<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2761672
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common stock, No par value: 5,238,411 shares outstanding as of July 31,
1998.
Page 1 of 21
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheets - June 30, 1998 and December 31,
1997.
Consolidated statements of income - Three months and
six months ended June 30, 1998 and 1997.
Consolidated statements of changes in stockholders' equity -
Six months ended June 30, 1998 and 1997.
Consolidated statements of cash flows - Six months ended
June 30, 1998 and 1997.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
Page 2 of 21
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
--------- -----------
(in thousands)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 42,585 $ 29,860
Interest-bearing deposits with banks 712 260
Federal funds sold 93,200 62,650
--------- ---------
Cash and cash equivalents 136,497 92,770
Loans held for resale 15,255 11,426
Investment securities:
Available for sale, carried at market value 64,444 62,253
Held for long-term investment, carried at
amortized cost which approximates market value 2,290 2,217
--------- ---------
Total investment securities 66,734 64,470
Portfolio loans:
Commercial 488,078 395,938
Real estate mortgage 70,615 66,630
Installment 47,930 40,187
--------- ---------
Total portfolio loans 606,623 502,755
Less allowance for loan losses (7,373) (6,229)
--------- ---------
Net portfolio loans 599,250 496,526
Premises and equipment 8,078 7,579
Accrued interest income 4,677 4,116
Excess of cost over net assets of acquired subsidiaries 2,292 2,154
Other assets 13,694 11,515
--------- ---------
TOTAL ASSETS $ 846,477 $ 690,556
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 100,094 $ 83,487
Interest-bearing 648,432 520,920
--------- ---------
Total deposits 748,526 604,407
Debt obligations 3,000
Accrued interest on deposits and other liabilities 6,290 5,971
--------- ---------
Total liabilities 757,816 610,378
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,237 24,126
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 17,649 11,020
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
issued and outstanding: 1998 - 5,232,031 shares
1997 - 5,198,380 shares 51,138 50,312
Retained earnings (3,579) (4,553)
Market value adjustment (net of tax effect) for
investment securities available for sale 86 143
--------- ---------
47,645 45,902
Less unallocated ESOP shares (870) (870)
--------- ---------
Total stockholders' equity 46,775 45,032
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 846,477 $ 690,556
========= =========
</TABLE>
Page 3 of 21
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------- --------------------
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $14,226 $10,142 $26,968 $19,208
Loans held for resale 429 107 635 185
Taxable investment securities 963 852 1,883 1,620
Federal funds sold 1,080 641 2,184 1,240
Other interest 32 4 53 4
Dividends on investment securities 26 132 49 155
------- ------- ------- -------
Total interest income 16,756 11,878 31,772 22,412
Interest expense:
Demand deposits 1,657 954 2,990 1,788
Savings deposits 360 392 732 762
Time deposits 6,106 4,347 11,678 8,269
Debt obligations and other 644 92 1,237 132
------- ------- ------- -------
Total interest expense 8,767 5,785 16,637 10,951
------- ------- ------- -------
Net interest income 7,989 6,093 15,135 11,461
Provision for loan losses 833 512 1,658 966
------- ------- ------- -------
Net interest income after
provision for loan losses 7,156 5,581 13,477 10,495
Noninterest income:
Service charges on deposit accounts 290 206 545 375
Trust fee income 111 81 203 158
Realized gains on sale of investment
securities available for sale 2 7 2 17
Other 494 78 840 656
------- ------- ------- -------
Total noninterest income 897 372 1,590 1,206
Noninterest expense:
Salaries and employee benefits 3,037 1,926 5,893 3,904
Occupancy 493 334 1,026 629
Equipment rent, depreciation and maintenance 690 465 1,335 889
Deposit insurance premiums 27 21 57 42
Other 1,627 1,212 3,546 2,352
------- ------- ------- -------
Total noninterest expense 5,874 3,958 11,857 7,816
------- ------- ------- -------
Income before federal income taxes 2,179 1,995 3,210 3,885
Federal income taxes 795 675 1,193 1,303
------- ------- ------- -------
NET INCOME $ 1,384 $ 1,320 $ 2,017 $ 2,582
======= ======= ======= =======
NET INCOME PER SHARE -- Note D:
Basic $ 0.26 $ 0.26 $ 0.39 $ 0.51
======= ======= ======= =======
Diluted $ 0.26 $ 0.26 $ 0.38 $ 0.51
======= ======= ======= =======
</TABLE>
Page 4 of 21
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Market Value
Adjustment for
Investment
Securities Unallocated
Common Retained Available ESOP
Stock Earnings for Sale Shares Total
-------- -------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1997
Balances at January 1, 1997 $ 34,972 $ 5,150 $ 37 $ 0 $ 40,159
Cash dividends paid (879) (879)
Issuance of 158,107 shares of common stock
upon exercise of warrants 1,292 1,292
Issuance of 60,176 shares of common stock
upon exercise of stock options 568 (1,016) (448)
Components of comprehensive income:
Market value adjustment for investment
securities available for sale (22) (22)
Net income for the period 2,582 2,582
--------
Comprehensive income for the period 2,560
-------- -------- ----- ------- --------
BALANCES AT JUNE 30, 1997 $ 36,832 $ 6,853 $ 15 $(1,016) $ 42,684
======== ======== ===== ======= ========
Six Months Ended June 30, 1998
Balances at January 1, 1998 $ 50,312 $ (4,553) $ 143 $ (870) $ 45,032
Cash dividends paid (1,043) (1,043)
Issuance of 5,980 shares of common stock
upon exercise of stock options 81 81
Issuance of 27,671 shares of common stock
in exchange for minority interest in
majority-owned subsidiary 745 745
Components of comprehensive income:
Market value adjustment for investment
securities available for sale (57) (57)
Net income for the period 2,017 2,017
--------
Comprehensive income for the period 1,960
-------- -------- ----- ------- --------
BALANCES AT JUNE 30, 1998 $ 51,138 $ (3,579) $ 86 $ (870) $ 46,775
======== ======== ===== ======= ========
</TABLE>
Page 5 of 21
<PAGE> 6
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,017 $ 2,582
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 1,658 966
Depreciation of premises and equipment 828 503
Amortization of goodwill and other intangibles 216 96
Net amortization of investment security
premiums (accretion of discount) (55) (190)
Gain on sale of premises and equipment 4 501
Originations and purchases of loans held for resale (141,570) (53,937)
Proceeds from sales of loans held for resale 137,741 53,165
Increase in accrued interest income
and other assets (2,958) (3,456)
Increase in accrued interest and
other liabilities 319 659
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,800) 889
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 500 1,976
Proceeds from maturities of investment securities 22,342 16,099
Purchases of investment securities (25,133) (30,933)
Net increase in portfolio loans (104,382) (66,331)
Proceeds from sales of premises and equipment 86 302
Purchases of premises and equipment (1,417) (1,876)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (108,004) (80,763)
FINANCING ACTIVITIES
Net borrowings from debt obligations 3,000 4,125
Resources provided by minority interest in consolidated subsidiaries 7,374 5,283
Net proceeds from issuance of common stock 81 1,861
Cash dividends paid (1,043) (879)
Increase in demand deposits, NOW
accounts and savings accounts 56,336 24,496
Increase in certificates of deposit 87,783 43,485
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 153,531 78,371
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 43,727 (1,503)
Cash and cash equivalents at beginning of period 92,770 63,333
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 136,497 $ 61,830
========= =========
</TABLE>
Page 6 of 21
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CAPITOL BANCORP LTD.
Note A - Basis of Presentation
- ------------------------------
The accompanying condensed consolidated financial statements of Capitol
Bancorp Ltd. have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q. Accordingly, they do not include all information and footnotes necessary
for a fair presentation of consolidated financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The statements do, however, include all adjustments of a normal
recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which
the Corporation considers necessary for a fair presentation of the interim
periods.
The results of operations for the six-month period ended June 30, 1998
are not necessarily indicative of the results to be expected for the year ending
December 31, 1998.
The consolidated balance sheet as of December 31, 1997 was derived from
audited consolidated financial statements as of that date. Certain 1997 amounts
have been reclassified to conform to the 1998 presentation.
Note B - Implementation of New Accounting Standards
- ---------------------------------------------------
Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income" requires presentation of all components of
"comprehensive income" and total comprehensive income. This new standard became
effective for the Corporation January 1, 1998. Implementation of this new
accounting standard had no impact on the Corporation's financial position or
results of operations for the period ended June 30, 1998. Components of
comprehensive income and total comprehensive income are included in the
consolidated statements of changes in stockholders' equity.
Note C - New Banks
- ------------------
Kent Commerce Bank, a de novo bank located in Grand Rapids, Michigan,
was formed in early January 1998. The Corporation owns 51% of the common stock
of Kent Commerce Bank. This new bank is consolidated for financial reporting
purposes with corresponding accounting recognition given to applicable minority
interest.
On May 20, 1998 Camelback Community Bank, a de novo bank, commenced
operations in Phoenix, Arizona. The Bank was capitalized with $4.2 million, of
which $2.1 million was invested by Sun Community Bancorp Limited ("Sun") with
the remainder invested by
Page 7 of 21
<PAGE> 8
individuals and other entities primarily located in the Phoenix area. Camelback
Community Bank is 51% owned by Sun and, accordingly, is consolidated with Sun
for financial reporting purposes.
Because of the Corporation's majority interest in Sun, Sun's
consolidated financial position and results of operations are included in the
Corporation's consolidated financial statements with corresponding accounting
recognition of applicable minority interest.
Note D - Net Income Per Share
- -----------------------------
The computations of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Numerator--net income for the period $1,384,042 $1,320,130 $ 2,017,245 $2,582,411
========== ========== =========== ==========
Denominator:
Weighted average number of common shares outstanding
(denominator for basic earnings per share) 5,222,676 5,062,196 5,211,727 5,019,031
Effect of dilutive securities -- stock options 182,317 100,256 151,050 90,256
---------- ---------- ----------- ----------
Denominator for diluted net income per share--
Weighted average number of common shares and potential
dilution 5,404,993 5,162,452 5,362,777 5,109,287
========== ========== =========== ==========
Basic Net Income Per Share $ 0.26 $ 0.26 $ 0.39 $ 0.51
========== ========== =========== ==========
Diluted Net Income Per Share $ 0.26 $ 0.26 $ 0.38 $ 0.51
========== ========== =========== ==========
</TABLE>
Note E - Prospective Impact of New Accounting Standards Not Yet Adopted
- -----------------------------------------------------------------------
FASB Statement No. 131, "Disclosures About Segments of An Enterprise
and Related Information" revises reporting of information about operating
segments in annual and interim financial statements. This statement sets revised
standards for disclosure about products and services, geographic areas and major
customers. It is intended to promote a more practical approach to segment
reporting by requiring presentation of information on the basis which is used
internally by management for evaluating segment performance and allocation of
resources to segments of the enterprise. Management has not completed its
analysis of this new accounting standard. The new standard will be effective for
the Corporation's financial statements as of December 31, 1998 and thereafter
and will require restatement of prior period information.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". It requires start-up costs and organizational costs to be charged
to expense when incurred. The initial application of the statement will require
a cumulative effect adjustment for those companies that have previously
Page 8 of 21
<PAGE> 9
capitalized start-up and organization costs and will be effective in 1999.
Management has not completed its analysis of this new accounting standard.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to the Corporation's financial statements.
Page 9 of 21
<PAGE> 10
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
- -------------------
Total assets approximated $846.5 million at June 30, 1998, an increase
of $155.9 million from the December 31, 1997 level of $690.6 million. The
consolidated balance sheets include the Corporation and its majority-owned
banking subsidiaries.
During the six months ended June 30, 1998, two de novo banks were
added. Kent Commerce Bank, in Grand Rapids, Michigan, was formed in early
January 1998 and was capitalized with $3.9 million of which $2 million was
invested by the Corporation. The Corporation owns 51% of the common stock of
Kent Commerce Bank and, accordingly, this new bank is consolidated for financial
reporting purposes with corresponding accounting recognition given to applicable
minority interest.
On May 20, 1998 Camelback Community Bank, a de novo commercial bank,
commenced operations in Phoenix, Arizona. The Bank was capitalized with $4.2
million, of which $2.1 million was invested by Sun Community Bancorp Limited
("Sun") with the remainder invested by individuals and other entities primarily
located in the Phoenix area. Camelback Community Bank is 51% owned by Sun and,
accordingly, is consolidated with Sun for financial reporting purposes. Sun is
consolidated for financial reporting purposes due to its 51% ownership by
Capitol Bancorp.
Portfolio loans increased during the 1998 six-month period by
approximately $104 million. The majority of 1998 portfolio loan growth occurred
in commercial loans, which increased approximately $92 million, consistent with
the banks' emphasis on commercial lending activities.
The allowance for loan losses at June 30, 1998 approximated $7.4
million or 1.22% of total portfolio loans, a slight decrease from the year-end
1997 ratio of 1.24%. Provisions for loan losses have been maintained at a higher
level in 1998 ($1,658,000) relative to 1997 ($966,000) commensurate with
portfolio growth, levels of delinquent and other nonperforming loans and other
factors.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including volume, amount and composition, potential
impairment of individual loans and concentrations of credit), past loss
experience, current economic conditions, loan commitments outstanding and other
factors.
Page 10 of 21
<PAGE> 11
The following table summarizes portfolio loan balances and activity in
the allowance for loan losses for the interim periods (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Allowance for loan losses at January 1 $ 6,229 $ 4,578
Loans charged-off:
Commercial 554 384
Real estate mortgage 9 70
Installment 52 10
-------- --------
Total charge-offs 615 464
Recoveries:
Commercial 96 253
Real estate mortgage 1 2
Installment 4 12
-------- --------
Total recoveries 101 267
-------- --------
Net charge-offs 514 197
Additions to allowance charged to expense 1,658 966
-------- --------
Allowance for loan losses at June 30 $ 7,373 $ 5,347
======== ========
Average total portfolio loans for period ended June 30 $551,373 $388,755
======== ========
Ratio of net charge-offs to average portfolio loans outstanding 0.09% 0.05%
======== ========
</TABLE>
The allowance for loan losses is a general allowance for the
Corporation's loan portfolio. For internal purposes, management allocates the
allowance to all loan classifications. The amounts allocated in the following
table (in thousands), which includes all loans for which, based on the
Corporation's loan rating system management has concerns, should not be
interpreted as an indication of future charge-offs. In addition, amounts
allocated are not intended to reflect the amount that may be available for
future losses, since the allowance is a general allowance.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------------------- ---------------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
--------- ---------
<S> <C> <C> <C> <C>
Commercial $ 3,626 0.60% $ 2,875 0.57%
Real estate mortgage 125 0.02 103 0.02
Installment 232 0.04 185 0.04
Unallocated 3,390 0.56 3,066 0.61
-------- ---- -------- ----
Total allowance for loan losses $ 7,373 1.22% $ 6,229 1.24%
======== ==== ======== ====
Total portfolio
loans outstanding $606,623 $502,755
======== ========
</TABLE>
Page 11 of 21
<PAGE> 12
In addition to the allowance for loan losses, certain loans are
enrolled in a state government loan program and have additional reserves
established to provide for loss protection. At June 30, 1998, total loans under
this program approximated $21.9 million. Reserves related to these loans, which
are represented by earmarked funds on deposit at certain of the bank
subsidiaries, approximated $2 million and are not included in the recorded
allowance for loan losses.
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 1997 and through
June 30, 1998. Impaired loans include amounts owed to one of the Corporation's
banks relating to a customer's checks drawn on uncollected funds which arose in
early February 1998. The total of the customer's overdrafts at the bank
subsidiary approximated $1.5 million. Management subsequently became aware that
larger overdrafts occurred at other, unaffiliated, financial institutions
(certain of which subsequently filed suit against the bank subsidiary). Based on
management's analysis of the customer's loan collateral and amounts owing the
bank by that customer, an estimated loss accrual and write-off of $600,000 was
recorded at March 31, 1998 relating to the advances arising from uncollected
funds. In addition, the bank increased its interim provision for loan losses at
March 31, 1998 by $300,000 relating to that customer.
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) at June 30, 1998 amounted to $4.9 million compared
with $4 million at December 31, 1997 as summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
June 30 Dec 31
1998 1997
------- -------
<S> <C> <C>
Nonaccrual loans:
Commercial $3,235 $2,570
Real estate 228 59
Installment 135 59
------ ------
Total nonaccrual loans 3,598 2,688
Past due (>90 days) loans:
Commercial 936 897
Real estate 352 401
Installment 40 25
------ ------
Total past due loans 1,328 1,323
------ ------
Total nonperforming loans $4,926 $4,011
====== ======
</TABLE>
Nonperforming loans increased approximately $900,000 during the
six-month period ended June 30, 1998. Exclusive of approximated $1 million
relating to one customer, most of the nonaccrual loans are a small number of
loans in various stages of resolution. Management believes such loans to be
adequately collateralized or otherwise appropriately considered in its
determination of the adequacy of the allowance for loan losses.
Page 12 of 21
<PAGE> 13
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the period,
additional interest income of $194,000 and $54,000 would have been recorded for
the six months ended June 30, 1998 and 1997, respectively. Interest income
recognized on loans in nonaccrual status for the period approximated $23,000 and
$26,000, respectively.
Other real estate owned (generally real estate acquired through
foreclosure or a deed in lieu of foreclosure and classified as a component of
other assets) approximated $215,000 at June 30, 1998 compared to the year-end
1997 level of $165,000.
The following comparative analysis summarizes each bank's total
portfolio loans, allowance for loan losses, nonperforming assets and certain
ratios (dollars in thousands):
<TABLE>
<CAPTION>
Total Allowance for Nonperforming Allowance as a Percentage
Portfolio Loans Loan Losses Loans of Total Portfolio Loans
------------------- --------------------- -------------------- -------------------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
1998 1997 1998 1997 1998 1997 1998 1997
--------- -------- -------- -------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $131,680 $115,882 $ 1,778 $ 1,564 $ 475 $ 913 1.35% 1.35%
Brighton Commerce Bank 22,900 13,817 229 139 -- -- 1.00 1.01
Capitol National Bank 98,979 94,400 1,357 1,270 894 760 1.37 1.35
Grand Haven Bank 44,817 35,770 531 427 106 32 1.18 1.19
Kent Commerce Bank 12,996 n/a 130 n/a -- n/a 1.00 n/a
Macomb Community Bank 28,981 19,546 290 196 -- -- 1.00 1.00
Muskegon Commerce Bank 13,280 1,610 133 17 -- -- 1.00 1.06
Oakland Commerce Bank 62,070 58,091 751 686 2,192 744 1.21 1.18
Paragon Bank & Trust 64,228 59,184 702 663 221 660 1.09 1.12
Portage Commerce Bank 82,958 72,115 1,044 950 1,038 902 1.26 1.32
Sun Community Bancorp Limited:
Bank of Tucson 29,243 23,406 294 235 -- -- 1.01 1.00
Camelback Community Bank -- n/a -- n/a -- n/a -- n/a
Valley First Community Bank 13,385 7,830 134 82 -- -- 1.00 1.05
Other, net 1,106 1,104 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---- ----
Consolidated $606,623 $502,755 $ 7,373 $ 6,229 $ 4,926 $ 4,011 1.22% 1.24%
======== ======== ======== ======== ======== ======== ==== ====
</TABLE>
n/a - Not applicable
Noninterest-bearing deposits approximated 13.4% of total deposits at
June 30, 1998, a slight decrease from the December 31, 1997 level of 13.8%.
Levels of noninterest-bearing deposits fluctuate based on customers' transaction
activity.
[The remainder of this page intentionally left blank]
Page 13 of 21
<PAGE> 14
Results of Operations
- ---------------------
Net income for the six months ended June 30, 1998 amounted to $2
million, a decrease from the $2.6 million earned during the corresponding period
of 1997, primarily due to the previously mentioned loss accruals recorded in the
first quarter of 1998. Earnings for the three months ended June 30, 1998
approximated $1.4 million, slightly more than the corresponding 1997 period.
Asset growth and earnings growth do not occur on a parallel basis.
Generally, growth in assets (which is funded primarily from interest-bearing
liabilities) will contribute to future earnings potential. Such future earnings
potential will depend upon how such funds are deployed into interest-earning
assets.
Operating results (in thousands) were as follows:
<TABLE>
<CAPTION>
Six months ended June 30
-----------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
---------------------- ----------------------- ---------------- ---------------
June 30 Dec 31
1998 1997 1998 1997 1998 1997 1998 1997
-------- --------- -------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $160,608 $138,390 $ 1,023 $ 996 20.97% 29.94% 1.42% 1.89%
Brighton Commerce Bank (2) 31,831 23,853 (127) (258) n/a n/a n/a n/a
Capitol National Bank 119,775 126,552 977 851 21.97 21.22 1.66 1.63
Grand Haven Bank 56,610 45,320 264 142 14.11 10.12 1.03 .87
Kent Commerce Bank (4) 17,832 n/a (249) n/a n/a n/a n/a n/a
Macomb Community Bank (1) 58,505 41,010 80 (75) 4.55 n/a .33 n/a
Muskegon Commerce Bank (2) 21,047 7,885 (126) n/a n/a n/a n/a n/a
Oakland Commerce Bank 95,951 81,839 348 395 11.98 14.53 .77 1.11
Paragon Bank & Trust 86,176 72,332 381 348 14.04 15.53 .98 1.09
Portage Commerce Bank 105,750 91,759 603 541 19.82 20.61 1.22 1.47
Sun Community Bancorp Limited:(3)
Bank of Tucson (1) 56,731 41,605 371 (44) 13.71 n/a 1.35 n/a
Camelback Community Bank (4) 5,112 n/a (45) n/a n/a n/a n/a n/a
Valley First Community Bank (2) 26,927 12,826 (90) -- n/a n/a n/a n/a
Mortgage banking 3,075 2,913 (62) (178) n/a n/a n/a n/a
Other, net 547 4,272 (1,331) (136) n/a n/a n/a n/a
-------- -------- -------- -------- ---- ----- --- ----
Consolidated
$846,477 $690,556 $ 2,017 $ 2,582 8.96% 12.57% .52% 1.00%
======== ======== ======== ======== ==== ===== === ====
</TABLE>
n/a - Not applicable
(1) Bank of Tucson and Macomb Community Bank, de novo banks, commenced
operations in June and September 1996, respectively.
(2) Brighton Commerce Bank, Valley First Community Bank and Muskegon Commerce
Bank, de novo banks, commenced operations in January, June and December
1997, respectively.
(3) Effective May 22, 1997, Sun Community Bancorp Limited, a bank holding
company 51% owned by the Corporation, was formed in Tucson, Arizona and
acquired a 100% ownership interest in Bank of Tucson.
(4) Kent Commerce Bank and Camelback Community Bank, de novo banks, commenced
operations in January and May 1998, respectively.
Net interest income increased 32.1% during the six-month 1998 period
versus the corresponding period of 1997.
Noninterest income increased in 1998 to $1,590,000 for the six-month
period, as compared with $1,206,000 for the corresponding 1997 period. Service
charge income increased 45% and fee income from trust services increased 28%.
Additionally, fees from origination and sale of mortgage loans increased
significantly from $113,000 in 1997 to $570,000 in the 1998 period.
Provisions for loan losses approximated $1,658,000 for the six months
ended June 30, 1998 compared to $966,000 during the corresponding 1997 period.
Exclusive of the previously
Page 14 of 21
<PAGE> 15
mentioned March 31, 1998 $300,000 provision relating to one customer, the
increase in the provision for loan losses relates primarily to portfolio growth.
Noninterest expense for the six months ended June 30, 1998 approximated
$11.9 million compared with $7.8 million in 1997. The increase in noninterest
expense is associated with newly formed banks, growth and increases in general
operating costs.
Liquidity and Capital Resources
- -------------------------------
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $144 million for the six month
1998 period, compared to $68 million in 1997. Such growth occurred in all
deposit categories, with the majority coming from time deposits. The
Corporation's banks generally do not rely on brokered deposits as a key funding
source; brokered deposits approximated $20.6 million as of June 30, 1998
compared to $24.3 million as of June 30, 1997.
Interim 1998 deposit growth was deployed primarily into commercial
loans, consistent with the banks' emphasis on commercial lending activities.
Pending future deployment into loans, cash and cash equivalents increased $43.7
million during the six months ended June 30, 1998.
Cash and cash equivalents approximated $136 million or 16.1% of total
assets at June 30, 1998 as compared with $93 million or 13.4% of total assets at
December 31, 1997. As liquidity levels vary continuously based on customer
activities, amounts of cash and cash equivalents can vary widely at any given
point in time. Management believes the Corporation's liquidity position at June
30, 1998 is adequate to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term
liquidity is the Corporation's marketable investment securities. The
Corporation's liquidity requirements have not historically necessitated the sale
of investments in order to meet liquidity needs. It also has not engaged in
active trading of its investments and has no intention of doing so in the
foreseeable future. At June 30, 1998 and December 31, 1997, the Corporation had
investment securities of approximately $64 million and $62 million,
respectively, classified as available for sale which can be utilized to meet
various liquidity needs as they arise.
Two of the Corporation's banks, (Oakland Commerce Bank and Ann Arbor
Commerce Bank) have secured lines of credit with the Federal Home Loan Bank of
Indianapolis. Borrowings thereunder approximated $3 million and additional
borrowing capacity approximated $7.2 million at June 30, 1998.
At June 30, 1998, the Corporation had unused lines of credit from an
unrelated financial institution aggregating $5 million.
In July 1998, the Corporation's Board of Directors announced a third
quarter cash dividend of $.10 per share (payable September 1, 1998 to
shareholders of record as of August 1, 1998), following cash dividends of $.10
per share paid March 1 and June 1, 1998.
Page 15 of 21
<PAGE> 16
The Corporation and its banks are subject to complex regulatory capital
requirements which require maintaining certain minimum capital ratios. These
ratio measurements, in addition to certain other requirements, are used by
regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. The Corporation and each of its
banks are in compliance with the regulatory requirements and management expects
to maintain such compliance.
Capital, as a percentage of total assets, approximated 5.5% at June 30,
1998, a decrease from the beginning of the year ratio of 6.5%. Total capital
funds (the Corporation's stockholders' equity, plus minority interest in
consolidated subsidiaries plus guaranteed preferred beneficial interests in the
Corporation's subordinated debentures) aggregated $88.7 million or 10.47% of
total assets at June 30, 1998. The Corporation and each of its banking
subsidiaries continue to exceed regulatory capital requirements as shown on the
following page (dollars in thousands):
[The remainder of this page intentionally left blank]
Page 16 of 21
<PAGE> 17
<TABLE>
<CAPTION>
Ann Arbor Brighton Capitol Grand Kent Macomb
Commerce Commerce National Haven Commerce Community
Bank Bank(1) Bank Bank Bank(1) Bank(1)
-------------- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $ 160,608 $ 31,494 $ 119,775 $ 56,610 $ 17,704 $ 58,443
Total Assets for Risk-Based
Capital Purposes 162,387 31,723 121,132 57,057 17,834 58,733
Risk-Weighted Assets 125,726 24,418 93,310 40,670 13,678 32,427
Tier I Capital 11,045 2,581 9,315 4,250 3,536 4,678
Allowable Tier II Capital 1,574 229 1,169 508 130 290
Tier I and Allowable Tier II
Capital, Combined 12,619 2,810 10,484 4,758 3,666 4,968
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 8.79% 10.57% 9.98% 10.45% 25.85% 14.43%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 10.04% 11.51% 11.24% 11.70% 26.80% 15.32%
Leverage Ratio 6.88% 8.20% 7.78% 7.51% 19.97% 8.00%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 4.00% 8.00% 4.00% 4.00% 8.00% 8.00%
Sun
Muskegon Oakland Paragon Portage Community Capitol
Commerce Commerce Bank & Commerce Bancorp Bancorp
Bank(1) Bank Trust Bank Limited Ltd. Consolidated
----------- ------------- ------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Position:
Total Assets $ 20,968 $ 95,951 $ 86,176 $ 105,750 $ 89,749 $ 72,912 $846,477
Total Assets for Risk-Based
Capital Purposes 21,101 96,702 86,878 106,794 89,555 69,505 849,798
Risk-Weighted Assets 14,391 69,880 68,372 79,451 53,271 68,175 615,483
Tier I Capital 2,412 6,383 6,133 6,970 20,111 44,397 81,873
Allowable Tier II Capital 133 751 702 994 428 24,774 10,428
Tier I and Allowable Tier II
Capital, Combined 2,545 7,134 6,835 7,964 20,539 69,171 92,301
Ratios Based on Financial
Position:
Ratio of Tier I Capital to
Risk-Weighted Assets 16.76% 9.13% 8.97% 8.77% 37.75% 65.12% 13.30%
Ratio of Combined Tier I
and Tier II Capital to
Risk-Weighted Assets 17.69% 10.21% 10.00% 10.02% 38.56% 101.46% 15.00%
Leverage Ratio 11.50% 6.65% 7.12% 6.59% 22.41% 60.89% 9.67%
Ratios Required:
Tier I 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Leverage Ratio 8.00% 4.00% 4.00% 4.00% 4.00% 3.00% 4.00%
</TABLE>
(1) As a condition of bank charter approval, de novo banks are generally
required to maintain Tier I leverage capital-to-assets ratios of not less
than 8% for the first three full years of operation.
Page 17 of 21
<PAGE> 18
As of June 30, 1998, applications were pending for the formation of de
novo banks in Arizona (Mesa and North Tucson) and Michigan (Detroit). Management
anticipates those de novo banks will commence operations in 1998 and will be
majority owned by the Corporation or, as to Arizona de novo banks, its
majority-owned subsidiary, Sun Community Bancorp Limited.
The Corporation's operating strategy continues to be focused on the
ongoing growth and maturity of its existing banks, coupled with de novo bank
expansion in selected markets as opportunities arise. Management continues to be
actively engaged in the ongoing process of exploring opportunities for future
growth which includes de novo bank formation and other growth strategies.
Accordingly, the Corporation may invest in or otherwise add additional banks in
future periods, subject to economic conditions and other factors, although the
timing of such additional banking units, if any, is uncertain. Such future de
novo banks and/or additions of other operating units could be either
wholly-owned, majority-owned or otherwise controlled by the Corporation.
Management believes the Corporation's capital resources at June 30,
1998 to be adequate to fund existing operations, future growth and expansion.
Year 2000
- ---------
Bank regulatory agencies, other regulatory bodies and the media have
focused on business continuity issues associated with computer systems and the
year 2000. Often described as the `Y2K' issue, financial institutions are
collectively being closely monitored for their plans to eliminate potential
computer processing problems on January 1, 2000. Regulatory agencies are
concerned about financial institution readiness with their internal systems to
accommodate the year 2000 transition. Specifically, financial institutions are
required to adopt a Y2K compliance plan which will be reviewed by bank
regulatory agencies.
The Corporation and its banks are subject to the requirements as
outlined by the Federal Financial Institutions Examination Council (FFIEC). As
such, the measures that have been taken follow those guidelines regarding the
Awareness, Assessment, Renovation, Validation (testing) and Implementation
phases as more fully defined and described in various interagency publications.
Year 2000 issues and plan status updates are communicated under these same
guidelines to the various boards of directors of the Corporation and its bank
subsidiaries. Further, periodic Year 2000 review is performed by various banking
regulatory agencies and the Corporation's internal audit staff.
At the present time both mission-critical and non mission-critical
programs and systems are being addressed to avoid unnecessary business
interruptions. The review is comprehensive and covers a variety of third party
providers as well as internal systems. The vast majority of programs in use are
"packaged" or "turn key" in nature. Following the guidelines as set forth by the
FFIEC, changes, modifications or replacements to those programs will be made in
conjunction with test results.
Certain key milestone dates, for the Renovation and Implementation
phases have been established by the FFIEC and the Corporation and its bank
subsidiaries are working towards compliance in each of these phases. The
Awareness, Assessment and Validation phases have been completed.
Page 18 of 21
<PAGE> 19
The Corporation and its banks, in their on-going effort to competently
address evolving Y2K issues, will continue to devote both human and financial
resources to this issue.
Bank regulatory and other agencies also have encouraged banks to
contact certain of their customers to determine customers' readiness to
accommodate the transition to the year 2000 in addition to mailings to bank
customers regarding this issue. 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.
Impact of New Accounting Standards
- ----------------------------------
FASB Statement No. 131, "Disclosures About Segments of An Enterprise
and Related Information" revises reporting of information about operating
segments in annual and interim financial statements. This statement sets revised
standards for disclosure about products and services, geographic areas and major
customers. It is intended to promote a more practical approach to segment
reporting by requiring presentation of information on the basis which is used
internally by management for evaluating segment performance and allocation of
resources to segments of the enterprise. Management has not completed its
analysis of this new accounting standard. The new standard will be effective for
the Corporation's financial statements as of December 31, 1998 and thereafter
and will require restatement of prior period information.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities". It requires start-up costs and organizational costs to be charged
to expense when incurred. The initial application of the statement will require
a cumulative effect adjustment for those companies that have previously
capitalized start-up and organization costs and will be effective in 1999.
Management has not completed its analysis of this new accounting standard.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to the Corporation's financial statements.
Page 19 of 21
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries are parties to certain
ordinary, routine litigation incidental to their business. In
the opinion of management, liabilities arising from such
litigation would not have a material effect on the
Corporation's consolidated financial position or results of
operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed
during the quarter ended June 30, 1998.
Page 20 of 21
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL BANCORP LTD.
(Registrant)
\s\ Joseph D. Reid
------------------
Chairman, President and CEO
(duly authorized to sign on behalf
of the registrant)
\s\ Lee W. Hendrickson
----------------------
Senior Vice President and
Chief Financial Officer
Date: August 7, 1998
- --------------------
Page 21 of 21
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 42,585
<INT-BEARING-DEPOSITS> 712
<FED-FUNDS-SOLD> 93,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,734
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 621,878
<ALLOWANCE> 7,373
<TOTAL-ASSETS> 846,477
<DEPOSITS> 748,526
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 6,290
<LONG-TERM> 0
0
0
<COMMON> 51,138
<OTHER-SE> (3,579)
<TOTAL-LIABILITIES-AND-EQUITY> 846,477
<INTEREST-LOAN> 27,603
<INTEREST-INVEST> 1,932
<INTEREST-OTHER> 2,237
<INTEREST-TOTAL> 31,772
<INTEREST-DEPOSIT> 15,400
<INTEREST-EXPENSE> 16,637
<INTEREST-INCOME-NET> 15,135
<LOAN-LOSSES> 1,658
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 11,857
<INCOME-PRETAX> 3,210
<INCOME-PRE-EXTRAORDINARY> 2,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,017
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
<YIELD-ACTUAL> 0
<LOANS-NON> 3,598
<LOANS-PAST> 1,328
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,229
<CHARGE-OFFS> 615
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 7,373
<ALLOWANCE-DOMESTIC> 7,373
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,390
</TABLE>
