 1995
and $12.3 million in 1996 to $16.4 million in 1997. The significant growth
in noninterest expense during those periods relates primarily to increased
staffing, management and facility costs associated with de novo banks as
well as increases necessary for the Corporation's more mature banks which
have continued to grow in both assets and number of customers.
Federal income taxes in recent years have approximated 34% of income before
federal income taxes.
Rates of return on average assets decreased in 1997 on a consolidated basis
due to asset growth exceeding the rate of earnings growth. In future
periods, a similar correlation may occur as the Corporation continues to add
de novo banks (which initially detract from earnings) which are less than
100% owned by the Corporation. Although all assets of such banks are
included in the Corporation's consolidated balance sheet, their future
earnings contribution will be included only to the extent of the percentage
ownership by the Corporation.
23
<PAGE> 24
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Asset growth has been significant in each of the past three years and has come
from two sources: ongoing growth of the Corporation's mature banks and growth
from newly formed affiliate banks.
Total assets increased 40% in 1997 to $691 million. Total assets in 1996
approximated $492 million, an increase of 28% over the December 31, 1995 level
of $384 million. Earning assets approximated $641.6 million or 92.9% of total
assets at December 31, 1997. Most of the Corporation's growth in assets occurred
in portfolio loans, funded by growth in deposits.
Total portfolio loans approximated $502.8 million at December 31, 1997, an
increase of 40% over the December 31, 1996 level of $357.6 million. The
Corporation emphasizes deployment of funds into portfolio loans, which
approximated 73% of total assets in 1997 and 1996. Commercial loans approximated
79% of total portfolio loans in both 1997 and 1996. The banks emphasize
commercial lending activities, consistent with their community banking focus in
their respective communities.
The following summarizes total assets and loans for each of the banks and on a
consolidated basis as of December 31 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Total
Total Assets Portfolio Loans
------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ann Arbor Commerce Bank $138,390 $105,651 $115,882 $79,463
Brighton Commerce Bank 23,853 n/a 13,817 n/a
Capitol National Bank 126,552 104,254 94,400 80,749
Grand Haven Bank 45,320 32,731 35,770 26,162
Macomb Community Bank 41,010 15,123 19,546 5,821
Muskegon Commerce Bank 7,885 n/a 1,610 n/a
Oakland Commerce Bank 81,839 71,095 58,091 54,569
Paragon Bank & Trust 72,332 63,752 59,184 46,680
Portage Commerce Bank 91,759 73,769 72,115 58,177
Sun Community Bancorp Ltd.:
Bank of Tucson 41,605 17,276 23,406 4,850
Valley First Community Bank 12,826 n/a 7,830 n/a
Other, net 7,185 8,612 1,104 1,152
-------- -------- -------- --------
Consolidated $690,556 $492,263 $502,755 $357,623
======== ======== ======== ========
<CAPTION>
Allowance as a
Percentage of
Allowance for Nonperforming Total
Loan Losses Loans Portfolio Loans
---------------- ------------------ ----------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $1,564 $1,088 $913 $304 1.35% 1.37%
Brighton Commerce Bank 139 n/a -- n/a 1.01 n/a
Capitol National Bank 1,270 1,076 760 797 1.35 1.33
Grand Haven Bank 427 303 32 -- 1.19 1.16
Macomb Community Bank 196 59 -- -- 1.00 1.01
Muskegon Commerce Bank 17 n/a -- n/a 1.06 n/a
Oakland Commerce Bank 686 655 744 1,227 1.18 1.20
Paragon Bank & Trust 663 563 660 44 1.12 1.21
Portage Commerce Bank 950 785 902 327 1.32 1.35
Sun Community Bancorp Ltd.:
Bank of Tucson 235 49 -- -- 1.00 1.01
Valley First Community Bank 82 n/a -- n/a 1.05 n/a
Other, net -- -- -- -- -- --
------ ------ ------ ------ ---- ----
Consolidated $6,229 $4,578 $4,011 $2,699 1.24% 1.28%
====== ====== ====== ====== ==== =====
</TABLE>
n/a - not applicable
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. A number of
elements are considered in management's determination of the adequacy of the
allowance which include evaluation of recent loss experience, current
economic conditions, volume, amount and composition of the portfolio, loan
commitments outstanding and other factors.
The ratio of the allowance for loan losses to total portfolio loans (1.24%
at December 31, 1997) has decreased slightly compared to 1996 (1.28%) and
1995 (1.30%). The decrease in the ratio, on a consolidated basis, is the
result of recent additions of de novo banks which, due to their unseasoned
nature, maintain a relatively lower allowance ratio (generally not less than
1%), while the Corporation's more mature banks maintain higher ratios.
Increases in nonperforming loans (total of $4.0 million outstanding on
December 31, 1997, compared to $2.7 million at December 31, 1996) are viewed
by management as being consistent with portfolio growth patterns. At
December 31, 1997, there were no material amounts of impaired loans or other
individually material amounts of nonperforming loans. In addition to the
recorded allowance for loan losses, certain loans ($18.7 million) are
enrolled in a loan program sponsored by the State of Michigan which have
specific loss reserves ($1.8 million at December 31, 1997) which are
separate and excluded from the allowance for loan losses.
24
<PAGE> 25
Asset growth has primarily been derived from increases in deposits. Total
deposits approximated $604.4 million at December 31, 1997, an increase of
slightly less than 40% over the year end 1996 level of $436.2 million.
Most deposit growth has occurred in interest-bearing deposits, particularly
in the category of time deposits. In each of the banks' markets, competition
for deposits has remained intense and highly price sensitive in 1997, 1996
and 1995, a trend which is likely to continue into the foreseeable future.
The banks seek to attractively price their deposit products without a
significant premium compared to competitor rates, although from time to time
premium pricing strategies may be deployed or implemented.
On a consolidated basis, a relatively high ratio of noninterest-bearing
deposits to total deposits has been maintained. At December 31, 1997,
noninterest-bearing deposits approximated 13.8% of total deposits compared
to 14.4% in 1996 and 12.9% in 1995. The ratio of noninterest-bearing
deposits to total deposits can fluctuate significantly depending upon
customer transactions. Additionally, the ratio of noninterest-bearing
deposits differs geographically inasmuch as affiliated banks in the state of
Arizona tend to have a substantially higher ratio of noninterest-bearing
deposits, compared to the Corporation's Michigan bank affiliates.
Liquidity and capital, which are key elements of the Corporation's
consolidated financial position, are discussed in the next section.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
Cash and cash equivalents approximated $92.8 million at December 31, 1997,
compared to $63.3 million in 1996 and $45.3 million at year end 1995. Cash
and cash equivalents, loans held for resale and investment securities
available for sale aggregated $166.4 million or 24.1% of total assets at
December 31, 1997, compared to $116.7 million or 23.7%, respectively, at
December 31, 1996. Those liquid assets have been maintained at that level to
fund depositor needs as well as future loan demand and credit commitments
outstanding. Management believes the Corporation's liquidity at December 31,
1997 to be adequate to meet future needs.
Management has designated most of the Corporation's investment securities as
being "available for sale" due to the banks' typical strategy of maintaining
a relatively high loan-to-deposit ratio to maximize earnings. Accordingly,
such investment securities available for sale ($62.3 million and $46.6
million at December 31, 1997 and 1996, respectively), are carried at market
value with the market value adjustment being reflected as an element of
stockholders' equity (net of related tax effect) on the Corporation's
consolidated balance sheet.
In addition to sources of liquidity within the Corporation's consolidated
balance sheet, additional liquidity is available in form of lines of credit.
Two of the Corporation's banks have secured lines of credit with the Federal
Home Loan Bank of Indianapolis aggregating $11.6 million of availability at
December 31, 1997. Further, the Corporation has a line of credit facility
with an unaffiliated bank with availability of $5 million at December 31,
1997. No amounts were outstanding on any of those credit facilities at
December 31, 1997.
On December 19, 1997, the Corporation and a subsidiary (Capitol Trust I)
completed a public offering of trust-preferred securities. Under the terms
of the offering, Capitol Trust I (of which the Corporation owns 100% of the
common interests of the Trust) issued 2,530,000 shares of preferred
securities, $10 liquidation amount per preferred security. Gross proceeds
from the offering aggregated $25.3 million. Upon receipt of the proceeds of
the offering, Capitol Trust I purchased subordinated debentures of the
Corporation of likeamount, which bear interest at 8.5% payable quarterly and
which mature in 2027 (which may be extended to 2036 if certain conditions
are met) and are callable after 2002. The liquidation amount of the trust
preferred securities is guaranteed by the Corporation.
Proceeds from the trust-preferred offering were used, in part (approximately
$10.8 million) to repay prior bank indebtedness of the Corporation. The
remaining proceeds (approximately $13 million at December 31, 1997) will be
used by the Corporation to facilitate further de novo bank expansion,
additional deployment of capital into the Corporation's more mature banks
and other corporate purposes.
Interest paid to the Trust by the Corporation (which is recorded as interest
expense in the consolidated financial statements) will be distributed by the
Trust to the holders of the trust-preferred securities. Under certain
conditions, the Corporation may defer payment of interest on the
subordinated debentures for periods of up to five years.
Because Capitol Trust I is a subsidiary (due to the Corporation's ownership
of the common interests of the Trust) Capitol Trust I is consolidated with
the Corporation for financial reporting purposes. The amount of
trust-preferred securities (net of issuance costs which are being amortized
over the life of the securities) is classified between liabilities and
equity
25
<PAGE> 26
on the Corporation's consolidated balance sheet under the caption
"Guaranteed Preferred Beneficial Interests in the Corporation's Subordinated
Debentures". Under current regulatory guidelines, such trust-preferred
securities are included as capital for purposes of meeting certain ratio
requirements.
The Corporation owns between 51% and 85% of certain affiliated banks.
Inasmuch as those banks are not wholly-owned, appropriate accounting
recognition is given to applicable minority interests in those consolidated
subsidiaries on the Corporation's consolidated balance sheet. Minority
interests in consolidated subsidiaries approximated $11 million at year end
1997 and $4.7 million in 1996. Resources provided by minority interests
approximated $6.3 million during 1997.
During 1997 and 1996, stockholders' equity increased significantly due to
the exercise of warrants and stock options, resulting in proceeds of $1.9
million in 1997 and $6.1 million in 1996. Most of those proceeds relate to
issuance of common stock upon exercise of warrants which were issued
originally in a 1994 merger transaction. At December 31, 1997, 560,000 stock
options were outstanding which, if exercised (although there is no assurance
that any such stock options will be exercised) would result in proceeds to
the Corporation of $7.8 million upon issuance of 560,000 additional shares
of common stock.
Stockholders' equity approximated $45 million at December 31, 1997, a net
increase of $4.9 million for the year. Such net increase is the result of
proceeds from exercise of stock options and warrants previously mentioned
and net income for the year, less cash dividends paid.
Near year end 1996 and 1997, the Corporation issued a 10% stock dividend
whereby each shareholder received one share for each ten shares then held.
All per-share information appearing in the consolidated financial statements
has been retroactively restated to reflect such stock dividends as if they
had occurred at the beginning of the periods presented. Although stock
dividends do not reduce shareholders' equity, or result in currently taxable
income to the recipients, accounting rules require that a transfer be made
from retained earnings to common stock when such stock dividends are "paid".
Such accounting recognition is required to be made based on the fair value
of the shares distributed. Due to recent increases in the market value of
the Corporation's common stock (market value of $28.4375 per share at
December 1, 1997) distribution of the 1997 10% stock dividend resulted in
negative retained earnings at December 31, 1997.
During 1997 and 1996, the Corporation has paid quarterly cash dividends of
$0.10 and $0.09 per share, respectively. The Corporation currently intends
to continue payment of quarterly cash dividends for the foreseeable future;
however, future payment of any cash dividends is contingent upon liquidity,
capital adequacy and other factors in future periods. Accordingly, there can
be no assurance with respect to payment of future cash dividends.
At December 31, 1997, stockholders' equity approximated 6.5% of total
assets. Total equity capital (stockholders' equity plus minority interest in
consolidated subsidiaries) approximated 8.1% of total assets at December 31,
1997. Total capital (Capitol Trust I preferred securities plus minority
interest in consolidated subsidiaries plus stockholders' equity)
approximated $80.2 million at December 31, 1997 or 11.6% of total assets.
The Corporation and each of its affiliated banks are subject to very complex
rules and regulations relating to capital adequacy. Key ratios of leverage,
Tier 1 capital and Tier 2 capital (as those terms are currently defined in
regulatory guidance) and corresponding ratios in relation to total assets
and risk-weighted assets are set forth in Note O of the consolidated
financial statements appearing on pages 40 and 41 of the Annual Report.
Under the current regulatory capital framework, banks are categorized as
"well capitalized", "adequately capitalized" or "inadequately capitalized".
Banks which fall into the "inadequately capitalized" category are subject to
the `prompt corrective action' provisions of the FDIC Improvement Act, which
can result in significant regulatory agency intervention and other adverse
action. Although it is permissible to maintain capital adequacy at the
"adequately capitalized" level, the Corporation's management proactively
manages the capital of each affiliated bank with the current objective of
maintaining those banks in the "well capitalized" category. Classification
as a "well capitalized" institution enables such institutions to enjoy the
lowest-cost deposit insurance assessment and less restrictive regulatory
intervention in relation to certain banking business activities.
In the opinion of management, all of the Corporation's affiliated banks meet
the criteria to be classified as "well capitalized" at December 31, 1997.
De novo banks, generally as a condition of their charter approval, are
required to maintain certain higher capital ratios. Generally, such banks
are required to maintain a Tier 1 capital to assets ratio of not less than
8% for the first three years
26
<PAGE> 27
of operation in addition to maintaining an allowance for loan losses of not
less than 1% of portfolio loans. Such ratio requirements, in the opinion of
management, do not constrict the operations of de novo banks during the
period that such ratios are required and, consistent with management's
effort to maintain capital adequacy at each affiliated bank, the Corporation
will infuse such amounts of capital as are necessary to maintain compliance
with those capital requirements.
TRENDS AFFECTING OPERATIONS
The most significant trends which can impact the financial condition and
results of operations of financial institutions are changes in market rates
of interest and changes in general economic condition.
Rapid changes in interest rates, either up or down, can have either a
positive or negative impact on net interest income, depending upon the
direction and timing of such changes. At any point in time, there is a
difference between interest rate-sensitive assets and interest
rate-sensitive liabilities. That difference arises because it is
theoretically impossible to maintain a perfectly matched relationship
between rate-sensitive assets and liabilities. The difference between
interest rate-sensitive assets and interest rate-sensitive liabilities is
characterized as a "gap" which is quantified by the distribution of
rate-sensitive amounts within various time periods in which they reprice or
mature. The following table summarizes the Corporation's consolidated
financial position in relation to "gap" at December 31, 1997 (dollar amounts
in thousands):
27
<PAGE> 28
<TABLE>
<CAPTION>
Interest Interest Interest
Rate Rate Rate
Sensitivity Sensitivity Sensitivity
0 to 3 months 4 to 12 months 1 to 5 Years
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Federal funds sold $ 62,650
Interest-bearing deposits with banks 260
Loans held for resale 11,426
Investment securities 11,243 $ 20,903 $ 28,095
Portfolio loans:
Commercial 205,672 47,081 142,467
Real estate mortgage 15,710 17,068 31,103
Installment 4,057 6,989 28,524
Non-earning assets and other 2,605
--------- --------- ---------
Total Assets $ 311,018 $ 92,041 $ 232,794
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits:
Time deposits over $100,000 $ 55,766 $ 67,967 $ 16,105
Time deposits under $100,000 51,232 118,796 54,558
All other interest-bearing deposits 156,377
--------- --------- ---------
Total Interest-bearing deposits 263,375 186,763 70,663
Noninterest-bearing liabilities
Capitol Trust I preferred securities
Minority interest in consolidated
subsidiaries
Stockholders' equity --------- --------- ---------
Total Liabilities and Stockholders'
Equity $ 263,375 $ 186,763 $ 70,663
========= ========= =========
Interest rate sensitive period gap $ 47,643 ($ 94,722) $ 162,131
========= ========= =========
Interest rate sensitive cumulative gap $ 47,643 ($ 47,079) $ 115,052
========= ========= =========
Period rate sensitive assets/period rate
sensitive liabilities 1.18 0.49 3.29
Cumulative rate sensitive assets
/cumulative rate sensitive liabilities 1.18 0.90 1.22
Cumulative gap to total assets 6.90% -6.82% 16.66%
<CAPTION>
Interest
Rate
Sensitivity
Over 5 Years Total
----------------- ----------------
<S> <C> <C>
ASSETS
Federal funds sold $ 62,650
Interest-bearing deposits with banks 260
Loans held for resale 11,426
Investment securities $ 4,229 64,470
Portfolio loans:
Commercial 718 395,938
Real estate mortgage 2,749 66,630
Installment 617 40,187
Non-earning assets and other 48,995
--------- ---------
Total Assets $ 8,313 $ 690,556
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits:
Time deposits over $100,000 $ 100 $ 139,938
Time deposits under $100,000 20 224,606
All other interest-bearing deposits 156,377
--------- ---------
Total Interest-bearing deposits 120 520,921
Noninterest-bearing liabilities 89,457
Capitol Trust I preferred securities 24,126 24,126
Minority interest in consolidated
subsidiaries 11,020
Stockholders' equity 45,032
--------- ---------
Total Liabilities and Stockholders'
Equity $ 24,246 $ 690,556
========= =========
Interest rate sensitive period gap ($ 15,933)
=========
Interest rate sensitive cumulative gap $ 99,119
=========
Period rate sensitive assets/period rate
sensitive liabilities 0.34
Cumulative rate sensitive assets
/cumulative rate sensitive liabilities 1.18
Cumulative gap to total assets 14.35%
</TABLE>
The "gap" changes daily based upon changes in the underlying assets and
liabilities. Analyzing exposure to interest rate risk is prone to
imprecision because the "gap" is constantly changing and it is difficult to
predict the timing, amount and direction of future changes in market
interest rates.
As a means to monitor and manage exposure to interest rate risk, management
uses various computerized simulation models which, at a static point in
time, are intended to estimate the pro forma effects of changes in interest
rates. Using the "gap" table information above and the Corporation's
simulation model, the following table illustrates, on a consolidated basis,
changes which would occur in annual levels of interest income, interest
expense and net interest income (in thousands) assuming one hundred and two
hundred basis point ("bp") increases and decreases in interest rates:
28
<PAGE> 29
<TABLE>
<CAPTION>
Pro Forma Pro Forma Effect of Pro Forma Effect of
Assuming No Interest Rate Increases Interest Rate Decreases
Change in ----------------------------- ------------------------------
Interest Rates +100 bp +200 bp -100 bp -200 bp
---------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Interest income $53,836 $56,962 $60,083 $50,706 $47,598
Interest expense 29,506 31,148 32,789 27,865 26,224
------- ------- ------- ------- -------
Net interest income $24,330 $25,814 $27,294 $22,841 $21,374
======= ======= ======== ======= =======
</TABLE>
The pro forma analysis above is intended to quantify theoretical changes in net
interest income based on stated assumptions. Such pro forma analysis excludes
the effect of numerous other variables such as borrowers' ability to repay loans
or the ability of banks to obtain deposits in a radically changed interest-rate
environment and how management would revise its asset and liability management
priorities in concert with rate changes.
Simulation modeling techniques are inherently flawed and inaccurate due to the
number of variables involved and due to the fact that the actual effects of
changes in interest rate are subject to some variables (for example, customer
behavior) which simulation models cannot effectively predict. Actual future
results will differ from pro forma simulation model analyses and could differ
significantly if such interest rate change scenarios were to occur.
The Corporation's affiliated banks endeavor to manage and monitor interest rate
risk in concert with market conditions. Management strives to maintain a
balanced position of interest rate-sensitive assets and liabilities. In these
most recent periods of lower interest rates, the affiliated banks emphasize
variable rate loans and time deposits to the extent possible in a competitive
environment; however, competitive influences often result in making fixed rate
loans, although the banks seek to limit the duration of such loans. Similarly,
low interest rates generally make competition more intense for deposits, since
loan demand will increase during periods of lower rates and, accordingly, result
in higher interest costs on deposits, adversely impacting interest margins.
Future interest rates and the impact on earnings are difficult to predict.
In addition to interest rate risk relating to the Corporation's interest-bearing
assets and liabilities, changes in interest rates also can impact future
transaction volume of loans and deposits at the banks. For activities which are
dependent upon certain levels of interest rates for transactions volume (for
example, origination of residential mortgage loans), pricing margins and demand
can become impacted significantly by changes in interest rates.
The Corporation owns a 49% interest in Amera Mortgage Corporation. In 1997,
Amera realigned its loan origination activities to reduce lower margin wholesale
originations and to emphasize retail originations through development of branch
offices and working with the Corporation's affiliated banks. Such changes in
business emphasis resulted in Amera incurring larger operating losses in 1997.
Its future operating results will be dependent upon achieving higher levels of
loan origination activity subject to market interest rates and other variables.
General economic conditions also have a significant impact on financial
institution results of operations and financial condition. Economic conditions
nationally and in the banks' local environments have remained relatively stable
and positive. Local economic conditions, and to some extent national economic
conditions, have a significant impact on levels of loan demand as well as the
ability of borrowers to repay loans and the availability of funds for customers
to make deposits. Throughout 1997 and 1996, the generally positive economic
environment has contributed favorably to earnings and asset quality. Future
economic conditions, and their effect on asset quality and earnings, are
difficult to predict.
Continuing consolidation of the banking industry on a national basis, and in the
respective markets of the Corporation's banks, has presented opportunities for
growth. More specifically, the consolidation of the banking industry, coupled
with the closure of branch locations by larger institutions, has had the effect
of displacing customer relationships. For retail customers, banking services
have become a commodity in an environment that is dominated by larger "mass
merchandising" institutions. For the professional, entrepreneur and other
customers seeking a more service-oriented, customized banking relationship, the
Corporation's affiliated banks fill that need through their focus on
single-location banks with full, local decision-making authority. In those
markets in which the Corporation's affiliated banks are located, the banks focus
on service delivery and keeping the bank's size at an appropriate level; only a
modest market share of deposits and loan activity is necessary to achieve
profitability and reasonable earnings performance.
29
<PAGE> 30
The ongoing banking consolidation environment further presents opportunities for
expansion of de novo banking activities in numerous markets. Plans are currently
underway for expansion into additional markets in 1998. In January 1998, Kent
Commerce Bank (51% owned by the Corporation) opened in Grand Rapids, Michigan.
Additional banks are expected to be opened in the states of Michigan and Arizona
in 1998.
De novo banks generally incur operating losses during their early periods of
operation. In 1997, net operating losses of banking units less than two years
old approximated $686,000. On a consolidated basis, however, such operating
losses reduced net income by the pro rata share of the Corporation's ownership
percentage of those banks. When de novo banks become profitable, their operating
results will contribute to consolidated earnings to the extent of the
Corporation's ownership percentage. Formation of additional de novo banks is
expected to similarly impact future operating results.
Financial institutions continue to be subject to significant regulatory
requirements which impact current and future operations. In addition to the
extent of regulatory interaction with financial institutions (extensive rules
and regulations governing lending activities, deposit gathering and capital
adequacy, to name a few), the costs of financial institution regulation are
significant. Such costs include, but are not limited to, the significant amount
of management time and expense which is incurred maintaining compliance and
developing systems for compliance with those rules and regulations as well as
the cost of examinations, audits and other compliance activities.
Premiums for insurance of deposits by the Federal Deposit Insurance Corporation
(FDIC) have been significant costs of doing business as financial institutions
in prior periods. In 1997, total deposit insurance premiums approximated $88,000
compared with $425,000 in 1996 and $401,000 in 1995. FDIC insurance premiums in
1997 were unusually low due to the continued health of the bank insurance fund
of the FDIC coupled with management's efforts to maintain capital adequacy of
the banks in the "well capitalized" category previously discussed. Future
deposit insurance premium levels are difficult to predict inasmuch as deposit
insurance premiums will be determined based on general economic conditions, the
relative health of the banking and financial institution industry and other
unpredictable factors. It is reasonable to expect that deposit insurance
premiums will increase at some point in the future.
The future of financial institution regulation and costs of regulation, is
uncertain and difficult to predict.
RECENT DEVELOPMENTS
Bank regulatory agencies and the media have recently focused upon business
continuity issues associated with computer systems and the year 2000. Often
described as the "Y2K" problem, financial institutions are collectively being
viewed by regulatory agencies and others as part of the "problem" and part of
the "solution". As to the "part of the problem" aspect, regulatory agencies are
concerned about financial institution readiness with their internal systems to
accommodate the Y2K 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 have prepared a Y2K
compliance plan which management believes to be Y2K compliant within the
prescribed deadlines as promulgated by the regulatory agencies. The Corporation
and its affiliated banks rely upon numerous vendors for development and
implementation of computerized software utilized in the business of banking.
Accordingly, the Corporation and its affiliated banks rely heavily upon those
vendors to properly and proactively develop and implement Y2K-compliant
software. Management expects the Corporation's costs of implementing the Y2K
compliance program to be significant and estimated to approximate $250,000 in
1998. Such costs are estimated on the basis of the amount of existing personnel
and other resources which will be used to implement the Y2K compliance plan in
1998. Therefore, management does not currently expect that material additional
(i.e., incremental) costs would be incurred in 1998. Future (i.e., beyond 1998)
Y2K costs have not been estimated.
With respect to financial institutions being viewed by regulatory and other
agencies as "part of the solution" for Y2K, banks are being strongly encouraged
to contact their customers to determine customers' readiness to accommodate the
transition to the year 2000. Regulatory agencies are concerned that, to the
extent that customers' computerized systems interface with banking and other
software, the Y2K compliance plan of bank customers may also have a significant
economic impact in the future.
In early January 1998, Sun Community Bancorp Limited completed a private
placement stock offering, resulting in net proceeds of $7 million. Proceeds from
the offering (which included $3.6 million invested by the Corporation,
maintaining its 51% interest in Sun) will be used for additional bank
development opportunities in the southwestern portion of the United States and
other corporate purposes.
In early February, 1998 a bank customer drew checks on uncollected funds
aggregating $1.5 million at one of the Corporation's banks. Management has been
informed that larger amounts may have been overdrawn at other, unaffiliated,
financial institutions. Based on management's analysis of the bank's
relationship with that customer, it
30
<PAGE> 31
is believed that the majority of the amount involved is covered by real estate
collateral. However, there is a likelihood that the bank will sustain some loss
from this occurrence, although an estimate was not determinable in mid-February
1998. In accordance with applicable accounting standards, losses relating to
this matter, if any, will be recorded during the period in which the event
occurred, to the extent an estimate of loss can be made at that time, or in a
subsequent period when a reasonable estimate can be made.
As of mid-February 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 either the Corporation or Sun and, accordingly, consolidated
for financial reporting purposes for periods on or after commencement of
operations.
NEW ACCOUNTING STANDARDS
Certain new accounting standards became applicable to the Corporation during
1997. The most significant new accounting standard implemented was Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share". Statement
No. 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effect of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for the periods presented have been restated to conform to the Statement
No. 128 requirements.
Statement No. 125 regarding accounting for the transfer and servicing of
financial assets and extinguishments of liabilities also became effective for
the Corporation in 1997. Implementation of this accounting standard had no
material effect on the Corporation's financial position or results of
operations.
Statement No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined to include all
changes in equity except those resulting from investments by stockholders and
distributions to stockholders.
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise," establishes standards for the way public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers.
Statements Nos. 130 and 131 are effective for financial statements for fiscal
years beginning after December 15, 1997, and require comparative information for
earlier years to be similarly presented. Management has not yet fully evaluated
the impact, if any, the statements may have on future financial statement
disclosures; however, neither standard is expected to have a material impact
upon implementation. Results of operations and financial position will be
unaffected by implementation of these new standards.
Numerous other potential changes in accounting standards are under study by the
accounting standard-setting entities, regulatory agencies and others at any
point in time. Because of the fluid state of those potential accounting standard
changes, it is difficult to predict what impact they might have on the
Corporation's consolidated financial statements when implemented or otherwise in
the future.
31
<PAGE> 32
Capitol Bancorp Limited
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Corporation's management is responsible for the preparation of the
consolidated financial statements and all other information appearing in this
Annual Report. The financial statements have been prepared in accordance with
generally accepted accounting principles.
The Corporation's management is also responsible for establishing and
maintaining the internal control structure of the Corporation. The general
objectives of the internal control structure are to provide management with
reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition, and that transactions are executed in accordance with
management's authorization and recorded properly to permit the preparation of
financial statements in accordance with generally accepted accounting
principles. In fulfilling this objective, management has various control
procedures in place which include, but are not limited to, review and approval
of transactions, a code of ethical conduct for employees, internal auditing and
an annual audit of the Corporation's consolidated financial statements performed
by a qualified independent audit firm. Management believes the internal control
structure of the Corporation to be adequate and that there are no material
weaknesses in internal control.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Capitol Bancorp Ltd.
We have audited the accompanying consolidated balance sheets of Capitol Bancorp
Ltd. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capitol Bancorp Ltd.
and subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
\s\ BDO Seidman, LLP
- -------------------------
Grand Rapids, Michigan
January 31, 1998
32
<PAGE> 33
CONSOLIDATED BALANCE SHEETS
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,860,238 $ 20,928,051
Interest-bearing deposits with banks 260,188 55,267
Federal funds sold 62,650,000 42,350,000
------------- -------------
Cash and cash equivalents 92,770,426 63,333,318
Loans held for resale 11,425,591 6,748,776
Investment securities--Note C:
Available for sale, carried at market value 62,252,538 46,621,416
Held for long-term investment, carried at
amortized cost which approximates market value 2,217,369 2,103,264
------------- -------------
Total investment securities 64,469,907 48,724,680
Portfolio loans--Note D:
Commercial 395,937,836 283,460,601
Real estate mortgage 66,630,299 53,712,381
Installment 40,186,694 20,450,216
------------- -------------
Total portfolio loans 502,754,829 357,623,198
Less allowance for loan losses (6,229,000) (4,578,000)
------------- -------------
Net portfolio loans 496,525,829 353,045,198
Premises and equipment--Note E 7,578,742 5,421,308
Accrued interest income 4,116,047 3,107,496
Excess of cost over net assets of acquired subsidiaries 2,154,350 2,347,256
Other assets 11,515,313 9,535,312
------------- -------------
TOTAL ASSETS $ 690,556,205 $ 492,263,344
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 83,486,671 $ 62,765,786
Interest-bearing--Note H 520,920,033 373,400,277
------------- -------------
Total deposits 604,406,704 436,166,063
Debt obligations--Note I 6,500,000
Accrued interest on deposits and other liabilities 5,971,152 4,708,188
------------- -------------
Total liabilities 610,377,856 447,374,251
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES--Note J 24,126,250
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES--Note B 11,019,643 4,730,553
STOCKHOLDERS' EQUITY--Notes K, L and O:
Common stock, no par value,
10,000,000 shares authorized;
issued and outstanding:
1997--5,198,380 shares
1996--4,504,911 shares 50,312,630 34,971,523
Retained earnings (4,553,265) 5,150,066
Market value adjustment (net of tax effect)
for investment securities
available for sale 143,494 36,951
------------- -------------
45,902,859 40,158,540
Less unallocated ESOP shares--Note L (870,403)
------------- ------------
Total stockholders' equity 45,032,456 40,158,540
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 690,556,205 $ 492,263,344
============= =============
</TABLE>
See notes to consolidated financial statements
33
<PAGE> 34
CONSOLIDATED STATEMENTS OF INCOME
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $42,448,290 $31,454,120 $25,915,949
Loans held for resale 535,529 818,344 300,032
Taxable investment securities 3,525,073 2,262,341 2,084,624
Federal funds sold 2,805,126 1,540,920 1,452,849
Interest-bearing deposits with banks and other 33,473 60,137 10,415
Dividends on investment securities 201,631 343,143 149,669
----------- ---------- -----------
Total interest income 49,549,122 36,479,005 29,913,538
Interest expense:
Demand deposits 4,110,632 2,417,599 2,297,240
Savings deposits 1,543,967 1,384,479 1,247,865
Time deposits 18,444,510 13,489,577 11,016,206
Debt obligations 752,416 495,679 492,271
Other 292 12,487 25,505
----------- ----------- -----------
Total interest expense 24,851,817 17,799,821 15,079,087
Net interest income 24,697,305 18,679,184 14,834,451
----------- ----------- -----------
Provision for loan losses--Note D 2,048,830 1,195,757 838,830
----------- ----------- -----------
Net interest income after
provision for loan losses 22,648,475 17,483,427 13,995,621
Noninterest income:
Service charges on deposit accounts 858,634 746,108 569,240
Trust fee income 355,585 262,043 207,000
Realized gain on sale of investment securities
available for sale 69,007 82,171 1,574
Other 874,092 614,834 493,907
----------- ----------- -----------
Total noninterest income 2,157,318 1,705,156 1,271,721
Noninterest expense:
Salaries and employee benefits 8,394,376 6,387,715 5,104,244
Occupancy 1,421,494 923,771 868,234
Equipment rent, depreciation and maintenance 2,051,658 1,010,975 817,054
Deposit insurance premiums 88,363 425,115 401,014
Other 4,405,210 3,560,387 3,269,237
----------- ----------- -----------
Total noninterest expense 16,361,101 12,307,963 10,459,783
----------- ----------- -----------
Income before federal income taxes 8,444,692 6,880,620 4,807,559
Federal income taxes--Note F 2,888,000 2,245,000 1,735,000
----------- ----------- -----------
NET INCOME $ 5,556,692 $ 4,635,620 $ 3,072,559
=========== =========== ===========
NET INCOME PER
SHARE--Notes A and Q:
Basic $ 1.09 $ 1.02 $ 0.76
=========== =========== ===========
Diluted $ 1.05 $ 0.99 $ 0.75
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Market Value
Adjustment for
Investment Unallocated
Common Retained Securities ESOP
Stock Earnings Available for Sale Shares Total
----- -------- ------------------ ------ -----
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $ 20,408,562 $ 6,274,899 $ (745,394) $ (223,755) $ 25,714,312
Issuance of 58,922 shares of common stock upon
exercise of warrants 529,709 529,709
Issuance of 173,693 shares of common stock
upon exercise of stock options 1,157,825 1,157,825
Issuance of 5,095 shares of common stock
pursuant to Shareholder Investment Plan . 53,497 53,497
Principal payment on note payable by ESOP 111,878 111,878
Cash dividends paid ($.23 per share) (933,269) (933,269)
Market value adjustment for investment
securities available for sale (net of tax
effect) 1,158,816 1,158,816
Net income for 1995 3,072,559 3,072,559
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1995 22,149,593 8,414,189 413,422 (111,877) 30,865,327
Issuance of 505,372 shares of common stock
upon exercise of warrants 4,543,294 4,543,294
Issuance of 177,881 shares of common stock
upon exercise of stock options 1,548,937 1,548,937
Issuance of 16,967 shares of common stock
pursuant to Shareholder Investment Plan 179,251 179,251
Issuance of 409,403 shares of common stock
upon distribution of 10% stock dividend 6,550,448 (6,552,961) (2,513)
Principal payment on note payable by ESOP 111,877 111,877
Cash dividends paid ($.30 per share) (1,346,782) (1,346,782)
Market value adjustment for investment securities
available for sale (net of tax effect) (376,471) (376,471)
Net income for 1996 4,635,620 4,635,620
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1996 34,971,523 5,150,066 36,951 40,158,540
Issuance of 158,107 shares of common stock upon
exercise of warrants 1,292,187 1,292,187
Issuance of 63,132 shares of common stock
upon exercise of stock options 619,879 (1,015,470) (395,591)
Issuance of 472,230 shares of common stock
upon distribution of 10% stock dividend 13,429,041 (13,429,041)
Principal payment on note payable by ESOP 145,067 145,067
Cash dividends paid ($.36 per share) (1,830,982) (1,830,982)
Market value adjustment for investment securities
available for sale (net of tax effect) 106,543 106,543
Net income for 1997 5,556,692 5,556,692
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1997 $ 50,312,630 $ (4,553,265) $ 143,494 $ (870,403) $ 45,032,456
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOWS
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
----------------- ----------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,556,692 $ 4,635,620 $ 3,072,559
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 2,048,830 1,195,757 838,830
Depreciation of premises and equipment 1,325,221 652,703 520,963
Amortization of goodwill and other intangibles 192,906 192,907 352,501
Net amortization of investment security premiums
(accretion of discount) (315,077) (266,610) 9,240
Gain (loss) on sale of premises and equipment 486,396 7,394 (12,130)
Deferred income taxes (842,000) (550,000) (240,000)
Originations and purchases of loans held for resale (142,253,992) (192,642,846) (84,430,817)
Proceeds from sales of loans held for resale 137,577,177 192,923,692 81,069,303
Increase in accrued interest income and other assets (3,064,592) (1,301,151) (171,994)
Increase in accrued interest on deposits and other liabilities 1,262,964 503,127 789,785
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,974,525 5,350,593 1,798,240
INVESTING ACTIVITIES
Proceeds from sale of 51% interest in Amera Mortgage Corporation 250,000
Proceeds from sales of investment securities available for sale 5,943,427 4,460,571 251,400
Proceeds from maturities of investment securities available for sale 34,261,591 39,742,019 14,207,785
Purchases of investment securities available for sale (55,480,988) (56,881,766) (15,239,503)
Net increase in portfolio loans (145,529,461) (74,456,584) (42,259,737)
Proceeds from sales of premises and equipment 407,383 12,757 33,481
Purchases of premises and equipment (4,376,434) (3,656,443) (657,565)
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (164,774,482) (90,779,446) (43,414,139)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 74,258,683 43,901,957 387,423
Net increase in certificates of deposit 93,981,958 51,976,646 60,249,566
Net proceeds from (payments on) debt obligations (6,500,000) (2,100,000) 900,000
Resources provided by minority interest 6,289,090 4,730,553 391,372
Net proceeds from issuance of common stock 1,912,066 6,271,482 1,741,031
Net proceeds from issuance of trust-preferred securities 24,126,250
Cash dividends paid and payments in lieu of
fractional shares (1,830,982) (1,349,295) (933,269)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 192,237,065 103,431,343 62,736,123
------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 29,437,108 18,002,490 21,120,224
Cash and cash equivalents at beginning of year 63,333,318 45,330,828 24,210,604
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 92,770,426 $ 63,333,318 $ 45,330,828
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
Capitol Bancorp Ltd. (the "Corporation") is a multibank holding company.
Consolidated subsidiaries consist of the following:
<TABLE>
<CAPTION>
Percentage Year Formed
Affiliate Location Owned or Acquired
--------------------------- --------------------------- ----- -----------
<S> <C> <C> <C>
Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990
Brighton Commerce Bank Brighton, Michigan 59% 1997
Capitol National Bank Lansing, Michigan 100% 1982
Grand Haven Bank Grand Haven, Michigan 85% 1995
Macomb Community Bank Clinton Township, Michigan 51% 1996
Muskegon Commerce Bank Muskegon, Michigan 51% 1997
Oakland Commerce Bank Farmington Hills, Michigan 100% 1992
Paragon Bank & Trust Holland, Michigan 100% 1994
Portage Commerce Bank Portage, Michigan 100% 1990
Sun Community Bancorp Ltd.: 51% 1997
Bank of Tucson Tucson, Arizona See Note B 1996
Valley First Community Bank Scottsdale, Arizona See Note B 1997
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
The Corporation and its subsidiaries are engaged in a single business
activity--banking. The bank affiliates provide a full range of banking services
to individuals, businesses and other customers located in their respective
communities. Each of the banks generally operate from a single location and
focus their activities on meeting the various credit and other banking needs of
entrepreneurs, professionals and other high net-worth individuals. A variety of
deposit products are offered, including checking, savings, money market,
individual retirement accounts and certificates of deposit. In addition, trust
services are offered through Paragon Bank & Trust. The principal markets for the
banks' financial services are the communities in which they are located and the
areas immediately surrounding those communities. In addition to commercial
banking units, mortgage banking activities are offered through Amera Mortgage
Corporation, a 49% owned affiliate.
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after elimination of intercompany accounts
and transactions, and after giving effect to applicable minority interest. Banks
formed or otherwise acquired during 1995, 1996 and 1997 are included in the
consolidated financial statements for periods after joining the consolidated
group (see Note B). Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.
ESTIMATES: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
LOANS HELD FOR RESALE: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the lower of cost or market.
INVESTMENT SECURITIES: Investment securities "available for sale" (generally
most debt securities investments of the Corporation), are carried at market
value with unrealized gains and losses reported as a separate component of
stockholders' equity, net of tax effect. All other investment securities are
classified as held for long-term investment and are carried at amortized cost
which approximates market value (see Note C). Investments are classified at the
date of purchase based on management's analysis of liquidity and other factors.
The adjusted cost of the specific securities sold is used to compute realized
gains or losses. Premiums and discounts are recognized in interest income using
the interest method over the period to maturity.
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment. Credit risk arises
from making loans and loan commitments in the ordinary course of business.
Substantially all portfolio loans are made to borrowers in the banks' geographic
areas. Consistent with the banks' emphasis on business lending, there are
concentrations of credit in loans secured by commercial real estate, equipment
and other business assets. The maximum potential credit risk to the Corporation,
without regard to underlying collateral and guarantees, is the total of loans
and loan commitments outstanding. Management reduces the Corporation's exposure
to losses from credit risk by requiring collateral and/or guarantees for loans
granted and monitoring concentrations of credit, in addition to recording
provisions for loan losses and maintaining an allowance for loan losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on evaluation of the
portfolio (including potential impairment of individual loans and concentrations
of credit), past loss experience, current economic conditions, volume, amount
and composition of the loan portfolio, loan commitments outstanding and other
factors. The allowance is increased by provisions charged to operations and
reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of loans
approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED SUBSIDIARIES: Goodwill, which relates
primarily to acquisitions in 1994 and 1992, is amortized on a straight-line
basis over various periods not to exceed 15 years. Management periodically
reviews long-lived assets, including associated goodwill, for potential
impairment based upon projected undiscounted net cash flows, when applicable,
and the related amortization periods.
OTHER REAL ESTATE: Other real estate (included as a component of other assets
and which, at December 31, 1997 and 1996 approximated $165,000 and $313,000,
respectively) comprises properties acquired through a foreclosure proceeding or
acceptance of a deed in lieu of foreclosure. These properties held for sale are
carried at the lower of cost or estimated fair value (net of estimated selling
cost) at the date acquired and are periodically reviewed for subsequent
impairment.
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon
granting of stock options, because such stock options are accounted for under
the provisions of Accounting Principles Board Opinion 25 and are granted at an
exercise price equal to the market price of common stock at grant date. Pro
forma disclosure of alternative accounting recognition is made elsewhere herein
(see Note K).
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Corporation's banks is not
included in the consolidated balance sheet because such property is not an asset
of the banks or the Corporation. Trust fee income is recorded on the accrual
method.
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
FEDERAL INCOME TAXES: The Corporation and subsidiaries owned 80% or more by the
Corporation file a consolidated federal income tax return. Deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax laws or
rates is recognized in income in the period that includes the enactment date.
NET INCOME PER SHARE: In 1997 the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share". Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the Statement 128
requirements. The computations of net income per share are set forth in Note Q.
NOTE B--CHANGES IN CONSOLIDATED GROUP
In 1997, two de novo banks in Michigan (Brighton Commerce Bank and Muskegon
Commerce Bank) became majority-owned subsidiaries of the Corporation. Initial
capitalization of each bank approximated $2.7 million and $2.8 million,
respectively.
In May 1997, a second-tier holding company (Sun Community Bancorp Limited,
hereinafter "Sun") commenced operations in the state of Arizona to facilitate
further de novo banking activities in the southwestern portion of the United
States. Sun entered into a share exchange agreement with Bank of Tucson, whereby
Bank of Tucson became a wholly-owned subsidiary of Sun, in May 1997. Bank of
Tucson, a de novo bank formed in 1996, was 51%-owned by the Corporation prior to
the share exchange. As a result of the share exchange, Sun became a 51% -owned
subsidiary of the Corporation. Additionally, Sun completed a $4.5 million
offering of common stock in 1997 (in which the Corporation invested $2.3
million, maintaining its 51% ownership of Sun), the proceeds of which will be
used for additional de novo bank expansion and other corporate purposes.
In June 1997, Valley First Community Bank in Scottsdale, Arizona was formed as a
de novo bank, 51% owned by Sun. Initial capitalization of Valley First Community
Bank was $4.4 million.
During 1996, two de novo banks (Bank of Tucson-- see discussion above-- and
Macomb Community Bank) became majority-owned subsidiaries of the Corporation.
The initial capitalization of those banks was $5.4 million and $4 million,
respectively.
Effective May 1, 1995, the Corporation formed Grand Haven Bank, an 85% owned de
novo bank, previously operated as the Grand Haven branch of Paragon Bank &
Trust. Its initial capitalization was $2.5 million.
As a condition of their charter approval, de novo banks are generally required
to maintain a core capital (Tier I) to assets ratio of not less than 8% and an
allowance for loan losses of not less than 1% for the first three years of
operations.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE C--INVESTMENT SECURITIES
Investment securities consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Available for sale:
United States Treasury securities $24,132,062 $24,243,086 $18,370,254 $18,472,498
United States government
agency securities 36,297,772 36,406,251 27,791,852 27,748,332
States and political subdivisions 1,609,758 1,603,201 100,000 100,118
Corporate bonds 300,543 300,468
----------- ----------- ----------- -----------
62,039,592 62,252,538 46,562,649 46,621,416
Held for long-term investment:
Federal Reserve Bank stock 115,900 115,900 115,900 115,900
Federal Home Loan Bank stock 1,073,200 1,073,000 984,100 984,000
Corporate stock 1,028,269 1,028,000 1,003,264 1,003,000
----------- ----------- ----------- -----------
2,217,369 2,216,900 2,103,264 2,102,900
----------- ----------- ----------- -----------
$64,256,961 $64,469,438 $48,665,913 $48,724,316
=========== =========== =========== ===========
</TABLE>
At December 31, 1997, securities with a market value approximating $6,536,000
were pledged to secure public and trust deposits and for other purposes as
required by law.
Gross unrealized gains and losses of investment securities available for sale
were as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------- --------------------
Gains Losses Gains Losses
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States Treasury securities $111,811 $ 787 $125,666 $ 23,422
United States government agency securities 141,720 33,241 60,062 103,582
States and political subdivisions 2,052 8,609 118
Corporate bonds and other 75
-------- -------- -------- --------
$255,583 $ 42,637 $185,846 $127,079
======== ======== ======== ========
</TABLE>
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE C--INVESTMENT SECURITIES--CONTINUED
Scheduled maturities of investment securities held as of December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------------ -------------
<S> <C> <C>
Due in one year or less $ 20,445,349 $ 20,485,510
After one year, through five years 37,569,574 37,743,098
After five years, through ten years 3,402,691 3,400,511
After ten years 621,978 623,419
Securities held for long-term
investment, without stated maturities 2,217,369 2,216,900
------------- ------------
$ 64,256,961 $ 64,469,438
============= ============
</TABLE>
NOTE D--LOANS
Transactions in the allowance for loan losses are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Balance at January 1 $ 4,578,000 $ 3,687,000 $ 3,220,000
Provision charged to operations 2,048,830 1,195,757 838,830
Loans charged off (deduction) (717,675) (437,648) (594,073)
Recoveries 319,845 132,891 222,243
------------- ------------ ------------
Balance at December 31 $ 6,229,000 $ 4,578,000 $ 3,687,000
============ =========== ===========
</TABLE>
Certain commercial loans are enrolled in a loan program sponsored by the State
of Michigan. Under that program, the governmental unit shares loss exposure on
such loans by funding reserves which are placed as deposits at the banks. Loans
participating in this program and related reserves approximated $18,719,000 and
$1,788,000, respectively, at December 31, 1997 ($13,901,000 and $1,551,000,
respectively, at December 31, 1996). Such reserve amounts are separate and
excluded from the allowance for loan losses.
At December 31, 1997 and 1996, 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.
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE E--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
------------ -----------
<S> <C> <C>
Land, buildings and improvements $ 1,974,828 $ 2,596,775
Leasehold improvements 2,108,912 1,051,938
Equipment and furniture 6,561,097 4,569,380
----------- -----------
10,644,837 8,218,093
Less accumulated depreciation (3,066,095) (2,796,785)
----------- -----------
$ 7,578,742 $ 5,421,308
=========== ===========
</TABLE>
The Corporation and certain subsidiaries rent office space under operating
leases. Rent expense (net of sublease income) under these lease agreements
approximated $958,000, $614,000 and $559,000 (including rent expense of
$506,000, $222,000 and $209,000 under leases with related parties) in 1997,
1996, and 1995, respectively. Future minimum rental payments under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1997 aggregate $8,557,000 due as follows: $1,157,000 in
1998, $993,000 in 1999, $1,015,000 in 2000, $969,000 in 2001, $973,000 in 2002
and $3,450,000 thereafter.
NOTE F--INCOME TAXES
Federal income taxes consist of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ --------
<S> <C> <C> <C>
Current $ 3,730,000 $ 2,795,000 $ 1,975,000
Deferred credit (842,000) (550,000) (240,000)
---------- ----------- -----------
$ 2,888,000 $ 2,245,000 $ 1,735,000
========== =========== ===========
</TABLE>
Federal income taxes paid during 1997, 1996 and 1995 approximated $3,639,000,
$2,451,000 and $1,831,000 respectively.
Differences between federal income tax expense recorded and amounts computed
using the statutory tax rate are reconciled below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ---------
<S> <C> <C> <C>
Federal income tax computed at
statutory rate of 34% $ 2,871,000 $ 2,339,000 $ 1,635,000
Tax effect of:
Amortization of goodwill 66,000 66,000 86,000
Other (49,000) (160,000) 14,000
------------- ------------- ------------
$ 2,888,000 $ 2,245,000 $ 1,735,000
============= ============= ============
</TABLE>
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE F--INCOME TAXES--CONTINUED
Net deferred income tax assets consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
-------------- ---------
<S> <C> <C>
Allowance for loan losses $ 1,925,000 $1,374,000
Deferred compensation 363,000 274,000
Market value adjustment for investment
securities available for sale (72,000) (20,000)
Other, net 412,000 158,000
----------- ----------
$ 2,628,000 $1,786,000
=========== ==========
</TABLE>
NOTE G--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Corporation's banking subsidiaries make
loans to officers and directors of the Corporation and its subsidiaries
including their immediate families and companies in which they are principal
owners. At December 31, 1997 and 1996, total loans to these persons approximated
$28,962,000 and $14,727,000, respectively. During 1997, $26,675,000 of new loans
were made to these persons and repayments totaled $12,440,000. Such loans are
made at the banking subsidiaries' normal credit terms.
Such officers and directors of the Corporation (and their associates, family
and/or affiliates) are also depositors of the banking subsidiaries. Such
deposits are similarly made at the banks' normal terms as to interest rate, term
and deposit insurance.
NOTE H--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated
$139,938,000 and $77,566,000, as of December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of such time deposits were as
follows:
<TABLE>
<S> <C>
1998 $ 123,732,928
1999 11,731,845
2000 2,630,601
2001 525,278
2002 and thereafter 1,317,007
--------------
$ 139,937,659
==============
</TABLE>
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE I--DEBT OBLIGATIONS
Debt obligations consisted of the following:
<TABLE>
<CAPTION>
December 31
1997 1996
------- --------
<S> <C> <C>
Short-term borrowings from Federal Home Loan Bank $ $3,000,000
Notes payable to unaffiliated bank 3,500,000
----------- ----------
$ -0- $6,500,000
=========== ==========
</TABLE>
Short-term borrowings from Federal Home Loan Bank of Indianapolis in 1996
represented advances secured by certain portfolio residential real estate
mortgage loans.
Notes payable to unaffiliated bank at December 31, 1996 represented borrowings
under lines of credit aggregating up to $10 million. Under the terms of those
credit facilities, up to $8 million was convertible into a term loan due in
quarterly principal installments based on an eight-year amortization (plus
interest at 7.5%). The remaining $2 million facility was a one-year revolving
credit agreement bearing interest at prime rate (8.25% at December 31, 1996),
payable quarterly. Interest paid under these credit facilities approximated
$562,000 in 1997, $342,000 in 1996 and $474,000 in 1995. In December 1997, all
outstanding borrowings on these credit facilities were repaid (from proceeds
from issuance of trust-preferred securities-- see Note J). After such repayment,
the Corporation renegotiated the credit facilities to provide a $5 million line
of credit which bears interest at prime rate (8.5% at December 31, 1997) and
which will be reviewed annually for continuance. This credit facility requires
the Corporation, among other things, to maintain certain minimum levels of
capital, rates of return on assets and other ratios or requirements and are
secured by the common stock of certain bank subsidiaries.
NOTE J-- TRUST-PREFERRED SECURITIES
On December 19, 1997, the Corporation and a subsidiary (Capitol Trust I)
completed a public offering of trust-preferred securities. Under the terms of
the offering, Capitol Trust I (of which the Corporation owns 100% of the common
interests of the Trust) issued 2,530,000 shares of preferred securities, $10
liquidation amount per preferred security. Gross proceeds from the offering
aggregated $25.3 million. Upon receipt of the proceeds of the offering, Capitol
Trust I purchased subordinated debentures of the Corporation of like amount,
which bear interest at 8.5% payable quarterly and which mature in 2027 (which
may be extended to 2036 if certain conditions are met) and are callable after
2002. The liquidation amount of the trust-preferred securities is guaranteed by
the Corporation.
Interest paid to the Trust by the Corporation (which is recorded as interest
expense in its consolidated financial statements) is distributed by the Trust to
the holders of the trust-preferred securities. Under certain conditions, the
Corporation may defer payment of interest on the subordinated debentures for
periods of up to five years.
Because Capitol Trust I is a subsidiary (due to the Corporation's ownership of
the common interests of the Trust), Capitol Trust I is consolidated with the
Corporation for financial reporting purposes. The amount of outstanding
trust-preferred securities (net of issuance costs which are being amortized over
the life of the securities) is classified between liabilities and equity in the
Corporation's consolidated balance sheet. Under current regulatory guidelines,
such trust-preferred securities are included as capital for purposes of meeting
certain ratio requirements.
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE K--COMMON STOCK, WARRANTS AND STOCK OPTIONS
On December 1, 1997 and December 31, 1996, the Corporation issued stock
dividends of 10%. All per-share data has been restated to reflect the stock
dividends as if they had occurred at the beginning of the periods presented.
At December 31, 1996, 162,244 warrants were outstanding which were issued in
conjunction with a 1994 merger transaction. Each warrant enabled the holder
thereof to purchase one share of common stock at $8.17272 per share (as adjusted
for the 1996 stock dividend). In 1997 158,107 warrants were exercised and the
remainder expired.
Stock options have been granted to certain officers which provide for the
purchase of shares of common stock. Generally, stock options are granted at an
exercise price equal to the fair value of common stock on the grant date, expire
seven years after grant, and are currently exercisable. Under the terms of an
employment agreement with a certain director and executive officer of the
Corporation, options granted thereunder shall be increased when the Corporation
issues additional shares so that such options granted equal 15% of outstanding
shares prior to exercise. In addition, certain other stock options resulted from
a 1994 merger transaction. Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Number of
Options Weighted Average
Outstanding Exercise Price Range Exercise Price
----------- ------------------ ------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 483,979 $ 5.90 to $ 10.50 $ 7.91
Granted in 1996 198,251 10.19 to 16.25 13.01
Exercised in 1996 (177,881) 6.28 to 7.27 6.87
Expired in 1996 (280) 5.90 5.90
-------- ------------------- --------
Outstanding at December 31, 1996 504,069 5.90 to 16.25 10.28
Granted in 1997 124,487 14.875 to 30.125 25.44
Exercised in 1997 (63,132) 5.90 to 15.90 7.44
Expired in 1997 (5,544) 5.90 5.90
-------- ------------------- --------
Outstanding at December 31, 1997 559,880 $ 5.90 to $ 30.125 $13.96
</TABLE>
As of December 31, 1997, stock options outstanding had a weighted average
remaining contractual life of 5 years. As of that date, stock options with an
exercise price of $15.00 or less had a weighted average exercise price of $9.19
and a weighted average remaining contractual life of 4.2 years; stock options
with an exercise price of more than $15.00 had a weighted average exercise price
of $22.03 and a weighted average remaining contractual life of 6.5 years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value method of accounting for stock options
whereby compensation expense is recognized based on the computed fair value of
the options on the grant date. However, as permitted by Statement No. 123, the
Corporation has elected to continue to account for its stock options under the
earlier accounting standard and, therefore, has not recognized compensation
expense. By electing this alternative, certain pro forma disclosures of the
expense recognition provisions are required. Under the fair value method of
accounting, 1997 net income and diluted earnings per share would have been $4.7
million and $.89, respectively, and 1996 net income and diluted earnings per
share would have been $4.3 million and $.91, respectively. The fair value of the
options in 1997 was estimated at the grant dates using an option pricing model
with the following weighted average assumptions: risk-free interest rate of
7.5%, dividend yield of 2.0%, stock price volatility of .36 and an expected
option life of 7 years. The pro forma effect of applying the fair value method
was not material to 1995 reported results.
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE L--EMPLOYEE RETIREMENT PLANS
The Corporation has a contributory employee retirement savings 401(k) plan which
covers substantially all full-time employees of the Corporation and certain
subsidiaries over age 21. The Plan provides for contributions by the Corporation
in amounts determined annually by the board of directors. Eligible employees may
also make voluntary contributions to the Plan. Contributions to the Plan charged
to expense for the years ended December 31, 1997, 1996 and 1995 were $111,000,
$88,000 and $84,000, respectively.
The Corporation also has a defined contribution employee stock ownership plan
("ESOP") which covers substantially all employees of the Corporation and certain
subsidiaries. Certain common stock purchases by the ESOP were financed by
long-term debt. ESOP contributions charged to expense in 1997, 1996 and 1995
approximated $180,000, $131,000, and $130,000 (including ESOP note payable
interest of $51,000, $8,400, and $19,000), respectively. Shares of common stock
held by the ESOP which have not yet been allocated to participants' accounts are
shown as a reduction of stockholders' equity.
NOTE M--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------- -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 92,770 $ 92,770 $ 63,333 $ 63,333
Loans held for resale 11,426 11,426 6,749 6,749
Investment securities:
Available for sale 62,253 62,253 46,622 46,622
Held for long-term investment 2,217 2,217 2,103 2,103
--------- --------- --------- ---------
64,470 64,470 48,725 48,725
Portfolio loans:
Fixed rate 327,096 327,517 212,286 212,341
Variable rate 175,659 174,399 145,337 145,330
--------- --------- --------- ---------
Total portfolio loans 502,755 501,916 357,623 357,671
Less allowance for loan losses (6,229) (6,229) (4,578) (4,578)
--------- --------- --------- ---------
Net portfolio loans 496,526 495,687 353,045 353,093
Financial Liabilities:
Deposits:
Noninterest-bearing deposits 83,487 83,487 62,766 62,766
Interest-bearing deposits:
Demand accounts 156,376 156,706 119,096 119,415
Time certificates of deposit less
than $100,000 224,606 227,438 176,738 176,733
Time certificates of deposit of
$100,000 or more 139,938 140,276 77,566 77,579
--------- --------- --------- ---------
Total interest-bearing deposits 520,920 524,420 373,400 373,727
--------- --------- --------- ---------
Total deposits 604,407 607,907 436,166 436,493
Debt obligations 6,500 6,500
Trust-preferred securities 24,126 25,300
</TABLE>
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE M--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--CONTINUED
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates on financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest unless quoted market values or
other fair value information is more readily available. Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
NOTE N--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of bank customers. Such loan commitments include
stand-by letters of credit, lines of credit, and various commitments for other
commercial, consumer and mortgage loans. Stand-by letters of credit, when
issued, commit the bank to make payments on behalf of customers when certain
specified future events occur and are used infrequently by the banks ($5,162,000
and $6,338,000 outstanding at December 31, 1997 and 1996, respectively). Other
loan commitments outstanding consist of unused lines of credit and approved, but
unfunded, specific loan commitments ($109,402,000 and $83,565,000 at December
31, 1997 and 1996, respectively). These loan commitments (stand-by letters of
credit and unfunded loans) generally expire within one year and are reviewed
periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the banks' normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
The Corporation's banking subsidiaries are required to maintain average reserve
balances in the form of cash on hand and balances due from the Federal Reserve
Bank and certain correspondent banks. The amount of reserve balances required as
of December 31, 1997 and 1996 were $1,914,000 and $1,463,000, respectively.
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to the Corporation in the form of cash dividends, loans or
advances. Subject to various regulatory capital requirements, bank subsidiaries'
current and retained earnings are available for distribution as dividends to the
Corporation (and other bank shareholders, as applicable) without prior approval
from regulatory authorities. Substantially all of the remaining net assets of
the subsidiaries are restricted as to payments to the Corporation.
Each bank and the Corporation are subject to certain other capital requirements.
Federal financial institution regulatory agencies have established certain
risk-based capital guidelines for banks and bank holding companies. Those
guidelines require all banks and bank holding companies to maintain certain
minimum ratios and related amounts based on `Tier I' and `Tier II' capital and
`risk-weighted assets' as defined and periodically prescribed by the respective
regulatory agencies. Failure to meet these capital requirements can result in
severe regulatory enforcement action or other adverse consequences for a
depository institution and, accordingly, could have a material impact on the
Corporation's consolidated financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgements by regulatory agencies with regard to
components, risk weighting and other factors.
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
As of December 31, 1997, the most recent notifications received by the banks
from regulatory agencies have advised that the banks are classified as "well
capitalized" as defined by the applicable agencies. There are no conditions or
events since those notifications that management believes would change the
regulatory classification of the banks.
Management believes, as of December 31, 1997, that the Corporation and the banks
meet all capital adequacy requirements to which the entities are subject.
The table on the following page summarizes the amounts (in thousands) and
related ratios of the individual banks' and consolidated regulatory capital
position as of December 31, 1997 and 1996:
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
<TABLE>
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS--CONTINUED
<CAPTION>
Ann Arbor Brighton Capitol Grand Macomb Muskegon Oakland
Commerce Commerce National Haven Community Commerce Commerce
Bank Bank Bank Bank Bank Bank Bank
---------- ----------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total capital to total assets:
Minimum required amount(1) > $ 5,536 > $ 1,886 > $ 5,062 > $ 3,626 > $ 3,272 > $ 630 > $ 3,274
- - - - - - -
Actual amount $ 9,759 $ 1,921 $ 8,893 $ 3,741 $ 3,412 $ 2,604 $ 5,811
Ratio 7.05% 8.15% 7.03% 8.25% 8.34% 33.08% 7.10%
Tier I Capital to risk-weighted assets:
Minimum required amount(2) > $ 4,298 > $ 641 > $ 3,631 > $ 1,163 > $ 869 > $ 120 > $ 2,458
- - - - - - -
Actual amount $ 9,746 $ 1,922 $ 8,888 $ 3,628 $ 3,400 $ 2,604 $ 5,805
Ratio 9.07% 11.99% 9.79% 12.48% 15.66% 87.03% 9.45%
Combined Tier I and Tier II capital
to risk-weighted assets:
Minimum required amount(3) > $ 8,596 > $ 1,282 > $ 7,263 > $ 2,325 > $ 1,737 > $ 239 > $ 4,916
- - - - - - -
Amount required to meet
"Well-Capitalized" category(4) > $10,745 > $ 1,603 > $ 9,079 > $ 2,907 > $ 2,172 > $ 299 > $ 6,146
- - - - - - -
Actual amount $11,092 $ 2,061 $10,024 $ 3,992 $ 3,596 $ 2,621 $ 6,491
Ratio 10.32% 12.86% 11.04% 13.73% 16.56% 87.60% 10.56%
December 31, 1996
Total capital to total assets:
Minimum required amount(1) > $ 4,226 n/a > $ 4,170 > $ 2,618 > $ 1,210 n/a > $ 2,844
- - - - -
Actual amount $ 6,655 n/a $ 8,020 $ 2,809 $ 3,587 n/a $ 5,434
Ratio 6.30% n/a 7.69% 8.58% 23.73% n/a 7.64%
Tier I capital to risk-weighted assets:
Minimum required amount(2) > $ 3,028 n/a > $ 3,100 > $ 893 > $ 289 n/a > $ 2,154
- - - - -
Actual amount $ 6,657 n/a $ 8,035 $ 2,638 $ 3,588 n/a $ 5,438
Ratio 8.79% n/a 10.37% 11.82% 49.73% n/a 10.10%
Combined Tier I and Tier II capital
to risk-weighted assets:
Minimum required amount(3) > $ 6,057 n/a > $ 6,200 > $ 1,785 > $ 577 n/a > $ 4,308
Amount required to meet - - - - -
"Well-Capitalized" category(4) > $ 7,571 n/a > $ 7,751 > $ 2,231 > $ 722 n/a > $ 5,384
- - - - -
Actual amount $ 7,605 n/a $ 9,005 $ 2,940 $ 3,647 n/a $ 6,093
Ratio 10.05% n/a 11.62% 13.18% 50.55% n/a 11.32%
CAPTION
Paragon Portage Sun Capitol
Bank & Commerce Community Bancorp
Trust Bank Bancorp Ltd. Consolidated
---------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Total capital to total assets:
Minimum required amount(1) > $ 2,893 > $ 3,670 > $ 2,200 > $ 2,844 > $27,622
- - - - -
Actual amount $ 5,426 $ 6,085 $ 9,691 $45,902 $45,903
Ratio 7.50% 6.63% 17.62% 64.56% 6.65%
Tier I Capital to risk-weighted assets:
Minimum required amount(2) > $ 2,400 > $ 2,755 > $ 1,474 > $ 2,282 > $19,961
- - - - -
Actual amount $ 5,402 $ 6,067 $11,236 $42,735 $71,142
Ratio 9.00% 8.81% 30.49% 74.90% 14.26%
Combined Tier I and Tier II capital
to risk-weighted assets:
Minimum required amount(3) > $ 4,801 > $ 5,510 > $ 2,948 > $ 4,565 > $39,922
- - - - -
Amount required to meet
"Well-Capitalized" category(4) > $ 6,001 > $ 6,888 > $ 3,685 n/a > $49,903
- - - -
Actual amount $ 6,065 $ 6,929 $11,553 $67,336 $82,898
Ratio 10.11% 10.06% 31.35% 118.02% 16.61%
December 31, 1996
Total capital to total assets:
Minimum required amount(1) > $ 2,550 > $ 2,951 > $ 1,382 > $ 1,826 > $19,691
- - - - -
Actual amount $ 4,484 $ 5,248 $ 5,189 $40,159 $40,159
Ratio 7.03% 7.11% 30.04% 87.98% 8.16%
Tier I capital to risk-weighted assets:
Minimum required amount(2) > $ 1,988 > $ 2,204 > $ 310 > $ 1,676 > $14,178
- - - - -
Actual amount $ 4,414 $ 5,265 $ 5,199 $37,775 $42,506
Ratio 8.88% 9.56% 67.12% 90.15% 11.99%
Combined Tier I and Tier II capital
to risk-weighted assets:
Minimum required amount(3) > $ 3,977 > $ 4,407 > $ 620 > $ 3,352 > $28,356
- - - - -
Amount required to meet
"Well-Capitalized" category(4) > $ 4,971 > $ 5,509 > $ 775 n/a > $35,446
- - - -
Actual amount $ 4,977 $ 5,955 $ 5,248 $36,715 $45,645
Ratio 10.01% 10.81% 67.76% 87.62% 12.88%
</TABLE>
(1) As a condition of charter approval, certain de novo banks (Brighton Commerce
Bank, Grand Haven Bank, Macomb Community Bank and Muskegon Commerce Bank)
are required to maintain a ratio of capital to total assets of not less than
8% for the first three years of operations.
(2) The minimum required ratio of Tier I capital to risk-weighted assets is 4%.
(3) The minimum required ratio of Tier I and Tier II capital to risk-weighted
assets is 8%.
(4) In order to be classified as a "well-capitalized" institution, the ratio of
Tier I and Tier II capital to risk-weighted assets must be 10% or more.
n/a - not applicable
49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE P--PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1997 1996
--------- ----------
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary banks $ 35,423 $ 8,980
Money market funds on deposit with subsidiary banks 13,181,846 323,178
Investment securities held for long-term investment 318,269 293,264
Investment in subsidiaries 49,363,477 36,641,909
Notes receivable 1,105,000 1,152,500
Investment in and advances to Amera Mortgage
Corporation 2,912,517 2,830,761
Equipment and furniture, net 170,443 138,317
Excess of cost over net assets of acquired subsidiaries 2,154,350 2,347,256
Other assets 2,645,710 1,911,447
----------- -----------
TOTAL ASSETS $71,887,035 $45,647,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other
liabilities $ 1,945,849 $ 1,989,072
Debt obligations payable to unaffiliated entities 3,500,000
Subordinated debentures 24,908,730
----------- -----------
Total liabilities 26,854,579 5,489,072
Stockholders' equity 45,032,456 40,158,540
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $71,887,035 $45,647,612
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------- --------- -----------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 2,100,000 $ 2,690,000 $ 2,375,000
Intercompany fees 3,811,792 2,045,901 1,415,760
Interest 254,421 182,127 173,460
Other (183,185) 312,197 (91,419)
----------- ----------- -----------
Total income 5,983,028 5,230,225 3,872,801
Expenses:
Interest 660,039 386,145 485,865
Salaries and employee benefits 1,618,421 1,546,195 1,005,238
Occupancy 171,088 109,469 97,809
Amortization, equipment rent and depreciation 1,527,835 707,779 525,204
Other 925,442 653,273 485,801
----------- ----------- -----------
Total expenses 4,902,825 3,402,861 2,599,917
----------- ----------- -----------
1,080,203 1,827,364 1,272,884
Equity in undistributed net earnings of
consolidated subsidiaries 4,202,489 2,479,256 1,503,675
Federal income taxes (credit) (274,000) (329,000) (296,000)
----------- ----------- -----------
NET INCOME $ 5,556,692 $ 4,635,620 $ 3,072,559
=========== =========== ===========
</TABLE>
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE P--PARENT COMPANY FINANCIAL INFORMATION--CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,556,692 $ 4,635,620 $ 3,072,559
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in undistributed net earnings of subsidiaries (4,202,489) (2,479,256) (1,503,675)
Depreciation and amortization 259,498 255,202 280,967
Loss (gain) on sale of equipment and furniture 364 168 (8,394)
Decrease (increase) in notes and accounts receivable
due from subsidiaries (81,756) 2,500,175
Decrease (increase) in other assets (1,519,651) (681,101) (2,915,387)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (43,223) 526,709 884,980
------------ ------------ ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (30,565) 2,257,342 2,311,225
INVESTING ACTIVITIES
Net cash investment in subsidiaries (8,450,051) (5,201,523) (2,369,784)
Proceeds from sale of 51% interest in Amera Mortgage Corporation 250,000
Net decrease in note receivable due from Amera
Mortgage Corporation 293,723
Purchases of investment securities (25,005) (96,600)
Proceeds from sales of equipment and furniture 3,952 14,226
Purchases of equipment and furniture (99,082) (81,232) (38,040)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (8,574,138) (4,985,080) (2,240,198)
FINANCING ACTIVITIES
Net payments on debt obligations (3,500,000) (2,100,000) (1,100,000)
Net proceeds from issuance of subordinated debentures 24,908,730
Net proceeds from issuance of common stock 1,912,066 6,271,482 1,741,031
Cash dividends paid and payments in lieu of fractional shares (1,830,982) (1,349,295) (933,269)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 21,489,814 2,822,187 (292,238)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,885,111 94,449 (221,211)
Cash and cash equivalents at beginning of year 332,158 237,709 458,920
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,217,269 $ 332,158 $ 237,709
============ ============ ============
</TABLE>
51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD. AND SUBSIDIARIES
NOTE Q--NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Numerator--net income for the year $5,556,692 $4,635,620 $3,072,559
========== ========== ==========
Denominator:
Weighted average number of shares
outstanding (denominator for basic earnings
per share) 5,108,244 4,563,759 4,034,004
Effect of dilutive securities:
Warrants 13,931 61,178 32,516
Stock Options 149,847 71,569 44,186
---------- ---------- ----------
Potential dilution 163,778 132,747 76,702
---------- ---------- ----------
Denominator for diluted earnings per share--
weighted average number of shares and
potential dilution 5,272,022 4,696,506 4,110,706
========== ========== ==========
Basic earnings per share $ 1.09 $ 1.02 $ 0.76
========== ========== ==========
Diluted earnings per share $ 1.05 $ 0.99 $ 0.75
========== ========== ==========
</TABLE>
Additional disclosures regarding stock options and warrants are set forth in
Note K.
NOTE R -- SUBSEQUENT EVENTS
In early January 1998, Sun Community Bancorp Limited completed a private
placement stock offering, resulting in net proceeds of $7 million. Proceeds from
the offering (which included $3.6 million invested by the Corporation,
maintaining its 51% interest in Sun) will be used for additional bank
development opportunities in the southwestern portion of the United States and
other corporate purposes.
In early February, 1998 a bank customer drew checks on uncollected funds
aggregating $1.5 million at one of the Corporation's banks. Management has been
informed that larger amounts may have been overdrawn at other, unaffiliated,
financial institutions. Based on management's analysis of the bank's
relationship with that customer, it is believed that the majority of the amount
involved is covered by real estate collateral. However, there is a likelihood
that the bank will sustain some loss from this occurrence, although an estimate
was not determinable in mid-February 1998. In accordance with applicable
accounting standards, losses relating to this matter, if any, will be recorded
during the period in which the event occurred, to the extent an estimate of loss
can be made at that time, or in a subsequent period when a reasonable estimate
can be made.
As of mid-February 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 either the Corporation or Sun and, accordingly, consolidated
for financial reporting purposes for periods on or after commencement of
operations.
52
<PAGE> 53
CAPITOL BANCORP LTD.
<TABLE>
<S><C>
OFFICERS OF THE CORPORATION
JOSEPH D. REID
Chairman, President and CEO
DAVID O'LEARY
Secretary
ROBERT C. CARR
Executive Vice President
and Treasurer
PAUL R. BALLARD
Executive Vice President
LEE W. HENDRICKSON
Senior Vice President
and Chief Financial Officer
DAVID K. POWERS
Senior Vice President
JOHN C. SMYTHE
Senior Vice President
BRUCE THOMAS
Senior Vice President
CRISTIN REID ENGLISH
Vice President of Corporate Development
and General Counsel
CHARLES J. MCDONALD
Vice President
LINDA D. PAVONA
Vice President
MARIE D. WALKER
Vice President and Controller
FREDRICK H. WISSER
Vice President
OTHER CORPORATE INFORMATION
CORPORATE OFFICE
One Business & Trade Center
200 Washington Square North
Lansing, Michigan 48933
(517) 487-6555
www.cbcl.com
INDEPENDENT AUDITORS
BDO Seidman, LLP
Grand Rapids, Michigan
LEGAL COUNSEL
Strobl & Borda, P.C.
Bloomfield Hills, Michigan
Lasky, Fifarek & Hogan
Lansing, Michigan
SHAREHOLDER INFORMATION
ANNUAL MEETING
The 1998 Annual Meeting of Capitol Bancorp Ltd. will be held on Thursday, April
30, 1998 at 4:00 p.m. at the Lansing Center, 333 E. Michigan Avenue, Lansing,
Michigan.
SHAREHOLDER INVESTMENT PLAN
Capitol Bancorp Ltd. offers its shareholders an easy and affordable way to
invest in Capitol Bancorp Ltd. common stock through the Shareholder Investment
Program. The Program's benefits include features such as reinvestment of
dividends in additional common stock, direct deposit of dividends, ability to
purchase as little as $50 in common stock as frequently as once a month, and the
option to make transfers or gifts of Capitol Bancorp Ltd. common stock to
another person free of charge. Participation in the Program is voluntary, and
all shareholders are eligible. Purchases under the Program are not currently
subject to any brokerage fees or commissions. For further information regarding
the Capitol Bancorp Ltd. Shareholder Investment Program or a copy of the Program
prospectus, informational brochure and enrollment materials contact UMB Bank,
n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555.
COMMON STOCK TRADING INFORMATION
Common stock of Capitol Bancorp Ltd. trades on the Nasdaq National Market Tier
of The Nasdaq Stock MarketSM under the trading symbol "CBCL".
The following brokerage firms make a market in the common stock of Capitol
Bancorp Ltd.:
Robert W. Baird & Co., Inc. Howe Barnes Investments, Inc.
Milwaukee, Wisconsin Chicago, Illinois
EVEREN Securities, Inc. McDonald & Company Securities, Inc.
Chicago, Illinois Cleveland, Ohio
First of Michigan Corporation Roney & Co. Inc.
Detroit, Michigan Detroit, Michigan
Herzog, Heine, Geduld, Inc. Stifel, Nicolaus & Company, Inc.
Detroit, Michigan St. Louis, Missouri
COMMON STOCK TRANSFER AGENT
UMB Bank, n.a.
928 Grand Avenue
P.O. Box 410064
Kansas City, Missouri 64141-0064
(800) 884-4225
TRUST-PREFERRED SECURITIES TRADING INFORMATION
Preferred securities of Capitol Trust I (a subsidiary of Capitol Bancorp Ltd.)
trade on the Nasdaq Stock Market SM under the trading symbol"CBCLP".
The following brokerage firms make a market in the trust-preferred securities of
Capitol Trust I:
Robert W. Baird & Co., Inc. Howe Barnes Investments, Inc. Stifel, Nicolaus & Company, Inc.
Milwaukee, Wisconsin Chicago, Illinois St. Louis, Missouri
TRUST PREFERRED SECURITIES TRUSTEE
The First National Bank of Chicago
Chicago, Illinois
</TABLE>
53
