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, 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 organization) Identification Number)
200 Washington Square North, Lansing, Michigan 48933
(Address of principal executive offices) (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 July 31, 2000.
Page 1 of 19
<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 - June 30, 2000 and
December 31, 1999. 3
Consolidated statements of income - Three months and
six months ended June 30, 2000 and 1999. 4
Consolidated statements of changes in stockholders'
equity - Six months ended June 30, 2000 and 1999. 5
Consolidated statements of cash flows - Six months
ended June 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 June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
----------- -----------
<S> <C> <C>
(in thousands)
ASSETS
Cash and due from banks $ 76,608 $ 41,757
Interest-bearing deposits with banks 15,559 12,025
Federal funds sold 61,328 50,524
----------- -----------
Total cash and cash equivalents 153,495 104,306
Loans held for resale 14,468 9,078
Investment securities:
Available for sale, carried at market value 72,766 102,514
Held for long-term investment, carried at
amortized cost which approximates market value 5,281 4,631
----------- -----------
Total investment securities 78,047 107,145
Portfolio loans:
Commercial 1,014,400 874,560
Real estate mortgage 107,105 96,000
Installment 79,819 78,644
----------- -----------
Total portfolio loans 1,201,324 1,049,204
Less allowance for loan losses (14,944) (12,639)
----------- -----------
Net portfolio loans 1,186,380 1,036,565
Premises and equipment, net 14,001 14,396
Accrued interest income 8,252 7,206
Excess of cost over net assets of acquired subsidiaries 5,051 3,652
Other assets 26,171 23,639
----------- -----------
TOTAL ASSETS $ 1,485,865 $ 1,305,987
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 181,693 $ 147,036
Interest-bearing 1,110,167 965,757
----------- -----------
Total deposits 1,291,860 1,112,793
Debt obligations 37,100 47,400
Accrued interest on deposits and other liabilities 12,123 12,242
----------- -----------
Total liabilities 1,341,083 1,172,435
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 24,309 24,291
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 59,084 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 3,474 1,068
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) (942) (907)
----------- -----------
63,530 56,809
Less note receivable from exercise of stock options
and unallocated ESOP shares (2,141) (2,141)
----------- -----------
Total stockholders' equity 61,389 54,668
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,485,865 $ 1,305,987
=========== ===========
</TABLE>
Page 3 of 19
<PAGE>
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 2000 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ------------------
2000 1999 2000 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 29,413 $ 19,312 $55,783 $36,915
Loans held for resale 176 471 272 942
Taxable investment securities 1,160 1,006 2,355 1,971
Federal funds sold 1,040 982 1,940 2,349
Interest-bearing deposits with banks and other 190 101 358 153
Dividends on investment securities 62 46 122 79
-------- -------- ------- -------
Total interest income 32,041 21,918 60,830 42,409
Interest expense:
Demand deposits 3,768 2,613 7,134 4,981
Savings deposits 421 365 829 722
Time deposits 10,056 6,982 18,924 14,031
Debt obligations and other 1,439 890 2,821 1,717
-------- -------- ------- -------
Total interest expense 15,684 10,850 29,708 21,451
-------- -------- ------- -------
Net interest income 16,357 11,068 31,122 20,958
Provision for loan losses 2,004 901 3,366 1,710
-------- -------- ------- -------
Net interest income after provision for loan losses 14,353 10,167 27,756 19,248
Noninterest income:
Service charges on deposit accounts 491 403 952 726
Trust fee income 270 195 532 312
Fees from origination of non-portfolio residential
mortgage loans 259 369 556 704
Realized gains (loss) on sale of investment
securities available for sale 114 (4) 110 17
Other 363 159 674 404
-------- -------- ------- -------
Total noninterest income 1,497 1,122 2,824 2,163
Noninterest expense:
Salaries and employee benefits 7,077 4,853 13,809 9,476
Occupancy 1,104 819 2,147 1,602
Equipment rent, depreciation and maintenance 993 1,026 1,941 1,884
Deposit insurance premiums 66 47 113 76
Other 3,721 2,470 7,174 4,447
-------- -------- ------- -------
Total noninterest expense 12,961 9,215 25,184 17,485
-------- -------- ------- -------
Income before federal income taxes, minority interest and
cumulative effect of change in accounting principle 2,889 2,074 5,396 3,926
Federal income taxes 995 930 1,892 1,695
-------- -------- ------- -------
Income before minority interest and cumulative
effect of change in accounting principle 1,894 1,144 3,504 2,231
Credit resulting from minority interest in net
losses of consolidated subsidiaries 36 359 144 611
-------- -------- ------- -------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,930 1,503 3,648 2,842
Cumulative effect of change in accounting principle -- Note B (197)
-------- -------- ------- -------
NET INCOME $ 1,930 $ 1,503 $ 3,648 $ 2,645
======== ======== ======= =======
NET INCOME PER SHARE -- Note D
</TABLE>
Page 4 of 19
<PAGE>
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2000 and 1999
(in thousands except share data)
<TABLE>
<CAPTION>
Note
Receivable
from Exercise
of Stock
Accumulated Options and
Other Unallocated
Common Retained Comprehensive ESOP
Stock Earnings Income Shares Total
----- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
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
income tax effect) (652) (652)
-------
Comprehensive income for the period 1,993
-------- ------- ----- ------- -------
BALANCES AT JUNE 30, 1999 $ 51,868 $ (516) $(484) $ (725) $50,143
======== ======= ===== ======= =======
SIX MONTHS ENDED JUNE 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 (1,242) (1,242)
Components of comprehensive income:
Net income for the period 3,648 3,648
Market value adjustment for investment
securities available for sale (net of
income tax effect) (35) (35)
-------
Comprehensive income for the period 3,613
-------- ------- ----- ------- -------
BALANCES AT JUNE 30, 2000 $ 60,998 $ 3,474 $(942) $(2,141) $61,389
======== ======= ===== ======= =======
</TABLE>
Page 5 of 19
<PAGE>
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
(in thousands)
OPERATING ACTIVITIES
Net income $ 3,648 $ 2,645
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 3,366 1,710
Depreciation of premises and equipment 1,592 1,362
Amortization of goodwill and other intangibles 245 575
Net accretion of investment security discounts (38) (127)
Loss (gain) on sale of premises and equipment 1 (2)
Minority interest in net losses of consolidated subsidiaries (144) (611)
Cumulative effect of change in accounting principle 197
Originations and purchases of loans held for resale (81,805) (197,678)
Proceeds from sales of loans held for resale 76,415 214,690
Increase in accrued interest income and other assets (5,188) (1,634)
Increase (decrease) in accrued interest and other liabilities (119) 34
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,027) 21,161
INVESTING ACTIVITIES
Proceeds from sales of investment securities
available for sale 1,096 2,500
Proceeds from maturities of investment securities
available for sale 53,883 59,617
Purchases of investment securities available for sale (25,894) (48,226)
Net increase in portfolio loans (153,181) (139,408)
Proceeds from sales of premises and equipment 14 38
Purchases of premises and equipment (1,212) (2,411)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (125,294) (127,890)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 75,937 61,598
Net increase in certificates of deposit 103,130 17,320
Net proceeds from (payments on) debt obligations (10,300) 1,600
Resources provided by minority interests 5,972 8,910
Net proceeds from issuance of common stock and warrants 3,013
Cash dividends paid (1,242) (1,142)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 176,510 88,286
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 49,189 (18,443)
Cash and cash equivalents at beginning of period 104,306 151,045
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 153,495 $ 132,602
========= =========
</TABLE>
Page 6 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD.
JUNE 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 six-month period ended June 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, 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.
In early 2000, First California Northern Bancorp and First California
Southern Bancorp were formed to facilitate certain bank development strategies
in California.
At June 30, 2000, applications were pending for new banks in Arizona,
California and Indiana.
Page 7 of 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
CAPITOL BANCORP LTD.
JUNE 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 June 30 Six Months Ended June 30
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator--net income for the period $ 1,930,000 $ 1,503,000 $ 3,648,000 $ 2,645,000
=========== =========== =========== ===========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic
earnings per share) 7,060,085 6,344,886 6,956,590 6,344,886
Effect of dilutive securities--stock
options and warrants 38,609 151,699 28,732 117,535
----------- ----------- ----------- -----------
Denominator for diluted net income per share--
Weighted average number of common shares and
potential dilution 7,098,694 6,496,585 6,985,322 6,462,421
=========== =========== =========== ===========
Net income per share:
Before cumulative effect of change in
accounting principle:
Basic $ 0.27 $ 0.24 $ 0.52 $ 0.45
=========== =========== =========== ===========
Diluted $ 0.27 $ 0.23 $ 0.52 $ 0.44
=========== =========== =========== ===========
After cumulative effect of change in
accounting principle:
Basic $ 0.27 $ 0.24 $ 0.52 $ 0.42
=========== =========== =========== ===========
Diluted $ 0.27 $ 0.23 $ 0.52 $ 0.41
=========== =========== =========== ===========
</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.
JUNE 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 $1.49 billion at June 30, 2000, an increase of
$180 million from the December 31, 1999 level of $1.31 billion. The consolidated
balance sheets include Capitol and its majority-owned subsidiaries.
Portfolio loans increased during the six-month period by approximately $152
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 $140 million, consistent with the banks' emphasis on commercial
lending activities. Portfolio loan growth in 2000 is net of about $12 million of
loans sold to other financial institutions.
The allowance for loan losses at June 30, 2000 approximated $15 million or
1.24% 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 1,093 213
Real estate mortgage 67
Installment 68 40
---------- --------
Total charge-offs 1,228 253
Recoveries:
Commercial 154 137
Real estate mortgage 4 3
Installment 9 3
---------- --------
Total recoveries 167 143
---------- --------
Net charge-offs 1,061 110
Additions to allowance charged to expense 3,366 1,710
---------- --------
Allowance for loan losses at June 30 $ 14,944 $ 10,417
========== ========
Average total portfolio loans for period
ended June 30 $1,135,410 $786,594
========== ========
Ratio of net charge-offs to average portfolio
loans outstanding 0.09% 0.01%
========== ========
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.
June 30, 2000 December 31, 1999
----------------------- -----------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Loans Loans
---- ----
Commercial $ 6,625 .55% $ 5,965 .57%
Real estate mortgage 192 .02 165 .01
Installment 445 .04 385 .04
Unallocated 7,682 .63 6,124 .58
----------- ---- ----------- ----
Total allowance for
loan losses $ 14,944 1.24% $ 12,639 1.20%
=========== ==== =========== ====
Total portfolio loans
outstanding $ 1,201,324 $ 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 June 30, 2000, total
loans under this program approximated $34.3 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
June 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):
June 30 Dec 31
2000 1999
------ ------
Nonaccrual loans:
Commercial $3,037 $2,709
Real estate 650 103
Installment 109 100
------ ------
Total nonaccrual loans 3,796 2,912
Past due (>90 days) loans:
Commercial 1,238 834
Real estate 715 196
Installment 137 182
------ ------
Total past due loans 2,090 1,212
------ ------
Total nonperforming loans $5,886 $4,124
====== ======
Nonperforming loans increased approximately $1.8 million during the
six-month period ended June 30, 2000. Most of the nonaccrual loans at June 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 $3.7 million at June 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
------------------------ ------------------ ----------------- ---------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
2000 1999 2000 1999 2000 1999 2000 1999
---------- ---------- ------- ------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 192,771 $ 186,022 $ 2,619 $ 2,511 $ 655 $ 492 1.36% 1.35%
Brighton Commerce Bank 50,510 46,673 536 467 1.06 1.00
Capitol National Bank 122,765 120,097 1,657 1,581 791 769 1.35 1.32
Detroit Commerce Bank(1) 20,537 20,694 219 209 1.07 1.01
Grand Haven Bank 65,636 61,498 860 802 655 257 1.31 1.30
Kent Commerce Bank(1) 40,875 36,429 434 365 1.06 1.00
Macomb Community Bank 84,145 69,570 858 696 9 1.02 1.00
Muskegon Commerce Bank(1) 51,895 41,848 546 419 9 13 1.05 1.00
Oakland Commerce Bank 79,559 77,192 971 880 645 1,504 1.22 1.14
Paragon Bank & Trust 67,522 69,752 840 804 672 64 1.24 1.15
Portage Commerce Bank 111,137 107,792 1,500 1,386 994 982 1.35 1.29
Indiana Community Bancorp Limited:
Elkhart Community Bank(1) 10,991 4,042 132 48 1.20 1.19
Sun Community Bancorp Limited:
Bank of Tucson 64,535 59,088 836 725 387 1.30 1.23
Camelback Community Bank(1) 29,826 22,731 345 228 1.16 1.00
East Valley Community Bank(1) 13,749 4,335 194 44 1.41 1.01
Mesa Bank(1) 24,558 18,884 270 189 1.10 1.00
Southern Arizona Community Bank(1) 27,531 20,610 303 207 1.10 1.00
Valley First Community Bank 39,770 36,334 460 418 255 34 1.16 1.15
Nevada Community Bancorp Limited: 384
Black Mountain Community Bank(1) 6,001 90 1.50
Desert Community Bank(1) 22,780 11,438 333 154 1.46 1.35
Red Rock Community Bank(1) 25,639 7,861 375 156 1.46 1.98
Sunrise Capital Corporation: 347
Sunrise Bank of Albuquerque(1) 5,552 56 1.01
Sunrise Bank of Arizona(1) 40,948 24,952 410 250 92 1.00 1.00
Other, net 2,092 1,362 100 100
---------- ---------- ------- ------- ------ ------- ----- -----
Consolidated $1,201,324 $1,049,204 $14,944 $12,639 $5,886 $ 4,124 1.24% 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.
Noninterest-bearing deposits approximated 14.1% of total deposits at June
30, 2000, an increase from the December 31, 1999 level of 13.2%. Levels of
noninterest-bearing deposits fluctuate based on customers' transaction activity.
Results of Operations
Net income for the six months ended June 30, 2000 amounted to $3,648,000
($.52 per diluted share), an increase from the $2,842,000 ($.44 per diluted
share) earned from operations during the corresponding period of 1999. Net
income in 1999, after the cumulative effect of a change in accounting principle,
approximated $2,645,000 ($.41 per diluted share).
Second 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 (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
2000 1999 2000 1999 2000 1999 2000 1999
---------- ----------- ------- ------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 223,802 $ 214,955 $ 1,741 $ 1,258 22.53% 19.50% 1.59% 1.30%
Brighton Commerce Bank 56,303 55,400 235 208 10.03 11.20 .84 .87
Capitol National Bank 142,304 133,179 1,102 1,028 22.17 21.06 1.57 1.62
Detroit Commerce Bank 28,597 28,160 1 (241) .08 n/a .01 n/a
Grand Haven Bank 73,872 72,915 557 468 20.85 19.82 1.52 1.36
Kent Commerce Bank 43,350 38,865 45 (62) 2.56 n/a .21 n/a
Macomb Community Bank 106,274 99,214 546 292 13.64 9.14 1.01 .74
Muskegon Commerce Bank 57,046 47,405 253 10 13.13 .80 .96 .06
Oakland Commerce Bank 97,371 93,065 368 442 9.91 13.36 .78 .87
Paragon Bank & Trust 89,382 87,259 277 222 8.36 6.95 .63 .53
Portage Commerce Bank 129,385 123,398 935 865 21.15 22.23 1.47 1.59
Indiana Community Bancorp Limited:
Elkhart Community Bank(1) 18,433 10,798 (165) n/a n/a n/a n/a n/a
Sun Community Bancorp Limited:
Bank of Tucson 90,749 82,113 982 558 28.31 18.44 2.24 1.55
Camelback Community Bank 42,524 30,254 55 (298) 3.32 n/a .30 n/a
East Valley Community Bank(1) 20,244 10,757 (396) 2 n/a n/a n/a n/a
Mesa Bank 32,470 24,738 69 (150) 3.56 n/a .49 n/a
Southern Arizona Community Bank 39,194 25,778 36 (274) 1.93 n/a .23 n/a
Valley First Community Bank 48,192 45,678 50 96 2.42 4.81 .22 .50
Nevada Community Bancorp Limited:
Black Mountain Community Bank(2) 12,112 n/a (252) n/a n/a n/a n/a n/a
Desert Community Bank(1) 31,688 17,839 (150) n/a n/a n/a n/a n/a
Red Rock Community Bank(1) 32,794 15,596 (54) n/a n/a n/a n/a n/a
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(2) 10,831 n/a (240) n/a n/a n/a n/a n/a
Sunrise Bank of Arizona 47,676 30,615 42 (240) 1.99 n/a .21 n/a
Other, net 11,272 18,006 (2,389) (1,539) n/a n/a n/a n/a
---------- ----------- ------- ------- ----- ----- ----- -----
Consolidated $1,485,865 $ 1,305,987 $ 3,648 $ 2,645 13.34% 10.73% .52% .52%
========== =========== ======= ======= ===== ===== ===== =====
</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 48% during the six-month period versus the
corresponding period of 1999. This increase is attributable to the expansion in
number of banks and the banks' growth.
Noninterest income increased in 2000 to $2,824,000 for the six-month
period, as compared with $2,163,000 in 1999. Service charge revenue and trust
fee income both increased in the 2000 period by 31% and 70%, respectively,
compared to 1999.
Provisions for loan losses approximated $3,366,000 for the six months ended
June 30, 2000 compared to $1,710,000 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 six months ended June 30, 2000 approximated
$25.2 million compared with $17.5 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 $179.1 million for the six
month 2000 period, compared to $78.9 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 $50.6 million as of June 30, 2000, or about 4% of
total deposits.
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 $153.5 million or 10% of total assets
at June 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 June 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 June
30, 2000 and December 31, 1999, the banks had approximately $72.8 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 $22.1
million and additional borrowing capacity approximated $21.4 million at June 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 June 30, 2000, Capitol had unused lines of credit
from an unrelated financial institution aggregating $20 million.
Capitol's Board of Directors recently approved a third quarter cash
dividend of $.09 per share (payable September 1, 2000 to shareholders of record
as of August 1, 2000), following cash dividends of $.09 per share paid March 1
and June 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 4.1% at
June 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 $144.8 million or 9.74% of
total assets at June 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 June 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 => $ 8,952 => $ 5,692 => $ 16,992 => $ 59,434
Actual amount $ 16,101 $ 10,239 $ 52,305 $ 61,389
Ratio 7.19% 7.20% 12.31% 4.13%
Tier I capital to risk-weighted assets:
Minimum required amount(1) => $ 7,358 => $ 4,635 => $ 13,615 => $ 48,613
Actual amount $ 16,237 $ 10,312 $ 74,089 $ 140,629
Ratio 8.83% 8.90% 21.77% 11.57%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) => $ 14,716 => $ 9,270 => $ 27,230 => $ 97,227
Amount required to meet "Well-Capitalized"
category(3) => $ 18,395 => $ 11,587 => $ 34,037 => $ 121,533
Actual amount $ 18,540 $ 11,763 $ 77,761 $ 155,573
Ratio 10.08% 10.15% 22.85% 12.80%
</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 three months ended June
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: August 14, 2000
Page 19 of 19
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
