<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
-----
Commission file number 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2761672
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common stock, No par value: 6,344,886 shares outstanding as of July 31, 1999.
Page 1 of 22
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including the
Corporation's consolidated financial statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and in documents
incorporated into this document by reference that are not historical facts,
including, without limitation, statements of future expectations, projections of
results of operations and financial condition, statements of future economic
performance and other forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, are subject to known and
unknown risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of the Corporation and/or its subsidiaries
and other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "believe", and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of the Corporation's
efforts to implement its business strategy, (ii) changes in interest rates,
(iii) legislation or regulatory requirements adversely impacting the
Corporation's banking business and/or expansion strategy, (iv) adverse changes
in business conditions or inflation, (v) general economic conditions, either
nationally or regionally, which are less favorable than expected and that result
in, among other things, a deterioration in credit quality and/or loan
performance and collectability, (vi) competitive pressures among financial
institutions, (vii) changes in securities markets, (viii) actions of competitors
of the Corporation's banks and the Corporation's ability to respond to such
actions, (ix) the cost of the Corporation's capital, which may depend in part on
the Corporation's asset quality, prospects and outlook, (x) changes in
governmental regulation, tax rates and similar matters, (xi) "Year 2000"
computer, imbedded chip and data processing issues, and (xii) other risks
detailed in the Corporation's other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written or oral forward-looking
statements attributable to the Corporation or persons acting on its behalf are
expressly qualified in their entirety by the foregoing factors. Investors and
other interested parties are cautioned not to place undue reliance on such
statements, which speak as of the date of such statements. The Corporation
undertakes no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of unanticipated events.
Item 1. Financial Statements:
Consolidated balance sheets - June 30, 1999 and December 31,
1998.
Consolidated statements of income - Three months and six
months ended June 30, 1999 and 1998.
Consolidated statements of changes in stockholders' equity -
Six months ended June 30, 1999 and 1998.
Consolidated statements of cash flows - Six months ended June
30, 1999 and 1998.
Notes to consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
Page 2 of 22
<PAGE> 3
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
----------------- -----------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 42,600 $ 45,263
Interest-bearing deposits with banks 9,632 1,732
Federal funds sold 80,370 104,050
------------ ------------
Total cash and cash equivalents 132,602 151,045
Loans held for resale 19,777 36,789
Investment securities:
Available for sale, carried at market value 67,994 83,597
Held for long-term investment, carried at
amortized cost which approximates market value 3,718 2,867
------------ ------------
Total investment securities 71,712 86,464
Portfolio loans:
Commercial 713,658 590,351
Real estate mortgage 83,341 80,808
Installment 66,580 53,121
------------ ------------
Total portfolio loans 863,579 724,280
Less allowance for loan losses (10,417) (8,817)
------------ ------------
Net portfolio loans 853,162 715,463
Premises and equipment, net 12,659 11,646
Accrued interest income 5,782 5,100
Excess of cost over net assets of acquired subsidiaries, net 2,051 2,626
Other assets 16,420 15,311
------------ ------------
TOTAL ASSETS $ 1,114,165 $ 1,024,444
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 139,258 $ 120,986
Interest-bearing 830,551 769,904
------------ ------------
Total deposits 969,809 890,890
Debt obligations -- Note F 25,200 23,600
Accrued interest on deposits and other liabilities 8,865 8,831
------------ ------------
Total liabilities 1,003,874 923,321
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,273 24,255
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 35,875 27,576
STOCKHOLDERS' EQUITY
Common stock, no par value:
25,000,000 shares authorized;
6,344,886 shares issued and outstanding 51,868 51,868
Retained earnings (516) (2,019)
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income) (484) 168
------------ ------------
50,868 50,017
Less unallocated ESOP shares (725) (725)
------------ ------------
Total stockholders' equity 50,143 49,292
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,114,165 $ 1,024,444
============ ============
</TABLE>
Page 3 of 22
<PAGE> 4
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------- --------------------------------
1999 1998 1999 1998
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 19,312 $ 14,226 $ 36,915 $ 26,968
Loans held for resale 471 429 942 635
Taxable investment securities 1,006 963 1,971 1,883
Federal funds sold 982 1,080 2,349 2,184
Interest-bearing deposits with banks and other 147 58 232 102
-------------- --------------- --------------- --------------
Total interest income 21,918 16,756 42,409 31,772
Interest expense:
Demand deposits 2,613 1,657 4,981 2,990
Savings deposits 365 360 722 732
Time deposits 6,982 6,106 14,031 11,678
Debt obligations and other 890 644 1,717 1,237
-------------- --------------- --------------- --------------
Total interest expense 10,850 8,767 21,451 16,637
-------------- --------------- --------------- --------------
Net interest income 11,068 7,989 20,958 15,135
Provision for loan losses 901 833 1,710 1,658
-------------- --------------- --------------- --------------
Net interest income after provision for loan losses 10,167 7,156 19,248 13,477
Noninterest income:
Service charges on deposit accounts 403 290 726 545
Trust fee income 195 111 312 203
Fees from origination of non-portfolio residential
mortgage loans 369 318 704 570
Realized gains (loss) on sale of investment
securities available for sale (4) 2 17 2
Other 159 176 404 270
-------------- --------------- --------------- --------------
Total noninterest income 1,122 897 2,163 1,590
Noninterest expense:
Salaries and employee benefits 4,853 3,037 9,476 5,893
Occupancy 819 493 1,602 1,026
Equipment rent, depreciation and maintenance 1,026 690 1,884 1,335
Deposit insurance premiums 47 27 76 57
Other 2,470 1,662 4,447 3,651
-------------- --------------- --------------- --------------
Total noninterest expense 9,215 5,909 17,485 11,962
-------------- --------------- --------------- --------------
Income before federal income taxes, minority interest and
cumulative effect of change in accounting principle 2,074 2,144 3,926 3,105
Federal income taxes 930 795 1,695 1,193
-------------- --------------- --------------- --------------
Income before minority interest and cumulative
effect of change in accounting principle 1,144 1,349 2,231 1,912
Credit resulting from minority interest in net losses
of consolidated subsidiaries 359 35 611 105
-------------- --------------- --------------- --------------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,503 1,384 2,842 2,017
Change in accounting principle -- Note B (197)
-------------- --------------- --------------- --------------
NET INCOME $ 1,503 $ 1,384 $ 2,645 $ 2,017
============== =============== =============== ==============
NET INCOME PER SHARE -- Note C
</TABLE>
Page 4 of 22
<PAGE> 5
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Unallocated
Common Retained Comprehensive ESOP
Stock Earnings Income Shares Total
-------- ----------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1998
- -------------------------------------------------------
Balances at January 1, 1998 $ 50,312 $ (4,553) $ 143 $ (870) $ 45,032
Cash dividends paid (1,043) (1,043)
Net proceeds from issuance of common stock 81 81
Issuance of 33,205 shares of common stock
in exchange for minority interest in
majority-owned subsidiary 745 745
Components of comprehensive income:
Net income for the period 2,017 2,017
Market value adjustment for investment
securities available for sale (net of tax effect) (57) (57)
--------
Comprehensive income for the period 1,960
-------- -------- -------- -------- --------
BALANCES AT JUNE 30, 1998 $ 51,138 $ (3,579) $ 86 $ (870) $ 46,775
======== ======== ======== ======== ========
Six Months Ended June 30, 1999
- -------------------------------------------------------
Balances at January 1, 1999 $ 51,868 $ (2,019) $ 168 $ (725) $ 49,292
Cash dividends paid (1,142) (1,142)
Components of comprehensive income:
Net income for the period 2,645 2,645
Market value adjustment for investment
securities available for sale (net of tax effect) (652) (652)
--------
Comprehensive income for the period 1,993
-------- -------- -------- -------- --------
BALANCES AT JUNE 30, 1999 $ 51,868 $ (516) $ (484) $ (725) $ 50,143
======== ======== ======== ======== ========
</TABLE>
Page 5 of 22
<PAGE> 6
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ----------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,645 $ 2,017
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 1,710 1,658
Depreciation of premises and equipment 1,362 828
Amortization of goodwill and other intangibles 575 216
Net accretion of investment security discounts (127) (55)
Loss (gain) on sale of premises and equipment (2) 4
Minority interest in net losses of consolidated subsidiaries (611) (105)
Cumulative effect of change in accounting principle 197
Originations and purchases of loans held for resale (197,678) (141,570)
Proceeds from sales of loans held for resale 214,690 137,741
Increase in accrued interest income and other assets (1,634) (2,958)
Increase in accrued interest and other liabilities 34 319
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 21,161 (1,905)
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 2,500 500
Proceeds from maturities of investment securities
available for sale 59,617 22,342
Purchases of investment securities available for sale (48,226) (25,133)
Net increase in portfolio loans (139,408) (104,382)
Proceeds from sales of premises and equipment 38 86
Purchases of premises and equipment (2,411) (1,417)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (127,890) (108,004)
FINANCING ACTIVITIES
Net proceeds from debt obligations 1,600 3,000
Resources provided by minority interests 8,910 7,479
Net proceeds from issuance of common stock 81
Cash dividends paid (1,142) (1,043)
Net increase in demand deposits, NOW accounts and
savings accounts 61,598 56,336
Net increase in certificates of deposit 17,320 87,783
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 88,286 153,636
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,443) 43,727
Cash and cash equivalents at beginning of period 151,045 92,770
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 132,602 $ 136,497
========= =========
</TABLE>
Page 6 of 22
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CAPITOL BANCORP LTD.
Note A - Basis of Presentation
The accompanying condensed consolidated financial statements of Capitol
Bancorp Ltd. have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q. Accordingly, they do not include all information and footnotes necessary
for a fair presentation of consolidated financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The statements do, however, include all adjustments of a normal
recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which
Capitol considers necessary for a fair presentation of the interim periods.
The results of operations for the six-month period ended June 30, 1999
are not necessarily indicative of the results to be expected for the year ending
December 31, 1999.
The consolidated balance sheet as of December 31, 1998 was derived from
audited consolidated financial statements as of that date. Certain 1998 amounts
have been reclassified to conform to the 1999 presentation.
Note B - Implementation of New Accounting Standards
AICPA Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities, requires start-up, preopening and organizational costs to be charged
to expense when incurred. The initial application of this statement, which
became effective January 1, 1999, also requires the write-off of any such costs
previously capitalized. Implementation of this new statement is shown as a
cumulative effect adjustment in the first quarter of 1999.
[The remainder of this page intentionally left blank]
Page 7 of 22
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CAPITOL BANCORP LTD. - CONTINUED
Note C - Net Income Per Share
The computations of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
------------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Numerator--net income for the period $ 1,502,912 $ 1,384,042 $ 2,645,057 $ 2,017,245
============= ============= ============= =============
Denominator:
Weighted average number of common shares outstanding
(denominator for basic earnings per share) 6,344,886 6,267,211 6,344,886 6,253,999
Effect of dilutive securities--stock options 151,699 218,787 117,535 220,678
------------- ------------- ------------- -------------
Denominator for dilutive net income per share--
Weighted average number of common shares and potential
dilution 6,496,585 6,485,998 6,462,421 6,474,677
============= ============= ============= =============
Net income per share:
Before cumulative effect of change in
accounting principle:
Basic $ 0.24 $ 0.22 $ 0.45 $ 0.32
============= ============= ============= =============
Diluted $ 0.23 $ 0.21 $ 0.44 $ 0.31
============= ============= ============= =============
After cumulative effect of change in accounting principle:
Basic $ 0.24 $ 0.22 $ 0.42 $ 0.32
============= ============= ============= =============
Diluted $ 0.23 $ 0.21 $ 0.41 $ 0.31
============= ============= ============= =============
</TABLE>
Note D - New Bank and Pending Bank Applications
East Valley Community Bank, located in Chandler, Arizona, opened on
June 30, 1999. It is majority owned by Sun Community Bancorp Limited (Sun),
Capitol's 51% owned subsidiary.
As of June 30, 1999, applications were pending for two new banks, one
in Nevada and one in Indiana. These entities are anticipated to open in the
third calendar quarter of 1999.
Note E - Prospective Impact of New Accounting Standards Not Yet Adopted
FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective in 2001
and, because Capitol and its banks have 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.
Page 8 of 22
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CAPITOL BANCORP LTD. - CONTINUED
Note E - Prospective Impact of New Accounting Standards Not Yet
Adopted - Continued
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 Capitol's financial statements.
Note F - Subsequent Event
In early July 1999, Sun completed an initial public offering of
1,650,000 shares of its common stock at $16.00 per share. In that offering,
Capitol purchased 850,000 shares, at the same share price as the public,
aggregating $13.6 million, maintaining its 51% ownership of Sun. Capitol's
purchase of those Sun shares was funded by an increase in its credit facilities
with an unaffiliated bank negotiated in June 1999.
Page 9 of 22
<PAGE> 10
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets approximated $1.11 billion at June 30, 1999, an increase
of $90 million from the December 31, 1998 level of $1.02 billion. The
consolidated balance sheets include Capitol and its majority-owned subsidiaries.
On June 30, 1999, one newly formed bank, East Valley Community Bank in Chandler,
Arizona, was added to the consolidated group.
Portfolio loans increased during the six-month period by approximately
$139 million. Loan growth was funded primarily by higher levels of time
deposits. The majority of portfolio loan growth occurred in commercial loans,
which increased approximately $123 million, consistent with the banks' emphasis
on commercial lending activities.
The allowance for loan losses at June 30, 1999 approximated $10.4
million or 1.21% of total portfolio loans, a slight decrease from the year-end
1998 ratio of 1.22%.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses inherent in the loan portfolio
at the balance sheet date. Management's determination of the adequacy of the
allowance is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors.
[The remainder of this page intentionally left blank]
Page 10 of 22
<PAGE> 11
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the six month periods (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Allowance for loan losses at January 1 $ 8,817 $ 6,229
Loans charged-off:
Commercial 213 554
Real estate mortgage 9
Installment 40 52
------------- -------------
Total charge-offs 253 615
Recoveries:
Commercial 137 96
Real estate mortgage 3 1
Installment 3 4
------------- -------------
Total recoveries 143 101
------------- -------------
Net charge-offs 110 514
Additions to allowance charged to expense 1,710 1,658
------------- -------------
Allowance for loan losses at June 30 $ 10,417 $ 7,373
============= =============
Average total portfolio loans for period ended June 30 $ 786,594 $ 551,373
============= =============
Ratio of net charge-offs to average portfolio loans outstanding 0.01% 0.09%
============= =============
</TABLE>
For internal purposes, management allocates the allowance to all loan
classifications. The amounts allocated in the following table (in thousands),
which includes all loans for which management has concerns based on Capitol's
loan rating system, should not be interpreted as an indication of future
charge-offs. In addition, amounts allocated are not intended to reflect the
amount that may be available for future losses.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------------------- --------------------------------
% %
Total Total
Portfolio Portfolio
Loans Loans
------------- -------------
<S> <C> <C> <C> <C>
Commercial $ 5,403 0.63% $ 4,501 0.62%
Real estate mortgage 128 0.01 127 0.02
Installment 303 0.04 262 0.04
Unallocated 4,583 0.53 3,927 0.54
-------- ------- -------- -------
Total allowance for loan losses $ 10,417 1.21% $ 8,817 1.22%
======== ======= ======== =======
Total portfolio
Loans outstanding $863,579 $724,280
======== ========
</TABLE>
Page 11 of 22
<PAGE> 12
In addition to the allowance for loan losses, some loans to Michigan
borrowers are enrolled in a state government loan program and have additional
reserves established to provide for loss protection. At June 30, 1999, total
loans under this program approximated $28.1 million. Reserves related to these
loans, which are represented by earmarked funds on deposit at participating bank
subsidiaries, approximated $2.1 million and are not included in the recorded
allowance for loan losses.
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 1998 and through
June 30, 1999. Impaired loans include amounts owed to one of the Corporation's
banks relating to a customer's checks drawn on uncollected funds which arose in
early February 1998. The total of the customer's overdrafts at the bank
subsidiary approximated $1.5 million. Management subsequently became aware that
larger overdrafts occurred at other, unaffiliated, financial institutions (one
of which subsequently filed suit against the bank subsidiary and remains
pending). Based on management's analysis of the customer's loan collateral and
amounts owing the bank by that customer, an estimated loss accrual and write-off
of $600,000 was recorded at March 31, 1998 relating to the advances arising from
uncollected funds. In addition, the bank increased its interim provision for
loan losses at March 31, 1998 by $300,000 relating to that customer.
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
<TABLE>
<CAPTION>
June 30 Dec 31
1999 1998
------------- -------------
<S> <C> <C>
Nonaccrual loans:
Commercial $ 5,953 $ 2,608
Real estate 199
Installment 101 185
------------ ------------
Total nonaccrual loans 6,054 2,992
Past due (>90 days) loans:
Commercial 1,400 3,963
Real estate 180 183
Installment 205 104
------------ ------------
Total past due loans 1,785 4,250
------------ ------------
Total nonperforming loans $ 7,839 $ 7,242
============ ============
</TABLE>
Nonperforming loans increased approximately $597,000 during the
six-month period ended June 30, 1999. During this period, however, nonaccrual
loans increased $3.1 million and past due loans on accrual status decreased $2.5
million as certain nonperforming loans were transferred to nonaccrual status
during the first quarter of 1999. Most of that change (about $2 million) relates
to one customer relationship of which $1.6 million is guaranteed by a
governmental agency. Most of the other nonaccrual loans are a small number of
loans in various stages of resolution which management believes to be adequately
collateralized or otherwise appropriately recorded in its determination of the
adequacy of the allowance for loan losses.
Page 12 of 22
<PAGE> 13
If nonperforming loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms, additional interest income
of $361,000 and $194,000 would have been recorded for the six months ended June
30, 1999 and 1998, respectively. Interest income recognized on loans in
nonaccrual status for these periods approximated $22,000 and $23,000,
respectively.
Other real estate owned (generally real estate acquired through
foreclosure or a deed in lieu of foreclosure and classified as a component of
other assets) approximated $413,000 at June 30, 1999 and $541,000 at December
31, 1998.
The following comparative analysis summarizes each bank's total
portfolio loans, allowance for loan losses, nonperforming assets and allowance
ratios (dollars in thousands):
<TABLE>
<CAPTION>
Total Allowance for Nonperforming Allowance as a Percentage
Portfolio Loans Loan Losses Loans of Total Portfolio Loans
-------------------- ------------------ ------------------ --------------------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
-------- --------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 168,122 $ 154,060 $ 2,270 $ 2,080 $ 732 $ 662 1.35% 1.35%
Brighton Commerce Bank(1) 42,712 34,024 428 341 --- --- 1.00 1.00
Capitol National Bank 106,239 104,333 1,438 1,406 973 880 1.35 1.35
Detroit Commerce Bank(1) 13,258 506 133 6 --- --- 1.00 1.19
Grand Haven Bank 60,371 57,057 754 682 355 62 1.25 1.20
Kent Commerce Bank(1) 31,441 22,930 315 250 --- --- 1.00 1.09
Macomb Community Bank(1) 50,593 40,426 507 405 --- --- 1.00 1.00
Muskegon Commerce Bank(1) 31,832 24,491 319 245 258 1 1.00 1.00
Oakland Commerce Bank 70,869 63,261 822 724 1,788 2,032 1.16 1.14
Paragon Bank & Trust 68,449 63,417 868 732 2,967 2,936 1.27 1.15
Portage Commerce Bank 97,329 90,589 1,232 1,150 741 669 1.27 1.27
Sun Community Bancorp
Limited:
Bank of Tucson(1) 45,653 37,899 480 392 --- --- 1.05 1.03
Camelback Community
Bank(1) 13,777 3,246 138 33 --- --- 1.00 1.02
Mesa Bank (1) 11,550 1,386 116 14 --- --- 1.00 1.01
Southern Arizona
Community Bank(1) 9,410 2,925 95 30 --- --- 1.01 1.03
Sunrise Bank of
Arizona(1) 9,402 1,745 95 18 --- --- 1.01 1.03
Valley First
Community Bank(1) 29,368 20,879 307 209 25 --- 1.05 1.00
Other, net 3,204 1,106 100 100 --- --- --- ---
--------- --------- ------- ------- ------ ------- ----- -----
Consolidated $ 863,579 $ 724,280 $10,417 $ 8,817 $7,839 $ 7,242 1.21% 1.22%
========= ========= ======= ======= ====== ======= ===== =====
</TABLE>
n/a Not applicable
(1) As a condition of charter approval, bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years
of operations.
Noninterest-bearing deposits approximated 14.4% of total deposits at
June 30, 1999, a slight increase from the December 31, 1998 level of 13.6%.
Levels of noninterest-bearing deposits fluctuate based on customers' transaction
activity.
[The remainder of this page intentionally left blank]
Page 13 of 22
<PAGE> 14
Results of Operations
Net income from operations (before cumulative effect of an accounting
change) for the six months ended June 30, 1999 amounted to $2.84 million ($.45
per basic share), an increase from the $2.02 million ($.32 per basic share)
earned during the corresponding period of 1998.
Operating results and total assets (in thousands) were as follows:
<TABLE>
<CAPTION>
Six months ended June 30
------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
-------------------- ------------------ ----------------- ----------------
June 30 Dec 31
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 197,846 $ 196,446 $ 1,258 $ 1,023 19.50% 20.97% 1.30% 1.42%
Brighton Commerce Bank 50,006 42,871 208 (127) 11.20 n/a .87 n/a
Capitol National Bank 125,891 136,776 1,028 977 21.06 21.97 1.62 1.66
Detroit Commerce Bank (1) 23,103 18,620 (241) n/a n/a n/a n/a n/a
Grand Haven Bank 71,781 66,872 468 264 19.82 14.11 1.36 1.03
Kent Commerce Bank (1) 35,880 31,587 (62) (249) n/a n/a n/a n/a
Macomb Community Bank 82,919 76,044 292 80 9.14 4.55 .74 .33
Muskegon Commerce Bank 37,300 28,552 10 (126) .80 n/a .06 n/a
Oakland Commerce Bank 98,720 108,747 442 348 13.36 11.98 .87 .77
Paragon Bank & Trust 82,929 86,692 222 381 6.95 14.04 .53 .98
Portage Commerce Bank 111,131 110,867 865 603 22.23 19.82 1.59 1.22
Sun Community Bancorp Limited:
Bank of Tucson 76,731 63,860 558 371 18.44 13.71 1.55 1.35
Camelback Community Bank (1) 26,414 10,017 (298) (45) n/a n/a n/a n/a
East Valley Community Bank (2) 4,406 n/a 2 n/a n/a n/a n/a n/a
Mesa Bank (1) 17,669 6,192 (150) n/a n/a n/a n/a n/a
Southern Arizona Community
Bank (1) 19,373 12,395 (274) n/a n/a n/a n/a n/a
Sunrise Bank of Arizona (1) 15,033 5,411 (240) n/a n/a n/a n/a n/a
Valley First Community Bank 36,984 36,588 96 (90) 4.81 n/a .50 n/a
Nevada Community Bancorp Limited 10,000 n/a -- n/a n/a n/a n/a n/a
Indiana Community Bancorp Limited 5,027 n/a -- n/a n/a n/a n/a n/a
Other, net (14,978) (14,093) (1,539) (1,393) n/a n/a n/a n/a
---------- ---------- ------- ------- ------- ------ ------ ------
Consolidated $1,114,165 $1,024,444 $ 2,645 $ 2,017 10.73% 8.96% .50% .52%
========== ========== ======= ======= ======= ====== ====== ======
</TABLE>
n/a Not applicable
(1) Kent Commerce Bank, Camelback Community Bank, Southern Arizona Community
Bank, Mesa Bank, Detroit Commerce Bank and Sunrise Bank of Arizona
commenced operations in January, May, August, October and December 1998,
respectively.
(2) East Valley Community Bank commenced operations on June 30, 1999.
Net interest income increased 38.5% during the six-month period versus
the corresponding period of 1998 primarily due to growth in total assets and the
number of banks within the consolidated group.
Noninterest income increased to $2.16 million for the 1999 six-month
period, as compared with $1.59 million in 1998. Service charge revenue and trust
fee income both increased in the 1999 period by 33% and 54%.
Provisions for loan losses were $1.71 million for the six months ended
June 30, 1999 compared to $1.66 million during the corresponding 1998 period.
The provisions for loan losses are based upon management's analysis of the
allowance for loan losses, as previously discussed.
Noninterest expense for the six months ended June 30, 1999 was $17.48
million compared with $11.96 million in 1998. The increase in noninterest
expense is associated with newly formed banks, growth and increases in general
operating costs. Increases in employee compensation and occupancy mostly relate
to the growth in number of banks within the consolidated group.
Page 14 of 22
<PAGE> 15
Liquidity and Capital Resources
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $78.92 million for the six
month 1999 period, compared to $144.12 million in 1998. Such growth occurred in
all deposit categories, with the majority from time deposits. The Corporation's
banks generally do not rely on brokered deposits as a key funding source;
brokered deposits approximated $16.73 million as of June 30, 1999, or about 2%
of total deposits.
Interim 1999 deposit growth was deployed primarily into commercial
loans, consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $132.6 million or 12% of total
assets at June 30, 1999 as compared with $151.05 million or 14.7% of total
assets at December 31, 1998. As liquidity levels vary continuously based on
customer activities, amounts of cash and cash equivalents can vary widely at any
given point in time. Management believes the banks' liquidity position at June
30, 1999 is adequate to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term
liquidity is the banks' marketable investment securities. Capitol's liquidity
requirements have not historically necessitated the sale of investments in order
to meet liquidity needs. It also has not engaged in active trading of its
investments and has no intention of doing so in the foreseeable future. During
the first six months of 1999, four available-for-sale securities aggregating
$2.50 million were sold to meet liquidity needs at two banks. At June 30, 1999
and December 31, 1998, the Corporation had approximately $67.99 million and
$83.6 million, respectively, of investment securities classified as available
for sale which can be utilized to meet various liquidity needs as they arise.
Six of the banks, (Macomb Community Bank, Brighton Commerce Bank, Grand
Haven Bank, Oakland Commerce Bank, Capitol National Bank and Ann Arbor Commerce
Bank) have secured lines of credit with the Federal Home Loan Bank of
Indianapolis. Borrowings thereunder approximated $8.50 million and additional
borrowing capacity approximated $12.04 million at June 30, 1999.
At June 30, 1999, the Corporation had unused lines of credit from an
unrelated financial institution aggregating $18.3 million, including an increase
in credit facilities negotiated in June. Borrowings increased in early July 1999
as a result of Capitol's investment in Sun's initial public offering. In late
July 1999, Capitol filed a registration statement regarding a secondary common
stock offering, the proceeds from which would be used to repay indebtedness, if
completed.
In early July 1999, Sun Community Bancorp completed an initial public
offering of 1,650,000 shares of its common stock at $16.00 per share. Of the
offering, Capitol purchased 850,000 shares, at the same share price as the
public, aggregating $13.6 million, maintaining its 51% ownership of Sun.
Page 15 of 22
<PAGE> 16
Capitol's Board of Directors recently approved a third quarter cash
dividend of $.09 per share (payable September 1, 1999 to shareholders of record
as of August 1, 1999), following cash dividends of $.09 per share paid March 1
and June 1, 1999.
Capitol and its banks are subject to complex regulatory capital
requirements which require maintaining certain minimum capital ratios. These
ratio measurements, in addition to certain other requirements, are used by
regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. Capitol and each of its banks are
in compliance with the regulatory requirements and management expects to
maintain such compliance.
Capital, as a percentage of total assets, approximated 4.5% at June 30,
1999, a slight decrease from the beginning of the year ratio of 4.8%. Total
capital funds (stockholders' equity, plus minority interests in consolidated
subsidiaries and guaranteed preferred beneficial interests in the Corporation's
subordinated debentures) aggregated $110.3 million or 9.9% of total assets at
June 30, 1999. The following table summarizes the amounts and related ratios of
individually significant subsidiaries (assets of $125 million or more at the
beginning of 1999) and consolidated regulatory capital position at June 30,
1999:
<TABLE>
<CAPTION>
Sun
Ann Arbor Capitol Community
Commerce National Bancorp
Bank Bank Limited Consolidated
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total capital to total assets:
Minimum required amount > $ 7,914 > $ 5,036 > $ 7,926 > $ 44,567
- - - -
Actual amount $ 13,944 $ 9,641 $ $25,835 $ 50,143
Ratio 7.05% 7.66% 13.04% 4.50%
Tier I capital to risk-weighted assets:
Minimum required amount(1) > $ 6,365 > $ 3,969 > $ 6,606 > $ 39,528
- - - -
Actual amount $ 14,024 $ 9,677 $ 40,618 $ 108,643
Ratio 8.81% 9.75% 24.60% 10.99%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) > $ 12,730 > $ 7,938 > $ 13,212 > $ 79,056
- - - -
Amount required to meet "Well-Capitalized"
category(3) > $ 15,912 > $ 9,923 > $ 16,514 > $ 98,820
- - - -
Actual amount $ 16,016 $ 10,920 $ 41,849 $ 119,030
Ratio 10.07% 11.01% 25.34% 12.05%
</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.
Capitol's operating strategy continues to be focused on the ongoing
growth and maturity of its existing banks, coupled with new bank expansion in
selected markets as opportunities arise. Accordingly, Capitol may invest in or
otherwise add additional banks in future periods, subject to economic conditions
and other factors, although the timing of such additional banking units, if any,
is uncertain. Such future new banks and/or additions of other operating units
could be either wholly-owned, majority-owned or otherwise controlled by Capitol.
Plans to form additional banks in the states of Arizona, Nevada and Indiana were
announced earlier this year. At June 30, 1999, applications were pending for two
new banks, one in Nevada and one in Indiana.
Page 16 of 22
<PAGE> 17
Year 2000
The year 2000 issue confronting Capitol and its suppliers, customers,
and competitors, centers on the inability of computer systems and embedded
technology to properly recognize dates near the end of and beyond the year 1999.
Capitol has been actively implementing a comprehensive plan throughout
1998 and 1999, as required by bank regulatory guidelines, to address potential
impacts of the year 2000 issue on Capitol's information technology (IT) and
non-IT systems. Capitol's year 2000 plans are subject to modification and are
revised periodically as additional information is developed.
READINESS. Capitol has completed the inventory, assessment, remediation and
planning phases for its mission-critical IT and non-IT systems, which are those
systems that pose risks to Capitol's ability to process data for its loans,
deposits, general ledger, revenues and operating results. Of the 17
mission-critical systems, all have tested as being year 2000 compliant.
Capitol recognizes that its ability to be year 2000 compliant is
somewhat dependent upon the year 2000 efforts of its vendors. Capitol and its
banks sent questionnaires to its significant vendors in 1998. Follow-up letters
requesting additional information of the vendors' year 2000 readiness were sent
when necessary. All mission-critical vendors have responded to the
questionnaires or have otherwise represented that they are year 2000 compliant.
Capitol also routinely monitors its nonmission-critical vendors to determine
their level of year 2000 readiness.
Capitol and its banks have been required by bank regulatory agencies to
update their customers on the banks' year 2000 compliance efforts. Letters and
informational brochures have been, and will continue to be, sent to customers
heightening their awareness of the year 2000 issue and notifying them of the
banks' efforts in addressing year 2000 issues. Compliance efforts are also
communicated to customers on their account statements and through brochures
available in bank lobbies.
Capitol and its banks are also following regulatory requirements that
require an assessment of loan customers' year 2000 readiness. Letters and
questionnaires have been utilized to assess material loan customers' readiness
based on the size of their loan type. The number of existing customers that have
not responded to the letters and questionnaires is minimal. Follow-up letters or
phone calls are being made when necessary to obtain additional information from
these customers. Of those who have responded, all material customers represented
that they are year 2000 compliant or are working toward compliance. The number
of customers still working towards year 2000 compliance is minimal and, in
Capitol's opinion, their inability to become compliant will not have a material
adverse effect on Capitol's business or operating results. Capitol and its banks
also monitor customers applying for new loans that exceed a certain dollar
amount by requiring a written representation that the customer is year 2000
compliant.
Page 17 of 22
<PAGE> 18
WORST CASE SCENARIO AND CONTINGENCY PLANS. Capitol and its banks have determined
the most reasonably likely worst case scenario is the possibility of the lack of
power or communication services for a period of time in excess of one day. If
this scenario were to occur, Capitol and its banks' operations could be
interrupted. Capitol and its banks have developed plans and procedures to
address this scenario, ranging from producing complete printed reports from the
core banking systems prior to January 1, 2000, to ensure that a hard copy of the
data is available in the event of a failure, to preparations for failures of
voice and data communications through the use of manual posting and courier
services, use of generators, alternative customer service locations and/or
reduced lobby hours.
Contingency planning, including the type discussed above, is an
integral part of Capitol's year 2000 readiness plan. Capitol's contingency plans
address alternative courses of action in the event that mission-critical systems
do not function properly with the date change. Development of the contingency
plans was recently completed. The year 2000 contingency plans will be tested
during the third and fourth quarters of 1999 to validate the effectiveness of
contingent procedures and refined as additional information becomes available.
COSTS. The costs associated with Capitol's year 2000 compliance in 1999 are
estimated at approximately $250,000, of which approximately $175,000 has been
incurred through June 30, 1999. A similar amount was incurred in 1998. These
costs principally relate to the added personnel costs, the employment of
external consultants, and the purchase of software upgrades.
These estimated costs are part of Capitol's information technology
budget. Capitol's information technology staff and senior management have
devoted significant time and resources to year 2000 activities. While this has
resulted in allocating resources that would have otherwise been devoted to other
information technology projects, no projects have been delayed or postponed that
would have a material adverse impact on Capitol or its banks' operations.
REGULATORY OVERSIGHT. Bank regulators have issued numerous statements and
guidance on year 2000 compliance issues and the responsibilities of senior
management and directors of banks and bank holding companies. In addition, the
bank regulators have issued safety and soundness guidelines to be followed by
insured depository institutions, including Capitol and its banks, to ensure
resolution of any year 2000 problems. Periodic year 2000 reviews are performed
by various bank regulatory agencies. Most of the recent examinations have been
performed by the FDIC and it is expected that the FDIC will continue its
frequent examinations throughout 1999. The banking regulatory agencies have
asserted that year 2000 testing and certification is a key safety and soundness
issue in conjunction with regulatory examinations. Consequently, Capitol's or
its banks' failure to address appropriately the year 2000 issue could result in
supervisory action, including the reduction of the banks' supervisory ratings,
the denial of applications for expansion, or the imposition of civil money
penalties.
The Federal Financial Institutions Examination Council maintains an
Internet site that lists financial institutions which have been subject to
enforcement actions relating to year 2000 readiness. As of July 31, 1999, none
of Capitol's banks are subject to enforcement actions for year 2000 readiness.
Page 18 of 22
<PAGE> 19
Impact of New Accounting Standards
As discussed elsewhere herein, a new accounting standard requiring the
write-off of previously capitalized start-up and preopening costs was
implemented effective January 1, 1999. That standard requires that such costs be
charged to expense, when incurred, in future periods.
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income, or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective in 2001
and, because Capitol and its banks have not typically entered into derivative
contracts either to hedge existing risks or for speculative purposes, is not
expected to have a material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Capitol's financial statements.
Page 19 of 22
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Capitol and its subsidiaries are parties to certain ordinary,
routine litigation incidental to their business. In the
opinion of management, liabilities arising from such
litigation would not have a material effect on Capitol's
consolidated financial position or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
a. The following matters were submitted to a vote of the
holders of common stock at the registrant's annual meeting
of shareholders held May 4, 1999.
b. Election of directors. Proxies for the meeting were
solicited pursuant to Regulation 14, there was no
solicitation in opposition to management's nominees
as listed in the proxy statement and all of
management's nominees were elected.
c. A proposal to amend the registrant's articles of
incorporation to increase the number of authorized
shares of common stock from 10,000,000 to
25,000,000 shares. The proposal was approved by the
following vote of the holders of Capitol's common
stock (each share represents one vote):
For 5,287,422
Against 414,235
Abstentions 9,747
d. Not applicable.
Item 5. Other Information.
None.
Page 20 of 22
<PAGE> 21
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed
during the quarter ended June 30,
1999.
Page 21 of 22
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL BANCORP LTD.
(Registrant)
\s\ Joseph D. Reid
----------------------------------
Joseph D. Reid
Chairman, President and CEO
(duly authorized to sign on behalf
of the registrant)
\s\ Lee W. Hendrickson
----------------------------------
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Date: August 6, 1999
- --------------------
Page 22 of 22
<PAGE> 23
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 42,600
<INT-BEARING-DEPOSITS> 9,632
<FED-FUNDS-SOLD> 80,370
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,712
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 883,356
<ALLOWANCE> 10,417
<TOTAL-ASSETS> 1,114,165
<DEPOSITS> 969,809
<SHORT-TERM> 25,200
<LIABILITIES-OTHER> 8,865
<LONG-TERM> 0
0
0
<COMMON> 51,868
<OTHER-SE> (516)
<TOTAL-LIABILITIES-AND-EQUITY> 1,114,165
<INTEREST-LOAN> 37,857
<INTEREST-INVEST> 2,050
<INTEREST-OTHER> 2,502
<INTEREST-TOTAL> 42,409
<INTEREST-DEPOSIT> 19,734
<INTEREST-EXPENSE> 21,451
<INTEREST-INCOME-NET> 20,958
<LOAN-LOSSES> 1,710
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 16,874
<INCOME-PRETAX> 4,537
<INCOME-PRE-EXTRAORDINARY> 2,842
<EXTRAORDINARY> 0
<CHANGES> (197)
<NET-INCOME> 2,645
<EPS-BASIC> .45
<EPS-DILUTED> .44
<YIELD-ACTUAL> 4.22
<LOANS-NON> 6,054
<LOANS-PAST> 1,785
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,817
<CHARGE-OFFS> 253
<RECOVERIES> 143
<ALLOWANCE-CLOSE> 10,417
<ALLOWANCE-DOMESTIC> 10,417
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,583
</TABLE>
