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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 September 30, 2000
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: 7,171,893 shares outstanding as of October 31,
2000.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including Capitol'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 Capitol 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 Capitol's efforts
to implement its business strategy, (ii) changes in interest rates, (iii)
legislation or regulatory requirements adversely impacting Capitol'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 Capitol's banks and Capitol's ability
to respond to such actions, (ix) the cost of capital, which may depend in part
on Capitol'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 Capitol'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 Capitol 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. Capitol 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.
Page
----
Item 1. Financial Statements:
Consolidated balance sheets - September 30, 2000
and December 31, 1999. 3
Consolidated statements of income - Three months and
nine months ended September 30, 2000 and 1999. 4
Consolidated statements of changes in stockholders' equity -
Nine months ended September 30, 2000 and 1999. 5
Consolidated statements of cash flows -
Nine months ended September 30, 2000 and 1999. 6
Notes to consolidated financial statements. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 2. Changes in Securities. 18
Item 3. Defaults Upon Senior Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 18
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
Page 2 of 19
<PAGE>
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999
September 30 December 31
2000 1999
----------- -----------
(in thousands)
ASSETS
Cash and due from banks $ 73,101 $ 41,757
Interest-bearing deposits with banks 17,106 12,025
Federal funds sold 47,901 50,524
----------- -----------
Total cash and cash equivalents 138,108 104,306
Loans held for resale 16,672 9,078
Investment securities:
Available for sale, carried at market value 71,671 102,514
Held for long-term investment, carried at
amortized cost which approximates market value 5,849 4,631
----------- -----------
Total investment securities 77,520 107,145
Portfolio loans:
Commercial 1,103,556 874,560
Real estate mortgage 110,698 96,000
Installment 83,748 78,644
----------- -----------
Total portfolio loans 1,298,002 1,049,204
Less allowance for loan losses (16,415) (12,639)
----------- -----------
Net portfolio loans 1,281,587 1,036,565
Premises and equipment, net 14,728 14,396
Accrued interest income 8,963 7,206
Excess of cost over net assets of acquired
subsidiaries, net 4,915 3,652
Other assets 25,930 23,639
----------- -----------
TOTAL ASSETS $ 1,568,423 $ 1,305,987
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 192,518 $ 147,036
Interest-bearing 1,157,690 965,757
----------- -----------
Total deposits 1,350,208 1,112,793
Debt obligations 53,075 47,400
Accrued interest on deposits and other liabilities 13,752 12,242
----------- -----------
Total liabilities 1,417,035 1,172,435
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,318 24,291
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 63,860 54,593
STOCKHOLDERS' EQUITY Common stock, no par value:
25,000,000 shares authorized;
issued and outstanding: 2000 - 7,171,893 shares
1999 - 6,769,521 shares 60,998 56,648
Retained earnings 4,909 1,068
Market value adjustment (net of tax effect)
for investment securities available for sale
(accumulated other comprehensive income) (556) (907)
----------- -----------
65,351 56,809
Less unallocated ESOP shares and note
receivable from sale of common stock (2,141) (2,141)
----------- -----------
Total stockholders' equity 63,210 54,668
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,568,423 $ 1,305,987
=========== ===========
Page 3 of 19
<PAGE>
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 32,017 $ 21,741 $ 87,800 $ 58,656
Loans held for resale 345 256 617 1,198
Taxable investment securities 1,039 1,279 3,394 3,250
Federal funds sold 932 1,037 2,872 3,386
Interest-bearing deposits with banks and other 243 195 601 348
Dividends on investment securities 75 53 197 132
-------- -------- -------- --------
Total interest income 34,651 24,561 95,481 66,970
Interest expense:
Demand deposits 4,144 2,952 11,278 7,933
Savings deposits 446 401 1,275 1,123
Time deposits 11,593 7,252 30,517 21,283
Debt obligations and other 1,278 1,195 4,099 2,912
-------- -------- -------- --------
Total interest expense 17,461 11,800 47,169 33,251
-------- -------- -------- --------
Net interest income 17,190 12,761 48,312 33,719
Provision for loan losses 1,630 1,221 4,996 2,931
-------- -------- -------- --------
Net interest income after provision for loan losses 15,560 11,540 43,316 30,788
Noninterest income:
Service charges on deposit accounts 553 429 1,505 1,155
Trust fee income 240 147 772 459
Fees from origination of non-portfolio residential
mortgage loans 526 358 1,082 1,062
Realized gain on sale of investment securities
available for sale -- -- 110 17
Other 231 38 905 442
-------- -------- -------- --------
Total noninterest income 1,550 972 4,374 3,135
Noninterest expense:
Salaries and employee benefits 7,453 5,604 21,262 15,080
Occupancy 1,256 939 3,403 2,541
Equipment rent, depreciation and maintenance 1,133 1,056 3,074 2,940
Deposit insurance premiums 61 39 174 115
Other 3,801 2,761 10,975 7,208
-------- -------- -------- --------
Total noninterest expense 13,704 10,399 38,888 27,884
-------- -------- -------- --------
Income before federal income taxes, minority interest and
cumulative effect of change in accounting principle 3,406 2,113 8,802 6,039
Federal income taxes 1,149 755 3,041 2,450
-------- -------- -------- --------
Income before minority interest and cumulative
effect of change in accounting principle 2,257 1,358 5,761 3,589
Credit (charge) resulting from minority interest in net
losses (income) of consolidated subsidiaries (177) (22) (33) 589
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 2,080 1,336 5,728 4,178
Cumulative effect of change in accounting principle -- Note B -- -- -- (197)
-------- -------- -------- --------
NET INCOME $ 2,080 $ 1,336 $ 5,728 $ 3,981
======== ======== ======== ========
NET INCOME PER SHARE -- Note D
</TABLE>
Page 4 of 19
<PAGE>
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
Unallocated
ESOP Shares
Accumulated and Note
Other Receivable
Common Retained Comprehensive From Sale of
Stock Earnings Income Common Stock Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1999
Balances at January 1, 1999 $ 51,868 $ (2,019) $ 168 $ (725) $ 49,292
Issuance of 224,770 shares of common stock to
acquire minority interest in bank subsidiary 3,004 3,004
Issuance of 199,865 shares of common stock
upon exercise of stock options 1,777 (1,561) 216
Cash dividends paid (1,713) (1,713)
Components of comprehensive income:
Net income for the period 3,981 3,981
Market value adjustment for investment
securities available for sale (net of tax effect)
income tax effect) (766) (766)
--------
Comprehensive income for the period 3,215
-------- -------- -------- -------- --------
BALANCES AT SEPTEMBER 30, 1999 $ 56,649 $ 249 $ (598) $ (2,286) $ 54,014
======== ======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Balances at January 1, 2000 $ 56,648 $ 1,068 $ (907) $ (2,141) $ 54,668
Issuance of 10,734 shares of common stock
upon exercise of stock options 83 83
Proceeds from sale of 266,783 shares of common stock
and 53,352 warrants to purchase common stock 2,930 2,930
Issuance of 124,855 shares of common stock to
acquire minority interest in bank subsidiary 1,337 1,337
Cash dividends paid (1,887) (1,887)
Components of comprehensive income:
Net income for the period 5,728 5,728
Market value adjustment for investment
securities available for sale (net of
income tax effect) 351 351
--------
Comprehensive income for the period 6,079
-------- -------- -------- -------- --------
BALANCES AT SEPTEMBER 30, 2000 $ 60,998 $ 4,909 $ (556) $ (2,141) $ 63,210
======== ======== ======== ======== ========
</TABLE>
Page 5 of 19
<PAGE>
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,728 $ 3,981
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 4,996 2,931
Depreciation of premises and equipment 2,367 2,136
Amortization of goodwill and other intangibles 396 206
Net amortization (accretion) of investment security discounts (86) 65
Loss (gain) on sale of premises and equipment 7 (6)
Minority interest in net income (losses) of consolidated subsidiaries 33 (589)
Cumulative effect of change in accounting principle 197
Originations and purchases of loans held for resale (162,887) (258,062)
Proceeds from sales of loans held for resale 155,293 288,522
Increase in accrued interest income and other assets (5,861) (8,723)
Increase in accrued interest expense and other liabilities 1,510 832
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,496 31,490
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 1,110 2,500
Proceeds from maturities of investment securities
available for sale 60,675 66,969
Purchases of investment securities available for sale (31,542) (86,275)
Net increase in portfolio loans (250,018) (228,713)
Proceeds from sales of premises and equipment 21 105
Purchases of premises and equipment (2,727) (4,337)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (222,481) (249,751)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 98,239 99,296
Net increase in certificates of deposit 139,176 50,275
Net proceeds from debt obligations 5,675 22,400
Resources provided by minority interests 10,571 26,277
Net proceeds from issuance of common stock and warrants 3,013 6
Cash dividends paid (1,887) (1,713)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 254,787 196,541
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,802 (21,720)
Cash and cash equivalents at beginning of period 104,306 151,045
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 138,108 $ 129,325
========= =========
</TABLE>
Page 6 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD.
SEPTEMBER 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Capitol
Bancorp Ltd. (Capitol) 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 nine-month period ended September 30,
2000 are not necessarily indicative of the results to be expected for the year
ending December 31, 2000.
The consolidated balance sheet as of December 31, 1999 was derived from
audited consolidated financial statements as of that date. Certain 1999 amounts
have been reclassified to conform to the 2000 presentation.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE
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, required the write-off of any such costs
previously capitalized. Implementation of this new statement was recorded as a
cumulative effect adjustment in the first quarter of 1999.
NOTE C - NEW BANKS AND PENDING BANK APPLICATIONS
Black Mountain Community Bank, located in Henderson, Nevada, opened in
March 2000. It is majority-owned by Nevada Community Bancorp Limited which is
majority-owned by Sun Community Bancorp Limited (Sun)., a consolidated
subsidiary of Capitol.
Sunrise Bank of Albuquerque, located in Albuquerque, New Mexico, opened in
April 2000. It is a majority-owned subsidiary of Sunrise Capital Corporation
which is majority-owned by Sun.
Arrowhead Community Bank, located in Glendale, Arizona, opened in September
2000. It is majority-owned by Sun.
Goshen Community Bank, located in Goshen, Indiana, opened in September
2000. It is majority-owned by Indiana Community Bancorp Limited, a consolidated
subsidiary of Capitol.
At September 30, 2000, applications were pending for new banks in Arizona
and California.
Page 7 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD.
SEPTEMBER 30, 2000
NOTE D - NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator--net income for the period $ 2,080,000 $ 1,336,000 $ 5,728,000 $ 3,981,000
=========== =========== =========== ===========
Denominator:
Weighted average number of common shares outstanding
(denominator for basic earnings per share) 7,171,893 6,349,291 7,028,882 6,357,959
Effect of dilutive securities--stock options and warrants 27,904 -- 89,317 3,103
----------- ----------- ----------- -----------
Denominator for diluted net income per share --
Weighted average number of common shares and
potential dilution 7,199,797 6,349,291 7,118,199 6,361,062
=========== =========== =========== ===========
Net income per share:
Before cumulative effect of change in
accounting principle:
Basic $ 0.29 $ 0.21 $ 0.81 $ 0.66
=========== =========== =========== ===========
Diluted $ 0.29 $ 0.21 $ 0.80 $ 0.66
=========== =========== =========== ===========
After cumulative effect of change in accounting principle:
Basic $ 0.29 $ 0.21 $ 0.81 $ 0.63
=========== =========== =========== ===========
Diluted $ 0.29 $ 0.21 $ 0.80 $ 0.63
=========== =========== =========== ===========
</TABLE>
NOTE E - PRIVATE PLACEMENT OF COMMON STOCK
In May 2000, Capitol completed a private placement of approximately 267,000
shares of common stock and 53,400 warrants (each such warrant permitting the
holder to purchase one share of common stock prior to the expiration date of the
warrant in May 2002). Proceeds from the offering approximated $2.9 million.
Page 8 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD.
SEPTEMBER 30, 2000
NOTE F - 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.
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.
[The remainder of this page intentionally left blank]
Page 9 of 19
<PAGE>
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets approximated $1.57 billion at September 30, 2000, an increase
of $262 million from the December 31, 1999 level of $1.31 billion. The
consolidated balance sheets include Capitol and its majority-owned subsidiaries.
In March 2000, Black Mountain Community Bank located in Henderson, Nevada
commenced operations and was added to the consolidated group as a majority-owned
subsidiary of Nevada Community Bancorp Limited, a majority-owned subsidiary of
Sun Community Bancorp Limited, which is a majority-owned subsidiary of Capitol.
In April 2000, Sunrise Bank of Albuquerque commenced operations and was added to
the consolidated group as a majority-owned subsidiary of Sunrise Capital
Corporation, a majority-owned subsidiary of Sun. In September 2000, Arrowhead
Community Bank located in Glendale, Arizona commenced operations and was added
to the consolidated group as a majority-owned subsidiary of Sun. Also in
September 2000, Goshen Community Bank commenced operations and was added to the
consolidated group as a majority-owned subsidiary of Indiana Community Bancorp
Limited, which is a majority-owned subsidiary of Capitol.
Portfolio loans increased during the nine-month period by approximately
$249 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 $229 million, consistent with the banks' emphasis
on commercial lending activities. Portfolio loan growth in 2000 is net of about
$19 million of loans sold to other financial institutions.
The allowance for loan losses at September 30, 2000 approximated $16
million or 1.26% of total portfolio loans, an increase from the year-end 1999
ratio of 1.20%.
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 19
<PAGE>
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the interim periods (in thousands):
2000 1999
---------- ----------
Allowance for loan losses at January 1 $ 12,639 $ 8,817
Loans charged-off:
Commercial 1,445 540
Real estate mortgage 74
Installment 81 59
---------- ----------
Total charge-offs 1,600 599
Recoveries:
Commercial 358 371
Real estate mortgage 5 5
Installment 17 4
---------- ----------
Total recoveries 380 380
---------- ----------
Net charge-offs 1,220 219
Additions to allowance charged to expense 4,996 2,931
---------- ----------
Allowance for loan losses at September 30 $ 16,415 $ 11,529
========== ==========
Average total portfolio loans for
period ended September 30 $1,175,977 $ 827,574
========== ==========
Ratio of net charge-offs to average
portfolio loans outstanding 0.10% 0.03%
========== ==========
For internal purposes, management allocates the allowance to all loan
classifications. The amounts allocated in the following table (in thousands),
which includes all loans for which, based on Capitol's loan rating system
management has concerns, should not be interpreted as an indication of future
charge-offs. In addition, amounts allocated are not intended to reflect the
amount that may be available for future losses.
September 30, 2000 December 31, 1999
-------------------- --------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Loans Loans
---------- ------- ---------- -------
Commercial $ 7,427 .57% $ 5,965 .57%
Real estate mortgage 137 .01 165 .01
Installment 522 .04 385 .04
Unallocated 8,329 .64 6,124 .58
---------- ------- ---------- -------
Total allowance for loan losses $ 16,415 1.26% $ 12,639 1.20%
========== ======= ========== =======
Total portfolio
loans outstanding $1,298,002 $1,049,204
========== ==========
Page 11 of 19
<PAGE>
In addition to the allowance for loan losses, certain loans to Michigan
borrowers are enrolled in a state government loan program and have additional
reserves established to provide for loss protection. At September 30, 2000,
total loans under this program approximated $34.6 million. Reserves related to
these loans, which are represented by earmarked funds on deposit at certain of
the bank subsidiaries, approximated $2 million and are not included in the
recorded allowance for loan losses.
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 1999 and through
September 30, 2000.
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
Sept 30 Dec 31
2000 1999
------ ------
Nonaccrual loans:
Commercial $4,422 $2,709
Real estate 419 103
Installment 225 100
------ ------
Total nonaccrual loans 5,066 2,912
Past due (>90 days) loans:
Commercial 1,106 834
Real estate 288 196
Installment 151 182
------ ------
Total past due loans 1,545 1,212
------ ------
Total nonperforming loans $6,611 $4,124
====== ======
Nonperforming loans increased approximately $2.5 million during the
nine-month period ended September 30, 2000. Most of the nonaccrual loans at
September 30, 2000 are a small number of loans in various stages of resolution
which management believes to be adequately collateralized or otherwise
appropriately considered in its determination of the adequacy of the allowance
for loan losses.
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 $3.3 million at September 30, 2000 and $3.6 million at December 31,
1999.
Page 12 of 19
<PAGE>
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming loans and certain ratios
(dollars in thousands):
<TABLE>
<CAPTION>
Allowance as a
Percentage
Total Allowance for Nonperforming of Total
Portfolio Loans Loan Losses Loans Portfolio Loans
----------------------- ------------------- ------------------ ----------------
Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
2000 1999 2000 1999 2000 1999 2000 1999
---------- ---------- -------- -------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 204,672 $ 186,022 $ 2,706 $ 2,511 $ 645 $ 492 1.32% 1.35%
Brighton Commerce Bank 53,652 46,673 581 467 1.08 1.00
Capitol National Bank 128,928 120,097 1,747 1,581 862 769 1.36 1.32
Detroit Commerce Bank(1) 22,416 20,694 245 209 1.09 1.01
Grand Haven Bank 66,890 61,498 875 802 455 257 1.31 1.30
Kent Commerce Bank(1) 39,840 36,429 435 365 73 1.09 1.00
Macomb Community Bank 86,912 69,570 906 696 211 9 1.04 1.00
Muskegon Commerce Bank(1) 53,060 41,848 572 419 44 13 1.08 1.00
Oakland Commerce Bank 80,325 77,192 940 880 504 1,504 1.17 1.14
Paragon Bank & Trust 64,353 69,752 842 804 553 64 1.31 1.15
Portage Commerce Bank 114,305 107,792 1,523 1,386 1,600 982 1.33 1.29
Indiana Community Bancorp Limited:
Elkhart Community Bank(1) 17,102 4,042 186 48 1.09 1.19
Goshen Community Bank(1) -- --
Sun Community Bancorp Limited:
Arrowhead Community Bank 597 9 1.51
Bank of Tucson 69,156 59,088 891 725 387 1.29 1.23
Camelback Community Bank(1) 33,100 22,731 406 228 1.23 1.00
East Valley Community Bank(1) 20,219 4,335 250 44 1.24 1.01
Mesa Bank(1) 27,415 18,884 315 189 1.15 1.00
Southern Arizona Community Bank(1) 31,748 20,610 366 207 1.15 1.00
Valley First Community Bank 43,655 36,334 516 418 491 34 1.18 1.15
Nevada Community Bancorp Limited: 384
Black Mountain Community Bank(1) 13,596 204 1.50
Desert Community Bank(1) 27,521 11,438 413 154 50 1.50 1.35
Red Rock Community Bank(1) 35,080 7,861 526 156 1.50 1.98
Sunrise Capital Corporation: 320
Sunrise Bank of Albuquerque(1) 9,078 119 1.31
Sunrise Bank of Arizona(1) 52,314 24,952 542 250 32 1.04 1.00
Other, net 2,068 1,362 300 100
---------- ---------- -------- -------- -------- ------- ------ ------
Consolidated $1,298,002 $1,049,204 $ 16,415 $ 12,639 $ 6,611 $ 4,124 1.26% 1.20%
========== ========== ======== ======== ======== ======= ====== ======
</TABLE>
----------
(1) As a condition of charter approval, bank is generally required to maintain
an allowance for loan losses of not less than 1% for the first three years
of operations.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 2000 amounted to $5.7
million ($.80 per diluted share), an increase from the $4.2 million ($.66 per
diluted share) earned from operations during the corresponding period of 1999.
Net income in the nine-month 1999 period, after the cumulative effect of a
change in accounting principle, approximated $4.0 million ($.63 per diluted
share).
Third quarter 2000 earnings were a new record level of income and net
income per share. This period was benefited by strong bank performance coupled
with earnings from Sun Community Bancorp, the southwestern bank development
affiliate.
Page 13 of 19
<PAGE>
Operating results (dollars in thousands) were as follows:
<TABLE>
<CAPTION>
Nine months ended September 30
-----------------------------------------------------------
Total Assets Return on Return on
----------------------- Net Income Beginning Equity Average Assets
Sept 30 Dec 31 ------------------- ------------------ ----------------
2000 1999 2000 1999 2000 1999 2000 1999
---------- ---------- -------- -------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 229,934 $ 214,955 $ 2,616 $ 1,931 22.57% 19.96% 1.57% 1.30%
Brighton Commerce Bank 66,864 55,400 357 349 10.16 12.55 .83 .94
Capitol National Bank 147,338 133,179 1,695 1,597 22.74 21.82 1.61 1.67
Detroit Commerce Bank 29,072 28,160 (2) (276) n/a n/a n/a n/a
Grand Haven Bank 74,536 72,915 845 714 21.09 20.15 1.53 1.35
Kent Commerce Bank 42,104 38,865 80 (59) 3.03 n/a .25 n/a
Macomb Community Bank 106,733 99,214 871 522 14.47 11.40 1.09 .85
Muskegon Commerce Bank 59,323 47,405 476 74 16.47 4.07 1.17 .27
Oakland Commerce Bank 96,922 93,065 687 708 12.33 14.27 .96 .95
Paragon Bank & Trust 86,742 87,259 268 333 5.39 6.94 .41 .53
Portage Commerce Bank 133,911 123,398 1,378 1,324 20.78 22.68 1.44 1.58
Indiana Community Bancorp
Limited:
Elkhart Community Bank(1) 21,150 10,798 (193) (103) n/a n/a n/a n/a
Goshen Community Bank(2) 5,453 n/a (100) n/a n/a n/a n/a n/a
Sun Community Bancorp Limited:
Arrowhead Community Bank(2) 5,651 n/a (201) n/a n/a n/a n/a n/a
Bank of Tucson 96,713 82,113 1,515 713 29.12 15.75 2.25 1.34
Camelback Community Bank 45,617 30,254 146 (518) 5.88 n/a .51 n/a
East Valley Community Bank(1) 23,778 10,757 (474) (464) n/a n/a n/a n/a
Mesa Bank 35,203 24,738 136 (210) 4.68 n/a .60 n/a
Southern Arizona Community Bank 41,557 25,778 88 (498) 3.14 n/a .34 n/a
Valley First Community Bank 51,949 45,678 183 43 5.91 1.40 .52 .16
Nevada Community Bancorp Limited:
Black Mountain Community Bank(2) 19,622 n/a (396) n/a n/a n/a n/a n/a
Desert Community Bank(1) 33,153 17,839 (152) (241) n/a n/a n/a n/a
Red Rock Community Bank(1) 40,091 15,596 39 n/a n/a n/a n/a n/a
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(2) 13,232 n/a (309) n/a n/a n/a n/a n/a
Sunrise Bank of Arizona 54,897 30,615 101 (551) 3.19 n/a .31 n/a
Other, net 6,878 18,006 (3,926) (1,407) n/a n/a n/a n/a
---------- ---------- -------- -------- ------- ------- ------ ------
Consolidated $1,568,423 $1,305,987 $ 5,728 $ 3,981 13.97% 10.77% .53% .48%
========== ========== ======== ======== ======= ======= ====== ======
</TABLE>
n/a Not applicable
(1) Commenced operations as a DE NOVO bank in 1999.
(2) Commenced operations as a DE NOVO bank in 2000.
Net interest income increased 43% during the nine-month period versus the
corresponding period of 1999. This increase is attributable to the larger number
of banks and the banks' growth.
Noninterest income increased in 2000 to $4.4 million for the nine-month
period, as compared with $3.1 million in 1999. Service charge revenue and trust
fee income both increased significantly in the 2000 period by 30% and 68%,
respectively, compared to 1999.
Provisions for loan losses approximated $5 million for the nine months
ended September 30, 2000 compared to $2.9 million during the corresponding 1999
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 nine months ended September 30, 2000
approximated $38.9 million compared with $27.9 million in 1999. The increase in
noninterest expense is associated with newly formed banks, growth and increases
in general operating costs. Increases in both employee compensation and
occupancy mostly relate to the growth in number of banks within the consolidated
group.
Page 14 of 19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $237.4 million for the nine
month 2000 period, compared to $149.6 million in 1999. Such growth occurred in
all deposit categories, with the majority coming from time deposits. Capitol's
banks generally do not rely on brokered deposits as a key funding source;
brokered deposits approximated $62.3 million as of September 30, 2000, or about
4.6% of total deposits.
Noninterest-bearing deposits approximated 14.3% of total deposits at
September 30, 2000, an increase from the December 31, 1999 level of 13.2%.
Levels of noninterest-bearing deposits fluctuate based on customers' transaction
activity.
Interim 2000 deposit growth was deployed primarily into commercial loans,
consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $138.1 million or 9% of total assets
at September 30, 2000 as compared with $104.3 million or 8% of total assets at
December 31, 1999. 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 September
30, 2000 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. Liquidity needs have not
historically necessitated the sale of investments in order to meet funding
requirements. The banks also have not engaged in active trading of their
investments and have no intention of doing so in the foreseeable future. At
September 30, 2000 and December 31, 1999, the banks had approximately $71.7
million and $102.5 million, respectively, of investment securities classified as
available for sale which can be utilized to meet various liquidity needs as they
arise. The majority of the 2000 decrease in investment securities available for
sale was due to maturities deployed into higher yielding loans. During the first
quarter of 2000, available-for-sale securities aggregating $1 million were sold.
Some of the Corporation's banks have secured lines of credit with the
Federal Home Loan Bank of Indianapolis. Borrowings thereunder approximated $34.8
million and additional borrowing capacity approximated $21.5 million at
September 30, 2000.
In February 2000, Capitol's borrowings under lines of credit from an
unaffiliated bank were reduced through intercompany borrowings from Sun
Community Bancorp Limited. At September 30, 2000, Capitol had unused lines of
credit from an unrelated financial institution approximating $20 million.
Capitol's Board of Directors recently approved a fourth quarter cash
dividend of $.09 per share (payable December 1, 2000 to shareholders of record
as of November 1, 2000), following cash dividends of $.09 per share paid March
1, June 1 and September 1, 2000.
Effective January 31, 2000, the Corporation acquired the minority shares of
Brighton Commerce Bank, previously a 59% owned bank subsidiary, in a share
exchange transaction. Under the terms of the exchange, the Corporation issued
approximately 125,000 previously unissued shares. As a result of the share
exchange transaction, Brighton Commerce Bank became a wholly-owned subsidiary.
Page 15 of 19
<PAGE>
Effective June 30, 2000, Valley First Community Bank, a previously
majority-owned subsidiary of Sun, became a wholly-owned subsidiary of Sun
through a share exchange between Sun and Valley First's minority shareholders.
In May 2000, Capitol completed a private placement of approximately 267,000
shares of common stock and 53,400 warrants (each such warrant permitting the
holder to purchase one share of common stock prior to the expiration date of the
warrant, May 2002). Proceeds from the offering approximated $2.9 million and
have been used for debt retirement and additional investment in bank development
activities.
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.
Stockholders' equity, as a percentage of total assets, approximated 4.03%
at September 30, 2000, a slight decrease from the beginning of the year ratio of
4.2%. Total capital funds (Capitol's stockholders' equity, plus minority
interests in consolidated subsidiaries, plus guaranteed preferred beneficial
interests in the corporation's subordinated debentures) aggregated $151.4
million or 9.65% of total assets at September 30, 2000. The following table
summarizes the amounts and related ratios of individually significant
subsidiaries (assets of $130 million or more at the beginning of 2000) and
consolidated regulatory capital position at September 30, 2000:
<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 >= $ 9,197 >= $ 5,894 >= $ 19,062 >= $ 62,737
Actual amount $ 17,028 $ 10,863 $ 52,568 $ 63,210
Ratio 7.41% 7.37% 11.03% 4.03%
Tier I capital to risk-weighted assets:
Minimum required amount(1) >= $ 7,672 >= $ 4,869 >= $ 16,062 >= $ 52,237
Actual amount $ 17,112 $ 10,906 $ 76,514 $ 146,993
Ratio 8.92% 8.96% 19.06% 11.26%
Combined Tier I and Tier II capital
to risk-weighted assets:
Minimum required amount(2) >= $ 15,343 >= $ 9,737 >= $ 32,123 >= $ 104,474
Amount required to meet
"Well-Capitalized" category(3) >= $ 19,179 >= $ 12,171 >= $ 40,154 >= $ 130,593
Actual amount $ 19,513 $ 12,430 $ 81,146 $ 163,317
Ratio 10.17% 10.21% 20.21% 12.51%
</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.
Page 16 of 19
<PAGE>
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
develop 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.
CENTURY DATE CHANGE
Throughout 1999, significant attention was drawn to the century date change
and concerns about whether banks were prepared. What was predicted by some media
to become a catastrophic disaster of computer failures, proved to be a nonevent.
Capitol and its banks were well prepared, far in advance of the regulatory
initiatives, and were pleased to celebrate the new year without any significant
problems.
Bank regulatory agencies have advised that they remain somewhat concerned
about the banking industry on this matter for the remainder of 2000 and are
likely to perform some limited follow-up examinations during the period.
Management estimates additional future costs relating to the century date change
will be minimal.
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 17 of 19
<PAGE>
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.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 2000.
Page 18 of 19
<PAGE>
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: November 14, 2000
Page 19 of 19
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
