<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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: 6,344,886 shares outstanding as of
April 30, 1999.
Page 1 of 20
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including the
Corporation's consolidated financial statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and in documents
incorporated into this document by reference that are not historical facts,
including, without limitation, statements of future expectations, projections of
results of operations and financial condition, statements of future economic
performance and other forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, are subject to known and
unknown risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of the Corporation and/or its subsidiaries
and other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "believe", and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of the Corporation's
efforts to implement its business strategy, (ii) changes in interest rates,
(iii) legislation or regulatory requirements adversely impacting the
Corporation's banking business and/or expansion strategy, (iv) adverse changes
in business conditions or inflation, (v) general economic conditions, either
nationally or regionally, which are less favorable than expected and that result
in, among other things, a deterioration in credit quality and/or loan
performance and collectability, (vi) competitive pressures among financial
institutions, (vii) changes in securities markets, (viii) actions of competitors
of the Corporation's banks and the Corporation's ability to respond to such
actions, (ix) the cost of the Corporation's capital, which may depend in part on
the Corporation's asset quality, prospects and outlook, (x) changes in
governmental regulation, tax rates and similar matters, (xi) "Year 2000"
computer, imbedded chip and data processing issues, and (xii) other risks
detailed in the Corporation's other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written or oral forward-looking
statements attributable to the Corporation or persons acting on its behalf are
expressly qualified in their entirety by the foregoing factors. Investors and
other interested parties are cautioned not to place undue reliance on such
statements, which speak as of the date of such statements. The Corporation
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of unanticipated events.
Item 1. Financial Statements:
Consolidated balance sheets - March 31, 1999 and December 31,
1998.
Consolidated statements of income - Three months ended
March 31, 1999 and 1998.
Consolidated statements of changes in stockholders' equity -
Three months ended March 31, 1999 and 1998.
Consolidated statements of cash flows - Three months ended
March 31, 1999 and 1998.
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 20
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
----------- -----------
(in thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 41,609 $ 45,263
Interest-bearing deposits with banks 4,901 1,732
Federal funds sold 102,900 104,050
----------- -----------
Cash and cash equivalents 149,410 151,045
Loans held for resale 28,167 36,789
Investment securities:
Available for sale, carried at market value 78,544 83,597
Held for long-term investment, carried at
amortized cost which approximates market value 3,210 2,867
----------- -----------
Total investment securities 81,754 86,464
Portfolio loans:
Commercial 638,500 590,351
Real estate mortgage 81,220 80,808
Installment 61,307 53,121
----------- -----------
Total portfolio loans 781,027 724,280
Less allowance for loan losses (9,543) (8,817)
----------- -----------
Net portfolio loans 771,484 715,463
Premises and equipment 11,748 11,646
Accrued interest income 5,429 5,100
Excess of cost over net assets of acquired subsidiaries 2,111 2,626
Other assets 16,019 15,311
----------- -----------
TOTAL ASSETS $ 1,066,122 $ 1,024,444
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 126,040 $ 120,986
Interest-bearing 812,765 769,904
----------- -----------
Total deposits 938,805 890,890
Debt obligations 16,700 23,600
Accrued interest on deposits and other liabilities 8,734 8,831
----------- -----------
Total liabilities 964,239 923,321
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,264 24,255
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 27,957 27,576
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
6,344,886 shares issued and outstanding 51,868 51,868
Retained earnings (1,448) (2,019)
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income) (33) 168
----------- -----------
50,387 50,017
Less unallocated ESOP shares (725) (725)
----------- -----------
Total stockholders' equity 49,662 49,292
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,066,122 $ 1,024,444
=========== ===========
</TABLE>
Page 3 of 20
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months Ended March 31, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Interest income:
Portfolio loans (including fees) $ 17,603 $ 12,742
Loans held for resale 471 206
Taxable investment securities 965 920
Federal funds sold 1,367 1,104
Interest-bearing deposits with banks and other 52 21
Dividends on investment securities 33 23
-------- --------
Total interest income 20,491 15,016
Interest expense:
Demand deposits 2,368 1,333
Savings deposits 357 372
Time deposits 7,049 5,572
Debt obligations and other 827 593
-------- --------
Total interest expense 10,601 7,870
-------- --------
Net interest income 9,890 7,146
Provision for loan losses 809 825
-------- --------
Net interest income after
provision for loan losses 9,081 6,321
Noninterest income:
Service charges on deposit accounts 323 255
Trust fee income 117 92
Fees from origination of non-portfolio residential
mortgage loans 335 252
Realized gain on sale of investment
securities available for sale 21
Other 245 94
-------- --------
Total noninterest income 1,041 693
Noninterest expense:
Salaries and employee benefits 4,623 2,856
Occupancy 783 533
Equipment rent, depreciation and maintenance 858 645
Deposit insurance premiums 29 30
Other 1,725 1,919
-------- --------
Total noninterest expense 8,018 5,983
-------- --------
Income before federal income taxes and cumulative effect of
change in accounting principle 2,104 1,031
Federal income taxes 765 398
-------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,339 633
Change in accounting principle, net of income tax
effect -- Note B: (197)
-------- --------
NET INCOME $ 1,142 $ 633
======== ========
NET INCOME PER SHARE -- Note C:
Before cumulative effect of change in accounting principle:
Basic $ 0.21 $ 0.10
======== ========
Diluted $ 0.21 $ 0.10
======== ========
After cumulative effect of change in accounting principle:
Basic $ 0.18 $ 0.10
======== ========
Diluted $ 0.18 $ 0.10
======== ========
</TABLE>
Page 4 of 20
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Unallocated
Common Retained Comprehensive ESOP
Stock Earnings Income Shares Total
--------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1998
Balances at January 1, 1998 $ 50,312 $ (4,553) $ 143 $ (870) $ 45,032
Cash dividends paid (520) (520)
Net proceeds from issuance of common stock 50 50
Components of comprehensive income:
Net income for the period 633 633
Market value adjustment for investment
securities available for sale (33) (33)
---------
Comprehensive income for the period 600
--------- --------- ------ ------- ---------
BALANCES AT MARCH 31, 1998 $ 50,362 $ (4,440) $ 110 $ (870) $ 45,162
========= ========= ====== ======= =========
Three Months Ended March 31, 1999
Balances at January 1, 1999 $ 51,868 $ (2,019) $ 168 $ (725) $ 49,292
Cash dividends paid (571) (571)
Components of comprehensive income:
Net income for the period 1,142 1,142
Market value adjustment for investment
securities available for sale (201) (201)
---------
Comprehensive income for the period 941
--------- --------- ------ ------- ---------
BALANCES AT MARCH 31, 1999 $ 51,868 $ (1,448) $ (33) $ (725) $ 49,662
========= ========= ====== ======= =========
</TABLE>
Page 5 of 20
<PAGE> 6
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,142 $ 633
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 809 825
Depreciation of premises and equipment 657 437
Amortization of goodwill and other intangibles 515 58
Net accretion of investment security discounts (146) (24)
Gain on sale of premises and equipment (6)
Cumulative effect of accounting change 197
Originations and purchases of loans held for resale (107,208) (64,190)
Proceeds from sales of loans held for resale 115,831 52,258
Increase in accrued interest income and other assets (1,120) (1,489)
Increase (decrease) in accrued interest and other liabilities (97) 1,236
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 10,574 (10,256)
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale 1,500 -
Proceeds from maturities of investment securities
available for sale 45,177 12,793
Purchases of investment securities available for sale (42,127) (13,157)
Net increase in portfolio loans (56,830) (41,274)
Proceeds from sales of premises and equipment 24 9
Purchases of premises and equipment (779) (576)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (53,035) (42,205)
FINANCING ACTIVITIES
Net proceeds from (payments on) debt obligations (6,900) 5,900
Resources provided by minority interests 381 5,274
Net proceeds from issuance of common stock 50
Cash dividends paid (571) (520)
Net increase in demand deposits, NOW accounts and
savings accounts 36,344 22,891
Net increase in certificates of deposit 11,572 34,752
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 40,826 68,347
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,635) 15,886
Cash and cash equivalents at beginning of period 151,045 92,770
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 149,410 $ 108,656
========= =========
</TABLE>
Page 6 of 20
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CAPITOL BANCORP LTD.
Note A - Basis of Presentation
The accompanying condensed consolidated financial statements of Capitol
Bancorp Ltd. have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q. Accordingly, they do not include all information and footnotes necessary
for a fair presentation of consolidated financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The statements do, however, include all adjustments of a normal
recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which
the Corporation considers necessary for a fair presentation of the interim
periods.
The results of operations for the three-month period ended March 31,
1999 are not necessarily indicative of the results to be expected for the year
ending December 31, 1999.
The consolidated balance sheet as of December 31, 1998 was derived from
audited consolidated financial statements as of that date. Certain 1998 amounts
have been reclassified to conform to the 1999 presentation.
Note B - Implementation of New Accounting Standards
In 1998, the American Institute of CPAs 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 requires a cumulative effect adjustment for
those companies that had previously capitalized start-up and organization costs
and became effective in 1999. In the circumstances of the Corporation and its
banks, this new accounting standard applies to previously capitalized preopening
and other start-up costs of certain bank subsidiaries which, net of
amortization, approximated $1,149,000 at December 31, 1998 and were classified
as a component of other assets in the consolidated balance sheet. Such amount
relates to capitalized preopening and start-up costs at de novo bank
subsidiaries which are majority-owned by Sun Community Bancorp (which is 51%
owned by the Corporation). Implementation of this standard is reflected as a
cumulative effect adjustment (net of income tax effect) of approximately
$197,000 in the first quarter 1999 consolidated statement of operations.
Page 7 of 20
<PAGE> 8
Note C - Net Income Per Share
The computations of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Numerator--net income for the period (in $1,000's) $ 1,142 $ 633
========== ==========
Denominator:
Weighted average number of common shares outstanding (denominator for
basic earnings per share) 6,344,886 6,240,787
Effect of dilutive securities--stock options 159,941 222,575
---------- ----------
Denominator for diluted net income per share--
Weighted average number of common shares and potential dilution
6,504,827 6,463,362
========== ==========
Basic net income per share $ 0.18 $ 0.10
========== ==========
Diluted net income per share $ 0.18 $ 0.10
========== ==========
</TABLE>
Note D - Prospective Impact of New Accounting Standards Not Yet Adopted
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective for the
Corporation in 2000 and, because the Corporation has not typically entered into
derivative contracts either to hedge existing risks or for speculative purposes,
is not expected to have a material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to the Corporation's financial statements.
Page 8 of 20
<PAGE> 9
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $1.07 billion at March 31, 1999, an increase
of $42 million from the December 31, 1998 level of $1.02 billion. The
consolidated balance sheets include the Corporation and its majority-owned
subsidiaries.
Portfolio loans increased during the three-month period by
approximately $57 million. Loan growth was funded primarily by higher levels of
time deposits. The majority of portfolio loan growth occurred in commercial
loans, which increased approximately $48 million, consistent with the banks'
emphasis on commercial lending activities.
The allowance for loan losses at March 31, 1999 approximated $9.5 ]
million or 1.22% of total portfolio loans, unchanged from the year-end 1998
ratio.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including volume, amount and composition, potential
impairment of individual loans and concentrations of credit), past loss
experience, current economic conditions, loan commitments outstanding and other
factors.
The table on the next page summarizes portfolio loan balances and
activity in the allowance for loan losses for the interim periods (in
thousands):
[The remainder of this page intentionally left blank]
Page 9 of 20
<PAGE> 10
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Allowance for loan losses at January 1 $ 8,817 $ 6,229
Loans charged-off:
Commercial 102 82
Installment 28 12
-------- --------
Total charge-offs 130 94
Recoveries:
Commercial 44 57
Real estate mortgage 2
Installment 1 1
-------- --------
Total recoveries 47 58
-------- --------
Net charge-offs 83 36
Additions to allowance charged to expense 809 825
-------- --------
Allowance for loan losses at March 31 $ 9,543 $ 7,018
======== ========
Average total portfolio loans for period ended March 31 $751,348 $522,992
======== ========
Ratio of net charge-offs to average portfolio loans outstanding 0.01% 0.01%
======== ========
</TABLE>
The allowance for loan losses is a general allowance for the
Corporation's loan portfolio. For internal purposes, management allocates the
allowance to all loan classifications. The amounts allocated in the following
table (in thousands), which includes all loans for which, based on the
Corporation's loan rating system management has concerns, should not be
interpreted as an indication of future charge-offs. In addition, amounts
allocated are not intended to reflect the amount that may be available for
future losses, since the allowance is a general allowance.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------------- --------------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
--------- ---------
<S> <C> <C> <C> <C>
Commercial $ 4,775 0.61% $ 4,501 0.62%
Real estate mortgage 139 0.02 127 0.02
Installment 274 0.04 262 0.04
Unallocated 4,355 0.55 3,927 0.54
--------- ---- --------- ----
Total allowance for loan losses $ 9,543 1.22% $ 8,817 1.22%
========= ==== ========= ====
Total portfolio
loans outstanding $ 781,027 $ 724,280
========= =========
</TABLE>
Page 10 of 20
<PAGE> 11
In addition to the allowance for loan losses, certain loans are
enrolled in a state government loan program and have additional reserves
established to provide for loss protection. At March 31, 1999, total loans under
this program approximated $26.5 million. Reserves related to these loans, which
are represented by earmarked funds on deposit at certain of the bank
subsidiaries, approximated $2 million and are not included in the recorded
allowance for loan losses.
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 1998 and through
March 31, 1999. Impaired loans include amounts owed to one of the Corporation's
banks relating to a customer's checks drawn on uncollected funds which arose in
early February 1998. The total of the customer's overdrafts at the bank
subsidiary approximated $1.5 million. Management subsequently became aware that
larger overdrafts occurred at other, unaffiliated, financial institutions
(certain of which subsequently filed suit against the bank subsidiary). Based on
management's analysis of the customer's loan collateral and amounts owing the
bank by that customer, an estimated loss accrual and write-off of $600,000 was
recorded at March 31, 1998 relating to the advances arising from uncollected
funds. In addition, the bank increased its interim provision for loan losses at
March 31, 1998 by $300,000 relating to that customer.
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) at March 31, 1999 amounted to $7.3 million compared
with $7.2 million at December 31, 1998 as summarized in the following table (in
thousands):
<TABLE>
<CAPTION>
March 31 Dec 31
1999 1998
------- -------
<S> <C> <C>
Nonaccrual loans:
Commercial $5,661 $2,608
Real estate 102 199
Installment 136 185
------ ------
Total nonaccrual loans 5,899 2,992
Past due (>90 days) loans:
Commercial 1,147 3,963
Real estate 68 183
Installment 162 104
------ ------
Total past due loans 1,377 4,250
------ ------
Total nonperforming loans $7,276 $7,242
====== ======
</TABLE>
Nonperforming loans increased slightly (approximately $34,000) during
the three-month period ended March 31, 1999. During this period, however,
nonaccrual loans increased $2.9 million and past due loans on accrual status
decreased $2.9 million as certain nonperforming loans were transferred to
nonaccrual status during the first quarter of 1999. Most of that change (about
$2 million) relates to one customer relationship of which $1.6 million is
guaranteed by a governmental agency. Most of the nonaccrual loans
are a small number of loans in various states of resolution which management
believes to be adequately collateralized or otherwise appropriately recorded in
its determination of the adequacy of the allowance for loan losses.
Page 11 of 20
<PAGE> 12
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the period,
additional interest income of $150,000 and $83,000 would have been recorded for
the three months ended March 31, 1999 and 1998, respectively. Interest income
recognized on loans in nonaccrual status for the period approximated $12,000 and
$1,000, 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 $541,000 at March 31, 1999 and December 31, 1998.
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
------------------- ------------------- ------------------- -------------------------
March 31 Dec 31 March 31 Dec 31 March 31 Dec 31 March 31 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $160,446 $154,060 $ 2,166 $ 2,080 $ 742 $ 662 1.35% 1.35%
Brighton Commerce Bank(1) 38,589 34,024 386 341 -- -- 1.00 1.00
Capitol National Bank 101,251 104,333 1,426 1,406 968 880 1.41 1.35
Detroit Commerce Bank(1) 10,531 506 106 6 -- -- 1.01 1.19
Grand Haven Bank 60,153 57,057 722 682 265 62 1.20 1.20
Kent Commerce Bank(1) 26,506 22,930 266 250 -- -- 1.00 1.09
Macomb Community Bank(1) 45,316 40,426 454 405 -- -- 1.00 1.00
Muskegon Commerce Bank(1) 26,740 24,491 268 245 -- 1 1.00 1.00
Oakland Commerce Bank 64,468 63,261 760 724 1,752 2,032 1.18 1.14
Paragon Bank & Trust 65,660 63,417 800 732 2,943 2,936 1.22 1.15
Portage Commerce Bank 94,096 90,589 1,184 1,150 581 669 1.26 1.27
Sun Community Bancorp
Limited:
Bank of Tucson(1) 40,369 37,899 426 392 -- -- 1.06 1.03
Camelback Community Bank(1) 7,855 3,246 79 33 -- -- 1.01 1.02
Mesa Bank(1) 5,404 1,386 55 14 -- -- 1.02 1.01
Southern Arizona
Community Bank(1) 5,866 2,925 59 30 -- -- 1.01 1.03
Sunrise Bank of Arizona(1) 3,276 1,745 33 18 -- -- 1.01 1.03
Valley First Community Bank(1) 23,397 20,879 253 209 25 -- 1.08 1.00
Other, net 1,104 1,106 100 100 -- -- -- --
-------- -------- -------- -------- -------- -------- ---- ----
Consolidated $781,027 $724,280 $ 9,543 $ 8,817 $ 7,276 $ 7,242 1.22% 1.22%
======== ======== ======== ======== ======== ======== ==== ====
</TABLE>
n/a Not applicable
(1) As a condition of charter approval, bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years
of operations.
Noninterest-bearing deposits approximated 13.4% of total deposits at
March 31, 1999, a slight decrease from the December 31, 1998 level of 13.6%.
Levels of noninterest-bearing deposits fluctuate based on customers' transaction
activity.
[The remainder of this page intentionally left blank]
Page 12 of 20
<PAGE> 13
Results of Operations
Net income from operations (before cumulative effect of an accounting
change) for the three months ended March 31, 1999 amounted to $1.34 million
($.21 per share), an increase from the $633,000 ($.10 per share) earned during
the corresponding period of 1998.
Operating results (in thousands) were as follows:
<TABLE>
<CAPTION>
Three months ended March 31
-----------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
-------------------------- ---------------- ------------------- ----------------
March 31 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
----------- ----------- ------ ------ ------- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 199,856 $ 196,446 $ 580 $ 504 17.98% 20.65% 1.21% 1.42%
Brighton Commerce Bank 51,078 42,871 87 (38) 9.38 n/a .72 n/a
Capitol National Bank 127,720 136,776 506 500 20.74 22.47 1.58 1.69
Detroit Commerce Bank (1) 20,594 18,620 (140) n/a n/a n/a n/a n/a
Grand Haven Bank 68,978 66,872 229 114 19.39 12.19 1.37 .95
Kent Commerce Bank (1) 33,989 31,587 (26) (144) n/a n/a n/a n/a
Macomb Community Bank 75,755 76,044 130 19 8.50 2.17 .68 .17
Muskegon Commerce Bank 32,473 28,552 (5) (78) n/a n/a n/a n/a
Oakland Commerce Bank 101,511 108,747 213 34 12.91 2.34 .83 .16
Paragon Bank & Trust 86,064 86,692 96 172 5.98 12.68 .45 .92
Portage Commerce Bank 108,473 110,867 416 294 21.40 19.34 1.54 1.24
Sun Community Bancorp Limited:
Bank of Tucson 69,509 63,860 247 157 16.34 11.62 1.45 1.17
Camelback Community Bank (1) 18,156 10,017 (177) n/a n/a n/a n/a n/a
Mesa Bank (1) 8,914 6,192 (92) n/a n/a n/a n/a n/a
Southern Arizona Community Bank (1) 16,474 12,395 (142) n/a n/a n/a n/a n/a
Sunrise Bank of Arizona (1) 12,121 5,411 (113) n/a n/a n/a n/a n/a
Valley First Community Bank 33,205 36,588 49 (62) 4.88 n/a .59 n/a
Other, net 1,252 (14,093) (716) (839) n/a n/a n/a n/a
----------- ----------- ------ ------ ------- ----- ---- ----
Consolidated $ 1,066,122 $ 1,024,444 $1,142 $ 633 9.27% 5.62% .44% .34%
=========== =========== ====== ====== ======= ===== ==== ====
</TABLE>
n/a Not applicable
(1) Kent Commerce Bank, Camelback Community Bank, Southern Arizona Community
Bank, Mesa Bank, Detroit Commerce Bank and Sunrise Bank of Arizona, de novo
banks, commenced operations in January, May, August, October and December 1998,
respectively.
Net interest income increased 38.4% during the three-month period
versus the corresponding period of 1998.
Noninterest income increased in 1999 to $1,041,000 for the three-month
period, as compared with $693,000 in 1998. Service charge revenue and trust fee
income both increased 27% in the 1999 period compared to 1998.
Provisions for loan losses approximated $809,000 for the three months
ended March 31, 1999 compared to $825,000 during the corresponding 1998 period.
Noninterest expense for the three months ended March 31, 1999
approximated $8 million compared with $6 million in 1998. The increase in
noninterest expense is associated with newly formed banks, growth and increases
in general operating costs.
A new accounting standard was implemented effective January 1, 1999. In
1998, the American Institute of CPAs 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 requires a cumulative effect adjustment for those
companies that had previously capitalized start-up and organization costs and
became effective in 1999. In the circumstances of the Corporation and its banks,
this new accounting standard applies to previously capitalized preopening and
other start-up costs of certain bank subsidiaries
Page 13 of 20
<PAGE> 14
which, net of amortization, approximated $1,149,000 at December 31, 1998 and
were classified as a component of other assets in the consolidated balance
sheet. Such amount relates to capitalized preopening and start-up costs at de
novo bank subsidiaries which are majority-owned by Sun Community Bancorp (which
is 51% owned by the Corporation). Implementation of this standard is reflected
as a cumulative effect adjustment (net of income tax effect) of approximately
$197,000 in the first quarter 1999 consolidated statement of operations.
Liquidity and Capital Resources
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $47.9 million for the three
month 1999 period, compared to $57.6 million in 1998. Such growth occurred in
all deposit categories, with the majority coming from time deposits. The
Corporation's banks generally do not rely on brokered deposits as a key funding
source; brokered deposits approximated $20 million as of March 31, 1999, or
about 2% of total deposits.
Interim 1999 deposit growth was deployed primarily into commercial
loans, consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $149.4 million or 14% of total
assets at March 31, 1999 as compared with $151 million or 14.7% of total assets
at December 31, 1998. As liquidity levels vary continuously based on customer
activities, amounts of cash and cash equivalents can vary widely at any given
point in time. Management believes the Corporation's liquidity position at March
31, 1999 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. During the first quarter of 1999, three available for sale
securities aggregating $1.5 million were sold to meet liquidity needs at two
banks. At March 31, 1999 and December 31, 1998, the Corporation had
approximately $79 million and $84 million, respectively, of investment
securities classified as available for sale which can be utilized to meet
various liquidity needs as they arise.
Five of the Corporation's banks, (Macomb Community Bank, Brighton
Commerce Bank, Grand Haven Bank, Oakland Commerce Bank and Ann Arbor Commerce
Bank) have secured lines of credit with the Federal Home Loan Bank of
Indianapolis. Borrowings thereunder approximated $6 million and additional
borrowing capacity approximated $6.8 million at March 31, 1999.
At March 31, 1999, the Corporation had unused lines of credit from an
unrelated financial institution aggregating $9.3 million.
The Corporation's Board of Directors recently approved a second quarter
cash dividend of $.09 per share (payable June 1, 1999 to shareholders of record
as of May 1, 1999), following a cash dividend of $.09 per share paid March 1,
1999.
Page 14 of 20
<PAGE> 15
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 4.7% at March
31, 1999, a slight decrease from the beginning of the year ratio of 4.8%. Total
capital funds (the Corporation's stockholders' equity, plus minority interests
in consolidated subsidiaries plus guaranteed preferred beneficial interests in
the Corporation's subordinated debentures) aggregated $101.9 million or 9.56% of
total assets at March 31, 1999. The following table summarizes the amounts and
related ratios of individually significant subsidiaries (assets of $125 million
or more at the beginning of 1999) and consolidated regulatory capital position
at March 31, 1999:
<TABLE>
<CAPTION>
Sun
Ann Arbor Capitol Community
Commerce National Bancorp
Bank Bank Limited Consolidated
------------- -------------- --------------- ---------------
Total capital to total assets:
<S> <C> <C> <C> <C>
Minimum required amount > $ 7,994 > $ 5,109 > $ 6,365 > $ 42,645
Actual amount - $13,475 - $ 9,555 - $26,129 - $ 50,387
Ratio 6.74% 7.48% 16.42% 4.73%
Tier I capital to risk-weighted assets:
Minimum required amount(1) > $ 6,159 > $ 3,903 > $ 4,179 > $ 32,023
Actual amount - $13,496 - $ 9,555 - $35,319 - $ 99,707
Ratio 8.77% 9.79% 33.81% 12.45%
Combined Tier I and Tier II capital to risk-
weighted assets:
Minimum required amount(2) > $12,317 > $ 7,806 > $ 8,357 > $ 64,046
Amount required to meet "Well-Capitalized" - - - -
category(3) > $15,396 > $ 9,758 > $10,447 > $ 80,057
Actual amount - $15,424 - $10,777 - $36,224 - $109,161
Ratio 10.02% 11.04% 34.68% 13.64%
</TABLE>
(1) The minimum required ratio of Tier I capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier I and Tier II capital to risk-weighted
assets is 8%.
(3) 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.
[The remainder of this page intentionally left blank]
Page 15 of 20
<PAGE> 16
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. Plans
to form additional banks in the states of Arizona, Nevada and Indiana were
announced earlier this year.
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 or after 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 comprehensive Y2K compliance plan which is reviewed by
various bank regulatory agencies from time to time in terms of carrying out the
aspects of the plan and its impact on financial institution readiness.
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 reviews are performed by various
banking regulatory agencies and the Corporation's internal audit staff.
Throughout 1998 and continuing in 1999, both mission-critical and non mission-
critical programs and systems are being addressed in an attempt to avoid
unnecessary business interruptions. The review is comprehensive and covers a
variety of third party providers as well as internal systems. The vast majority
of programs in use are "packaged" or "turn key" in nature, upon which the
Corporation will primarily rely on its vendors for resolution of year 2000
issues. Following the guidelines as set forth by the FFIEC, changes,
modifications or replacements to those programs are being made in conjunction
with test results. Except for its reliance on certain software and hardware
vendors for year 2000 solutions, the Corporation and its banks have minimal
dependence on other vendors on which the century date change is expected to have
a material impact.
Certain key milestone dates for the Renovation and Implementation
phases have been established by the FFIEC. The Awareness, Assessment and
Validation phases have been completed. The Renovation and Implementation phases
are on schedule as of March 31, 1999.
Page 16 of 20
<PAGE> 17
The efforts of the Corporation and its banks on this issue are
significant and ongoing.
During the fourth quarter of 1998, certain of the Corporation's and the
banks' systems and software were tested for year 2000 readiness. Other key
planning and testing efforts will occur throughout calendar 1999, consistent
with the FFIEC's guidance and other regulatory requirements.
Contingency plans, intended to address alternative courses of action in
the event that certain systems and software do not function properly with the
date change, are in the process of development. Timing and development of those
contingency plans are currently evolving in accordance with the FFIEC's guidance
and other regulatory requirements. Those contingency plan are expanded in scope
and also include infrastructure issues such as continuity of electricity
provided by public power companies and telecommunications provided by a variety
of entities.
From a federal financial institution regulatory standpoint, most of
the recent monitoring and examinations performed by federal financial
institution regulatory agencies have been performed by the FDIC. Those FDIC
examinations have been frequent and are expected to be ongoing throughout 1999.
Examinations are performed on location at each bank insured by the FDIC, as
required by Congressional mandate. The FDIC, based on the results of its
examination procedures, determines a financial institution's 'rating' regarding
its year 2000 readiness. Those ratings are 'satisfactory', 'needs improvement'
or 'unsatisfactory'. Federal banking regulations prohibit disclosure of those
ratings to the public and outside parties by an institution. The FFIEC does,
however, maintain a website address which includes an updated list of financial
institutions that have been subject to enforcement actions relating to
regulatory concerns with the banks' current year 2000 readiness status. As of
March 31, 1999, none of the Corporation's banks were listed as being subject
to enforcement action for year 2000 readiness.
The Corporation's and its banks' risk of year 2000 problems principally
center around the ability of various systems and software to continue processing
transactions and accurately accounting for activity in customers accounts after
the century date change. Even with the extensive testing methodologies
implemented by this Corporation, its banks and other financial institutions,
until the century date change actually occurs and it is determined that such
systems properly process data after that date, there can be no assurance that
such systems will function properly, despite adequate and appropriate planning,
testing and remediation efforts.
Regulatory agencies require banks to update their customers on the
banks compliance efforts. Letters and informational brochures are being sent to
customers notifying them of the banks' efforts at addressing the year 2000
issue, while block messages are being included on customers' account statements.
The Corporation and its banks are also following regulatory mandates that
require an assessment of their customers' year 2000 readiness efforts. Each bank
has distributed questionnaires requesting the status of certain customers' year
2000 readiness which the banks are reviewing and pursuing as deemed necessary.
The Corporation estimates its costs to address the year 2000 issue
approximated $250,000 in 1998. These costs principally relate to added personnel
costs, external consultants and software upgrades in addition to the costs of
testing and planning. Such costs are difficult to estimate. Management expects
to incur a similar amount of such costs on this matter in 1999.
The Corporation and its banks, in their ongoing effort to competently
address evolving Y2K issues, will continue to devote both human and financial
resources to this issue.
Impact of New Accounting Standards
As discussed elsewhere herein, a new accounting standard requiring the
write-off of previously capitalized start-up and preopening costs was
implemented effective January 1, 1999. That standard requires that such costs be
charged to expense, when incurred, in future periods.
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting
Page 17 of 20
<PAGE> 18
and the type of hedging instrument involved. This new standard will become
effective for the Corporation in 2000 and, because the Corporation has not
typically entered into derivative contracts either to hedge existing risks or
for speculative purposes, is not expected to have a material effect on its
financial statements.
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 18 of 20
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries are parties to certain
ordinary, routine litigation incidental to their business. In
the opinion of management, liabilities arising from such
litigation would not have a material effect on the
Corporation's consolidated financial position or results of
operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed
during the quarter ended
March 31, 1999.
Page 19 of 20
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL BANCORP LTD.
(Registrant)
\s\ Joseph D. Reid
-------------------------------------
Chairman, President and CEO
(duly authorized to sign on behalf
of the registrant)
\s\ Lee W. Hendrickson
-------------------------------------
Senior Vice President and
Chief Financial Officer
Date: May 14, 1999
Page 20 of 20
<PAGE> 21
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 41,609
<INT-BEARING-DEPOSITS> 4,901
<FED-FUNDS-SOLD> 102,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,754
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 809,194
<ALLOWANCE> 9,543
<TOTAL-ASSETS> 1,066,122
<DEPOSITS> 938,805
<SHORT-TERM> 10,700
<LIABILITIES-OTHER> 8,734
<LONG-TERM> 6,000
0
0
<COMMON> 51,868
<OTHER-SE> (1,447)
<TOTAL-LIABILITIES-AND-EQUITY> 1,066,122
<INTEREST-LOAN> 18,074
<INTEREST-INVEST> 998
<INTEREST-OTHER> 1,419
<INTEREST-TOTAL> 20,491
<INTEREST-DEPOSIT> 9,774
<INTEREST-EXPENSE> 10,601
<INTEREST-INCOME-NET> 9,890
<LOAN-LOSSES> 809
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 8,018
<INCOME-PRETAX> 2,104
<INCOME-PRE-EXTRAORDINARY> 1,339
<EXTRAORDINARY> 0
<CHANGES> (197)<F1>
<NET-INCOME> 1,142
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<YIELD-ACTUAL> 0
<LOANS-NON> 5,899
<LOANS-PAST> 1,377
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,817
<CHARGE-OFFS> 130
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 9,543
<ALLOWANCE-DOMESTIC> 9,543
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,355
<FN>
<F1>(Net of Tax)
</FN>
</TABLE>
