<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1998 or
( ) TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its Charter)
MICHIGAN 38-2761672
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
ONE BUSINESS & TRADE CENTER
200 WASHINGTON SQUARE NORTH
LANSING, MICHIGAN 48933
(Address of principal executive offices)
Registrant's telephone number, including area code: (517) 487-6555
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
8.50% CUMULATIVE TRUST PREFERRED SECURITIES, $10 LIQUIDATION AMOUNT
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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
- -
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked price of stock, as of a specified date within 60 days prior to the date of
filing: $84,940,336 as of February 17, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 6,344,886 as of
February 17, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
See Cross-Reference Sheet
<PAGE> 2
CAPITOL BANCORP LTD.
Form 10-K
Fiscal Year Ended: December 31, 1998
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM OF FORM 10-K INCORPORATION BY REFERENCE FROM:
- ----------------- --------------------------------
PART I
------
<S> <C> <C>
Item 1, Business Pages 22-24, 31-35, 45 and 58-60,
Annual Report
Item 2, Properties Pages 3-19 and 51, Annual Report, and
Pages 14-15, Proxy Statement
PART II
Item 5, Market for Registrant's Pages 20-21, 52-55 and 64, Annual Report
Common Equity and
Related Stockholder Matters
Item 6, Selected Financial Data Page 20, Annual Report
Item 7, Management's Discussion Pages 22-39, Annual Report
and Analysis of Financial
Condition and Results of
Operations
Item 7a, Quantitative and Qualitative Pages 31-35 and 39, Annual Report
Disclosures About Market
Risk
Item 8, Financial Statements and Pages 40-63 and 20, Annual Report
Supplementary Data
PART III
Item 10, Directors and Executive Pages 4-7, Proxy Statement, and
Officers of the Registrant Pages 2 and 64, Annual Report
Item 11, Executive Compensation Pages 8-14, Proxy Statement
Item 12, Security Ownership of Pages 3-7, 10 and 13, Proxy Statement
Certain Beneficial
Owners and Management
Item 13, Certain Relationships Pages 14-15, Proxy Statement
and Related Transactions
PART IV
Item 14, Exhibits, Financial Statement Pages 40-63, Annual Report
Schedules and Reports on
Form 8-K
</TABLE>
KEY:
- ----
"Annual Report" means the 1998 Annual Report of the Registrant provided to
Stockholders and the Commission pursuant to Rule 14a-3(b).
"Proxy Statement" means the Proxy Statement of the Registrant on
Schedule 14A filed pursuant to Rule 14a-101.
Note: The page number references herein are based on the paper version of the
Annual Report and Proxy Statement. Accordingly, those page number
references may differ from the electronically filed versions of those
documents.
-2-
<PAGE> 3
CAPITOL BANCORP LTD.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
ITEM 1. Business...............................................................................................4
ITEM 2. Properties............................................................................................14
ITEM 3. Legal Proceedings.....................................................................................14
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................15
ITEM 6. Selected Financial Data...............................................................................15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................15
ITEM 8. Financial Statements and Supplementary Data...........................................................15
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................15
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................................16
ITEM 11. Executive Compensation.................................................................................16
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.........................................16
ITEM 13. Certain Relationships and Related Transactions.........................................................16
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................17
</TABLE>
-3-
<PAGE> 4
PART I
Item 1, Business.
a. General development of business:
Incorporated by reference from Pages 45-46, Annual Report, under the
caption "Note A--Nature of Operations, Basis of Presentation and Principles of
Consolidation".
b. Financial information about industry segments:
Incorporated by reference from Pages 45-46, Annual Report, under the
caption "Note A--Nature of Operations, Basis of Presentation and Principles of
Consolidation".
c. Narrative description of business:
Incorporated by reference from Page 45, Annual Report, under the
caption "Note A--Nature of Operations, Basis of Presentation and Principles of
Consolidation", Pages 31-35, Annual Report, under the caption "Trends Affecting
Operations" and Pages 29-31, Annual Report, under the caption "Liquidity,
Capital Resources and Capital Adequacy".
At December 31, 1998, the Corporation and its subsidiaries employed 307
full time equivalent employees.
In 1997, the Registrant formed Capitol Trust I, a Delaware statutory
business trust. Capitol Trust I's business and affairs are conducted by its
property trustee, a Delaware trustee, and three individual administrative
trustees who are employees and officers of the Registrant. Capitol Trust I
exists for the sole purpose of issuing and selling its preferred securities and
common securities, using the proceeds from the sale of those securities to
acquire subordinated debentures issued by the Registrant and certain related
services. Additional information regarding Capitol Trust I is incorporated by
reference from Page 53, Annual Report, under the caption "Note
I--Trust-Preferred Securities".
The following tables (Tables A to G, inclusive), present certain
statistical information regarding the Corporation's business.
-4-
<PAGE> 5
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A)
CAPITOL BANCORP LTD.
Net interest income, the primary component of earnings, represents the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Net interest income depends upon the
volume of interest-earning assets and interest-bearing liabilities and the rates
earned or paid on them. This table sets forth the daily average balances for the
major asset and liability categories and the actual related interest income and
expense (in thousands) and average yield/cost for the years ended December 31,
1998, 1997, and 1996.
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997
---------------------------------------------- -----------------------------------
Interest (1) Interest (1)
Average Income/ Average Average Income/ Average
Balance Expense Yield/Cost Balance Expense Yield/Cost
---------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury and government agencies $62,247 $3,688 5.92% $56,604 $3,516 6.21%
States and political subdivisions (2) 1,609 77 4.79% 239 14 5.86%
Other 2,679 111 4.14% 2,342 211 9.01%
Interest-bearing deposits with banks 9,034 118 1.31% 1,158 19 1.64%
Federal funds sold 93,310 5,013 5.37% 50,948 2,805 5.51%
Loans held for resale 20,188 1,529 7.57% 7,122 536 7.53%
Portfolio loans (3) 605,923 59,132 9.76% 425,664 42,448 9.97%
--------------- ------------- ------------- ---------- ---------- ----------
Total Interest-Earning
Assets/Interest Income 794,990 69,668 8.76% 544,077 49,549 9.11%
Allowance for loan losses (deduct) (7,371) (5,294)
Cash and due from banks 30,000 19,159
Premises and equipment, net 8,836 6,045
Other assets 20,861 15,828
--------------- ----------
Total Assets $847,316 $579,815
=============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $37,517 $1,487 3.96% $38,496 $1,544 4.01%
Time deposits under $100,000 259,916 16,119 6.20% 200,108 12,187 6.09%
Time deposits of $100,000 or more 165,627 9,331 5.63% 104,501 6,257 5.99%
Other interest-bearing deposits 189,707 7,211 3.80% 110,395 4,111 3.72%
Debt obligations 4,751 271 5.70% 9,003 753 8.36%
Other 106
--------------- ------------- ------------- ---------- ---------- ----------
Total Interest-Bearing
Liabilities/Interest Expense 657,518 34,525 5.25% 462,503 24,852 5.37%
Capitol Trust I preferred securities 24,192 2,145 8.87% 822 - -
--------------- ------------- ------------- ---------- ---------- ----------
681,710 36,670 5.38% 463,325 24,852 5.36%
Noninterest-bearing demand deposits 94,077 62,166
Accrued interest on deposits and
other liabilities 7,267 4,421
Minority interest in consolidated subsidiaries 18,830 8,047
Stockholders' equity 45,432 41,856
--------------- -----------
Total Liabilities and
Stockholders' Equity $847,316 $579,815
=============== ------------- =========== ----------
Net Interest Income $32,998 $24,697
============= ==========
Interest Rate Spread (4) 3.39% 3.75%
============= ==========
Net Yield on Interest-Earning Assets (5) 4.15% 4.54%
============= ==========
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.17 X 1.18 X
================= ==============
<CAPTION>
Year Ended December 31
1996
----------------------------------------------
Interest (1)
Average Income/ Average
Balance Expense Yield/Cost
----------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury and government agencies $39,549 $2,234 5.65%
States and political subdivisions (2) 207 18 8.70%
Other 2,510 372 14.82%
Interest-bearing deposits with banks 474 42 8.86%
Federal funds sold 32,318 1,541 4.77%
Loans held for resale 10,737 818 7.62%
Portfolio loans (3) 318,491 31,454 9.88%
-------------- ------------ --------------
Total Interest-Earning
Assets/Interest Income 404,286 36,479 9.02%
Allowance for loan losses (deduct) (4,095)
Cash and due from banks 14,149
Premises and equipment, net 3,188
Other assets 12,734
--------------
Total Assets $430,262
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $35,288 $1,384 3.92%
Time deposits under $100,000 160,502 9,555 5.95%
Time deposits of $100,000 or more 66,106 3,935 5.95%
Other interest-bearing deposits 69,818 2,418 3.46%
Debt obligations 8,625 496 5.75%
Other 12
-------------- ------------ --------------
Total Interest-Bearing
Liabilities/Interest Expense 340,339 17,800 5.23%
Capitol Trust I preferred securities - - -
-------------- ------------ --------------
340,339 17,800 5.23%
Noninterest-bearing demand deposits 44,727
Accrued interest on deposits and
other liabilities 4,166
Minority interest in consolidated subsidiaries 2,439
Stockholders' equity 38,591
--------------
Total Liabilities and
Stockholders' Equity $430,262
============== ------------
Net Interest Income $18,679
============
Interest Rate Spread (4) 3.79%
==============
Net Yield on Interest-Earning Assets (5) 4.62%
==============
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.19 X
=================
</TABLE>
(1) Average yield/cost is determined by dividing the actual interest
income/expense by the daily average balance of the asset or liability category.
(2) Tax equivalent yield.
(3) Average balance of loans includes non-accrual loans.
(4) Interest rate spread represents the average yield on interest-earning assets
less the average cost of interest-bearing liabilities.
(5) Net yield is based on net interest income as a percentage of average total
interest-earning assets.
-5-
<PAGE> 6
CHANGES IN NET INTEREST INCOME (TABLE B)
CAPITOL BANCORP LTD.
The following table summarizes the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Corporation's net interest income during the
periods indicated. The change in interest attributable to volume is calculated
by multiplying the annual change in volume by the prior year's rate. The change
in interest attributable to rate is calculated by multiplying the annual change
in rate by the current year's average balance. Any variance attributable jointly
to volume and rate changes has been allocated to each category based on the
percentage of each to the total change in both categories.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
1998 compared to 1997 1997 compared to 1996
--------------------------------- ---------------------------------
Volume Rate Net Total Volume Rate Net Total
-------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) In Interest Income:
Investment securities:
U.S. Treasury and government agencies $ 350 ($178) $ 172 $ 965 $ 317 $ 1,282
States and political subdivisions 80 (17) 63 3 (7) (4)
Other 30 (130) (100) (25) (136) (161)
Interest-bearing deposits with banks 129 (30) 99 61 (84) (23)
Federal funds sold 2,334 (126) 2,208 888 376 1,264
Loans held for resale 984 9 993 (276) (6) (282)
Portfolio loans 17,972 (1,288) 16,684 10,589 405 10,994
-------- -------- -------- -------- -------- --------
Total 21,879 (1,760) 20,119 12,205 865 13,070
Increase (Decrease) In Interest Expense
On Deposits:
Savings (39) (18) (57) 126 34 160
Time deposits under $100,000 3,642 290 3,932 2,352 280 2,632
Time deposits of $100,000 or more 3,661 (587) 3,074 2,280 42 2,322
Other interest-bearing deposits 2,950 150 3,100 1,406 287 1,693
Debt obligations (355) (127) (482) 22 235 257
Other 106 106 (12) (12)
Capitol Trust I preferred securities 2,145 2,145
-------- -------- -------- -------- -------- --------
Total 12,110 (292) 11,818 6,174 878 7,052
-------- -------- -------- -------- -------- --------
Increase (Decrease) in Net
Interest Income $ 9,769 ($1,468) $ 8,301 $ 6,031 ($13) $ 6,018
======== ======== ======== ======== ======== ========
<CAPTION>
Year Ended December 31
---------------------------------
1996 compared to 1995
---------------------------------
Volume Rate Net Total
-------- -------- ---------
<S> <C> <C> <C>
Increase (Decrease) In Interest Income:
Investment securities:
U.S. Treasury and government agencies $ 253 ($35) $ 218
States and political subdivisions (2) 10 8
Other (18) 182 164
Interest-bearing deposits with banks 4 28 32
Federal funds sold 444 (356) 88
Loans held for resale 399 119 518
Portfolio loans 5,239 299 5,538
-------- -------- --------
Total 6,319 247 6,566
Increase (Decrease) In Interest Expense
On Deposits:
Savings 99 37 136
Time deposits under $100,000 1,830 25 1,855
Time deposits of $100,000 or more 736 (117) 619
Other interest-bearing deposits 348 (227) 121
Debt obligations 98 (94) 4
Other (14) (14)
Capitol Trust I preferred securities
-------- -------- --------
Total 3,097 (376) 2,721
-------- -------- --------
Increase (Decrease) in Net
Interest Income $ 3,222 $ 623 $ 3,845
======== ======== ========
</TABLE>
-6-
<PAGE> 7
INVESTMENT PORTFOLIO (TABLE C)
CAPITOL BANCORP LTD.
The following table sets forth the amortized cost and market value of investment
securities as of December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $80,445 $80,667 $60,430 $60,650
States and political subdivisions 2,897 2,930 1,610 1,603
Other:
Corporate bonds
Federal Reserve Bank stock 116 116 116 116
Federal Home Loan Bank stock 1,431 1,431 1,073 1,073
Corporate stock (1) 1,003 1,003 1,028 1,028
Other investments 317 317
------------- ------------- -------------- --------------
Total other securities 2,867 2,867 2,217 2,217
------------- ------------- -------------- --------------
Total investments $86,209 $86,464 $64,257 $64,470
============= ============= ============== ==============
<CAPTION>
December 31
------------------------------
1996
------------------------------
Amortized Market
Cost Value
------------- -------------
<S> <C> <C>
U.S. Treasury and government agencies $46,162 $46,221
States and political subdivisions 100 100
Other:
Corporate bonds 301 300
Federal Reserve Bank stock 116 116
Federal Home Loan Bank stock 984 984
Corporate stock (1) 1,003 1,003
Other investments
------------- -------------
Total other securities 2,404 2,403
------------- -------------
Total investments $48,666 $48,724
============= =============
</TABLE>
(1) Consists primarily of investment in the common stock of Access BIDCO,
Incorporated.
The following table sets forth the amortized cost, relative maturities and
weighted average yields of investment securities at December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
U.S. Treasury and States and Political
Government Agencies Subdivisions Other
-------------------------------------------------------------------------------
Weighted Weighted Weighted Total
Amortized Average Amortized Average Amortized Average Carrying
Cost Yield Cost Yield Cost Yield Amount
------------- ------------ ------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maturity:
Due in one year or less $40,653 5.11% $40,653
Due after one year but within
five years 35,448 5.77% $2,296 5.27% 37,744
Due after five years but within
ten years 2,089 6.94% 2,089
Due after ten years 2,255 6.71% 601 5.11% 2,856
Without stated maturities $2,867 * 2,867
------------- ------------- ------------ ------------
Total $80,445 $2,897 $2,867 $86,209
============= ============= ============ ============
</TABLE>
* Investment securities which do not have stated maturities (corporate stock,
Federal Reserve Bank and Federal Home Loan Bank stock) do not have stated
yields or rates of return and such rates of return vary from time to time.
Following is a summary of the weighted average maturities of investment
securities (exclusive of securities without stated maturities) at December 31,
1998:
<TABLE>
<S> <C> <C>
U.S. Treasury securities 6 months
U.S. Agencies 3 years 9 months
States and political subdivisions 5 years 5 months
</TABLE>
-7-
<PAGE> 8
LOAN PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D)
CAPITOL BANCORP LTD.
Portfolio Loans outstanding as of the end of each period are shown in the
following table according to type of loan (in thousands):
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial - real estate $417,296 57.62% $262,157 52.14% $180,310 50.42%
Commercial - other 173,055 23.89% 133,781 26.61% 103,151 28.84%
-------------- ------------- -------------- ------------- -------------- -------------
Total commercial loans 590,351 81.51% 395,938 78.75% 283,461 79.26%
Real estate mortgage 80,808 11.16% 66,630 13.25% 53,712 15.02%
Installment 53,121 7.33% 40,187 7.99% 20,450 5.72%
-------------- ------------- -------------- ------------- -------------- -------------
Total portfolio loans $724,280 100.00% $502,755 100.00% $357,623 100.00%
============== ============= ============== ============= ============== =============
<CAPTION>
December 31
---------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Commercial - real estate $140,462 49.55% $99,330 41.12%
Commercial - other 81,699 28.82% 83,391 34.52%
-------------- ------------- -------------- -------------
Total commercial loans 222,161 78.37% 182,721 75.63%
Real estate mortgage 48,954 17.27% 47,260 19.56%
Installment 12,356 4.36% 11,602 4.80%
-------------- ------------- -------------- -------------
Total portfolio loans $283,471 100.00% $241,583 100.00%
============== ============= ============== =============
</TABLE>
The following table presents (in thousands) the remaining maturity of portfolio
loans outstanding at December 31, 1998 according to scheduled repayments of
principal.
Aggregate maturities of portfolio loan balances which are due:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
-------------- ------------- --------------
<S> <C> <C> <C>
In one year or less $193,788 $222,031 $415,819
After one year but within five years 283,085 6,775 289,860
After five years 5,403 5,956 11,359
Non-accrual loans (classified as variable rate) 7,242 7,242
-------------- ------------- --------------
Total $482,276 $242,004 $724,280
============== ============= ==============
</TABLE>
The following summarizes, in general, the Corporation's various loan
classifications:
Commercial - real estate
Comprised of a broad mix of business use and multi-family housing
properties, including office, retail, warehouse and light industrial
uses. A typical loan size approximates $500,000 and, at December 31,
1998, approximately 15% of such properties were owner-occupied.
Commercial - other
Includes a range of business credit products, current asset lines of
credit and equipment term loans. These products bear higher inherent
economic risk than other types of lending activities. A typical loan
size approximates $250,000, and multiple account relationships serve
to reduce such risks.
Real Estate
Includes single family residential loans held for permanent portfolio,
and home equity lines of credit. Risks are nominal, borne out by loss
experience, housing economic data and loan-to-value percentages.
Installment
Includes a broad range of consumer credit products, secured by
automobiles, boats, etc., with typical consumer credit risks.
All loans are subject to underwriting procedures commensurate with the loan
size, nature of collateral, industry trends, risks and experience factors.
Appropriate collateral is required for most loans, as is documented evidence of
debt repayment sources.
-8-
<PAGE> 9
TABLE D, CONTINUED
CAPITOL BANCORP LTD.
The aggregate amount of nonperforming portfolio loans is set forth in the
following table. Nonperforming loans comprise (a) loans accounted for on a
nonaccrual basis, and (b) loans contractually past due 90 days or more as to
principal and interest payments (but not included in nonaccrual loans in (a)
above) and consist primarily of commercial real estate loans. Nonperforming
portfolio loans include all loans for which, based on the Corporation's loan
rating system, management has concerns. Loans are placed in nonaccrual status
when, in management's opinion, there is a reasonable probability of not
collecting 100% of future principal and interest payments. In addition, certain
loans, although current based on the Corporation's rating criteria, are placed
in nonaccrual status. Generally, loans are placed in nonaccrual status when they
become 90 days delinquent; however, management may elect to continue the accrual
of interest in certain circumstances. When interest accruals are discontinued,
interest previously accrued (but unpaid) is reversed. If nonperforming loans
(including loans in nonaccrual status) had performed in accordance with their
contractual terms during the year, additional interest income of $398,000 would
have been recorded in 1998. Interest income recognized on loans in nonaccrual
status in 1998 operations approximated $58,000. At December 31, 1998, there were
no material amounts of loans which were restructured or otherwise renegotiated
as a concession to troubled borrowers. Of the nonperforming loans at December
31, 1998, $1.6 million is guaranteed by an agency of the federal government.
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nonperforming loans: (in thousands)
Nonaccrual loans: Commercial $2,608 $2,570 $928 $438 $1,121
Real estate 199 59 107 115 156
Installment 185 59 22 28 43
----------- ----------- ----------- ----------- -----------
Total Nonaccrual loans 2,992 2,688 1,057 581 1,320
Past due loans: Commercial 3,963 897 1,009 379 146
Real estate 183 401 549 299 424
Installment 104 25 84 82 40
----------- ----------- ----------- ----------- -----------
Total past due loans 4,250 1,323 1,642 760 610
----------- ----------- ----------- ----------- -----------
Total nonperforming loans $7,242 $4,011 $2,699 $1,341 $1,930
=========== =========== =========== =========== ===========
Nonperforming loans as a percentage
of total portfolio loans 1.00% 0.80% 0.75% 0.47% 0.80%
=========== =========== =========== =========== ===========
Nonperforming loans as a percentage
of total assets 0.71% 0.58% 0.55% 0.35% 0.61%
=========== =========== =========== =========== ===========
Allowance for loan losses as a
percentage of nonperforming loans 121.75% 155.30% 169.62% 274.94% 166.84%
=========== =========== =========== =========== ===========
</TABLE>
The table below summarizes activity in other real estate owned, including
transfers to and from the loan portfolio and subsequent payments on or sales of
the property, for each period (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Other real estate owned at January 1 $165 $313 $972 $1,255 $1,364
Properties acquired in restructure
of loans or in lieu of foreclosure 612 1,635 1,658
Properties sold (161) (128) (520) (1,714) (1,455)
Payments received from borrowers or
tenants, credited to carrying amount (75) (10) (47) (300)
Other changes, net (10) (92) (204) (12)
----------- ----------- ----------- ----------- -----------
Other real estate owned at December 31 $541 $165 $313 $972 $1,255
=========== =========== =========== =========== ===========
Other real estate owned reserve at January 1 $0 $0 $0 $64 $0
Net charge-offs 64 64
----------- ----------- ----------- ----------- -----------
Other real estate owned reserve at December 31 $0 $0 $0 $0 $64
=========== =========== =========== =========== ===========
</TABLE>
Other real estate owned is valued at the lower of fair value or cost (net of
estimated selling cost) at the date of transfer/acquisition.
Management performs a periodic analysis of estimated fair values to determine
potential impairment of other real estate owned.
-9-
<PAGE> 10
SUMMARY OF LOAN LOSS EXPERIENCE (TABLE E)
CAPITOL BANCORP LTD.
The table below summarizes portfolio loan balances, daily average loan balances,
changes in the allowance for loan losses arising from loans charged-off and
recoveries on loans previously charged-off, by loan category, and additions to
the allowance for loan losses through provisions charged to expense, as of the
end of each period.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan losses at January 1 $ 6,229 $ 4,578 $ 3,687 $ 3,220 $ 2,500
Allowance of acquired bank 515
Loans charged-off:
Commercial 1,165 551 308 547 339
Real estate 9 117 35 9
Installment 131 49 94 47 36
-------- -------- -------- -------- --------
Total charge-offs 1,305 717 437 594 384
Recoveries:
Commercial 336 288 119 178 106
Real estate 4 18 8 3 3
Installment 30 13 5 41 7
-------- -------- -------- -------- --------
Total recoveries 370 319 132 222 116
-------- -------- -------- -------- --------
Net charge-offs 935 398 305 372 268
Additions to allowance charged to expense 3,523 2,049 1,196 839 473
-------- -------- -------- -------- --------
Allowance for loan losses at December 31 $ 8,817 $ 6,229 $ 4,578 $ 3,687 $ 3,220
======== ======== ======== ======== ========
Total portfolio loans outstanding at December 31 $724,280 $502,755 $357,623 $283,471 $241,583
======== ======== ======== ======== ========
Ratio of allowance for loan losses to
portfolio loans outstanding 1.22% 1.24% 1.28% 1.30% 1.33%
======== ======== ======== ======== ========
Average total portfolio loans for the year $605,923 $425,664 $318,491 $264,919 $203,924
======== ======== ======== ======== ========
Ratio of net charge-offs to average
portfolio loans outstanding 0.15% 0.09% 0.10% 0.14% 0.13%
======== ======== ======== ======== ========
</TABLE>
-10-
<PAGE> 11
TABLE E, CONTINUED
CAPITOL BANCORP LTD.
The allowance for loan losses has been established as a general allowance for
future losses on the loan portfolio. For internal purposes, management allocates
the allowance to all loan classifications. The amounts allocated in the
following table, 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 and the 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>
December 31
--------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial $ 4,501 $ 2,875 $ 2,281 $ 1,726 $ 1,831
Real estate mortgage 127 103 67 67 55
Installment 262 185 100 57 61
Unallocated 3,927 3,066 2,130 1,837 1,273
-------- -------- -------- -------- --------
Total Allowance for Loan Losses $ 8,817 $ 6,229 $ 4,578 $ 3,687 $ 3,220
======== ======== ======== ======== ========
Total portfolio loans outstanding $724,280 $502,755 $357,623 $283,471 $241,583
======== ======== ======== ======== ========
Percent of allowance to portfolio loans outstanding 1.22% 1.24% 1.28% 1.30% 1.33%
======== ======== ======== ======== ========
</TABLE>
In addition to the Corporation's allowance for loan losses, certain commercial
loans participate in a loan program sponsored by the State of Michigan. Under
that program, the governmental unit shares loss exposure on such loans by
funding reserves which are placed as deposits at the banks. Loans participating
in this program and related reserves approximated $24.9 million and $2 million,
respectively, at December 31, 1998. Such reserve amounts are separate and
excluded from the allowance for loan losses.
-11-
<PAGE> 12
AVERAGE DEPOSITS (TABLE F)
CAPITOL BANCORP LTD.
The following table presents the average balances of deposits (in thousands) and
the average rates of interest paid for the years ended December 31, 1998, 1997
and 1996:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------ -----------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $94,077 $62,166 $44,727
Savings deposits 37,517 3.96% 38,496 4.01% 35,288 3.92%
Time deposits under $100,000 259,916 6.20% 200,108 6.09% 160,502 5.95%
Time deposits of $100,000 or more 165,627 5.63% 104,501 5.99% 66,106 5.95%
Other interest-bearing deposits 189,707 3.80% 110,395 3.72% 69,818 3.46%
-------- -------- --------
Total deposits $746,844 $515,666 $376,441
======== ======== ========
</TABLE>
The following table sets forth the amount of time certificates of deposit issued
in amounts of $100,000 or more, by time remaining until maturity, which were
outstanding at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Three months or less $81,468
Three months to twelve months 100,540
Over 12 months 39,092
--------
$221,100
========
</TABLE>
-12-
<PAGE> 13
FINANCIAL RATIOS (TABLE G)
CAPITOL BANCORP LTD.
The following table shows the ratio of net income to average stockholders'
equity, average total assets and certain other ratios for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Income as a percentage of:
Average stockholders' equity 10.19% 13.28% 12.01%
Average total assets 0.55% 0.96% 1.08%
Average stockholders' equity as
a percentage of average total assets 5.36% 7.22% 8.97%
Dividend payout ratio (cash dividends per share
as a percentage of net income per share) (1):
Basic 45.00% 32.97% 29.41%
Diluted 46.25% 34.09% 30.49%
</TABLE>
(1) As restated to reflect the Corporation's 1998 6-for-5 stock split as if it
had occurred at the beginning of the periods presented.
-13-
<PAGE> 14
Item 2, Properties.
Substantially all of the Corporation's office locations are leased.
Each of the Corporation's banks operate from a single location, except Capitol
National Bank (which has one branch location in Okemos, Michigan). The addresses
of each bank's main office are stated on pages 3-19, Annual Report, which are
incorporated herein by reference.
Ann Arbor Commerce Bank, in 1998, and Portage Commerce Bank, in 1997,
relocated their main offices to substantially larger leased facilities
(approximately 18,000 and 10,000 square feet, respectively) in response to asset
growth and to better serve customers.
Most of the other bank subsidiaries' facilities are generally small
(i.e., less than 10,000 square feet), first floor offices with convenient access
to parking.
Some of the banks have drive-up customer service. The banks are
typically located in or near high traffic centers of commerce in their
respective communities. Customer service is enhanced through utilization of ATMs
to process some customer-initiated transactions and some of the banks also make
available a courier service to pick up transactions at customers' locations.
The principal offices of the Corporation are located within the same
building as Capitol National Bank in Lansing, Michigan. Those headquarters
include administrative, operations, accounting, and executive staff and the
Corporation's data center.
Sun Community Bancorp Limited (a second-tier, 51%-owned bank holding
company headquartered in Arizona) occupies executive office space adjacent to
Camelback Community Bank in Phoenix.
Certain of the office locations are leased from related parties.
Incorporated by reference from Page 51, Annual Report, under the caption "Note
F--Premises and Equipment" and Pages 14-15, Proxy Statement, from the 9th to
11th paragraph thereunder under the caption "Certain Relationships and Related
Transactions".
Management believes the Corporation's and the banks' offices to be in
good and adequate condition and adequately covered by insurance.
Item 3, Legal Proceedings.
As of December 31, 1998, there were no material pending legal
proceedings to which the Corporation or its subsidiaries is a party or to which
any of its property was subject, except for proceedings which arise in the
ordinary course of business. In the opinion of management, pending legal
proceedings will not have a material effect on the consolidated financial
position or results of operations of the Corporation.
Item 4, Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 1998, no matters were submitted to a vote
by security holders.
-14-
<PAGE> 15
PART II
Item 5, Market for Registrant's Common Equity and Related Stockholder Matters.
A. Market Information:
Incorporated by reference from Page 21, Annual Report, under
the caption "Information Regarding the Corporation's Common Stock",
Pages 53-55, Annual Report, under the caption "Note J--Common Stock and
Stock Options" and Page 64, Annual Report, under the caption
"Shareholder Information".
B. Holders:
Incorporated by reference from first sentence of third
paragraph on Page 21, Annual Report, under the caption "Information
Regarding the Corporation's Common Stock".
C. Dividends:
Incorporated by reference from Page 20, Annual Report, under
the caption "Quarterly Results of Operations" and subcaption "Cash
dividends paid per share", Pages 58-60, Annual Report, under the
caption "Note O--Dividend Limitations of Subsidiaries and Other Capital
Requirements" and the first full paragraph commencing on Page 53,
Annual Report, under the caption "Note H--Debt Obligations".
Item 6, Selected Financial Data.
Incorporated by reference from Page 20, Annual Report, under the
caption "Selected Consolidated Financial Data" under the column heading "As of
and for the Year Ended December 31, 1998, 1997, 1996, 1995, and 1994".
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference from Pages 22-38, Annual Report, under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Page 39, Annual Report, under the caption "Forward Looking
Statements".
Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Incorporated by reference from Pages 31-35, Annual Report, under the
caption "Trends Affecting Operations" and Page 39, Annual Report, under the
caption "Forward Looking Statements".
Item 8, Financial Statements and Supplementary Data.
See Item 14 (under subcaption "A. Exhibits") of this Form 10-K for
specific description of financial statements incorporated by reference from
Annual Report.
Incorporated by reference from Page 20, Annual Report, under the
caption "Quarterly Results of Operations".
Item 9, Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
-15-
<PAGE> 16
PART III
Item 10, Directors and Executive Officers of the Registrant.
Incorporated by reference from Pages 4-7, Proxy Statement, under the
caption "Election of Directors" (excluding Mr. Epolito) and Page 64, Annual
Report, under the caption "Officers of the Corporation".
Item 11, Executive Compensation.
Incorporated by reference from Pages 9-13, Proxy Statement; Page 8,
Proxy Statement, the second paragraph under the caption "Meetings of the Board
of Directors" and Page 14, Proxy Statement, the first five paragraphs under the
caption "Certain Relationships and Related Transactions".
Item 12, Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from Page 3, Proxy Statement, under the
caption "Voting Securities and Principal Holders Thereof", Pages 4-7, Proxy
Statement, under the caption "Election of Directors" and Page 10, Proxy
Statement, under the captions "Employee Stock Ownership Plan" and "Employee
Retirement 401(k) Plan" and Page 13, Proxy Statement, under the caption
"Directors Deferred Compensation Plan".
Item 13, Certain Relationships and Related Transactions.
Incorporated by reference from Pages 14-15, Proxy Statement, under the
caption "Certain Relationships and Related Transactions".
-16-
<PAGE> 17
PART IV
Item 14, Exhibits, Financial Statement Schedules and Reports on Form 8-K.
A. Exhibits:
The following consolidated financial statements of Capitol
Bancorp Ltd. and subsidiaries and report of independent auditors
included on Pages 40-63 of the Annual Report of the registrant to its
stockholders for the year ended December 31, 1998, are incorporated by
reference in Item 7:
Report of Independent Auditors
Consolidated balance sheets--December 31, 1998 and 1997.
Consolidated statements of income--Years ended December 31,
1998, 1997 and 1996.
Consolidated statements of changes in stockholders'
equity--Years ended December 31, 1998, 1997 and 1996.
Consolidated statements of cash flows--Years ended December
31, 1998, 1997 and 1996.
Notes to consolidated financial statements.
All financial statements and schedules have been incorporated
by reference from the Annual Report or are included in Management's
Discussion and Analysis of Financial Condition and Results of
Operations. No schedules are included here because they are either not
required, not applicable or the required information is contained
elsewhere.
B. Reports on Form 8-K:
During the fourth quarter of 1998, no reports on Form 8-K were filed by
the registrant.
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: \s\ Joseph D. Reid By: \s\ Lee W. Hendrickson
----------------------- ------------------------
Joseph D. Reid Lee W. Hendrickson
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant as Directors of the Corporation on February 4, 1999.
\s\ Joseph D. Reid \s\ Robert C. Carr
- --------------------------------- -------------------------------
Joseph D. Reid, Chairman, President, Robert C. Carr, Executive Vice
Chief Executive Officer and Director President, Treasurer and
Director
- --------------------------------- -------------------------------
David O'Leary, Secretary and Director Louis G. Allen, Director
\s\ Paul R. Ballard \s\ David L. Becker
- --------------------------------- -------------------------------
Paul R. Ballard, Executive David L. Becker, Director
Vice President and Director
\s\ Douglas E. Crist \s\ Richard G. Dorner
- --------------------------------- -------------------------------
Douglas E. Crist, Director Richard G. Dorner, Director
\s\ Gary A. Falkenberg
- --------------------------------- -------------------------------
Gary A. Falkenberg, Director Joel I. Ferguson, Director
\s\ Kathleen A. Gaskin \s\ H. Nicholas Genova
- --------------------------------- -------------------------------
Kathleen A. Gaskin, Director H. Nicholas Genova, Director
\s\ L. Douglas Johns \s\ Michael L. Kasten
- --------------------------------- -------------------------------
L. Douglas Johns, Director Michael L. Kasten, Director
\s\ James R. Kaye \s\ Leonard Maas
- --------------------------------- -------------------------------
James R. Kaye, Director Leonard Maas, Director
\s\ Lyle W. Miller
- ---------------------------------
Lyle W. Miller, Director
-18-
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE NUMBER OR
INCORPORATED BY
EXHIBIT NO. DESCRIPTION REFERENCE FROM:
- ----------- ----------- ---------------
<C> <C> <S> <C>
3 Articles of Incorporation and
Bylaws (1)
4 Instruments Defining the Rights
of Security Holders:
(a) Common Stock Certificate (1)
(b) Indenture dated December 18, 1997 (15)
(c) Subordinated Debenture (15)
(d) Amended and Restated Trust Agreement
dated December 18, 1997 (15)
(e) Preferred Security Certificate dated
December 18, 1997 (15)
(f) Preferred Securities Guarantee Agreement
of Capitol Trust I dated December 18, 1997 (15)
(g) Agreement as to Expenses and Liabilities
of Capitol Trust I (15)
10 Material Contracts:
(a) Joseph D. Reid Employment
Agreement (as amended effective
January 1, 1989) (2)
(b) Profit Sharing/401(k) Plan
(as amended and restated April 1, 1995) (13)
(b1) First and Second Amendments to Profit Sharing/
401(k) Plan
(c) Lease Agreement with Business &
Trade Center, Ltd. (11)
(d) Employee Stock Ownership Plan
(as amended and restated February
10, 1994) (12)
(d1) Second and Third Amendments to Employee
Stock Ownership Plan
(e) Employment Agreements with
Robert C. Carr, John C. Smythe,
and Charles J. McDonald (2)
(f) Executive Supplemental Income
Agreements with Robert C. Carr,
Paul R. Ballard, Richard G. Dorner,
James R. Kaye, Scott G. Kling,
John D. Groothuis, David K. Powers,
John C. Smythe and Charles J.
McDonald (13)
(g) Amendment to Employment Agreement
of Joseph D. Reid, dated October
2, 1989 (3)
</TABLE>
-19-
<PAGE> 20
<TABLE>
<CAPTION>
PAGE NUMBER OR
INCORPORATED BY
EXHIBIT NO. DESCRIPTION REFERENCE FROM:
- ----------- ----------- ---------------
<C> <C> <S> <C>
10 Material Contracts--continued:
(h) Consolidation Agreement between
the Corporation and Portage
Commerce Bank (4)
(i) Amendment to Employment Agreement
of Joseph D. Reid, dated
January 30, 1990 (5)
(j) Employment Agreements with
Paul R. Ballard and Richard G.
Dorner (6)
(k) Employment Agreement with
David K. Powers (7)
(l) Definitive Exchange Agreement and
Closing Memorandum between the
Registrant and United Savings
Bank, FSB (8)
(m) Employment Agreement with James
R. Kaye (9)
(n) Definitive Exchange Agreement
between the Registrant and
Financial Center Corporation (10)
13 Annual Report to Security Holders (16)
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
</TABLE>
KEY:
(1) Form S-18, Reg. No. 33-24728C, filed September 15, 1988.
(2) Form S-1, Reg. No. 33-30492, filed August 14, 1989.
(3) Amendment No. 1 to Form S-1, Reg. No. 33-31323, filed
November 20, 1989.
(4) Form S-1, Reg. No. 33-31323, filed September 29, 1989.
(5) Originally filed as exhibit to Form 10-K for year ended December 31,
1989, filed March 30, 1990; refiled as exhibit to Form 10-KSB for year
ended December 31, 1995, filed March 14, 1996, due to time limit for
incorporation by reference pursuant to Regulation SB Item 10(f).
(6) Originally filed as exhibit to Form 10-K for year ended
December 31, 1990, filed March 6, 1991; refiled as exhibit to
Form 10-KSB for year ended December 31, 1995, filed March 14, 1996,
due to time limit for incorporation by reference pursuant to
Regulation SB Item 10(f).
(7) Form 10-K for year ended December 31, 1991, filed February 28, 1992.
(8) Form 8-K dated July 15, 1992, as amended under Form 8 on
September 14, 1992.
-20-
<PAGE> 21
KEY - CONTINUED:
- ----------------
(9) Form 10-KSB for year ended December 31, 1992, filed February 25, 1993.
(10) Form S-4, Reg. No. 33-73474, filed December 27, 1993.
(11) Form 10-KSB for year ended December 31, 1993, filed March 14, 1994.
(12) Form 10-KSB for year ended December 31, 1994, filed March 15, 1995.
(13) Form 10-KSB for the year ended December 31, 1995, filed March 14, 1996.
(14) Form 10-KSB for the year ended December 31, 1996, filed March 21, 1997.
(15) Post Effective Amendment No.1 to Form S-3, Reg. No. 333-41215 and
333-41215-01 filed February 9, 1998.
(16) Proxy statement of Registrant in Schedule 14A filed pursuant to
Rule 14a-101.
-21-
<PAGE> 1
EXHIBIT 10(b1)
FIRST AMENDMENT TO THE CAPITOL BANCORP, LTD.
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership
Plan is hereby amended effective January 1, 1998 by replacing Section 2.1(t)
with the following:
2.1 (t) Employer: Capitol Bancorp, Ltd., a bank holding company
organized and existing under the laws of the State of Michigan, and the entities
listed below, or their respective successor or successors and any other entity
whose Board of Directors authorizes participation in this Plan where Capitol
Bancorp, Ltd. by its Board of Directors has approved said participation. Capitol
Bancorp, Ltd. may also be referred to as the Primary Employer, as defined in
Section 2.1(ss).
Employers participating in the Plan in addition to Capitol
Bancorp, Ltd. are:
<TABLE>
<CAPTION>
Name of Type of State of Date of
Employer Entity Organization Participation
-------- ------ ------------ -------------
<S> <C> <C> <C>
Portage Commerce Bank Banking corp. Michigan Participating as of
restatement date
Capitol National Bank Banking corp. Michigan Participating as of
restatement date
Ann Arbor Commerce Bank Banking corp. Michigan Participating as of
restatement date
Oakland Commerce Bank Banking corp. Michigan Participating as of
restatement date
Paragon Bank & Trust Banking corp. Michigan Participating as of
restatement date
Grand Haven Bank Banking corp. Michigan Participating as of
restatement date
Macomb Community Bank Banking corp. Michigan Adopted as a restatement
effective as of July 1,
1997
Brighton Commerce Bank Banking corp. Michigan Adopted as a restatement
effective as of July 1,
1997
Sun Community Bancorp Limited Corporation Arizona January 1, 1998
Bank of Tucson Banking corp. Arizona January 1, 1998
Valley First Community Bank Banking corp. Arizona January 1, 1998
</TABLE>
<PAGE> 2
Each of the individual Employers named in this Section 2.1(t) may
be referred to as an Employer Member. For purposes of Section 5.3, Employer also
includes all members of a controlled group of corporations (as defined in Code
Section 414(b) as modified by Code Section 415(h)), all commonly controlled
trades or businesses (as defined in Code Section 414(c) as modified by Code
Section 415(h)) or affiliated service groups (as defined in Code Section 414(m))
of which the Employer is a part, and any other entity required to be aggregated
with the Employer pursuant to regulations under Code Section 414(o).
CAPITOL BANCORP, LTD.
Date: December 26, 1997 By: \s\ Joseph D. Reid
----------------- --------------------
Joseph D. Reid
Chairman and CEO
<PAGE> 3
SECOND AMENDMENT TO THE
CAPITOL BANCORP, LTD.
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is
hereby amended effective July 1, 1998 by adding the following participating
employers at the end of the list therein contained:
<TABLE>
<CAPTION>
Name of Type of State of Date of
Employer Entity Organization Participation
- -------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Kent Commerce Bank Banking corp. Michigan July 1, 1998
Muskegon Commerce Bank Banking corp. Michigan July 1, 1998
</TABLE>
CAPITOL BANCORP, LTD.
Dated: December 21, 1998 By: \s\ Joseph D. Reid
----------------- --------------------
Joseph D. Reid
Chairman and CEO
KENT COMMERCE BANK
Dated: December 7, 1998 By: \s\ David Veen
---------------- ----------------
David Veen
President and CEO
MUSKEGON COMMERCE BANK
Dated: December 17, 1998 By: \s\ Robert McCarthy
----------------- ---------------------
Robert McCarthy
President and CEO
<PAGE> 1
EXHIBIT 10(d1)
[SECOND] AMENDMENT TO THE
CAPITOL BANCORP, LTD.
EMPLOYEE STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Stock Ownership Plan is hereby
amended effective January 1, 1997, by replacing Section 2.1(p) with the
following:
2.1(p) Employer: Capitol Bancorp, Ltd., a bank holding company
organized and existing under the laws of the State of
Michigan, Portage Commerce Bank, Ann Arbor Commerce Bank,
Capitol National Bank, Oakland Commerce Bank, Paragon Bank &
Trust (effective Jan. 1, 1995), Grand Haven Bank (effective
July 1, 1994), Macomb Community Bank (effective January 1,
1997) and Brighton Commerce Bank (effective January 8, 1997),
all of which are banks organized and existing under the laws
of the State of Michigan, and Mortgage Connection, Inc., a
corporation organized and existing under the laws of the State
of Michigan, or their respective successor or successors and
any other entity whose Board of Directors authorizes
participation in this Plan where Capitol Bancorp, Ltd. by its
Board of Directors has approved said participation. Each of
the individual Employers named herein may be referred to as an
Employer Member. For purposes of Section 5.3, Employer also
includes all members of a controlled group of corporations (as
defined in Code Section 414(b) as modified by Code Section
415(h)), all commonly controlled trades or businesses (as
defined in Code Section 414(c) as modified by Code Section
415(h)) or affiliated service groups (as defined in Code
Section 414(m)) of which the Employer is a part, and any other
entity required to be aggregated with the Employer pursuant to
regulations under Code Section 414(o).
CAPITOL BANCORP, LTD.
Date: December 26, 1997 By: \s\ Joseph D. Reid
----------------- ----------------------
Joseph D. Reid
Chairman and CEO
<PAGE> 2
THIRD AMENDMENT TO THE
CAPITOL BANCORP, LTD.
EMPLOYEE STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Stock Ownership Plan is hereby
amended effective July 1, 1998 by adding the following participating employers
at the end of the list contained in Section 2.1(p):
<TABLE>
<CAPTION>
Name of Type of State of Date of
Employer Entity Organization Participation
- --------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Kent Commerce Bank Banking corp. Michigan July 1, 1998
Muskegon Commerce Bank Banking corp. Michigan July 1, 1998
</TABLE>
CAPITOL BANCORP, LTD.
Dated: December 21, 1998 By: \s\ Joseph D. Reid
----------------- --------------------
Joseph D. Reid
Chairman and CEO
KENT COMMERCE BANK
Dated: December 7, 1998 By: \s\ David Veen
---------------- ----------------
David Veen
President and CEO
MUSKEGON COMMERCE BANK
Dated: December 17, 1998 By: \s\ Robert McCarthy
----------------- ---------------------
Robert McCarthy
President and CEO
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- ------------------
<S> <C> <C> <C>
Revenues $ 73,226,000 $ 51,706,000 $ 38,184,000
Net Income 4,628,000 5,557,000 4,636,000
Per common share:
Net income:
Basic 0.74 0.91 0.85
Diluted 0.72 0.88 0.82
Book value at year end 7.77 7.22 7.42
Market price at year end 20.938 25.62 12.71
At December 31:
Total assets 1,024,444,000 690,556,000 492,263,000
Stockholders' equity $ 49,292,000 $ 45,032,000 $ 40,159,000
Number of banks 17 11 8
</TABLE>
<PAGE> 2
[PHOTO] REPORT TO
SHAREHOLDERS
- --------------------------------------------------------------------------------
TO OUR SHAREHOLDERS:
I am pleased to report Capitol Bancorp's significant achievements for 1998
and near-term plans for the future.
BANK DEVELOPMENT
Our Corporation grew fifty percent from $691 million in assets to a
consolidated total in excess of $1 billion. This exceeds a growth rate of forty
percent in 1997 and twenty eight percent in 1996. We expect a significant rate
of growth to continue in calendar year 1999.
Following the opening of Kent Commerce Bank, Grand Rapids, Michigan, in
January of 1998, five additional affiliated banks were formed and opened for
business before the close of the calendar year. In Phoenix, Arizona, Camelback
Community Bank opened in May under the leadership of President Barbara Ralston.
It is the signature tenant in a 100,000 square foot office building located in
the upscale "24th and Camelback" area. Sunrise Bank of Arizona opened in
temporary quarters in December. President Bill Hinz, Executive Vice President
Ward Hickey and Executive Vice President Kevin Kinerk each bring expertise in
small business (SBA) lending which will serve the Bank as a significant
specialty product. The Bank is located in the "44th and Camelback" area, also
in Phoenix.
In Tucson, Arizona, Southern Arizona Community Bank opened for business in
August in a building formerly occupied by a large financial institution in the
northwest section of the city. President John P. Lewis, a career Tucson banker,
managed the former "branch" earlier in his career. In Mesa, Arizona, we opened
Mesa Bank in October recruiting long-time Mesa resident and career banker Neil
Barna. The Bank is a highly visible citizen of downtown Mesa occupying a
high-rise structure as the signature tenant.
Detroit Commerce Bank opened its doors in December as the prominent ground
floor tenant of the historic Penobscot Building in downtown Detroit. This
facility adds significant identity to the newly formed institution. President
Linda Watters reported asset growth to $18 million in the bank's first two
weeks of operation.
The components of 1998 asset growth rate are significant. Of the $334
million asset growth, $85 million came from banks formed in 1998. $63 million
came from banks formed in 1997, which now total $108 million as a group. Banks
formed in 1996 grew $57 million or 70% in their second full year of operation.
Banks formed before 1996 produced asset growth of $149 million in 1998, an
annualized growth rate of about 27%.
During the course of 1999 we will embark upon our most ambitious expansion
effort to date. We expect to add seven to nine affiliated banks in the states of
Arizona, Nevada, California and Indiana. It is our strategy to develop new bank
opportunities through the development of affiliated bank-development companies
established in each of the states in which we operate. In Arizona, Sun Community
Bancorp Limited serves as our affiliate bank-development company. In Nevada,
Nevada Community Bancorp Limited serves as the bank-development affiliate.
Indiana Community Bancorp Limited serves the Indiana market. California,
similarly, will be served by a bank-development company which, at the time of
this writing, is in formation.
Each affiliate bank-development company will organize new community-based
banks and provide consolidated services to each bank encouraging maximum bank
operating efficiency.
Advanced technological support for our community banks can be obtained
without the oppressive cost structure shouldered by solo bank companies. As an
example, we have been able to pool our resources in order to address the Y2K
issues which confront the banking industry. We have engaged outside consultants
and teamed the diverse talent which exists in our affiliated bank structure.
This arrangement has allowed us to develop a solution to the Y2K issues
1
<PAGE> 3
BOARD OF
DIRECTORS
LOUIS G. ALLEN
Private Banker
Bank of Bloomfield Hills
PAUL R. BALLARD
President and CEO
Portage Commerce Bank
DAVID L. BECKER
President
Becker Insurance Agency, P.C.
ROBERT C. CARR
Executive Vice President
Capitol Bancorp Ltd.
DOUGLAS E. CRIST
President
Developers of SW Florida, Inc.
RICHARD G. DORNER
President and CEO
Ann Arbor Commerce Bank
GARY A. FALKENBERG, D.O.
Physician
JOEL I. FERGUSON
Chairman
Ferguson Development
KATHLEEN A. GASKIN
Associate Broker and State Appraiser
Tomie Raines, Inc. Realtors
H. NICHOLAS GENOVA
Chairman and CEO
Washtenaw News Co., Inc.
LEWIS D. JOHNS
President
Mid-Michigan Investment Company
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
JAMES R. KAYE
President and CEO
Oakland Commerce Bank
LEONARD MAAS
President
Gillisse Construction Company
LYLE W. MILLER
President
Servco, Inc.
DAVID O'LEARY
Chairman
O'Leary Paint Company
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
One Business & Trade Center
200 Washington Square N.
Lansing, MI 48933
(517) 487-6555
without the imposition of expense that each affiliated bank would incur if
required to fund a Y2K solution separately.
This development structure minimizes the capital requirements imposed upon
the Corporation while allowing for aggressive growth and further reduces the
burden of early start-up losses generally associated with new banks. This
strategy does not necessitate one hundred percent ownership of each financial
institution. We are willing to share ownership with shareholders in the
community which the bank serves. A sharing arrangement is mutually beneficial to
the Corporation and the communities served by the affiliated banks.
EARNINGS PERFORMANCE
Consolidated earnings for 1998 remained strong with net income of $4.6
million. 1998 earnings decreased and were materially impacted by aggressive
expansion in the number of banks within the consolidated group. The overall
earnings contribution of our banks is particularly notable in 1998. De novo
banks, by their nature, are expected to incur operating losses during their
early periods of operations. Accordingly, banks formed in 1998 and 1997, as a
group, did not add to earnings.
However, banks formed in 1996, and less than three years old at year-end
1998, reported strong positive earnings which approximated a return on average
assets of 1%. This measure is particularly significant given the age of those
banks while also achieving an asset growth rate of 70% in 1998.
Banks formed before 1996 generated a return on average assets of more than
1.2%. Again, this rate of return is significant in the context of their asset
growth rate which was more than 25% in 1998.
OUR MISSION
The strength of our community banks rests upon two seemingly irreconcilable
concepts. First, is the independence of bank management. Second, is the
dependence of each bank on its affiliation for technology and oversight. We are
convinced that we have married these two concepts into a successful formula for
growth and profitability. Each of the affiliated financial institutions has
complete authority to make all decisions affecting credit, pricing and the
marketing of bank services. We rely on the President and the Board of Directors
of each bank to determine the best interests of the bank within their community.
We seek to encourage a human interface between bank customers and the banking
system.
However, successful relationship banking cannot be obtained at the expense
of technological progress. Customers demand both. Our affiliated network of
community banks allows us to explore and fund significant technological
innovations on behalf of the community banks and at a moderate cost to the bank.
Successful safety and soundness objectives require specialized programs in
both risk management and credit administration for the affiliated banks.
Moreover, the demands of the customer necessitate implementation of advanced
programs in electronic banking. Nevertheless, we are convinced that our
community banks will remain in the forefront of change without forgetting the
primary mission of caring for the customer.
We have laid the foundation for exciting development over the next two
years, which we believe will significantly enhance shareholder value.
Thank you for your continued support.
Sincerely,
Joseph D. Reid
JOSEPH D. REID
Chairman, President and CEO
2
<PAGE> 4
[PHOTO] ANN ARBOR
COMMERCE
BANK
- --------------------------------------------------------------------------------
2950 STATE STREET SOUTH
ANN ARBOR, MI 48104 - (734) 887-3100
Ann Arbor--the charm of a college town and the energy of a major business
center. It is dynamic, growing, and open to change, yet content with what has
stood the test of time. Ann Arbor is a leading medical arena, a cultural center
and an incubator for new ideas. This is a town where you might begin your autumn
Saturday morning at the Farmer's Market, cheer the football team to a national
championship in the afternoon and don your tux for the symphony the same
evening...only in Ann Arbor.
Ann Arbor Commerce Bank has become an integral part of Ann Arbor--the charm
of a personalized community bank with the capability to meet the rapidly
changing needs of our market. Reflecting our community, we offer diversity in
our services, from traditional checking, savings and CD accounts to our new
offering of trust and investment services. We finance student housing, high-tech
companies, medical practices, entrepreneurs, as well as small and large
residences. Ann Arbor Commerce Bank is committed to retaining that which is
tried and true while remaining open to changes we know the future will bring.
Ann Arbor Commerce Bank...only in Ann Arbor.
Richard G. Dorner
RICHARD G. DORNER - President and CEO
BOARD OF
DIRECTORS
MARY LINCOLN CAMPBELL
Principal
Enterprise Development Fund
ROBERT C. CARR
Executive Vice President
Capitol Bancorp Ltd.
RICHARD G. DORNER
President and CEO
Ann Arbor Commerce Bank
CRISTIN REID ENGLISH
Vice President of Corporate
Development and General Counsel
Capitol Bancorp Ltd.
JAMES A. FAJEN
Attorney at Law
Fajen & Miller, P.L.L.C.
JAMES W. FINN
Chairman and CEO
Finn's - JM&J Insurance Agency, Inc.
H. NICHOLAS GENOVA
Chairman and CEO
Washtenaw News Co., Inc.
RICHARD M. GREENE
Consultant, Mortgage Banking
Richard Greene Point Training
MARILYN D. KATZ-PEK
General Managing Partner
Biotechnology Business
Consultants, L.L.P.
DAVID W. LUTTON
President
Charles Reinhart Company Realtors
FRITZ SEYFERTH
Executive Associate Athletic Director
University of Michigan Athletic Dept.
CARL VAN APPLEDORN, M.D.
Vice President
Urological Surgery Associates, P.C.
WARREN E. WRIGHT
Chairman and Partner
Renosol Corporation
OFFICERS
JAMES A. FAJEN
Chairman of the Board
WARREN E. WRIGHT
Secretary
RICHARD G. DORNER
President and CEO
CLIFFORD G. SHELDON
Senior Vice President
LOUISE A. MORSE
Vice President
JOHN NIXON III
Vice President
BRIAN F. PICKNELL
Vice President
MARK J. SLADE
Vice President and Cashier
RICHARD G. TICE
Vice President
ANN ARBOR COMMERCE BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $196,446 $138,390 $105,651
PORTFOLIO LOANS 154,060 115,882 79,463
DEPOSITS 172,356 127,852 98,415
TOTAL CAPITAL 12,901 9,759 6,655
</TABLE>
3
<PAGE> 5
BOARD OF
DIRECTORS
BRUCE I. ASH
Vice President
Paul Ash Investment Company
SLIVY EDMONDS COTTON
Chairman and CEO
Perpetua, Inc.
MICHAEL J. DEVINE
Attorney at Law
BRIAN K. ENGLISH
English Law Firm
WILLIAM A. ESTES, JR.
President
TEM Corp.
RICHARD N. FLYNN
President
Flynn & Associates
MICHAEL F. HANNLEY
President
Bank of Tucson
MICHAEL J. HARRIS
Associate Broker
Tucson Realty and Trust Company
RICHARD F. IMWALLE
President
University of Arizona Foundation
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
BURTON J. KINERK
Attorney at Law
Kinerk, Beal, Schmidt & Dyer, P.C.
HUMBERTO S. LOPEZ
CPA and President
HSL Properties, Inc.
LYN M. PAPANIKOLAS
Manager of Public Relations
Arizona Childrens Foundation
JOSEPH D. REID
Chairman and CEO
Sun Community Bancorp Limited
OFFICERS
JOSEPH D. REID
Chairman of the Board and CEO
RICHARD N. FLYNN
Secretary
MICHAEL F. HANNLEY
President
C. DAVID FOUST
Executive Vice President and CCO
BARBARA A. SADLER
Vice President
CHARLENE F. SCHUMAKER
Vice President
SANDI L. SMITHE
Vice President
PATRICK W. SNEIZEK
Senior Vice President
Sun Community Mortgage Company
BANK OF [PHOTO]
TUCSON
- --------------------------------------------------------------------------------
4400 EAST BROADWAY
TUCSON, AZ 85711 - (520) 321-4500
"The Old Pueblo", "Valley of the Sun", "Painted Desert"--these are phrases
often used to describe our Tucson community; unique for its tradition, blending
a vibrant exciting city with small town ambiance. The Bank of Tucson has drawn
from this rich heritage, combining the personal service and tradition of a small
bank and business interests while also providing the technology and support so
necessary to banking clients in the 21st century.
We are an entity that supports large and small business alike, while never
wavering from the personal service credo that was our beginning. We have become
an integral part of the lush desert and rugged mountain infrastructure of Tucson
and the surrounding region because we have restored the standard of the old west
where a handshake and a commitment are your stock in trade. This personal
approach is fueling our success, not just in satisfied customers, but even more
by the significant number of referrals from those customers. It has resulted in
our potential customers becoming clients and clients becoming part of the
dynamic, successful Bank of Tucson family. That's why we call it "today's
banking the old-fashioned way". The Bank of Tucson.
Michael F. Hannley
MICHAEL F. HANNLEY - President
BANK OF TUCSON
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $63,860 $41,605 $17,276
PORTFOLIO LOANS 37,899 23,406 4,850
DEPOSITS 57,432 35,926 12,021
TOTAL CAPITAL 6,053 5,412 5,189
</TABLE>
4
<PAGE> 6
[PHOTO] BRIGHTON
COMMERCE
BANK
- --------------------------------------------------------------------------------
8700 NORTH SECOND STREET
BRIGHTON, MI 48116 - (810) 220-1199
Brighton, one of the fastest growing communities in Michigan, offers a
quality of life that makes it one of the more attractive and appealing
residential and commercial areas in Southeast Michigan.
With its pristine landscape, Brighton offers a quaint downtown on the mill
pond, one of the few ski areas in this part of the state and many quality golf
courses. Numerous all-sports lakes incorporate into a varied terrain to create
attractive residential home sites.
Its prime geographical location and impressive demographics also enhance the
attractive nature of Brighton. Only forty minutes away by expressway are two of
the largest universities in the United States. The University of Michigan and
Michigan State University offer Big Ten college sports in addition to academics
and entertainment. Brighton is also forty-five minutes by expressway from one of
Michigan's major industrial cities--Detroit, the automotive capital of the
world--which offers all major professional sports, as well as many other
entertainment opportunities.
As we look to the future, we expect another exciting year in 1999 thanks to
the continued support of a community which is one of the fastest growing in the
state, and which appreciates a local community bank.
Gary T. Nickerson
GARY T. NICKERSON - President and CEO
BOARD OF
DIRECTORS
ROBERT C. CARR
Executive Vice President
Capitol Bancorp Ltd.
MICHAEL B. CORRIGAN
President and Owner
Corrigan Oil Co., Inc.
SCOTT C. GRIFFITH
President and Co-Owner
ERA Griffith Realty
MARK A. LATTERMAN
President
Latterman & Associates, P.C.
PIET W. LINDHOUT
Director and CEO
Lindhout Associates
SUSAN GRIMES MUNSELL
Certified Public Accountant
GARY T. NICKERSON
President and CEO
Brighton Commerce Bank
MITCHELL J. STANLEY
President
Mickey Stanley and Associates
JAMES A. WINCHEL
President and Owner
Colt Park Insurance Agency, Inc.
OFFICERS
ROBERT C. CARR
Chairman of the Board
MICHAEL B. CORRIGAN
Vice Chairman and Secretary
GARY T. NICKERSON
President and CEO
CANDICE G. RANDOLPH
Vice President and Cashier
WILLIAM R. ANDERSON
Vice President
JOSEPH M. PETRUCCI
Vice President
BRIGHTON COMMERCE BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997
<S> <C> <C>
TOTAL ASSETS $42,871 $23,853
PORTFOLIO LOANS 34,024 13,817
DEPOSITS 39,023 21,518
TOTAL CAPITAL 3,707 1,921
</TABLE>
5
<PAGE> 7
BOARD OF
DIRECTORS
SHIRLEY A. AGNOS
President
Arizona Town Hall
MICHAEL J. DEVINE
Attorney at Law
BRIAN K. ENGLISH
English Law Firm
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
JOHN S. LEWIS
President
Sun Community Bancorp Limited
TAMMY A. LINN
Community Volunteer
SUSAN C. MULLIGAN
Certified Public Accountant
Miller Wagner Business Services, Inc.
EARL A. PETZNIK
President and CEO
Northside Hay Company
WILLIAM J. POST
President and CEO
Arizona Public Service Co.
BARBARA J. RALSTON
President
Camelback Community Bank
JOSEPH D. REID
Chairman and CEO
Sun Community Bancorp Limited
DAN A. ROBLEDO
SVP and County Operations Manager
Lawyer's Title of Arizona, Inc.
MARY JANE RYND, CPA
Partner
Rynd, Carneal and Ewing
JACQUELINE J. STEINER
Retired State Senator
OFFICERS
JOSEPH D. REID
Chairman of the Board and CEO
BARBARA J. RALSTON
President
J. ROBERT BOOSMAN
Executive Vice President and CCO
BETTY L. CORNISH
Vice President
CHRISTOPHER M. GRAHAM
Vice President
CAMELBACK [PHOTO]
COMMUNITY
BANK
- --------------------------------------------------------------------------------
2777 EAST CAMELBACK ROAD
PHOENIX, AZ 85016 - (602) 224-5800
Camelback Community Bank opened May 20, 1998. In August we moved into our
permanent space in a newly constructed building in the Camelback Corridor, the
heart of the emerging financial hub of Phoenix.
Phoenix is the sixth largest and one of the fastest growing cities in the
country and economic forecasts indicate continued growth for the next several
years. In 1998, Phoenix experienced the highest-ever number of new housing
starts and saw an increase in the construction of new office buildings and back
office space. These factors support growth potential for us.
Management and personnel changes resulting from the mergers of the three
biggest banks in our marketplace provide new business opportunities for our
bank. Customers seek out Camelback Community Bank where they can experience
relationship banking and quality customer service.
We look forward to continued growth in the coming year as we differentiate
our bank through our local decision making and outstanding service.
Barbara Ralston
BARBARA J. RALSTON - President
CAMELBACK COMMUNITY BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998
<S> <C>
TOTAL ASSETS $10,017
PORTFOLIO LOANS 3,246
DEPOSITS 6,327
TOTAL CAPITAL 3,678
</TABLE>
6
<PAGE> 8
[PHOTO] CAPITOL
NATIONAL
BANK
- --------------------------------------------------------------------------------
ONE BUSINESS & TRADE CENTER - 200 WASHINGTON SQUARE NORTH
LANSING, MI 48933 - (517) 484-5080
Capitol National Bank completed its 16th year of serving its community
during 1998 with another strong performance, reporting income in excess of $2
million for the year.
We are fortunate to serve a market with a stable economic base which
includes state government, Michigan State University and General Motors
Corporation. These large cornerstones of our community, coupled with a thriving
service sector comprised of many small to medium-sized businesses, have provided
excellent growth opportunities for the Bank.
We are continually exploring methods to better serve the banking needs of
our community so as to better respond to the many new opportunities both today
and in the future. During the past year, we introduced check imaging technology
for our customers along with expansion of our popular courier service.
Our philosophy of providing a high level of service with experienced
management accessible to our customers will continue to be our focus for the
future growth and success of Capitol National Bank.
John C. Smythe
JOHN C. SMYTHE - President and CEO
BOARD OF
DIRECTORS
ROBERT C. CARR
Executive Vice President
Capitol Bancorp Ltd.
NAN ELIZABETH CASEY
Attorney at Law
Casey & Boog, P.C.
CHARLES J. CLARK
President
Clark Construction Company
BRIAN K. ENGLISH
English Law Firm
JAMES C. EPOLITO
President and CEO
The Accident Fund Company
PATRICK F. HAYES
President
F. D. Hayes Electric
RICHARD A. HENDERSON
President
Henderson & Associates, P.C.
CHRISTOPHER HOLMAN
Publisher
Greater Lansing Business Monthly
KEVIN A. KELLY
Managing Director
Michigan State Medical Society
MARK A. LATTERMAN
President
Latterman & Associates, P.C.
BRUCE J. MAGUIRE, III
President and Treasurer
Spartan Oil Corporation
CHARLES J. MCDONALD
Executive Vice President and Cashier
Capitol National Bank
JOHN O'LEARY
Co-President
O'Leary Paint Company
PATRICIA A. REYNOLDS
President
Capital Region Community Foundation
JOHN C. SMYTHE
President and CEO
Capitol National Bank
OFFICERS
ROBERT C. CARR
Chairman of the Board
MARK A. LATTERMAN
Vice Chairman
PATRICK F. HAYES
Secretary
JOHN C. SMYTHE
President and CEO
CHARLES J. MCDONALD
Executive Vice President and Cashier
JOHN R. FARQUHAR
Vice President
DAVID E. FELDPAUSCH
Vice President
CAPITOL NATIONAL BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $136,776 $126,552 $104,254
PORTFOLIO LOANS 104,333 94,400 80,749
DEPOSITS 126,062 116,746 95,468
TOTAL CAPITAL 9,759 8,893 8,020
</TABLE>
7
<PAGE> 9
BOARD OF
DIRECTORS
RALPH J. BURRELL
President
Symcon
DR. VIVIAN L. CARPENTER
Associate Professor/Assistant Dean, CPA
Florida A&M University
ROBERT C. CARR
Executive Vice President
Capitol Bancorp Ltd.
DONALD M. DAVIS, JR.
Vice President, Human Resources
Health Alliance Plan
DOUGLAS H. GRAHAM
Director of Economic Development
Detroit Renaissance
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
MARTHA K. RICHARDSON
President
Services Marketing Specialists, Inc.
JAMES F. STAPLETON
President
B and R Consultants
LINDA A. WATTERS
President and CEO
Detroit Commerce Bank
OFFICERS
JOSEPH D. REID
Chairman of the Board
LINDA A. WATTERS
President and CEO
ROBERT C. CARR
Secretary
DETROIT [PHOTO]
COMMERCE
BANK
- --------------------------------------------------------------------------------
645 GRISWOLD - SUITE 70
DETROIT, MI 48226 - (313) 967-9700
Detroit Commerce Bank, the first bank chartered in the city of Detroit in 28
years, opened on December 14, 1998 in the lobby of the historic, 47-story
Penobscot Building. Located downtown in the central business district, the Bank
is well positioned for growth. Over the past three years, Detroit has
experienced rapid economic expansion, with $5.5 billion in investments led by
small businesses and large corporations, as evidenced by the relocation of
General Motors World Headquarters to the Renaissance Center after 76 years in
the New Center area. Downtown Detroit and its neighborhoods are experiencing a
transformation with two new sports stadiums (Detroit Tigers baseball and Detroit
Lions football), three new casinos, an entertainment district and new housing
developments.
Detroit Commerce Bank is a full service bank. Customers can select from a
wide range of traditional bank products and services for individuals and small
business owners. In a large urban market where the major banks have merged with
out-of-state rivals, Detroit Commerce Bank will distinguish itself by providing
a high level of personalized customer service supported by the belief that every
customer is important, has value and is appreciated.
Linda A. Watters
LINDA A. WATTERS - President and CEO
DETROIT COMMERCE BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998
<S> <C>
TOTAL ASSETS $18,620
PORTFOLIO LOANS 506
DEPOSITS 15,622
TOTAL CAPITAL 2,979
</TABLE>
8
<PAGE> 10
[PHOTO] GRAND
HAVEN
BANK
- --------------------------------------------------------------------------------
15 SOUTH SECOND STREET
GRAND HAVEN, MI 49417 - (616) 846-1930
The Tri-Cities area is special for many reasons. Consider the winds and
waves of the Lake Michigan waterfront, which make the area a very popular
vacation destination. Combine the small-town, resort-like atmosphere with a
diverse local economy and strong work ethic and you have an excellent place to
live and work.
The Tri-Cities' unique personality continues to make it an ideal place for
our community oriented, relationship-style approach to banking. The continued
growth of Grand Haven Bank indicates that our community appreciates products and
services offered in a straightforward, responsive manner. It also shows that our
growing client base prefers our local decision-making authority and personal
attention to details, rather than subjecting them to across-the-board policies
which do not take into account their individual needs.
Our customer service delivery system will be improved in 1999 when a new
facility is built for us in downtown Grand Haven. While the facility will
change, our unwavering commitment to our customers will not.
John D. Groothuis
JOHN D. GROOTHUIS - President and CEO
BOARD OF
DIRECTORS
PAUL R. BALLARD
President and CEO
Portage Commerce Bank
STANLEY L. BOELKINS
Owner and Appraiser
Boelkins & Associates
PETER E. BOLLINE
Owner
Wood Specialties Co.
BRAD J. FORTENBACHER
President
Tri-Cast, Inc.
JOHN D. GROOTHUIS
President and CEO
Grand Haven Bank
BARI STANTON JOHNSON
CEO and Principal Consultant
The Stanton Group
MARK A. KLEIST
Attorney at Law/Treasurer
Scholten and Fant, P.C.
STEVEN L. MAAS
Vice President
Gillisse Construction Company
CALVIN D. MEEUSEN
Certified Public Accountant
ARNOLD W. REDEKER, JR.
Partner and Vice President
Redeker Ford, Inc.
ROBERT J. TRAMERI
Chairman
Paragon Bank & Trust
JOHN P. VAN EENENAAM
Attorney at Law
Scholten and Fant, P.C.
GERALD A. WITHERELL
President
Oakes Agency, Inc.
OFFICERS
JOHN P. VAN EENENAAM
Chairman of the Board
PAUL R. BALLARD
Vice Chairman
ARNOLD W. REDEKER, JR.
Secretary
JOHN D. GROOTHUIS
President and CEO
SHERRY J. PATTERSON
Vice President
GRAND HAVEN BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $ 66,872 $ 45,320 $ 32,731
PORTFOLIO LOANS 57,057 35,770 26,162
DEPOSITS 61,797 41,298 29,728
TOTAL CAPITAL 4,724 3,741 2,809
</TABLE>
9
<PAGE> 11
BOARD OF
DIRECTORS
JAMES M. BADALUCO
Vice President
S.J. Wisinski & Company
PAUL R. BALLARD
President and CEO
Portage Commerce Bank
PAUL S. BUITEN
Chairman
Buiten, Tamblin, Steensma &
Associates, Inc.
Julius Duthler
President
Duthler Ford Sales, Inc.
Kevin J. Einfeld
President
BDR Executive Custom Homes
GRANT J. GRUEL
Attorney at Law and Partner
Gruel, Mills, Nims & Pylman
GARY D. HENSCH
Certified Public Accountant
JAMES P. HOVINGA
President
JPH, Inc.
DOUGLAS L. KOOL
President
Kool Chevrolet-Geo, Inc.
DALE R. MEDEMA
President
Medemaas Carpet & Interiors, Inc.
CALVIN D. MEEUSEN
Certified Public Accountant
JOHN H. PLEUNE
President
Pleune Service Company, Inc.
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
MARY L. URSUL
General Counsel
Spectrum Health
DAVID E. VEEN
President and CEO
Kent Commerce Bank
MICHAEL C. WALTON
Attorney At Law
Tolley, VandenBosch, Walton,
Korolewicz & Brengle, P.C.
OFFICERS
JOSEPH D. REID
Chairman of the Board
DAVID E. VEEN
President and CEO
MARTINE KALUSKE
Vice President and Cashier
MICHAEL P. BOELENS
Vice President
JOHN J. CODER
Vice President
KENT [PHOTO]
COMMERCE
BANK
- --------------------------------------------------------------------------------
4050 LAKE DRIVE
GRAND RAPIDS, MI 49546 - (616) 974-0200
Kent Commerce Bank is privileged to be located in one of the fastest growing
and most dynamic economic areas in the Midwest--Kent County, Michigan. It has
been exciting to be a part of the growth and expansion of both small business
and commercial and residential real estate in the metro Grand Rapids community.
In our first year of bank operations we have begun to earn a solid
reputation as a community-focused business advocate, going the extra mile to
deliver on our commitment to provide personalized banking services to local
companies. We are actively promoting and participating in community-sponsored
lending programs to assist local businesses with their financing objectives.
Kent Commerce Bank has also established itself as a capable and responsive real
estate lender, where our knowledge of the local market truly sets us apart. Our
depositors appreciate our convenient and accessible location, our drive through
and 24 hour ATM, and bankers who know them when they call or visit.
The response to Kent Commerce Bank in 1998 has been tremendous, and we will
continue to thrive by focusing on these strengths.
David E. Veen
DAVID E. VEEN - President and CEO
KENT COMMERCE BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998
<S> <C>
TOTAL ASSETS $31,587
PORTFOLIO LOANS 22,930
DEPOSITS 28,028
TOTAL CAPITAL 3,490
</TABLE>
10
<PAGE> 12
[PHOTO] MACOMB
COMMUNITY
BANK
- --------------------------------------------------------------------------------
16000 HALL ROAD - SUITE 102
CLINTON TOWNSHIP, MI 48038 - (810) 228-1600
It seems like just yesterday that the landscape surrounding Macomb Community
Bank's prime location was sparsely populated, highlighted mostly by farmland.
Today, our community is home to more than forty facilities owned by Fortune 100
firms. Since 1995, residential housing construction permits are up over 40%. A
recent University of Michigan study says it all: "Macomb County ranked first in
per person income growth this past decade among comparable counties across our
great nation".
The vitality of our citizens and community is evident everywhere. The
well-publicized M-59 corridor bustles with exciting new retail/commercial,
industrial and residential development projects.
Natural treasures such as Lake St. Clair and Stoney Creek Metro Park are
just minutes from Macomb Community Bank. The neighboring Macomb Center for the
Performing Arts, and the north campus of Macomb Community College provide
residents with cultural amenities and challenging educational programs.
After multiple years of sustained, positive economic growth, the future is
indeed bright for our successful community bank to continue its goal of bringing
"relationship banking" with a sense of personality and tradition, to the state
of Michigan's third most populated community.
Stephen C. Tarczy
STEPHEN C. TARCZY - President and CEO
BOARD OF
DIRECTORS
EUGENE J. AGNONE, JR., M.D.
Medical Oncologist
GERALD J. CARNAGO
Attorney/CPA, Attorney at Law
Carnago & Associates, P.C.
Carnago & Carnago, P.C.
ROBERT C. CARR
Executive Vice President
Capitol Bancorp Ltd.
CHRISTINA D'ALESSANDRO
Vice President
Villa Custom Homes, Inc.
RONALD G. FORSTER
Treasurer
Arkay Manufacturing, Inc.
ROBERT F. GARVEY
Attorney
Thomas, Garvey, Garvey & Sciotti
JOHN H. JOHNSON
President
Johnson Consulting Group
JAMES R. KAYE
President and CEO
Oakland Commerce Bank
DAVID F. KEOWN
Building Official
Washington Township
SAM A. LOCRICCHIO
Executive Vice President
Macomb Community Bank
VITO MUNACO
Owner and Operator
WEMCO
The Mandamus Group
JAMES A. PATRONA
President and Owner
Universal Press & Machinery, Inc.
DELIA RENDON-MARTIN
Co-Owner
Martin Enterprises
STEPHEN C. TARCZY
President and CEO
Macomb Community Bank
OFFICERS
ROBERT C. CARR
Chairman of the Board
RONALD G. FORSTER
Vice Chairman
STEPHEN C. TARCZY
President and CEO
SAM A. LOCRICCHIO
Executive Vice President
and Secretary
MACOMB COMMUNITY BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $76,044 $41,010 $15,123
PORTFOLIO LOANS 40,426 19,546 5,821
DEPOSITS 69,356 37,227 11,487
TOTAL CAPITAL 6,106 3,412 3,587
</TABLE>
11
<PAGE> 13
BOARD OF
DIRECTORS
NEIL R. BARNA
President
Mesa Bank
MICHAEL J. DEVINE
Attorney at Law
DEBRA L. DUVALL, ED. D.
Associate Superintendent
Mesa Public Schools
BRIAN K. ENGLISH
English Law Firm
ROBERT R. EVANS, SR.
President
Baron Resources, Inc.
GARY W. HICKEL
President
Valley First Community Bank
STEWART A. HOGUE
Owner
Commercial Lithographers
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
PHILIP S. KELLIS
Partner
Dobson Ranch Inn and Resort
RUTH L. NESBITT
Community Volunteer
JOSEPH D. REID
Chairman and CEO
Sun Community Bancorp Limited
JAMES A. SCHMIDT
Executive Director-Tax Services
Nelson Lambson & Co., P.L.C.
DANIEL P. SKINNER
President
LeBaron and Carroll Insurance
TERRY D. TURK
President
Sun American Mortgage Co.
OFFICERS
JOSEPH D. REID
Chairman of the Board and CEO
NEIL R. BARNA
President
DAVID D. FORTUNE
Executive Vice President and CCO
SUE KATHE
Vice President
DANIEL R. LAUX
Vice President
MESA [PHOTO]
BANK
- --------------------------------------------------------------------------------
63 EAST MAIN STREET - SUITE 100
MESA, AZ 85201 - (602) 649-5100
Mesa Bank opened on October 20, 1998 with the backing of nearly 250
shareholders. With the commitment of a strong board of directors with ties to
Mesa and the East Valley, Mesa Bank is Mesa's only community bank, providing
services to customers with an emphasis on the human touch. Access to senior
management, local decision-making capabilities, and prompt responses to customer
requests set us apart from our competition.
Mesa Bank provides traditional deposit and loan products with an emphasis on
business and professional services. Our product line also includes residential
interim construction financing and plant or office construction-to-permanent
financing. As an affiliate of the Sun Community Bancorp Limited family of banks,
Mesa Bank also provides SBA loans, real estate mortgage products and trust
services. `Personalized Service from Your Hometown Bank' is not just a slogan
but a way of doing business at Mesa Bank. We are proud to be a part of our
community.
Neil Barna
NEIL R. BARNA - President
MESA BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998
<S> <C>
TOTAL ASSETS $6,192
PORTFOLIO LOANS 1,386
DEPOSITS 2,191
TOTAL CAPITAL 4,001
</TABLE>
12
<PAGE> 14
[PHOTO] MUSKEGON
COMMERCE
BANK
- --------------------------------------------------------------------------------
255 SEMINOLE ROAD
MUSKEGON, MI 49444 - (616) 737-4431
Muskegon Commerce Bank celebrated its first year of operations in December
after achieving several milestones during the year. Based on consistent deposit
growth and strong loan demand, the Bank quickly outgrew its original facility
and relocated to a newly remodeled 5,500 square foot building. The move allowed
us to expand our banking services by adding a second drive through lane, an ATM
machine, and several private offices.
Our new building brought us closer to the residential community which helped
generate $20 million in mortgage closings during the year. With the added space
we were also able to add to the bank a veteran commercial loan officer who is
well-known in Muskegon.
While the bank is still growing at a rapid pace, we were able to reach
profitability for the first time in November. With our base of core customers we
have built a solid foundation for Muskegon Commerce Bank to continue to increase
earnings in 1999 while maintaining an aggressive growth strategy.
Robert J. McCarthy
ROBERT J. MCCARTHY - President and CEO
BOARD OF
DIRECTORS
PAUL R. BALLARD
President and CEO
Portage Commerce Bank
WILLIAM C. COOPER
President
Omni Fitness Club
THOMAS F. DEVOURSNEY
President and CEO
Pliant Plastics
RONALD R. GOSSETT
Vice Chairman
Muskegon Commerce Bank
ROBERT D. JEWELL
Chairman
Baker College System
CHARLES E. JOHNSON II
Retired Chairman and CEO
SPX Corporation
CHRISTOPHER L. KELLY
Attorney at Law
Parmenter O'Toole
DANIEL J. KUZNAR
Owner
Quality Tool & Stamping Co., Inc.
ROBERT J. MCCARTHY
President and CEO
Muskegon Commerce Bank
JOSEPH D. REID
Chairman, President and CEO
Capitol Bancorp Ltd.
PATRICIA J. ROY, D.O.
Co-Owner and President
Roy and Rosema, P.C.
JAMES S. TYLER
President
Tyler Sales Co., Inc.
OFFICERS
JOSEPH D. REID
Chairman of the Board
RONALD R. GOSSETT
Vice Chairman
ROBERT J. MCCARTHY
President and CEO
BRUCE A. MAY
Vice President
DAVID W. SEPPALA
Vice President
MUSKEGON COMMERCE BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997
<S> <C> <C>
TOTAL ASSETS $ 28,552 $7,885
PORTFOLIO LOANS 24,491 1,610
DEPOSITS 26,022 5,240
TOTAL CAPITAL 2,424 2,604
</TABLE>
13
<PAGE> 15
BOARD OF
DIRECTORS
DONALD A. BOSCO
President
Donald A. Bosco Building, Inc.
ROBERT C. CARR
Executive Vice President
Capitol Bancorp Ltd.
MARK B. CHURELLA
President and CEO
FDI Group
LEON S. COHAN
Counsel to the Firm
Barris, Scott, Denn & Driker
MICHAEL J. DEVINE
Attorney at Law
JEFFREY L. HAUSWIRTH
CPA, CVA, and Principal
Jenkins, Magnus, Volk & Carroll, P.C.
JAMES R. KAYE
President and CEO
Oakland Commerce Bank
IHOR J. KUCZER
Vice President
Oakland Commerce Bank
DAVID F. LAU, J.D. CLU
Chartered Financial Consultant/Owner
Lau & Lau Associates
AKRAM G. NAMOU
Certified Public Accountant
JULIUS L. PALLONE
President
J.L. Pallone Associates
FRANCINE PEGUES
Regional Sales Director
Blue Cross Blue Shield of Michigan
OFFICERS
MICHAEL J. DEVINE
Chairman of the Board
JAMES R. KAYE
President and CEO
IHOR J. KUCZER
Vice President and Secretary
THOMAS K. PERKINS
Vice President
OAKLAND [PHOTO]
COMMERCE
BANK
- --------------------------------------------------------------------------------
31731 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MI 48334 - (248) 855-0550
Oakland Commerce Bank is located in Oakland County, one of the fastest
growing counties in Michigan. We are also part of the metro Detroit setting.
This positions us to maintain solid growth and to be part of the new
opportunities certain to be present in Detroit's revitalization.
While growing in the midst of this major metropolitan financial hub, we have
seen the creation of larger and larger financial institutions. As their capacity
grows, competition becomes more intense to provide expanded products and
services. This also creates a growing potential customer base. Simply put, big
banks need big businesses.
Oakland Commerce Bank focuses on small businesses. We understand that our
customers need the latest technology and must be provided a wide variety of
products, services and expertise. However, the most important support we can
offer small businesses is fulfilling their desire for a relationship that
provides a financial partner and consultant. This is the need that Oakland
Commerce Bank is committed to fill.
James R. Kaye
JAMES R. KAYE - President and CEO
OAKLAND COMMERCE BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $108,747 $81,839 $71,095
PORTFOLIO LOANS 63,261 58,091 54,569
DEPOSITS 97,465 75,549 62,167
TOTAL CAPITAL 6,613 5,811 5,434
</TABLE>
14
<PAGE> 16
[PHOTO] PARAGON
BANK &
TRUST
- --------------------------------------------------------------------------------
301 HOOVER BOULEVARD
HOLLAND, MI 49423 - (616) 394-9600
Located in Holland, Michigan, a city known for its Dutch heritage and a
strong work ethic, Paragon Bank & Trust has flourished as a small community bank
for the past eight years. Strong growth from both the automotive and office
furniture industries have fueled the local economy and have helped Paragon
achieve its goals as a bank. This growth has brought a diversity of new people
to Holland and has changed the former, more conservative nature to a more
cosmopolitan outlook.
Providing financial tools and services to the small business sector in the
community is the focus of Paragon Bank & Trust. In response to a demand for
financial services relating to non-bank products, our Trust Department has
expanded to a state-wide operation by offering mutual funds, brokerage services,
investment management services and a variety of insurance investment products in
all of the Michigan banks.
We look forward to serving you into the new millennium.
Scott G. Kling
SCOTT G. KLING - President and CEO
BOARD OF
DIRECTORS
PAUL R. BALLARD
President and CEO
Portage Commerce Bank
ROBERT J. BATES
Physician
Western Mich. Urological Assoc., P.C.
CHARLES A. BROWER
CPA and Partner
DeLong & Brower, P.C.
JACK L. DEWITT
President
Request Foods, Inc.
SCOTT DIEPENHORST
Principal
SD & Associates
PAUL ELZINGA
Co-Chairman and Director of
Business Development
Elzinga & Volkers, Inc.
SUSAN K. HUTCHINSON
Owner
Hutchinson's Stores for Children
GEORGE P. JULIUS, JR.
President and CEO
Vista Ventures
LAWRENCE D. KERKSTRA
President and CEO
Kerkstra Precast, Inc.
SCOTT G. KLING
President and CEO
Paragon Bank & Trust
LEONARD MAAS
President
Gillisse Construction Company
MITCHELL W. PADNOS
Executive Vice President
Louis Padnos Iron & Metal Company
RICHARD H. RUCH
Director
Herman Miller, Inc.
RICHARD G. SWANEY
Attorney at Law
Swaney, Thomas & Moritz, P.C.
ROBERT J. TRAMERI
Chairman
Paragon Bank & Trust
OFFICERS
ROBERT J. TRAMERI
Chairman of the Board
RICHARD G. SWANEY
Vice Chairman
SCOTT G. KLING
President and CEO
ERIC J. HOOGSTRA
Senior Vice President-Trust
CHRISTOPHER L. HUGAR
Senior Vice President
PARAGON BANK & TRUST
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $86,692 $72,332 $63,752
PORTFOLIO LOANS 63,417 59,184 46,680
DEPOSITS 79,640 66,466 58,940
TOTAL CAPITAL 6,395 5,426 4,484
</TABLE>
15
<PAGE> 17
BOARD OF
DIRECTORS
PAUL R. BALLARD
President and CEO
Portage Commerce Bank
DAVID L. BECKER
President
Becker Insurance Agency, P.C.
THOMAS R. BERGLUND
Physician
ProMed Family Practice
PATRICIA E. DOLAN
Community Volunteer
CRISTIN REID ENGLISH
Vice President of Corporate
Development and General Counsel
Capitol Bancorp Ltd.
ALAN A. HALPERN, M.D.
President
Michigan Orthopedic Surgery
& Rehab, Inc.
ROBERT L. JOHNSON
CFO
Medallion Management, Inc.
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
PAUL M. LANE, PH.D.
Grand Valley State University
WILLIAM J. LONGJOHN
Vice President
Midwest Business Exchange
JOHN W. MARTENS
Certified Public Accountant
OFFICERS
MICHAEL L. KASTEN
Chairman of the Board
WILLIAM J. LONGJOHN
Vice Chairman and Secretary
PAUL R. BALLARD
President and CEO
ALLAN T. REIFF
Senior Vice President
GARY T. ADAMS
Vice President
JAMES V. LUNARDE
Vice President
MARK K. MACLELLAN
Vice President
HARRY B. STORR
Vice President
PORTAGE [PHOTO]
COMMERCE
BANK
- --------------------------------------------------------------------------------
800 EAST MILHAM ROAD
PORTAGE, MI 49002 - (616) 323-2200
Portage Commerce Bank celebrated its tenth anniversary this year and
continued to grow both in size and profitability.
The area continues to develop as a strong regional retail center, and many
of the smaller businesses that make up the Portage Commerce Bank customer base
have experienced solid growth. The largest employer, Pharmacia & Upjohn,
continues to maintain large research and manufacturing facilities in the area,
despite moving its corporate headquarters to New Jersey.
We continue to see opportunities for growth, as Western Michigan University
has announced a major expansion, including a business research park, and three
other area colleges have shown record enrollments.
Portage Commerce Bank's lenders are experts in small business lending. The
Bank's record of loaning its deposit base back to local businesses is a source
of great pride to us. We look forward to the next year of serving and growing
along with our community.
Paul R. Ballard
PAUL R. BALLARD - President and CEO
PORTAGE COMMERCE BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997 1996
<S> <C> <C> <C>
TOTAL ASSETS $110,867 $91,759 $73,769
PORTFOLIO LOANS 90,589 72,115 58,177
DEPOSITS 102,690 85,358 68,273
TOTAL CAPITAL 7,783 6,085 5,248
</TABLE>
16
<PAGE> 18
[PHOTO] SOUTHERN
ARIZONA
COMMUNITY
BANK
- --------------------------------------------------------------------------------
6400 NORTH ORACLE ROAD
TUCSON, AZ 85704 - (520) 219-5000
Southern Arizona Community Bank opened on August 17th. The name is no
coincidence. The original Southern Arizona Bank, opened in the early 1900's,
provided community banking services to Arizona pioneers. Our mission remains the
same as it was for that early financial institution--community, relationship
banking. The true relationship banking attitude expressed in our slogan "Banking
the Way It Should Be" will distinguish our bank from the mega banks mired in
image and service issues resulting from continued mergers.
Southern Arizona Community Bank is located in the fast-growing northwest
area of Tucson. Our target market is the small to medium sized business and
professional clients the large banks have historically ignored. We have listened
and our business philosophy is what this community wants and deserves.
The word "community" has a special meaning to our staff, directors and
shareholders. Community is the shared spirit of a common history. Community is
knowing our customer's needs without having to ask. Community is what will build
this bank.
Southern Arizona Community Bank looks forward to the millennium with
superior performance expectations.
John P. Lewis
JOHN P. LEWIS - President
BOARD OF
DIRECTORS
WILLIAM R. ASSENMACHER
President
T. A. Caid Industries, Inc.
THOMAS F. CORDELL
Director and Multi-Media Specialist
University of Arizona, ECAT
MICHAEL J. DEVINE
Attorney at Law
ROBERT A. ELLIOTT
President and Owner
Robert A. Elliott, Inc.
BRIAN K. ENGLISH
English Law Firm
MICHAEL F. HANNLEY
President
Bank of Tucson
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
JOHN P. LEWIS
President
Southern Arizona Community Bank
JIM LIVENGOOD
Director of Athletics
University of Arizona
JAMES A. MATHER
Certified Public Accountant
and Attorney at Law
JOSEPH D. REID
Chairman and CEO
Sun Community Bancorp Limited
LOUISE M. THOMAS
President
Events Made Special
PAUL A. ZUCARELLI
Principal and Owner
Gordon, Zucarelli and
Handley Insurance
OFFICERS
JOSEPH D. REID
Chairman of the Board and CEO
JOHN P. LEWIS
President
MICHAEL J. TRUEBA
Executive Vice President and CCO
SOUTHERN ARIZONA COMMUNITY BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998
<S> <C>
TOTAL ASSETS $12,395
PORTFOLIO LOANS 2,925
DEPOSITS 8,255
TOTAL CAPITAL 4,127
</TABLE>
17
<PAGE> 19
BOARD OF
DIRECTORS
SANDY A. ABALOS
President
Abalos and Associates, P.C.
MICHAEL J. DEVINE
Attorney at Law
BRIAN K. ENGLISH
English Law Firm
HOWARD J. HICKEY, III
Executive Vice President
Sunrise Bank of Arizona
WILLIAM D. HINZ, II
President
Sunrise Bank of Arizona
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
JOHN T. KATSENES
Manager
Katsenes Enterprises
KEVIN B. KINERK
Executive Vice President
Sunrise Bank of Arizona
G. D. "RAB" PAQUETTE
President
Commercial Blueprint Co.
JOSEPH D. REID
Chairman and CEO
Sun Community Bancorp Limited
DR. MARK STEIG
Mark Steig D.D.S, M.S.
JAMES R. WENTWORTH
Principal
Wentworth, Webb and Postal, L.L.C.
OFFICERS
JOSEPH D. REID
Chairman of the Board and CEO
WILLIAM D. HINZ, II
President
HOWARD J. HICKEY, III
Executive Vice President
KEVIN B. KINERK
Executive Vice President
MARIAN B. CREEL
Vice President
DOUGLAS N. REYNOLDS
Vice President
LEONARD C. ZAZULA
Vice President
SUNRISE [PHOTO]
BANK OF
ARIZONA
- --------------------------------------------------------------------------------
4350 EAST CAMELBACK ROAD - SUITE 100A
PHOENIX, AZ 85018 - (602) 956-6250
Sunrise Bank of Arizona opened its doors December 16, 1998 to an
overwhelming response from the Phoenix business community. Our experienced team
of SBA and commercial lenders have gotten off to a fast start approving and
closing eight loans in our first two weeks of operations, while occupying
temporary space.
Sunrise Bank of Arizona is well positioned to take advantage of Phoenix's
tremendous growth. 1998 saw more than ten million square feet of multi-tenant
office and industrial space built in Phoenix. At the same time all of this new
growth was added to the market, strong demand from users kept vacancy rates
level at 7.92% for industrial space and 9.34% for professional office space.
1999 forecasts predict even higher levels of construction in the Valley as more
and more companies expand or choose to move to Phoenix.
Sunrise Bank of Arizona is committed to "bringing the relationship back to
banking" to help our customers make the most of Phoenix's robust economic times.
William D. Hinz II
WILLIAM D. HINZ, II - President
SUNRISE BANK OF ARIZONA
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998
<S> <C>
TOTAL ASSETS $5,411
PORTFOLIO LOANS 1,745
DEPOSITS 1,283
TOTAL CAPITAL 4,016
</TABLE>
18
<PAGE> 20
BOARD OF
DIRECTORS
W. CRAIG BERGER
President
W. Craig Berger Financial
Services, Ltd.
MARILYN D. CUMMINGS
Realtor
Russ Lyon Realty Company
MICHAEL J. DEVINE
Attorney at Law
BRIAN K. ENGLISH
English Law Firm
W. RANDY FITZPATRICK
Certified Public Accountant
Fitzpatrick , Hopkins, Kelly and
Leonhard, P.L.C.
WARNER A. GABEL, III
President and Designated Broker
Gabel Investments, Inc.
PATRICK J. HARRIS
Vice President of Marketing
Skill Golf, Inc.
GARY W. HICKEL
President
Valley First Community Bank
MICHAEL L. KASTEN
Managing Partner
Kasten Investments, L.L.C.
GORDON D. MURPHY
Chairman
Esperanca
MARY DUNLAP OGILVY
President
Phoenix Museum of History
JOSEPH D. REID
Chairman and CEO
Sun Community Bancorp Limited
HARRY ROSENZWEIG
Co-Owner
Harry's Fine Jewelry
OFFICERS
JOSEPH D. REID
Chairman of the Board and CEO
PATRICK J. HARRIS
Secretary
GARY W. HICKEL
President
EDWARD T. WILLIAMS
Executive Vice President and CCO
FREDERICK A. SCHERTENLIEB
Senior Vice President - Trust
LANCE K. WISE
Vice President
[PHOTO] VALLEY FIRST
COMMUNITY
BANK
- --------------------------------------------------------------------------------
7501 EAST MCCORMICK PARKWAY - NORTH COURT - SUITE 105N
SCOTTSDALE, AZ 85258-3495 - (602) 596-0883
Located in one of the Valley's signature office complexes at McCormick
Ranch, our Scottsdale location affords us the opportunity to service the
waterfront redevelopment taking place in the downtown area as well as the
expanding concentration of business in the Scottsdale Airpark. Scottsdale's
growth has been aided by various partnerships which exist among the residents
who have a passionate interest in their community.
Valley First's focus is on forging partnerships with the small business
owners, professionals, and high net worth households located in and adjacent to
the Scottsdale metropolitan area. Personalized service and electronic
convenience, coupled with an enthusiastic and highly professional staff, have
enabled us to establish a loyal base of customers in our short history.
Scottsdale's future is extremely bright as it continues to be one of
Arizona's fastest growing communities, and Valley First looks forward to being
an integral part of this growth.
Gary Hickel
GARY W. HICKEL - President
VALLEY FIRST COMMUNITY BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At end of year (in thousands) 1998 1997
<S> <C> <C>
TOTAL ASSETS $36,588 $12,826
PORTFOLIO LOANS 20,879 7,830
DEPOSITS 32,445 8,603
TOTAL CAPITAL 3,994 4,170
</TABLE>
19
<PAGE> 21
Selected Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------
1998(1) 1997(2) 1996(3) 1995(4) 1994
--------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
For the year:
Interest income $ 69,668 $ 49,549 $ 36,479 $ 29,914 $ 21,480
Interest expense 36,670 24,852 17,800 15,079 9,397
Net interest income 32,998 24,697 18,679 14,835 12,083
Provision for loan losses 3,523 2,049 1,196 839 473
Noninterest income 3,558 2,157 1,705 1,272 2,189
Noninterest expense 25,821 16,360 12,307 10,460 10,563
Net income 4,628 5,557 4,636 3,073 2,076
Net income per share:(5)
Basic .74 .91 .85 .63 .52
Diluted .72 .88 .82 .62 .52
Cash dividends paid per share(5) .33 .30 .25 .19 .19
At end of year:
Total assets $1,024,444 $ 690,556 $ 492,263 $ 384,070 $ 316,312
Total earning assets 952,682 641,561 455,502 357,446 292,817
Portfolio loans 724,280 502,755 357,623 283,471 241,583
Deposits 890,890 604,407 436,166 340,287 279,650
Debt obligations 23,600 6,500 8,712 7,924
Trust-preferred securities 24,255 24,126
Stockholders' equity 49,292 45,032 40,159 30,865 25,714
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL FOR
QUARTER QUARTER QUARTER QUARTER THE YEAR
--------------- --------------- --------------- -------------- ---------------
Year ended December 31, 1998:(1)
<S> <C> <C> <C> <C> <C>
Interest income $ 15,016 $ 16,756 $ 18,430 $ 19,466 $ 69,668
Interest expense 7,870 8,767 9,719 10,314 36,670
Net interest income 7,146 7,989 8,711 9,152 32,998
Provision for loan losses 825 833 800 1,065 3,523
Income before income taxes 1,031 2,179 2,313 1,689 7,212
Net income 633 1,384 1,510 1,101 4,628
Net income per share:(5)
Basic .10 .22 .24 .17 .74
Diluted .10 .21 .23 .17 .72
Cash dividends paid per share(5) .083 .083 .083 .083 .333
Year ended December 31, 1997:(2)
Interest income $ 10,534 $ 11,878 $ 13,039 $ 14,098 $ 49,549
Interest expense 5,166 5,785 6,682 7,219 24,852
Net interest income 5,368 6,093 6,357 6,879 24,697
Provision for loan losses 454 512 476 607 2,049
Income before income taxes 1,890 1,995 2,278 2,282 8,445
Net income 1,262 1,320 1,476 1,499 5,557
Net income per share:(5)
Basic .21 .22 .24 .24 .91
Diluted .20 .21 .23 .23 .88
Cash dividends per share(5) .075 .075 .075 .075 .30
</TABLE>
(1) Includes Kent Commerce Bank effective January 1998 and Detroit Commerce
Bank effective December 1998, both located in Michigan and majority-owned
by the Corporation and, in Arizona, Camelback Community Bank (effective May
1998), Southern Arizona Community Bank (effective August 1998), Mesa Bank
(effective October 1998) and Sunrise Bank of Arizona (effective December
1998), majority-owned de novo bank subsidiaries of Sun Community Bancorp
Limited.
(2) Includes Brighton Commerce Bank, effective January 1997, and Muskegon
Commerce Bank, effective December 1997, which are 59% and 51% owned by the
Corporation, respectively. Also includes Valley First Community Bank,
effective June 1997, which is 51% owned by Sun Community Bancorp Limited, a
second-tier holding company 51% owned by the Corporation and formed in May
1997.
(3) Includes Bank of Tucson and Macomb Community Bank, effective June 1996 and
September 1996, respectively, both of which are 51% owned by the
Corporation (Bank of Tucson became a wholly-owned subsidiary of Sun
Community Bancorp Limited, which is 51% owned by the Corporation, in May
1997).
(4) The Corporation formed and implemented Grand Haven Bank as a de novo bank
effective May 1, 1995 (formerly a branch of Paragon Bank & Trust, which was
acquired in 1994). Effective March 31, 1995, the Corporation sold a
majority interest in Amera Mortgage Corporation (formerly Mortgage
Connection, Inc., acquired in 1992); for periods after March 31, 1995, the
Corporation's remaining investment has been accounted for under the equity
method.
(5) As restated to reflect the Corporation's 1998 6-for-5 stock split as if it
had occurred at the beginning of the periods presented.
20
<PAGE> 22
INFORMATION REGARDING THE CORPORATION'S COMMON STOCK
The Corporation's common stock is traded on the National Market Tier of the
Nasdaq Stock Market(SM) under the symbol "CBCL". Market quotations regarding the
range of high and low sales prices of the Corporation's common stock (as
restated for the Corporation's 6-for-5 stock split in December 1998), which
reflect inter-dealer prices without retail mark-up, mark-down or commissions,
were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ---------------------------
LOW HIGH LOW HIGH
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Quarter Ended:
March 31 $25.625 $20.833 $12.083 $13.542
June 30 25.417 20.104 11.458 15.000
September 30 21.667 18.333 14.375 22.083
December 31 22.500 16.250 20.104 27.500
</TABLE>
During 1998 and 1997, the Corporation paid quarterly cash dividends of
$0.083 and $0.075 per share, respectively (as restated).
As of February 17, 1999, there were approximately 2,500 beneficial holders of
the Corporation's common stock, based on information supplied to the Corporation
from its stock transfer agent and other sources. At that date, 6,344,886 shares
of common stock were outstanding. The Corporation's stock transfer agent is UMB
Bank, n.a., 928 Grand Ave., P.O. Box 410064, Kansas City, Missouri 64141-0064
(telephone (800) 884-4225).
The Corporation has a Shareholder Investment Program which offers a variety of
convenient features including dividend reinvestment, certain fee-free
transactions, certificate safekeeping and other benefits. For a copy of the
Program Prospectus, informational brochure and enrollment materials, contact UMB
Bank, n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555.
In addition to the Corporation's common stock, trust-preferred securities of
Capitol Trust I (a subsidiary of the Corporation) are also traded on the
National Market Tier of The Nasdaq Stock Market(SM) under the symbol "CBCLP".
Such trust-preferred securities consist of 2,530,000, 8.5% cumulative preferred
securities, with a liquidation amount of $10 per preferred security. The
trust-preferred securities are guaranteed by the Corporation and mature in 2027,
are callable after 2002 and may be extended to 2036 if certain conditions are
met.
AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS
A copy of the Corporation's 1998 report on Form 10-K, without exhibits, is
available to holders of the Corporation's common stock or trust-preferred
securities without charge, upon written request. Form 10-K includes certain
statistical and other information regarding the Corporation and its business.
Requests to obtain Form 10-K should be addressed to Linda D. Pavona, Vice
President, Capitol Bancorp Ltd., One Business & Trade Center, 200 Washington
Square North, Lansing, Michigan 48933.
Form 10-K, and certain other periodic reports, are filed with the Securities and
Exchange Commission ("the Commission"). The Commission maintains an internet web
site that contains reports, proxy and information statements and other
information regarding companies which file electronically (which includes the
Corporation). The Commission's web site address is http:\\www.sec.gov. The
Corporation's filings with the Commission can also be accessed through the
Corporation's web site, http:\\www.cbcl.com.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This section of the Annual Report discusses the Corporation's financial
condition and results of operations and should be read in conjunction with the
consolidated financial statements. This discussion also includes certain
supplementary statistical and other data which are described more fully in the
Corporation's report on Form 10-K, copies of which are available upon request as
indicated on page 21. This section includes a discussion of historical financial
information as well as some statements which are "forward-looking". Such
forward-looking statements are subject to a variety of future events and
uncertainties. Readers are cautioned to not place significant reliance on such
forward-looking statements. A more comprehensive cautionary warning regarding
forward-looking statements is presented herein on page 39 which is incorporated
herein by reference. Past trends and results may not be reliable indicators of
future results or trends. The Corporation wishes to caution readers that a
number of important factors, which are outside the Corporation's control, could
affect the Corporation's actual future results and cause actual future results
to differ materially from those in the forward-looking statements.
OVERVIEW
At the end of 1998, the Corporation reported a significant achievement:
Total assets exceeding $1 billion. Total assets increased nearly 50% in 1998,
following 40% growth in 1997.
At year-end 1998, the consolidated group consisted of seventeen banks,
eleven in Michigan and six in Arizona. Six new banks were added in 1998.
Consolidated earnings for 1998 remained strong with net income of $4.6
million compared to $5.6 million in 1997 and $4.6 million in 1996. The 1998
decrease was materially impacted by the aggressive expansion in the number of
banks within the consolidated group.
CHANGES IN CONSOLIDATED GROUP
1998, 1997 and 1996 have been significant periods of evolution for the
Corporation. Through the development of de novo (newly formed) banks, the
Corporation has evolved into a bank-development company in addition to its role
in managing investments in its consolidated bank subsidiaries.
The Corporation is a uniquely structured affiliation of community
banks. Each bank, which typically has only one location, is focused on meeting
the banking needs of entrepreneurs, professionals and other individuals seeking
individually-tailored service. Each bank has full decision-making authority in
structuring and approving loans and the delivery of other banking services. Each
bank is managed by an on-site president and management team under the direction
of its local board of directors, which is comprised of business leaders from
that bank's community.
The Corporation's de novo community banking philosophy involves the
formation and operation of small, customer-focused community banks. In recent
years (particularly 1997 and 1998), de novo banks have been organized on a
`partnership' basis through which local investors purchase up to 49% of the
de novo bank's common stock and initial capital. Ideally, between
22
<PAGE> 24
100 and 150 local business leaders and other community individuals become
stakeholders in those community banks. This approach also serves to form the
initial customer base for those de novo banks, inasmuch as those community
stakeholders typically open accounts at their new community bank.
During 1998, six new banks were formed using this philosophy. Four of
those banks are located in Arizona and two are in Michigan. In 1997, three new
banks were formed (two in Michigan and one in Arizona). In 1996, two de novo
banks were formed. At year-end 1998, eleven of the Corporation's seventeen banks
were three years old or younger.
At year-end 1998, the Corporation's affiliate banks include the
following:
<TABLE>
<CAPTION>
Year
Formed or
Acquired Community
---------------- -----------------------
<S> <C> <C>
In Michigan:
Ann Arbor Commerce Bank 1990 Ann Arbor
Brighton Commerce Bank 1997 Brighton
Capitol National Bank 1982 Lansing
Detroit Commerce Bank 1998 Detroit
Grand Haven Bank 1995 Grand Haven
Kent Commerce Bank 1998 Grand Rapids
Macomb Community Bank 1996 Clinton Township
Muskegon Commerce Bank 1997 Muskegon
Oakland Commerce Bank 1992 Farmington Hills
Paragon Bank & Trust 1994(1) Holland
Portage Commerce Bank 1990(2) Portage
In Arizona:
Bank of Tucson 1996 Tucson
Camelback Community Bank 1998 Phoenix
Mesa Bank 1998 Mesa
Southern Arizona Community Bank 1998 Tucson
Sunrise Bank of Arizona 1998 Phoenix
Valley First Community Bank 1997 Scottsdale
</TABLE>
(1) Became a subsidiary in 1994, however, was formed in 1990.
(2) Became a subsidiary in 1990, however, was formed in 1988.
The Corporation's ongoing development of community banks in the
southwestern portion of the United States is carried out through Sun Community
Bancorp Limited ("Sun"). Sun is a second-tier subsidiary bank holding company
which is 51% owned by Capitol Bancorp (Sun became a 51% owned subsidiary when it
acquired, through a share exchange, all of the outstanding common stock of Bank
of Tucson, previously a 51% owned subsidiary of Capitol Bancorp). Sun is
headquartered in Phoenix, Arizona with a full complement of management staff,
including credit administration, asset/liability management, information systems
and other key functions. Sun also raised additional capital in 1998 through
private stock offerings aggregating $17 million, including $8.7 million invested
by Capitol Bancorp.
23
<PAGE> 25
Because of the addition of de novo banks during the past three years,
comparability of consolidated results of operations and financial position is
difficult. This is particularly true because generally accepted accounting
principles require consolidation of 100% of subsidiaries' assets and liabilities
and, with respect to earnings, only count the Corporation's actual ownership
percentage (which varies by entity from essentially 26%--in the case of banks
owned 51% by Sun--to 100%, depending upon the individual bank).
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Total consolidated assets exceeded $1 billion at December 31, 1998, an
increase of $334 million or 48% over assets at the beginning of the year of $691
million. Total consolidated assets at the beginning of 1997 approximated $492
million.
The components of 1998 asset growth are particularly notable. Of the
$334 million asset growth, $85 million came from banks formed in 1998 and,
hence, did not exist in the prior year. $63.4 million of asset growth came from
banks formed in 1997 which, as a group, reported total assets of $108 million at
year-end 1998, compared to $44.6 million at year-end 1997. Banks formed in 1996,
with total assets of $140 million at year-end 1998 and $82.6 million at year-end
1997, grew $57.4 million or nearly 70% in their second full year of operation.
The Corporation's more mature banks (i.e., formed prior to 1996) produced asset
growth of $149 million in 1998, or an annualized growth rate of about 27%. These
asset growth rates are significant and record-setting for the Corporation.
Most of the 1998 asset growth occurred in portfolio loans, which
increased $221.5 million or 44%. Total portfolio loans increased 40% in 1997 to
$502.8 million. Most loan growth occurred in commercial loans, consistent with
the banks' emphasis on fulfilling the credit needs of entrepreneurs,
professionals, commercial real estate developers and other small, local
businesses within their communities. Commercial loans approximated 82% of total
portfolio loans at year-end 1998.
Cash and cash equivalents also increased significantly in 1998 from
$92.8 million to $151 million.
The primary funding source for asset growth is the deposit gathering
activity of the banks. Total deposits increased from $604 million to $891
million in 1998, an increase of 47%. In 1997, deposits increased about 39% from
the $436 million level at the beginning of the year.
Other funding sources for asset growth in 1998 included borrowings on
lines of credit and resources provided by minority interests. Additionally, in
late 1997, the Corporation issued approximately $25 million of trust-preferred
securities in a public offering. These funding sources, as well as additional
commentary regarding deposit gathering activities, are discussed more fully in
the "Liquidity, Capital Resources and Capital Adequacy" section of this
narrative.
24
<PAGE> 26
A comparative summary of the individual banks' financial position
follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Allowance as a
Percentage of
Total Total Allowance for Nonperforming Total
Assets Portfolio Loans Loan Losses Loans Portfolio Loans
---------------------- ------------------- ---------------- ----------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
---------------------- ------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 196,446 $138,390 $154,060 $115,882 $ 2,080 $ 1,564 $ 662 $ 913 1.35% 1.35%
Brighton Commerce Bank 42,871 23,853 34,024 13,817 341 139 -- -- 1.00 1.01
Capitol National Bank 136,776 126,552 104,333 94,400 1,406 1,270 880 760 1.35 1.35
Detroit Commerce Bank 18,620 n/a 506 n/a 6 n/a -- n/a 1.19 n/a
Grand Haven Bank 66,872 45,320 57,057 35,770 682 427 62 32 1.20 1.19
Kent Commerce Bank 31,587 n/a 22,930 n/a 250 n/a -- n/a 1.09 n/a
Macomb Community Bank 76,044 41,010 40,426 19,546 405 196 -- -- 1.00 1.00
Muskegon Commerce Bank 28,552 7,885 24,491 1,610 245 17 1 -- 1.00 1.06
Oakland Commerce Bank 108,747 81,839 63,261 58,091 724 686 2,032 744 1.14 1.18
Paragon Bank & Trust 86,692 72,332 63,417 59,184 732 663 2,936 660 1.15 1.12
Portage Commerce Bank 110,867 91,759 90,589 72,115 1,150 950 669 902 1.27 1.32
Sun Community Bancorp Ltd.:
Bank of Tucson 63,860 41,605 37,899 23,406 392 235 -- -- 1.03 1.00
Camelback Community Bank 10,017 n/a 3,246 n/a 33 n/a -- n/a 1.02 n/a
Mesa Bank 6,192 n/a 1,386 n/a 14 n/a -- n/a 1.01 n/a
Southern Arizona Community
Bank 12,395 n/a 2,925 n/a 30 n/a -- n/a 1.03 n/a
Sunrise Bank of Arizona 5,411 n/a 1,745 n/a 18 n/a -- n/a 1.03 n/a
Valley First Community
Bank 36,588 12,826 20,879 7,830 209 82 -- -- 1.00 1.05
Other, net (14,093) 7,185 1,106 1,104 100 -- -- -- -- --
----------- -------- -------- -------- ------- ------- ------- ------- ---- ----
Consolidated $ 1,024,444 $690,556 $724,280 $502,755 $ 8,817 $ 6,229 $ 7,242 $ 4,011 1.22% 1.24%
=========== ======== ======== ======== ======= ======= ======= ======= ==== ====
</TABLE>
n/a - not applicable
The allowance for loan losses increased $2.6 million in 1998 and $1.6
million in 1997. The allowance for loan losses is increased by provisions
charged to operations and is reduced by net loan charge-offs. The increase in
the allowance for loan losses (which correlates with an increase in the
provision for loan losses charged to operations) is related to growth in the
loan portfolio, in general.
The allowance for loan losses, as a percentage of portfolio loans,
approximated 1.22% at December 31, 1998, compared with 1.24% at year-end 1997
and 1.28% in 1996. The decrease in the allowance percentage is primarily the
result of the Corporation's addition of de novo banks during the past three
years. De novo banks, as a condition of charter approval, are required to
maintain an allowance for loan losses of not less than 1% for their first few
years of operation, which is not materially different than requirements under
generally accepted accounting principles. More mature banks typically maintain
substantially higher loan loss allowances, on a percentage basis.
The lower allowance ratio for de novo banks is appropriate in the
context of their young and, hence, unseasoned loan portfolios. While the lower
allowance ratio is appropriate in early
25
<PAGE> 27
periods for de novo banks, ultimately it is expected that they will increase
their allowance ratios as they mature and their loan portfolios become more
seasoned.
Nonperforming loans (defined as loans which are 90 days or more past
due and loans on nonaccrual status) increased significantly in 1998 to $7.2
million ($5.6 million net of government guarantees), compared with $4 million at
year-end 1997 and $2.7 million in 1996. While these increases are, in part,
attributable to the combined effects of portfolio growth and maturity, the 1998
increase is primarily the result of two specific larger credit relationships
(one each at Oakland Commerce Bank and Paragon Bank & Trust) which deteriorated
during 1998. There are no material amounts of impaired loans or other
individually material amounts of nonperforming loans at December 31, 1998. Of
the nonperforming loans at December 31, 1998, $1.6 million is guaranteed by an
agency of the federal government.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio. A
number of elements are considered in management's determination of the adequacy
of the allowance which include evaluation of recent loss experience, current
economic conditions, volume, amount and composition of the portfolio, loan
commitments outstanding and other factors. In addition to the recorded allowance
for loan losses, certain loans ($24.9 million at December 31, 1998) are enrolled
in a loan program sponsored by the State of Michigan and have specific loss
reserves ($2 million) which are separate and excluded from the allowance for
loan losses.
CONSOLIDATED RESULTS OF OPERATIONS
Revenue growth has been significant. Total revenues (interest income
and noninterest income) increased 42% in 1998 to $73.2 million, compared with
$51.7 million in 1997 and $38.2 million in 1996. Revenue growth approximated 35%
in 1997 and 22% in 1996.
Revenue growth and net interest income generally lag behind the rate of
asset growth. This is because asset growth is funded primarily through increases
in interest-bearing deposits which are not immediately deployed into the
highest-yielding asset category--loans. Additionally, de novo banks, because of
their start-up nature, first generate deposits, often at a pace faster than the
rate of deployment into loans.
The overall earnings contribution of the various bank subsidiaries is
particularly notable in 1998. De novo banks, by their nature, are expected to
incur operating losses during their early periods of operations. Accordingly,
banks formed in 1997 and 1998, as a group, did not contribute positively to
consolidated earnings. It is, however, notable that banks formed in 1997 as a
group reported their first quarterly period of profitability for the fourth
quarter of 1998.
Banks formed in 1996 and, accordingly, less than three years old at
year-end 1998, produced the significant achievement of strong positive earnings
which approximated a return on average assets of 1%. This performance measure is
particularly significant for the age of those banks and also in relation to
achieving that rate of return while also producing an asset growth rate of
nearly 70% in 1998.
26
<PAGE> 28
Banks formed before 1996, the Corporation's most mature and highest
performing ones, produced earnings which represented a return on average assets
of more than 1.2%. Again, this rate of return on average assets is significant
and notable in the context of their asset growth rate (more than 25% in 1998)
and other factors.
The majority of the increase in consolidated interest income (and net
interest income) is the result of increases in interest-earning assets. Interest
expense similarly increased during the periods due to volume. In 1998, market
interest rates decreased, impacting rates on federal funds sold, variable rate
loans and interest-bearing demand deposits and also reducing rates on new and/or
renewing fixed rate loans and time deposits. These changes in market interest
rates had the effect of reducing the net interest margin in 1998.
A comparative summary of operations follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Return on Return on
Net Income Average Equity Average Assets
-------------------------------- ---------------------------- ------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- -------- ------- ------ ----- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 2,125 $ 1,869 $ 1,177 19.13% 23.36% 20.90% 1.32% 1.58% 1.36%
Brighton Commerce Bank (48) (505) n/a n/a n/a n/a n/a n/a n/a
Capitol National Bank 2,012 1,804 1,573 21.62 21.41 20.79 1.69 1.64 1.61
Detroit Commerce Bank (21) n/a n/a n/a n/a n/a n/a n/a n/a
Grand Haven Bank 615 341 220 14.19 10.53 8.10 1.11 .85 .83
Kent Commerce Bank (415) n/a n/a n/a n/a n/a n/a n/a n/a
Macomb Community Bank 323 (83) (120) 7.16 n/a n/a .56 n/a n/a
Muskegon Commerce Bank (191) (25) n/a n/a n/a n/a n/a n/a n/a
Oakland Commerce Bank 866 917 637 13.77 16.39 11.88 .90 1.18 .91
Paragon Bank & Trust 678 701 623 11.35 13.80 12.74 .82 1.04 1.12
Portage Commerce Bank 1,393 1,168 1,091 20.38 20.83 22.00 1.34 1.38 1.58
Sun Community Bancorp Ltd.:
Bank of Tucson 776 150 (164) 12.73 2.88 n/a 1.25 .47 n/a
Camelback Community Bank (370) n/a n/a n/a n/a n/a n/a n/a n/a
Mesa Bank (118) n/a n/a n/a n/a n/a n/a n/a n/a
Southern Arizona Community (252)
Bank n/a n/a n/a n/a n/a n/a n/a n/a
Sunrise Bank of Arizona (26) n/a n/a n/a n/a n/a n/a n/a n/a
Valley First Community Bank (81) (245) n/a n/a n/a n/a n/a n/a n/a
Other, net (2,638) (535) (401) n/a n/a n/a n/a n/a n/a
-------- -------- ------- ------ ----- ------ ------ ----- -----
Consolidated $ 4,628 $ 5,557 $ 4,636 10.19% 13.28% 12.01% .55% .96% 1.08%
======== ======== ======= ====== ===== ====== ====== ===== =====
</TABLE>
n/a - not applicable
On a consolidated basis, earnings in 1998 were adversely affected by
two factors: the predictable impact of aggressive growth through formation of
de novo banks and asset growth, discussed previously, and losses associated with
a particular customer incurred early in the year.
In February 1998, a bank customer drew checks against uncollected funds
aggregating $1.5 million at Oakland Commerce Bank. Management subsequently
became aware that the customer may have drawn larger amounts at other,
unaffiliated, financial institutions. While it is believed, based on
management's analysis of the bank's relationship with that customer, that the
majority of the amount involved is covered by real estate collateral, management
concluded that the bank may sustain some loss from this occurrence. In the first
quarter of 1998, $600,000 of
27
<PAGE> 29
the uncollected funds was written off and the bank charged off approximately
$300,000 related to that customer relationship in the second quarter of 1998.
Future resolution of the credit relationship with that customer will take an
extended period of time, complicated by the customer's filing for bankruptcy
protection and lawsuits filed by financial institutions, including a suit
against the Corporation's bank subsidiary brought by an unaffiliated financial
institution which incurred larger losses.
The provision for loan losses approximated $3.5 million in 1998,
compared with $2 million in 1997 and $1.2 million in 1996. As previously
discussed, the increase in the provision for loan losses is primarily related to
portfolio growth and new banks.
Growth in noninterest income in 1998 approximated 65%. The significant
1998 increase was primarily the result of increases in fees from origination of
non-portfolio residential mortgage loans which increased from $298,000 in 1997
($200,000 in 1996) to $1.4 million in 1998. The dramatic increase in this
revenue category (which is reported gross, exclusive of commissions paid to loan
originators recorded as compensation expense) is the byproduct of low mortgage
interest rates during 1998 which created a favorable environment for significant
loan originations and a focused marketing effort. Because these mortgage loans
tend to have low interest rates which are fixed for periods up to thirty years,
such loans are sold into the secondary market through an affiliate, Amera
Mortgage Corporation (49% owned by the Corporation) or to other investors.
Service charges on deposit accounts have increased significantly in
each of the last three years, largely as a result of growth in the number of
transaction accounts at the Corporation's mature banks and the impact of
de novo banks.
Trust fee income, which is a growing source of revenue for the
Corporation ($472,000 in 1998 compared to $355,000 in 1997 and $262,000 in
1996), is expected to grow in future periods as trust operations are expanded to
ultimately include all of the Corporation's banks.
Noninterest expenses have increased significantly during each of the
past three years. Total noninterest expense approximated $25.8 million in 1998,
compared with $16.4 million in 1997 and $12.3 million in 1996. The most
significant element of noninterest expense is the category of salaries and
employee benefits. In 1998, total salaries and employee benefits approximated
$13.4 million, compared with $8.4 million in 1997 and $6.4 million in 1996;
these increases correspond with the growth in the size of the more mature banks
as well as the increased number of banks within the consolidated group. Similar
increases occurred in the other categories of noninterest expense such as
occupancy, equipment costs and other.
Federal income tax expense generally approximates the statutory tax
rate of 34% of income before federal income taxes. The effective income tax rate
is slightly higher in 1998 (35.8%) mainly due to amortization of intangible
assets which is not deductible for federal income tax purposes.
28
<PAGE> 30
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
At December 31, 1998, the Corporation maintained significant liquidity.
Cash and cash equivalents approximated $151 million or about 15% of total
assets. In addition to cash and cash equivalents, significant liquidity exists
in the form of loans held for resale ($36.8 million and $11.4 million at
December 31, 1998 and 1997, respectively) and investment securities available
for sale ($83.6 million and $62.3 million at December 31, 1998 and 1997,
respectively). Together, total liquidity approximated $271.4 million at December
31, 1998 (26.5% of total assets) and $166.4 million at year-end 1997 (24.1% of
total assets).
Management has designated most of the Corporation's investment
securities as being `available for sale' due to the banks' typical strategy of
maintaining a relatively high loan-to-deposit ratio to maximize earnings.
Accordingly, such investment securities available for sale are carried at market
value with the market value adjustment being reflected as an element of
stockholders' equity (net of related tax effect) on the Corporation's
consolidated balance sheet (also described as accumulated other comprehensive
income).
In addition to sources of liquidity within the Corporation's
consolidated balance sheet, additional liquidity is available in the form of
lines of credit. Three of the Corporation's banks have secured lines of credit
with the Federal Home Loan Bank of Indianapolis aggregating $15.1 million with
$1.1 million of availability at December 31, 1998 ($11.6 million of availability
at December 31, 1997). Further, the Corporation has a line of credit facility
with an unaffiliated bank which, as amended and increased in early 1999,
provides for up to $20 million of availability ($9.6 million was drawn at
December 31, 1998).
As discussed previously, the primary funding source for asset growth is
deposits. Each of the banks offer a full array of deposit products. The banks
emphasize time deposits by offering attractive rates in comparison to
competitors, when needed, to fund loan demand. Time deposits approximated $523
million or 59% of total deposits at December 31, 1998 ($365 million or 60% at
December 31, 1997).
The banks also emphasize noninterest-bearing demand deposits (checking
accounts) which amounted to $121 million or 13.6% of total deposits at December
31, 1998 ($83 million or 13.8% at December 31, 1997). The level of checking
account deposits is important in reducing the banks' overall cost of funds.
Deposits at each of the banks are insured up to the maximum amount
covered by FDIC insurance. To supplement deposit insurance coverage, certain
municipal government deposits at some of the banks have their deposits
guaranteed by Capitol Bancorp ($21.2 million at December 31, 1998).
In December 1997, the Corporation and a subsidiary (Capitol Trust I)
completed a $25 million public offering of trust-preferred securities. The
amount of the trust-preferred securities (net of issuance costs, which are being
amortized over the life of the securities) is classified between liabilities and
equity on the Corporation's consolidated balance sheet under the caption
"guaranteed preferred beneficial interests in the Corporation's subordinated
debentures". Under current regulatory guidelines, such trust-preferred
securities are included as capital for purposes
29
<PAGE> 31
of meeting certain ratio requirements. The trust-preferred securities account
for most of the 1998 increase in interest expense from debt obligations.
As noted previously, the Corporation owns (directly or indirectly)
between 26% and 100% of its consolidated affiliated banks. For banks which are
not wholly-owned by the Corporation, appropriate accounting recognition is given
to applicable minority interests in those subsidiaries on the Corporation's
consolidated balance sheet. Minority interests in consolidated subsidiaries
approximated $27.6 million at December 31, 1998 and $11 million at December 31,
1997 ($4.7 million at December 31, 1996). Resources provided by minority
interests approximated $16.6 million in 1998 and $6.3 million in 1997. The
Corporation's strategy of majority ownership (less than 100% ownership) for its
de novo expansion has generated significant resources provided by minority
interests in those entities.
Stockholders' equity approximated $49.3 million at December 31, 1998,
an increase of $4.3 million for the year. Such net increase is the result of net
income for the year, less cash dividends paid, and proceeds from the exercise of
stock options and shares issued to acquire the minority interest in a particular
bank subsidiary.
In December 1998, the Corporation issued a 6-for-5 (20%) stock split.
All share and per share information appearing in the consolidated financial
statements has been retroactively restated to reflect the stock split as if it
had occurred at the beginning of the periods presented.
Near year end 1996 and 1997, the Corporation issued 10% stock dividends
whereby each shareholder received one share for each ten shares then held. All
per-share information appearing in the consolidated financial statements has
been retroactively restated to reflect such stock dividends as if they had
occurred at the beginning of the periods presented. Although stock dividends do
not reduce stockholders' equity, or result in currently taxable income to the
recipients, accounting rules require that a transfer be made from retained
earnings to common stock when such stock dividends are "paid". Such accounting
recognition is required to be made based on the fair value of the shares
distributed. Due to increases in the market value of the Corporation's common
stock, distribution of the 1997 10% stock dividend resulted in negative retained
earnings at December 31, 1997.
During 1998, 1997 and 1996, the Corporation paid cash dividends per
share of $0.33, $0.30 and $0.25, respectively (restated, as previously
discussed). The Corporation currently intends to continue payment of quarterly
cash dividends for the foreseeable future; however, future payment of any cash
dividends is contingent upon liquidity, cash adequacy and other factors in
future periods. Accordingly, there can be no assurance with respect to payment
of future cash dividends.
At December 31, 1998, stockholders' equity approximated 4.8% of total
assets, a decrease from 6.5% at December 31, 1997. The 1998 percentage decrease
resulted from significant asset growth during the year. Total equity capital
(stockholders' equity plus minority interest in consolidated subsidiaries)
amounted to $76.9 million or 7.5% of total assets at December 31, 1998. Total
capital funds (Capitol Trust I preferred securities plus minority
30
<PAGE> 32
interest in consolidated subsidiaries plus stockholders' equity) approximated
$101 million at December 31, 1998 or 9.9% of total assets.
The Corporation and each of its affiliated banks are subject to very
complex banking rules and regulations relating to capital adequacy. Key ratios
of leverage, Tier I capital and Tier II capital (as those terms are currently
defined in regulatory guidance) and corresponding ratios in relation to total
assets and risk-weighted assets are set forth in Note O of the consolidated
financial statements appearing on pages 58-60 of the Annual Report.
Under the current regulatory framework, banks are categorized as "well
capitalized", "adequately capitalized" or "inadequately capitalized". Banks
which fall into the "inadequately capitalized" category are subject to the
"prompt corrective action" provisions of the FDIC Improvement Act, which can
result in significant regulatory agency intervention and other adverse action.
Although it is permissible to maintain capital adequacy at the "adequately
capitalized" level, the Corporation's management proactively manages the capital
of each affiliated bank with the current objective of maintaining those banks in
the "well capitalized" category. Classification as a "well capitalized"
institution enables such institutions to enjoy the lowest-cost deposit insurance
assessment and less restrictive regulatory intervention in relation to certain
banking business activities.
De novo banks, as a condition of charter approval, are required to
maintain certain higher capital ratios. Generally, such banks are required to
maintain a Tier I capital to assets ratio of not less than 8% for the first
three years of operation in addition to maintaining the previously discussed
allowance for loan losses of not less than 1% of portfolio loans. Such capital
ratio requirements, in the opinion of management, do not constrict the
operations of de novo banks during the period that the ratios are required and,
consistent with management's effort to maintain capital adequacy at each
affiliated bank, the Corporation will infuse such amounts of capital as are
necessary to maintain compliance with those capital requirements.
In the opinion of management, all of the Corporation's affiliated banks
meet the criteria to be classified as "well capitalized" at December 31, 1998.
TRENDS AFFECTING OPERATIONS
The most significant trends which can impact the financial condition
and results of operations of financial institutions are changes in market rates
of interest and changes in general economic conditions.
Changes in interest rates, either up or down, can have an impact on net
interest income (plus or minus), depending on the direction and timing of such
changes. At any point in time, there is a difference between interest
rate-sensitive assets and interest rate-sensitive liabilities. That difference,
from a timing perspective, arises because it is practically impossible to
maintain a perfectly matched relationship between rate-sensitive assets and
liabilities. This means that when interest rates change, the timing of the
effect of such interest rate changes can differ between their effect on assets
and liabilities. The difference between interest rate-sensitive assets and
interest rate-sensitive liabilities is characterized as a "gap" which is
quantified by the distribution of rate-sensitive amounts within various time
periods in which they reprice or mature. The following table summarizes the
Corporation's consolidated financial position in relation to "gap" at December
31, 1998 (dollar amounts in thousands):
31
<PAGE> 33
<TABLE>
<CAPTION>
Interest Rate Sensitivity
----------------------------------------------------------------------
0 to 3 4 to 12 1 to 5 Over
Months Months Years 5 Years Total
-------------- ------------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 104,050 $ 104,050
Interest-bearing deposits with banks 1,732 1,732
Loans held for resale 36,789 36,789
Investment securities 34,509 $ 21,905 $ 24,098 $ 5,952 86,464
Portfolio loans:
Commercial 300,542 74,710 213,369 1,730 590,351
Real estate mortgage 21,264 17,064 39,240 3,240 80,808
Installment 7,445 14,181 30,628 867 53,121
Non-earning assets and other 2,919 71,129
-------------- ------------- --------------- ------------ -----------
Total Assets $ 506,331 $ 127,860 $ 310,254 $ 11,789 $ 1,024,444
============== ============= =============== ============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits:
Time deposits over $100,000 $ 81,468 $ 100,540 $ 39,092 $ 221,100
Time deposits under $100,000 71,950 177,387 52,251 $ 77 301,665
All other interest-bearing deposits 247,139 247,139
-------------- ------------- --------------- ------------ -----------
Total interest-bearing deposits 400,557 277,927 91,343 77 769,904
Debt obligations 20,600 2,000 1,000 23,600
Non-interest bearing liabilities 129,817
Capitol Trust I preferred securities 24,255 24,255
Minority interest in consolidated
subsidiaries 27,576
Stockholders' equity 49,292
-------------- ------------- --------------- ------------ -----------
Total Liabilities and Stockholders'
Equity $ 421,157 $ 279,927 $ 92,343 $ 24,332 $ 1,024,444
============== ============= =============== ============ ===========
Interest rate sensitive period gap $ 85,174 $ (152,067) $ 217,911 $ (12,543)
Interest rate sensitive cumulative gap $ 85,174 $ (66,893) $ 151,018 $ 138,475
Period rate sensitive assets/period rate
sensitive liabilities 1.20 0.46 3.36 0.48
Cumulative rate sensitive assets/cumulative
rate sensitive liabilities 1.20 0.90 1.19 1.17
Cumulative gap to total assets 8.31% -6.53% 14.74% 13.52%
</TABLE>
The "gap" changes daily based upon changes in the underlying assets and
liabilities at each of the Corporation's affiliate banks. Analyzing exposure to
interest rate risk is prone to imprecision because the "gap" is constantly
changing, the "gap" differs at each of the banks, and it is difficult to predict
the timing, amount and direction of future changes in market interest rates and
the corresponding effect on customer behavior.
The Corporation's affiliated banks endeavor to manage and monitor
interest rate risk in concert with market conditions. Management strives to
maintain a balanced position of interest rate-sensitive assets and liabilities.
The Corporation and its banks have not engaged in speculative positions through
the use of derivatives in anticipation of interest rate movements. In these most
recent periods of lower interest rates, affiliated banks emphasize variable rate
loans and time deposits to the extent possible in a competitive environment;
however, competitive influences often result in making fixed rate loans,
although the banks seek to limit the duration of such loans. Similarly, low
interest rates generally make competition more intense for deposits,
32
<PAGE> 34
since loan demand will typically increase during periods of lower rates and,
accordingly, result in higher interest costs on deposits, adversely impacting
interest margins. Future interest rates and the impact on earnings are difficult
to predict. In addition to interest rate risk relating to the Corporation's
interest-bearing assets and liabilities, changes in interest rates also can
impact future transaction volume of loans and deposits at the banks. For
activities which are influenced by levels of interest rates for transaction
volume (for example, origination of residential mortgage loans), pricing margins
and demand can become impacted significantly by changes in interest rates.
As a means of monitoring and managing exposure to interest rate risk,
management uses a computerized simulation model which, at a static point in
time, is intended to estimate pro forma effects of changes in interest rates.
Using the consolidated "gap" table information above and the Corporation's
simulation model, the following table illustrates, on a consolidated basis,
changes which would occur in annual levels of interest income, interest expense
and net interest income (in thousands) assuming one hundred and two hundred
basis point ("bp") increases and decreases in interest rates:
<TABLE>
<CAPTION>
Pro Forma
Assuming Pro Forma Effect of Pro Forma Effect of
No Change Interest Rate Increases Interest Rate Decreases
in Interest ---------------------------- -----------------------------
Rates +100 bp +200 bp -100 bp -200 bp
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 76,986 $ 82,376 $ 87,764 $ 71,683 $ 66,409
Interest expense 40,089 44,943 49,798 35,234 30,380
------------ ------------ ------------ ------------ ------------
Net interest income $ 36,897 $ 37,433 $ 37,966 $ 36,449 $ 36,029
============ ============ ============ ============ ============
</TABLE>
The pro forma analysis above is intended to quantify theoretical
changes in interest income based on stated assumptions. Such pro forma analysis
excludes the effect of numerous other variables such as borrowers' ability to
repay loans or the ability of banks to obtain deposits in a radically changed
interest-rate environment and how management would revise its asset and
liability management priorities in concert with rate changes.
Simulation modeling techniques are inherently flawed and inaccurate due
to the number of variables and due to the fact that the actual effects of
changes in interest rates are subject to some variables (for example, customer
behavior) which simulation models cannot effectively predict. Therefore, actual
future results will differ from pro forma simulation model analyses and such
differences may be significant.
General economic conditions also have a significant impact on financial
institution results of operations and financial condition. Economic conditions
nationally and in the banks' local environments have remained relatively stable
and positive. Local economic conditions, and to some extent national economic
conditions, have a significant impact on levels of loan demand as well as the
ability of borrowers to repay loans and the availability of funds for customers
to make deposits. Throughout 1998, 1997 and 1996, the U.S. economy has continued
to produce the longest peacetime economic expansion in history. While worldwide
economic conditions are
33
<PAGE> 35
unstable, the duration of the current economic expansion period in the United
States is questionable. Additionally, issues regarding the century date change
and its impact on financial institutions, their customers and the economy in
general are uncertain.
Continuing consolidation of the banking industry on a national basis,
and in the respective markets of the Corporation's banks, has presented
opportunities for growth. As a result of consolidation of the banking industry,
coupled with the closure of branch locations by larger institutions and
conversion of customer relationships into perceived `commodities' by the larger
banks, many customer relationships have been displaced, generating opportunities
for development by the Corporation's banks. For retail customers, banking
services have become a commodity in an environment that is dominated by larger
mega-bank or mass-merchandising institutions. For the professional, entrepreneur
and other customers seeking a more service-oriented, customized banking
relationship, the Corporation's affiliated banks fill that need through their
focus on single-location banks with full, local decision-making authority. In
those markets in which the Corporation's affiliated banks are located, the banks
focus on service delivery and keeping the bank's size at an appropriate level;
only a modest market share of deposits and loan activity is necessary to achieve
profitability and reasonable earnings performance.
The ongoing banking consolidation environment further presents
opportunities for expansion of de novo banking activities in numerous markets.
While it is difficult to predict specific locations and markets for future de
novo banking development, plans are underway in early 1999 for additional de
novo banks in Arizona and elsewhere in the southwestern United States as well as
exploring opportunities in the midwest.
As previously discussed, de novo banks generally incur operating losses
during their early periods of operations. Management expects the Corporation's
recently-formed de novo banks to detract from consolidated earnings performance
and additional de novo banks formed in 1999 and beyond will similarly adversely
impact short-term profitability. On a consolidated basis, such operating losses
reduce net income by the pro rata share of the Corporation's ownership
percentage in those de novo banks. When de novo banks become profitable, their
operating results will contribute to consolidated earnings to the extent of the
Corporation's ownership percentage.
Commercial banks continue to be subject to significant regulatory
requirements which impact current and future operations. In addition to the
extent of regulatory interaction with financial institutions, extensive rules
and regulations governing lending activities, deposit gathering and capital
adequacy (to name a few), the costs of financial institution regulation are
significant. Such costs include, but are not limited to, the significant amount
of management time and expense which is incurred in maintaining compliance and
developing systems for compliance with those rules and regulations as well as
the cost of examinations, audits and other compliance activities.
Premiums for FDIC insurance have historically been significant costs of
doing business as financial institutions. In recent years, however, deposit
insurance premiums have been maintained at a stable and modest level by the
Corporation maintaining its banks in the so-called
34
<PAGE> 36
"well capitalized" category of capital adequacy and the overall health of the
banking industry, in general. Future deposit insurance premium levels are
difficult to predict inasmuch as deposit insurance premiums will be determined
based on general economic conditions, the relative health of the banking and
financial institution industry and other unpredictable factors. It is reasonable
to expect that deposit insurance premiums will increase at some point in the
future.
The future of financial institution regulation, and the costs of
regulation is uncertain and difficult to predict.
The ongoing expansion of Internet and `e-commerce' activity continues
to evolve. Thus far, the Corporation's banks have not experienced significant
competition from competitors' delivery of banking services via the Internet or
other e-commerce channels. The impact of the Internet and e-commerce on the
Corporation's banks is difficult to predict; the Corporation's information
systems staff is continuing to explore implementation of Internet banking
opportunities for the Corporation's banks. Management expects that Internet
banking and e-commerce, in general, will result in deposits being obtained as
more of a "commodity" in the future, while nongeneric loan products will
continue to be handled face-to-face with the customer.
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 Counsel (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
nonmission-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
35
<PAGE> 37
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 December 31, 1998.
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. Based on the
results of that testing, no significant mission-critical system failures were
observed. 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 plans 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
December 31, 1998, 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 customer 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.
36
<PAGE> 38
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 cost to address the year 2000 issue
approximated $250,000 in 1998. These costs principally relate to the 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.
NEW ACCOUNTING STANDARDS
Certain new accounting standards became applicable to the Corporation
during 1998.
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 year ended December 31, 1998. Components of
comprehensive income and total comprehensive income are included in the
consolidated statements of stockholders' equity.
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 disclosures 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. The Statement permits aggregation or
combination of segments which have similar characteristics. Although the
Corporation's banks operate independently and are managed and monitored
separately, each bank is substantially similar in terms of business focus, types
of customers, products and services. Further, each of the banks and the
Corporation are subject to substantially similar laws and regulations unique to
the banking industry. Accordingly, the consolidated financial statements reflect
the presentation of segment information on an aggregated basis.
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 comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new accounting standard will become
effective
37
<PAGE> 39
for the Corporation in 2000 and, because the Corporation has not typically
entered into derivative contracts either to hedge existing risks or for
speculative purposes, is not expected to have a material effect on its financial
statements.
The American Institute of Certified Public Accountants (AICPA) issued
Statement of Position 98-1, "Costs of Computer Software Developed or Obtained
for Internal Use". It requires capitalization of certain costs of development of
software and is not expected to have a material effect on the Corporation's
financial statements when implemented in 1999.
The AICPA issued Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities". It requires start-up costs and organizational costs to be
charged to expense when incurred. The initial application of the statement will
require a cumulative effect adjustment for those companies that had previously
capitalized start-up and organization costs and will become effective in 1999.
Based on management's preliminary analysis, implementation of this standard is
not expected to have a material impact on the Corporation's consolidated
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 in future
periods.
38
<PAGE> 40
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Corporation's management is responsible for the preparation of the
consolidated financial statements and all other information appearing in this
Annual Report. The financial statements have been prepared in accordance with
generally accepted accounting principles.
The Corporation's management is also responsible for establishing and
maintaining the internal control structure of the Corporation. The general
objectives of the internal control structure are to provide management with
reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition, and that transactions are executed in accordance with
generally accepted accounting principles. In fulfilling this objective,
management has various control procedures in place which include, but are not
limited to, review and approval of transactions, a code of ethical conduct for
employees, internal auditing and an annual audit of the Corporation's
consolidated financial statements performed by a qualified independent audit
firm. Management believes the internal control structure of the Corporation to
be adequate and that there are no material weaknesses in internal control.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Annual Report, including the
Corporation's consolidated financial statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and in other portions
of this Annual Report that are not historical facts, including, without
limitation, statements of 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", "will",
"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.
39
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Capitol Bancorp Ltd.
We have audited the accompanying consolidated balance sheets of Capitol Bancorp
Ltd. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capitol Bancorp Ltd.
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Grand Rapids, Michigan
January 29, 1999
40
<PAGE> 42
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- December 31 -
1998 1997
----------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 45,263 $ 29,860
Interest-bearing deposits with banks 1,732 260
Federal funds sold 104,050 62,650
----------- ---------
Cash and cash equivalents 151,045 92,770
Loans held for resale 36,789 11,426
Investment securities--Note C:
Available for sale, carried at market value 83,597 62,253
Held for long-term investment, carried at amortized cost
which approximates market value 2,867 2,217
----------- ---------
Total investment securities 86,464 64,470
Portfolio loans--Note D:
Commercial 590,351 395,938
Real estate mortgage 80,808 66,630
Installment 53,121 40,187
----------- ---------
Total portfolio loans 724,280 502,755
Less allowance for loan losses (8,817) (6,229)
----------- ---------
Net portfolio loans 715,463 496,526
Premises and equipment--Note F 11,646 7,579
Accrued interest income 5,100 4,116
Excess of cost over net assets of acquired subsidiaries 2,626 2,154
Other assets 15,311 11,515
----------- ---------
TOTAL ASSETS $ 1,024,444 $ 690,556
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 120,986 $ 83,487
Interest-bearing--Note G 769,904 520,920
----------- ---------
Total deposits 890,890 604,407
Debt obligations--Note H 23,600
Accrued interest on deposits and other liabilities 8,831 5,971
----------- ---------
Total liabilities 923,321 610,378
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE CORPORATION'S SUBORDINATED DEBENTURES--
Note I 24,255 24,126
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES--
Note A 27,576 11,020
STOCKHOLDERS' EQUITY--Notes J and O:
Common stock, no par value,
10,000,000 shares authorized;
issued and outstanding:
1998 -- 6,344,886 shares
1997 -- 6,238,056 shares 51,868 50,312
Retained earnings (2,019) (4,553)
Market value adjustment (net of tax effect) for investment securities
available for sale (accumulated other comprehensive income) 168 143
----------- ---------
50,017 45,902
Less unallocated ESOP shares--Note K (725) (870)
----------- ---------
Total stockholder's equity 49,292 45,032
----------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 1,024,444 $ 690,556
=========== =========
</TABLE>
See notes to consolidated financial statements.
41
<PAGE> 43
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- Year Ended December 31 -
1998 1997 1996
------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $59,132 $42,448 $31,454
Loans held for resale 1,529 536 819
Taxable investment securities 3,765 3,525 2,262
Federal funds sold 5,013 2,805 1,541
Interest-bearing deposits with banks and other 118 33 60
Dividends on investment securities 111 202 343
------- ------- -------
Total interest income 69,668 49,549 36,479
Interest expense:
Demand deposits 7,211 4,111 2,418
Savings deposits 1,487 1,544 1,384
Time deposits 25,450 18,445 13,490
Debt obligations 2,486 752 496
Other 36 12
------- ------- -------
Total interest expense 36,670 24,852 17,800
------- ------- -------
Net interest income 32,998 24,697 18,679
Provision for loan losses--Note D 3,523 2,049 1,196
------- ------- -------
Net interest income after
provision for loan losses 29,475 22,648 17,483
Noninterest income:
Service charges on deposit accounts 1,202 859 746
Trust fee income 472 355 262
Fees from origination of non-portfolio residential
mortgage loans 1,383 298 200
Realized gain on sale of investment securities
available for sale 2 69 82
Other 499 576 415
------- ------- -------
Total noninterest income 3,558 2,157 1,705
Noninterest expense:
Salaries and employee benefits 13,376 8,394 6,387
Occupancy 2,373 1,421 924
Equipment rent, depreciation and maintenance 3,030 2,052 1,011
Deposit insurance premiums 121 88 425
Other 6,921 4,405 3,560
------- ------- -------
Total noninterest expense 25,821 16,360 12,307
------- ------- -------
Income before federal income taxes 7,212 8,445 6,881
Federal income taxes--Note L 2,584 2,888 2,245
------- ------- -------
NET INCOME $ 4,628 $ 5,557 $ 4,636
======= ======= =======
NET INCOME PER
SHARE--Note Q:
Basic $ 0.74 $ 0.91 $ 0.85
======= ======= =======
Diluted $ 0.72 $ 0.88 $ 0.82
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 44
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Unallocated
Common Retained Comprehensive ESOP
Stock Earnings Income Shares Total
----- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $22,150 $ 8,414 $413 $(112) $30,865
Issuance of 606,446 shares of common stock
upon exercise of warrants 4,543 4,543
Issuance of 213,457 shares of common stock
upon exercise of stock options 1,549 1,549
Issuance of 20,360 shares of common stock
pursuant to Shareholder Investment Plan 179 179
Issuance of 491,284 shares of common stock
upon distribution of 10% stock dividend 6,551 (6,553) (2)
Allocation of shares to ESOP participants'
accounts 112 112
Cash dividends paid ($.24 per share) (1,347) (1,347)
Components of comprehensive income:
Net income for 1996 4,636 4,636
Market value adjustment for investment
securities available for sale (net of tax effect) (376) (376)
-------
Total comprehensive income for 1996 4,260
------- ------- ---- ----- -------
BALANCES AT DECEMBER 31, 1996 34,972 5,150 37 40,159
Issuance of 189,728 shares of common stock
upon exercise of warrants 1,292 1,292
Issuance of 75,758 shares of common stock
upon exercise of stock options 619 (1,015) (396)
Issuance of 566,676 shares of common stock
upon distribution of 10% stock dividend 13,429 (13,429)
Allocation of shares to ESOP participants'
accounts 145 145
Cash dividends paid ($.30 per share) (1,831) (1,831)
Components of comprehensive income:
Net income for 1997 5,557 5,557
Market value adjustment for investment
securities available for sale (net of tax effect) 106 106
------
Total comprehensive income for 1997 5,663
------- ------- ---- ----- -------
BALANCES AT DECEMBER 31, 1997 50,312 (4,553) 143 (870) 45,032
Issuance of 73,852 shares of common stock
upon exercise of stock options 816 816
Issuance of 33,205 shares of common stock to
acquire minority interest in bank subsidiary 745 745
Allocation of shares to ESOP participants'
accounts 145 145
Cash dividends paid ($.33 per share) (2,094) (2,094)
Cash in lieu of fractional shares upon issuance of
stock split (5) (5)
Components of comprehensive income:
Net income for 1998 4,628 4,628
Market value adjustment for investment
securities available for sale (net of tax effect) 25 25
-------
Total comprehensive income for 1998 4,653
------- ------- ---- ----- -------
BALANCES AT DECEMBER 31, 1998 $51,868 $(2,019) $168 $(725) $49,292
======= ======= ==== ===== =======
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 45
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- Year Ended December 31 -
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,628 $ 5,557 $ 4,636
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 3,523 2,049 1,196
Depreciation of premises and equipment 2,025 1,325 653
Amortization of goodwill and other intangibles 225 193 193
Net accretion of investment security discounts (174) (315) (267)
Loss on sale of premises and equipment 51 486 7
Deferred income taxes (1,657) (842) (550)
Originations and purchases of loans held for resale (361,769) (142,254) (192,643)
Proceeds from sales of loans held for resale 336,406 137,577 192,923
Increase in accrued interest income and other assets (2,818) (3,065) (1,301)
Increase in accrued interest on deposits and other liabilities 2,860 1,263 503
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (16,700) 1,974 5,350
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 1,005 5,943 4,461
Proceeds from maturities of investment securities available for sale 64,266 34,262 39,742
Purchases of investment securities available for sale (87,049) (55,481) (56,882)
Net increase in portfolio loans (222,460) (145,529) (74,457)
Proceeds from sales of premises and equipment 38 407 13
Purchases of premises and equipment (6,181) (4,376) (3,656)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (250,381) (164,774) (90,779)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 137,953 74,259 43,902
Net increase in certificates of deposit 148,530 93,982 51,977
Net proceeds from (payments on) debt obligations 23,600 (6,500) (2,100)
Resources provided by minority interest 16,556 6,289 4,730
Net proceeds from issuance of common stock 816 1,912 6,271
Net proceeds from issuance of trust-preferred securities 24,126
Cash dividends paid and payments in lieu of
fractional shares (2,099) (1,831) (1,349)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 325,356 192,237 103,431
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 58,275 29,437 18,002
Cash and cash equivalents at beginning of year 92,770 63,333 45,331
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 151,045 $ 92,770 $ 63,333
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
Capitol Bancorp Ltd. (the "Corporation") is a multibank holding company.
Consolidated subsidiaries consist of the following:
<TABLE>
<CAPTION>
Percentage Year Formed
Affiliate Location Owned or Acquired
- ------------------------------------- ------------------------------- ------------- ------------------
<S> <C> <C> <C>
Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990
Brighton Commerce Bank Brighton, Michigan 59% 1997
Capitol National Bank Lansing, Michigan 100% 1982
Detroit Commerce Bank Detroit, Michigan 93% 1998
Grand Haven Bank Grand Haven, Michigan 100% 1995
Kent Commerce Bank Grand Rapids, Michigan 51% 1998
Macomb Community Bank Clinton Township, Michigan 51% 1996
Muskegon Commerce Bank Muskegon, Michigan 51% 1997
Oakland Commerce Bank Farmington Hills, Michigan 100% 1992
Paragon Bank & Trust Holland, Michigan 100% 1994
Portage Commerce Bank Portage, Michigan 100% 1990
Sun Community Bancorp Ltd.: 51% 1997
Bank of Tucson Tucson, Arizona 1996
Camelback Community Bank Phoenix, Arizona 1998
Mesa Bank Mesa, Arizona 1998
Southern Arizona Community
Bank Tucson, Arizona 1998
Sunrise Bank of Arizona Phoenix, Arizona 1998
Valley First Community Bank Scottsdale, Arizona 1997
</TABLE>
Sun Community Bancorp Limited ("Sun") was formed in 1997 and became a
majority-owned subsidiary as a result of a share exchange with the shareholders
of Bank of Tucson. In that share exchange, Bank of Tucson (previously a
majority-owned direct subsidiary of Capitol Bancorp Ltd.) then became a
wholly-owned subsidiary of Sun. Consolidated subsidiaries of Sun, exclusive of
Bank of Tucson, are approximately 51% owned by Sun. Sun raised additional
capital in 1998 through private stock offerings aggregating $17 million,
including $8.7 million invested by Capitol Bancorp.
The Corporation and its subsidiaries are engaged in a single business
activity--banking. The bank affiliates provide a full range of banking services
to individuals, businesses and other customers located in their respective
communities. Each of the banks generally operate from a single location and
focus their activities on meeting the various credit and other banking needs of
entrepreneurs, professionals and other high net-worth individuals. A variety of
deposit products are offered, including checking, savings, money market,
individual retirement accounts and certificates of deposit. In addition, trust
services are offered through Paragon Bank & Trust. The principal markets for the
banks' financial services are the communities in which they are located and the
areas immediately surrounding those communities. In addition to commercial
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION--Continued
banking units, mortgage banking activities are offered through Amera Mortgage
Corporation, a 49% owned affiliate, and Sun Community Mortgage Company, a
wholly-owned subsidiary of Bank of Tucson.
Financial Accounting Standards Board ("FASB") Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information" became effective for
and has been implemented by the Corporation in 1998. This new accounting
standard revises the definition of reportable `segments' and the presentation of
related disclosures. The standard focuses on the identification of reportable
segments on the basis of discreet business units and their financial information
to the extent such units are reviewed by an entity's `chief decision maker'
(which can be an individual or group of management persons). The Statement
permits aggregation or combination of segments which have similar
characteristics.
In the Corporation's operations, each bank is viewed by management as being a
separately identifiable business or segment from the perspective of monitoring
performance and allocation of financial resources. Although the banks operate
independently and are managed and monitored separately, each bank is
substantially similar in terms of business focus, type of customers, products
and services. Further, each of the banks and the Corporation are subject to
substantially similar laws and regulations unique to the banking industry.
Accordingly, the Corporation's consolidated financial statements reflect the
presentation of segment information on an aggregated basis.
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after elimination of intercompany accounts
and transactions, and after giving effect to applicable minority interests.
Banks formed or otherwise acquired during 1996, 1997 and 1998 are included in
the consolidated financial statements for periods after joining the consolidated
group. Certain 1997 and 1996 amounts have been reclassified to conform to the
1998 presentation.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
Estimates: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
Loans Held For Resale: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the aggregate lower of cost or market.
Investment Securities: Investment securities "available for sale" (generally
most debt securities investments of the Corporation), are carried at market
value with unrealized gains and losses reported as a separate component of
stockholders' equity, net of tax effect (accumulated other comprehensive
income). All other investment securities are classified as held for long-term
investment and are carried at amortized cost which approximates market value
(see Note C). Investments are classified at the date of purchase based on
management's analysis of liquidity and other factors. The adjusted cost of the
specific securities sold is used to compute realized gains or losses. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
Loans, Credit Risk and Allowance for Loan Losses: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Substantially all portfolio loans are made to borrowers in the
banks' geographic areas. Consistent with the banks' emphasis on business
lending, there are concentrations of credit in loans secured by commercial real
estate, equipment and other business assets. The maximum potential credit risk
to the Corporation, without regard to underlying collateral and guarantees, is
the total of loans and loan commitments outstanding. Management reduces the
Corporation's exposure to losses from credit risk by requiring collateral and/or
guarantees for loans granted and by monitoring concentrations of credit, in
addition to recording provisions for loan losses and maintaining an allowance
for loan losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on evaluation of the
portfolio (including potential impairment of individual loans and concentrations
of credit), past loss experience, current economic conditions, volume, amount
and composition of the loan portfolio, loan commitments outstanding and other
factors. The allowance is increased by provisions charged to operations and
reduced by net charge-offs.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Interest and Fees on Loans: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of portfolio
loans approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
Premises and Equipment: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
Excess of Cost Over Net Assets of Acquired Subsidiaries: Goodwill is amortized
on a straight-line basis over various periods not to exceed 15 years. Management
periodically reviews long-lived assets, including associated goodwill, for
potential impairment based upon projected undiscounted net cash flows, when
applicable, and the related amortization periods.
Other Real Estate: Other real estate (included as a component of other assets
and which, at December 31, 1998 and 1997 approximated $541,000 and $165,000,
respectively) comprises properties acquired through a foreclosure proceeding or
acceptance of a deed in lieu of foreclosure. These properties held for sale are
carried at the lower of cost or estimated fair value (net of estimated selling
cost) at the date acquired and are periodically reviewed for subsequent
impairment.
Stock-Based Compensation: No stock-based compensation expense is recorded upon
granting of stock options, because such stock options are accounted for under
the provisions of Accounting Principles Board (APB) Opinion 25 and are granted
at an exercise price equal to the market price of common stock at grant date.
Pro forma disclosure of alternative accounting recognition is made elsewhere
herein (see Note J).
Trust Assets and Related Income: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Corporation's banks is not
included in the consolidated balance sheet because such property is not an asset
of the banks or the Corporation. Trust fee income is recorded on the accrual
method.
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Federal Income Taxes: The Corporation and subsidiaries owned 80% or more by the
Corporation file a consolidated federal income tax return. Deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax laws or
rates is recognized in income in the period that includes the enactment date.
Comprehensive Income: "Comprehensive income", as that term is defined in FASB
Statement No. 130, is the sum of net income and certain other items which are
charged or credited to stockholders' equity. For the periods presented, the
Corporation's only element of comprehensive income other than net income was the
net change in the market value adjustment for investment securities available
for sale. Accordingly, the elements and total of comprehensive income are shown
within the statement of changes in stockholders' equity presented herein.
Implementation of this new accounting standard in 1998 had no impact on the
Corporation's consolidated financial position or results of operations.
NOTE C--INVESTMENT SECURITIES
Investment securities consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Available for sale:
United States Treasury securities $35,123 $35,307 $24,132 $24,243
United States government agency
securities 45,322 45,360 36,298 36,407
States and political subdivisions 2,897 2,930 1,610 1,603
------- ------- ------- -------
83,342 83,597 62,040 62,253
Held for long-term investment:
Federal Reserve Bank stock 116 116 116 116
Federal Home Loan Bank stock 1,431 1,431 1,073 1,073
Corporate stock 1,320 1,320 1,028 1,028
------- ------- ------- -------
2,867 2,867 2,217 2,217
------- ------- ------- -------
$86,209 $86,464 $64,257 $64,470
======= ======= ======= =======
</TABLE>
At December 31, 1998, securities with a market value approximating $7 million
were pledged to secure public and trust deposits and for other purposes as
required by law.
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE C--INVESTMENT SECURITIES--CONTINUED
Gross unrealized gains and losses on investment securities available for sale
were as follows (in thousands):
<TABLE>
<CAPTION>
- December 31 -
1998 1997
---------------------- ------------------
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
United States Treasury securities $185 $ 1 $112 $ 1
United States government agency securities 131 93 142 33
States and political subdivisions 33 2 9
---- ---- ---- ----
$349 $ 94 $256 $ 43
---- ---- ---- ----
</TABLE>
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
Scheduled maturities of investment securities held as of December 31, 1998 were
as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
-------------- --------------
<S> <C> <C>
Due in one year or less $40,653 $40,728
After one year, through five years 37,744 37,928
After five years, through ten years 2,089 2,088
After ten years 2,856 2,853
Securities held for long-term investment,
without stated maturities 2,867 2,867
------- -------
$86,209 $86,464
======= =======
</TABLE>
NOTE D--LOANS
Transactions in the allowance for loan losses are summarized below (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Balance at January 1 $ 6,229 $ 4,578 $ 3,687
Provision charged to operations 3,523 2,049 1,196
Loans charged off (deduction) (1,305) (718) (438)
Recoveries 370 320 133
------- ------- -------
Balance at December 31 $ 8,817 $ 6,229 $ 4,578
======= ======= =======
</TABLE>
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE D--LOANS--CONTINUED
Certain commercial loans are enrolled in a loan program sponsored by the State
of Michigan. Under that program, the governmental unit shares loss exposure on
such loans by funding reserves, which are placed as deposits at the banks. Loans
participating in this program and related reserves approximated $24,870,000 and
$1,953,000, respectively, at December 31, 1998 ($18,719,000 and $1,788,000,
respectively, at December 31, 1997). Such reserve amounts are separate and
excluded from the allowance for loan losses.
At December 31, 1998 and 1997, 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.
NOTE E--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Corporation's banking subsidiaries make
loans to officers and directors of the Corporation and its subsidiaries
including their immediate families and companies in which they are principal
owners. At December 31, 1998 and 1997, total loans to these persons approximated
$59,939,000 and $28,962,000, respectively. During 1998, $52,397,000 of new loans
were made to these persons and repayments totaled $21,420,000. Such loans are
made at the banking subsidiaries' normal credit terms.
Such officers and directors of the Corporation (and their associates, family
and/or affiliates) are also depositors of the banking subsidiaries. Such
deposits are similarly made at the banks' normal terms as to interest rate, term
and deposit insurance.
NOTE F--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
- December 31 -
1998 1997
-------- --------
<S> <C> <C>
Land, buildings and improvements $ 2,795 $ 1,975
Leasehold improvements 3,789 2,109
Equipment and furniture 9,485 6,561
-------- --------
16,069 10,645
Less accumulated depreciation (4,423) (3,066)
-------- --------
$ 11,646 $ 7,579
======== ========
</TABLE>
The Corporation and certain subsidiaries rent office space under operating
leases. Rent expense (net of sublease income) under these lease agreements
approximated $1,577,000, $958,000 and $614,000 (including rent expense of
$893,000, $506,000 and $222,000 under leases with related parties) in 1998,
1997, and 1996, respectively. Future minimum rental payments under operating
51
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE F--PREMISES AND EQUIPMENT--CONTINUED
leases that have initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1998 aggregate $18,374,000 due as follows: $2,191,000 in
1999, $2,208,000 in 2000, $1,995,000 in 2001, $2,005,000 in 2002, $1,882,000 in
2003 and $8,093,000 thereafter.
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $221.1
million and $139.9 million as of December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of such time deposits were as
follows (in thousands):
<TABLE>
<S> <C>
1999 $ 182,008
2000 25,627
2001 6,419
2002 743
2003 and thereafter 6,303
---------
$ 221,100
=========
</TABLE>
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE H--DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
- December 31 -
1998 1997
-------------- --------------
<S> <C> <C>
Short-term borrowings from Federal
Home Loan Bank $ 14,000
Notes payable to unaffiliated bank 9,600
---------- ------
$ 23,600 $ 0
========== ======
</TABLE>
Short-term borrowings from Federal Home Loan Bank of Indianapolis in 1998
represented advances secured by certain portfolio residential real estate
mortgage loans. Such advances become due at varying dates, generally within one
year, and bear interest at market short-term rates. At December 31, 1998, unused
lines of credit under these facilities approximated $1.1 million.
52
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE H--DEBT OBLIGATIONS--CONTINUED
Notes payable to unaffiliated bank at December 31, 1998 represented borrowings
under lines of credit. As amended and increased in early 1999, up to $20 million
can be borrowed pursuant to a one-year revolving credit agreement which bears
interest at a rate slightly less than prime rate (effectively 7.50% at December
31, 1998), payable monthly. The credit facility is reviewed annually for
continuance and requires the Corporation, among other things, to maintain
certain minimum levels of capital, rates of return on assets and other ratios or
requirements and is secured by the common stock of certain bank subsidiaries.
Interest paid under this credit facility approximated $5,000 in 1998, $562,000
in 1997 and $342,000 in 1996.
NOTE I--TRUST-PREFERRED SECURITIES
On December 19, 1997, the Corporation and a subsidiary (Capitol Trust I)
completed a public offering of trust-preferred securities. Under the terms of
the offering, Capitol Trust I (of which the Corporation owns 100% of the common
interests of the Trust) issued 2,530,000 shares of preferred securities, $10
liquidation amount per preferred security. Gross proceeds from the offering
aggregated $25.3 million. Upon receipt of the proceeds of the offering, Capitol
Trust I purchased subordinated debentures of the Corporation of like amount,
which bear interest at 8.5% payable quarterly and which mature in 2027 (which
may be extended to 2036 if certain conditions are met) and are callable after
2002. The liquidation amount of the trust-preferred securities is guaranteed by
the Corporation.
Interest paid to the Trust by the Corporation (which is recorded as interest
expense in its consolidated financial statements) is distributed by the Trust to
the holders of the trust-preferred securities. Under certain conditions, the
Corporation may defer payment of interest on the subordinated debentures for
periods of up to five years.
Because Capitol Trust I is a subsidiary (due to the Corporation's ownership of
the common interests of the Trust), Capitol Trust I is consolidated with the
Corporation for financial reporting purposes. The amount of outstanding
trust-preferred securities (net of issuance costs which are being amortized over
the life of the securities) is classified between liabilities and equity in the
Corporation's consolidated balance sheet. Under current regulatory guidelines,
such trust-preferred securities are included as capital for purposes of meeting
certain ratio requirements.
NOTE J--COMMON STOCK AND STOCK OPTIONS
In December 1998 a 6-for-5 stock split occurred. In 1997 and 1996, the
Corporation issued stock dividends of 10%. All share and per share data have
been restated to reflect the stock split as if it had occurred at the beginning
of the periods presented. Per share data has been restated for stock dividends.
53
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE J--COMMON STOCK AND STOCK OPTIONS--CONTINUED
Stock options have been granted to certain officers which provide for the
purchase of shares of common stock. Generally, stock options are granted at an
exercise price equal to the fair value of common stock on the grant date, expire
seven years after grant, and are currently exercisable.
Under the terms of an employment agreement with a certain director and executive
officer of the Corporation, options granted thereunder shall be increased when
the Corporation issues additional shares so that such options granted equal 15%
of outstanding shares prior to exercise. In addition, certain other stock
options resulted from a 1994 merger transaction. Stock option activity is
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Exercise
Outstanding Price Range Price
-------------- --------------------------- ------------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1, 1996 580,775 $ 4.92 to $ 8.75 $ 6.59
Granted in 1996 237,901 8.49 to 13.54 10.84
Exercised in 1996 (213,457) 5.23 to 6.06 5.72
Expired in 1996 (336) $4.92 4.92
-------- --------------------------- -------
Outstanding at December 31, 1996 604,883 4.92 to 13.54 8.57
Granted in 1997 149,384 12.40 to 25.10 21.20
Exercised in 1997 (75,758) 4.92 to 13.25 6.20
Expired in 1997 (6,653) 4.92 4.92
-------- --------------------------- -------
Outstanding at December 31, 1997 671,856 4.92 to 25.10 11.63
Granted in 1998 18,710 17.23 to 24.38 20.94
Exercised in 1998 (73,852) 4.92 to 13.25 6.80
Expired/other in 1998 1,000
-------- --------------------------- -------
Outstanding at December 31, 1998 617,714 $ 4.92 to $25.10 $ 12.48
</TABLE>
As of December 31, 1998, stock options outstanding had a weighted average
remaining contractual life of 4.2 years. As of that date, stock options with an
exercise price of $15.00 or less had a weighted average exercise price of $9.62
and a weighted average remaining contractual life of 3.8 years; stock options
with an exercise price of more than $15.00 had a weighted average exercise price
of $24.45 and a weighted average remaining contractual life of 6 years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value method of accounting for stock options
whereby compensation expense is recognized based on the computed fair value of
the options on the grant date. However, as permitted by Statement No. 123, the
Corporation accounts for its stock options under APB 25 and, therefore, does not
recognize compensation expense. By electing
54
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE J--COMMON STOCK AND STOCK OPTIONS--CONTINUED
this alternative, certain pro forma disclosures of the expense recognition
provisions of Statement No. 123 are required, which are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Fair value assumptions:
Risk-free interest rate 5.0% 7.5% 7.5%
Dividend yield 1.5% 2.0% 2.0%
Stock price volatility .41 .36 .36
Expected option life 7 years 7 years 7 years
Pro forma net income (in thousands) $4,521 $4,700 $4,300
Pro forma net income per diluted share $.70 $.74 $.76
</TABLE>
NOTE K--EMPLOYEE RETIREMENT PLANS
The Corporation has a contributory employee retirement savings 401(k) plan which
covers substantially all full-time employees of the Corporation and certain
subsidiaries over age 21. The Plan provides for contributions by the Corporation
in amounts determined annually by the board of directors. Eligible employees
make voluntary contributions to the Plan. Contributions to the Plan, which are
an employer match (50%, subject to certain limitations) for employee
contributions, charged to expense for the years ended December 31, 1998, 1997
and 1996 were $182,000, $111,000 and $88,000, respectively.
The Corporation also has a defined contribution employee stock ownership plan
("ESOP") which covers substantially all employees of the Corporation and certain
subsidiaries. Certain common stock purchases by the ESOP were financed by
long-term debt. ESOP contributions charged to expense in 1998, 1997 and 1996
approximated $256,000, $180,000 and $131,000 (including ESOP note payable
interest of $74,000, $51,000 and $8,400), respectively. Shares of common stock
held by the ESOP which have not yet been allocated to participants' accounts are
shown as a reduction of stockholders' equity. As of December 31, 1998, the ESOP
held 154,000 shares of the Corporation's common stock which have been allocated
to participants' accounts and 59,200 shares of common stock (with an approximate
fair value of $1.2 million) which have not yet been allocated to participants'
accounts.
NOTE L--INCOME TAXES
Federal income taxes consist of the following components (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Current $ 4,241 $ 3,730 $ 2,795
Deferred Credit (1,657) (842) (550)
--------- -------- --------
$ 2,584 $ 2,888 $ 2,245
========= ======== ========
</TABLE>
55
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE L--INCOME TAXES--CONTINUED
Federal income taxes paid during 1998, 1997 and 1996 approximated $2,975,000,
$3,639,000 and $2,451,000 respectively.
Differences between federal income tax expense recorded and amounts computed
using the statutory tax rate are reconciled below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Federal income tax computed at statutory rate of 34% $ 2,452 $ 2,871 $ 2,339
Tax effect of:
Amortization of goodwill 77 66 66
Other 55 (49) (160)
--------- --------- ---------
$ 2,584 $ 2,888 $ 2,245
========= ========= =========
</TABLE>
Net deferred income tax assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
- December 31 -
1998 1997
-------------- --------------
<S> <C> <C>
Allowance for loan losses $ 2,726 $ 1,925
Deferred compensation 463 363
Market value adjustment for investment
securities available for sale (80) (72)
Other, net 1,530 412
--------- ---------
$ 4,639 $ 2,628
========= =========
</TABLE>
56
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE M--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
- December 31 -
1998 1997
--------------------------------- ----------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 151,045 $ 151,045 $ 92,770 $ 92,770
Loans held for resale 36,789 36,789 11,426 11,426
Investment securities:
Available for sale 83,597 83,597 62,253 62,253
Held for long-term investment 2,867 2,867 2,217 2,217
--------- --------- --------- ---------
86,464 86,464 64,470 64,470
Portfolio loans:
Fixed rate 482,276 482,460 327,096 327,517
Variable rate 242,004 241,938 175,659 174,399
--------- --------- --------- ---------
Total portfolio loans 724,280 724,398 502,755 501,916
Less allowance for loan losses (8,817) (8,817) (6,229) (6,229)
--------- --------- --------- ---------
Net portfolio loans 715,463 715,581 496,526 495,687
Financial Liabilities:
Deposits:
Noninterest-bearing deposits 120,986 120,986 83,487 83,487
Interest-bearing deposits:
Demand accounts 247,139 247,188 156,376 156,706
Time certificates of deposit less
than $100,000 301,665 305,303 224,606 227,438
Time certificates of deposit of
$100,000 or more 221,100 223,766 139,938 140,276
--------- --------- --------- ---------
Total interest-bearing deposits 769,904 776,257 520,920 524,420
--------- --------- --------- ---------
Total deposits 890,890 897,243 604,407 607,907
Debt obligations 23,600 23,596
Trust-preferred securities 24,255 25,300 24,126 25,300
</TABLE>
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates on financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest unless quoted market values or
other fair value information is more readily available. Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE N--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of bank customers. Such loan commitments include
stand-by letters of credit, lines of credit, and various commitments for other
commercial, installment and mortgage loans. Stand-by letters of credit, when
issued, commit the bank to make payments on behalf of customers if certain
specified future events occur and are used infrequently by the banks ($8,813,000
and $5,162,000 outstanding at December 31, 1998 and 1997, respectively). Other
loan commitments outstanding consist of unused lines of credit and approved, but
unfunded, specific loan commitments ($145,028,000 and $109,402,000 at December
31, 1998 and 1997, respectively). These loan commitments (stand-by letters of
credit and unfunded loans) generally expire within one year and are reviewed
periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the banks' normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
The Corporation's banking subsidiaries are required to maintain average reserve
balances in the form of cash on hand and balances due from the Federal Reserve
Bank and certain correspondent banks. The amount of reserve balances required as
of December 31, 1998 and 1997 were $1,845,000 and $1,914,000, respectively.
Deposits at each of the banks are insured up to the maximum amount covered by
FDIC insurance. To supplement deposit insurance coverage, certain municipal
government deposits at some of the banks have their deposits guaranteed by the
Corporation ($21.2 million at December 31, 1998).
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to the Corporation in the form of cash dividends, loans or
advances. Subject to various regulatory capital requirements, bank subsidiaries'
current and retained earnings are available for distribution as dividends to the
Corporation (and other bank shareholders, as applicable) without prior approval
from regulatory authorities. Substantially all of the remaining net assets of
the subsidiaries are restricted as to payments to the Corporation.
Each bank and the Corporation are subject to certain other capital requirements.
Federal financial institution regulatory agencies have established certain
risk-based capital guidelines for
58
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
banks and bank holding companies. Those guidelines require all banks and bank
holding companies to maintain certain minimum ratios and related amounts based
on `Tier I' and `Tier II' capital and `risk-weighted assets' as defined and
periodically prescribed by the respective regulatory agencies. Failure to meet
these capital requirements can result in severe regulatory enforcement action or
other adverse consequences for a depository institution and, accordingly, could
have a material impact on the Corporation's consolidated financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgements by regulatory agencies with regard to
components, risk weighting and other factors.
As a condition of their charter approval, de novo banks are generally required
to maintain a core capital (Tier I) to assets ratio of not less than 8% and an
allowance for loan losses of not less than 1% for the first three years of
operations.
As of December 31, 1998, the most recent notifications received by the banks
from regulatory agencies have advised that the banks are classified as "well
capitalized" as defined by the applicable agencies. There are no conditions or
events since those notifications that management believes would change the
regulatory classification of the banks.
Management believes, as of December 31, 1998, that the Corporation and the banks
meet all capital adequacy requirements to which the entities are subject.
The following table summarizes the amounts (in thousands) and related ratios of
the individually significant subsidiaries (assets of $125 million or more at
December 31, 1998) and consolidated regulatory capital position as of December
31, 1998 and 1997:
59
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
<TABLE>
<CAPTION>
Sun
Ann Arbor Capitol Community
Commerce National Bancorp
Bank Bank Limited Consolidated
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
December 31, 1998
Total capital to total assets:
Minimum required amount => $ 7,858 => $ 5,471 => $ 5,411 => $40,978
Actual amount $12,901 $ 9,759 $26,627 $50,017
Ratio 6.57% 7.14% 19.68% 4.88%
Tier I capital to risk-weighted assets:
Minimum required amount(1) => $ 5,898 => $ 4,178 => $ 3,397 => $29,262
Actual amount $12,906 $ 9,750 $35,102 $98,143
Ratio 8.75% 9.34% 41.33% 13.42%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) => $11,797 => $ 8,355 => $ 6,795 => $58,525
Amount required to meet "Well-Capitalized"
category(3) => $14,746 => $10,444 => $ 8,494 => $73,156
Actual amount $14,752 $11,057 $35,798 $106,842
Ratio 10.00% 10.59% 42.15% 14.60%
December 31, 1997
Total capital to total assets:
Minimum required amount => $ 5,536 => $ 5,062 => $ 2,200 => $27,622
Actual amount $ 9,759 $ 8,893 $ 9,691 $45,903
Ratio 7.05% 7.03% 17.62% 6.65%
Tier I capital to risk-weighted assets:
Minimum required amount(1) => $ 4,298 => $ 3,631 => $ 1,474 => $19,961
Actual amount $ 9,746 $ 8,888 $11,236 $71,142
Ratio 9.07% 9.79% 30.49% 14.26%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) => $ 8,596 => $ 7,263 => $ 2,948 => $39,922
Amount required to meet "Well-Capitalized"
category(3) => $10,745 => $ 9,079 => $ 3,685 => $49,903
Actual amount $11,092 $10,024 $11,553 $82,898
Ratio 10.32% 11.04% 31.35% 16.61%
</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.
60
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE P--PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- Year Ended December 31 -
1998 1997
-------------- --------------
(in thousands)
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary banks $ 1 $ 35
Money market funds on deposit with subsidiary banks 4 13,182
Investment securities held for long-term investment 649 318
Investment in subsidiaries 75,673 49,364
Notes receivable 1,105 1,105
Investment in and advances to Amera Mortgage Corporation 3,037 2,913
Equipment and furniture, net 727 170
Excess of cost over net assets of acquired subsidiaries 2,172 2,154
Other assets 3,553 2,646
------- -------
TOTAL ASSETS $86,921 $71,887
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 2,992 $ 1,946
Debt obligations payable to unaffiliated entities 9,600
Subordinated debentures 25,037 24,909
------- -------
Total liabilities 37,629 26,855
Stockholders' equity 49,292 45,032
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $86,921 $71,887
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- Year Ended December 31 -
1998 1997 1996
--------------- --------------- --------------
(in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 2,600 $ 2,100 $ 2,690
Intercompany fees 4,232 3,812 2,046
Interest 394 254 182
Other (162) (183) 312
------- ------- -------
Total income 7,064 5,983 5,230
Expenses:
Interest 2,311 660 386
Salaries and employee benefits 2,524 1,618 1,546
Occupancy 202 171 109
Amortization, equipment rent and depreciation 1,889 1,528 708
Other 1,606 926 653
------- ------- -------
Total expenses 8,532 4,903 3,402
------- ------- -------
(1,468) 1,080 1,828
Equity in undistributed net earnings of consolidated
subsidiaries 4,810 4,203 2,479
Federal income taxes (credit) (1,286) (274) (329)
------- ------- -------
NET INCOME $ 4,628 $ 5,557 $ 4,636
======= ======= =======
</TABLE>
61
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE P--PARENT COMPANY FINANCIAL INFORMATION--Continued
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
- Year Ended December 31 -
1998 1997 1996
-------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,628 $ 5,557 $ 4,636
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed net earnings of subsidiaries (4,810) (4,203) (2,479)
Depreciation and amortization 140 260 255
Decrease in amounts due from subsidiaries and other assets (97) (1,602) (681)
Increase (decrease) in accounts payable, accrued expenses and other
liabilities 1,046 (43) 526
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 907 (31) 2,257
INVESTING ACTIVITIES
Net cash investment in subsidiaries (21,410) (8,450) (5,202)
Net decrease in note receivable due from Amera Mortgage Corporation 294
Purchases of investment securities (316) (25)
Proceeds from sales of equipment and furniture 6 4
Purchases of equipment and furniture (716) (99) (81)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (22,436) (8,574) (4,985)
FINANCING ACTIVITIES
Net borrowings (payments) on debt obligations 9,600 (3,500) (2,100)
Net proceeds from issuance of subordinated debentures 24,909
Net proceeds from issuance of common stock 816 1,912 6,271
Cash dividends paid and payments in lieu of fractional shares (2,099) (1,831) (1,349)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,317 21,490 2,822
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,212) 12,885 94
Cash and cash equivalents at beginning of year 13,217 332 238
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5 $ 13,217 $ 332
======== ======== ========
</TABLE>
62
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE Q--NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Numerator--net income for the year $4,628 $5,557 $4,636
====== ====== ======
Denominator:
Weighted average number of shares outstanding
(denominator for basic earnings per share) 6,284 6,130 5,477
Effect of dilutive securities:
Warrants 16 73
Stock options 141 180 86
------ ------ ------
Potential dilution 141 196 159
------ ------ ------
Denominator for diluted earnings per share--weighted
average number of shares and potential dilution 6,425 6,326 5,636
====== ====== ======
Basic earnings per share $ 0.74 $ 0.91 $ 0.85
====== ====== ======
Diluted earnings per share $ 0.72 $ 0.88 $ 0.82
====== ====== ======
</TABLE>
Additional disclosures regarding stock options are set forth in Note J.
63
<PAGE> 65
CAPITOL BANCORP LIMITED
- --------------------------------------------------------------------------------
OFFICERS OF THE
CORPORATION
JOSEPH D. REID
Chairman, President and CEO
DAVID O'LEARY
Secretary
ROBERT C. CARR
Executive Vice President and Treasurer
PAUL R. BALLARD
Executive Vice President
DAVID K. POWERS
Executive Vice President
LEE W. HENDRICKSON
Senior Vice President and Chief Financial Officer
CARL C. FARRAR
Senior Vice President
JOHN C. SMYTHE
Senior Vice President
BRUCE A. THOMAS
Senior Vice President
CRISTIN REID ENGLISH
Vice President of Corporate Development
and General Counsel
MARC A. DEUR
Vice President
JANET L. HARDIN
Vice President
CHARLES J. MCDONALD
Vice President
LINDA D. PAVONA
Vice President
MARIE D. WALKER
Vice President and Controller
WILLIAM E. RHEAUME
Senior Counsel
OTHER CORPORATE
INFORMATION
CORPORATE OFFICE
One Business & Trade Center
200 Washington Square North
Lansing, Michigan 48933
(517) 487-6555
www.cbcl.com
INDEPENDENT AUDITORS
BDO Seidman, LLP
Grand Rapids, Michigan
SHAREHOLDER INFORMATION
ANNUAL MEETING
The 1999 Annual Meeting of Capitol Bancorp Ltd. will be held on Tuesday, May 4,
1999 at 4:00 p.m. at the Lansing Center, 333 E. Michigan Avenue, Lansing,
Michigan.
SHAREHOLDER INVESTMENT PLAN
Capitol Bancorp Ltd. offers its shareholders an easy and affordable way
to invest in Capitol Bancorp Ltd. common stock through the Shareholder
Investment Program. The Program's benefits include features such as reinvestment
of dividends in additional common stock, direct deposit of dividends, ability to
purchase as little as $50 in common stock as frequently as once a month, and the
option to make transfers or gifts of Capitol Bancorp Ltd. common stock to
another person free of charge. Participation in the Program is voluntary, and
all shareholders are eligible. Purchases under the Program are not currently
subject to any brokerage fees or commissions. For further information regarding
the Capitol Bancorp Ltd. Shareholder Investment Program or a copy of the Program
prospectus, informational brochure and enrollment materials contact UMB Bank,
n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555.
COMMON STOCK TRADING INFORMATION
Common stock of Capitol Bancorp Ltd. trades on the Nasdaq National Market Tier
of The Nasdaq Stock Market(SM) under the trading symbol "CBCL" .
The following brokerage firms make a market in the common stock of
Capitol Bancorp Ltd.:
ROBERT W. BAIRD & CO., INC.
Milwaukee, Wisconsin
HOWE BARNES INVESTMENTS, INC.
Chicago, Illinois
EVEREN SECURITIES, INC.
Chicago, Illinois
RONEY & CO. INC.
Detroit, Michigan
FIRST OF MICHIGAN CORPORATION
Detroit, Michigan
STIFEL, NICOLAUS & COMPANY, INC.
St. Louis, Missouri
HERZOG, HEINE, GEDULD, INC.
Detroit, Michigan
COMMON STOCK TRANSFER AGENT
UMB Bank, n.a.
928 Grand Avenue
P.O. Box 410064
Kansas City, Missouri 64141-0064
Telephone (800) 884-4225
TRUST-PREFERRED SECURITIES TRADING INFORMATION
Preferred securities of Capitol Trust I (a subsidiary of Capitol Bancorp Ltd.)
trade on the Nasdaq Stock Market(SM) under the trading symbol "CBCLP".
THE FOLLOWING BROKERAGE FIRMS MAKE A MARKET IN THE TRUST-PREFERRED SECURITIES OF
CAPITOL TRUST I:
Robert W. Baird & Co., Inc. - Milwaukee, Wisconsin
Howe Barnes Investments, Inc. - Chicago, Illinois
Stifel, Nicolaus & Company, Inc. - St. Louis, Missouri
TRUST PREFERRED SECURITIES TRUSTEE
The First National Bank of Chicago, Chicago, Illinois
64
<PAGE> 1
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
CAPITOL BANCORP LTD.
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PAGE 1 OF 2 STATE OR OTHER
JURISDICTION
NAME OF SUBSIDIARY OF INCORPORATION
- ------------------ ----------------
Consolidated Subsidiaries:
- --------------------------
<S> <C>
Ann Arbor Commerce Bank Michigan
Brighton Commerce Bank (59% owned) Michigan
Capitol National Bank United States (national bank)
Detroit Commerce Bank (93% owned) Michigan
Grand Haven Bank Michigan
Kent Commerce Bank (51% owned) Michigan
Macomb Community Bank (51% owned) Michigan
Muskegon Commerce Bank (51% owned) Michigan
Oakland Commerce Bank Michigan
Paragon Bank & Trust Michigan
Portage Commerce Bank Michigan
Sun Community Bancorp Limited (51% owned) Arizona
Bank of Tucson
(100% owned by Sun Community Bancorp Limited) Arizona
Valley First Community Bank
(51% owned by Sun Community Bancorp Limited) Arizona
Camelback Community Bank
(51% owned by Sun Community Bancorp Limited) Arizona
Southern Arizona Community Bank
(51% owned by Sun Community Bancorp Limited) Arizona
Mesa Bank
(51% owned by Sun Community Bancorp Limited) Arizona
Sunrise Bank of Arizona
(51% owned by Sun Community Bancorp Limited) Arizona
Capitol Trust I Delaware
Unconsolidated Subsidiary:
Amera Mortgage Corporation, Inc. Michigan
(49% owned equity method investee)
Inactive subsidiaries:
MOI, Inc. Michigan
(wholly-owned subsidiary of
Oakland Commerce Bank)
Financial Center Corporation Michigan
C.B. Services, Inc. Michigan
</TABLE>
<PAGE> 2
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT - CONTINUED:
CAPITOL BANCORP LTD.
DECEMBER 31, 1998
PAGE 2 OF 2
The following summarizes regulatory agencies of the registrant and its
subsidiaries:
The Corporation's state-chartered banks located in Michigan are regulated by the
Financial Institutions Bureau of the Michigan Department of Commerce. Capitol
National Bank, as a national bank, is regulated by the Office of the Comptroller
of the Currency. Bank subsidiaries located in Arizona are state-chartered and
are regulated by the Arizona Corporation Division. Each of the banking
subsidiaries, as federally-insured depository institutions, are also regulated
by the Federal Deposit Insurance Corporation. As a bank holding company, Capitol
Bancorp Ltd. is regulated by the Federal Reserve Board, which also regulates its
nonbanking subsidiaries. Sun Community Bancorp Limited is also regulated by the
Federal Reserve Board. In addition to the bank regulatory agencies, the
registrant and its subsidiaries are subject to regulation by other state and
federal agencies.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Capitol Bancorp Ltd.
Lansing, Michigan
We hereby consent to the incorporation by reference and use of our report dated
January 29, 1999, which appears on page 40 of Capitol Bancorp Ltd.'s Annual
Report to shareholders for the year ended December 31, 1998, in that
corporation's previously filed Form S-3 Registration Statement No. 33-71774 for
its Shareholder Investment Program.
BDO SEIDMAN, LLP
s/BDO Seidman, LLP
- ------------------
March 16, 1999
Grand Rapids, Michigan
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45263
<INT-BEARING-DEPOSITS> 1732
<FED-FUNDS-SOLD> 104050
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 86464
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 761069
<ALLOWANCE> 8817
<TOTAL-ASSETS> 1024444
<DEPOSITS> 890890
<SHORT-TERM> 23600
<LIABILITIES-OTHER> 8831
<LONG-TERM> 0
0
0
<COMMON> 51868
<OTHER-SE> (1851)
<TOTAL-LIABILITIES-AND-EQUITY> 1024444
<INTEREST-LOAN> 60661
<INTEREST-INVEST> 3876
<INTEREST-OTHER> 5131
<INTEREST-TOTAL> 69668
<INTEREST-DEPOSIT> 34148
<INTEREST-EXPENSE> 36670
<INTEREST-INCOME-NET> 32998
<LOAN-LOSSES> 3523
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 25821
<INCOME-PRETAX> 7212
<INCOME-PRE-EXTRAORDINARY> 4628
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4628
<EPS-PRIMARY> .74
<EPS-DILUTED> .72
<YIELD-ACTUAL> 8.76
<LOANS-NON> 2992
<LOANS-PAST> 4250
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6229
<CHARGE-OFFS> 1305
<RECOVERIES> 370
<ALLOWANCE-CLOSE> 8817
<ALLOWANCE-DOMESTIC> 8817
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3927
</TABLE>
