UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1999 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its Charter)
MICHIGAN 38-2761672
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
One Business & Trade Center
200 Washington Square North
Lansing, Michigan 48933
(Address of principal executive offices)
Registrant's telephone number, including area code: (517) 487-6555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
8.50% Cumulative Trust Preferred Securities, $10 Liquidation Amount
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked price of
stock, as of a specified date within 60 days prior to the date of filing:
$60,441,708 as of February 24, 2000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 6,894,376 as of
February 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
See Cross-Reference Sheet
<PAGE>
CAPITOL BANCORP LTD.
Form 10-K
Fiscal Year Ended: December 31, 1999
CROSS REFERENCE SHEET
ITEM OF FORM 10-K INCORPORATION BY REFERENCE FROM:
- ----------------- --------------------------------
PART I
Item 1, Business Pages 5-8, 14-20, 27-28, 36 and 42-43,
Financial Information Section of
Annual Report
Item 2, Properties Page 34, Financial Information Section
of Annual Report; Pages 13-14, Proxy
Statement; and Pages 6-26, Marketing
Section of Annual Report
PART II
Item 5, Market for Registrant's Pages 2-3, 22, 30, 36-38 and 42-43,
Common Equity and Related Financial Information Section of Annual
Stockholder Matters Report and Page 28 of Marketing
Section of Annual Report
Item 6, Selected Financial Data Page 2, Financial Information Section
of Annual Report
Item 7, Management's Discussion Pages 4-21, Financial Information
and Analysis of Financial Section of Annual Report
Condition and Results of
Operations
Item 7a, Quantitative and Pages 4 and 17-20, Financial
Qualitative Disclosures Information Section of Annual Report
About Market Risk
Item 8, Financial Statements and Pages 2 and 22-46, Financial
Supplementary Data Information Section of Annual Report
PART III
Item 10, Directors and Executive Pages 4-5, Proxy Statement, and
Officers of the Registrant Pages 4-5, Marketing Section of
Annual Report
Item 11, Executive Compensation Pages 8-12, Proxy Statement
Item 12, Security Ownership of Certain Pages 3-5 and 8, Proxy Statement
Beneficial Owners and
Management
Item 13, Certain Relationships and Pages 13-14, Proxy Statement
Related Transactions
PART IV
Item 14, Exhibits, Financial Statement Pages 22-46, Financial Information
Schedules and Reports on Section of Annual Report
Form 8-K
KEY:
"Annual Report" means the 1999 Annual Report of the Registrant provided to
Stockholders and the Commission pursuant to Rule 14a-3(b). Capitol's 1999
Annual Report consists of two documents: a Financial Information Section
and a Marketing Section.
"Proxy Statement" means the Proxy Statement of the Registrant on Schedule 14A
filed pursuant to Rule 14a-101.
Note: The page number references herein are based on the paper version of the
Annual Report and Proxy Statement. Accordingly, those page number
references may differ from the electronically filed versions of those
documents.
-2-
<PAGE>
CAPITOL BANCORP LTD.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business....................................................... 4
ITEM 2. Properties..................................................... 13
ITEM 3. Legal Proceedings.............................................. 13
ITEM 4. Submission of Matters to a Vote of Security Holders............ 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 14
ITEM 6. Selected Financial Data........................................ 14
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 14
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..... 14
ITEM 8. Financial Statements and Supplementary Data.................... 14
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...................................... 14
PART III
ITEM 10. Directors and Executive Officers of the Registrant............. 16
ITEM 11. Executive Compensation.......................................... 16
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management ................................................. 16
ITEM 13. Certain Relationships and Related Transactions.................. 16
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................... 17
-3-
<PAGE>
PART I
ITEM 1. BUSINESS.
a. General development of business:
Incorporated by reference from Pages 5-8 under the captions "The Business
of Capitol and its Banks", and "Capitol's Structure", and Pages 27-28, Financial
Information Section of Annual Report, under the caption "Note A--Nature of
Operations, Basis of Presentation and Principles of Consolidation".
b. Financial information about industry segments:
Incorporated by reference from Pages 27-28, Financial Information Section
of Annual Report, under the caption "Note A--Nature of Operations, Basis of
Presentation and Principles of Consolidation".
c. Narrative description of business:
Incorporated by reference from Pages 5-8 under the captions "The Business
of Capitol and its Banks", and "Capitol's Structure", Pages 27-28, Financial
Information Section of Annual Report, under the caption "Note A--Nature of
Operations, Basis of Presentation and Principles of Consolidation", and Pages
17-20, Financial Information Section of Annual Report, under the caption "Trends
Affecting Operations" and Pages 14-17, Financial Information Section of Annual
Report, under the caption "Liquidity, Capital Resources and Capital Adequacy".
At December 31, 1999, Capitol and its subsidiaries employed 449 full time
equivalent employees.
In 1997, the Registrant formed Capitol Trust I, a Delaware statutory
business trust. Capitol Trust I's business and affairs are conducted by its
property trustee, a Delaware trustee, and three individual administrative
trustees who are employees and officers of the Registrant. Capitol Trust I
exists for the sole purpose of issuing and selling its preferred securities and
common securities, using the proceeds from the sale of those securities to
acquire subordinated debentures issued by the Registrant and certain related
services. Additional information regarding Capitol Trust I is incorporated by
reference from Page 36, Financial Information Section of Annual Report, under
the caption "Note I--Trust-Preferred Securities".
The following tables (Tables A to G, inclusive), present certain
statistical information regarding Capitol's business.
-4-
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A)
CAPITOL BANCORP LIMITED
Net interest income, the primary component of earnings, represents the
difference between interest income on interest-earning assets and interest
expense on interest- bearing liabilities. Net interest income depends upon the
volume of interest-earning assets and interest-bearing liabilities and the rates
earned or paid on them. This table shows the daily average balances for the
major asset and liability categories and the actual related interest income and
expense (in $1,000s) and average yield/cost for 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1999
-------------------------------------
Interest (1)
Average Income/ Average
Balance Expense Yield/Cost
-------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities:
U.S. Treasury and government agencies $77,947 $ 4,589 5.89%
States and political subdivisions (2) 1,607 73 4.54%
Other 5,118 190 3.71%
Interest-bearing deposits with banks 9,295 544 5.85%
Federal funds sold 82,002 4,272 5.21%
Loans held for resale 17,781 1,364 7.67%
Portfolio loans (3) 872,481 82,570 9.46%
---------- ------- -----
Total interest-earning
assets/interest income 1,066,231 93,602 8.78%
Allowance for loan losses (deduct) (10,391)
Cash and due from banks 43,815
Premises and equipment, net 12,725
Other assets 26,332
----------
Total Assets $1,138,712
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $42,828 1,547 3.61%
Time deposits under $100,000 285,683 15,744 5.51%
Time deposits of $100,000 or more 252,713 13,434 5.32%
Other interest-bearing deposits 276,670 11,203 4.05%
Debt obligations 29,959 2,072 6.92%
Other 639 87 13.62%
---------- ------- -----
Total interest-bearing
liabilities/interest expense 888,492 44,087 4.96%
Capitol Trust I preferred securities 24,274 2,150 8.86%
---------- ------- -----
912,766 46,237 5.07%
Noninterest-bearing demand deposits 130,457
Accrued interest on deposits and
other liabilities 9,483
Minority interest in consolidated
subsidiaries 40,276
Stockholders' equity 50,730
----------
Total liabilities and
stockholders' equity $1,143,712
========== -------
Net interest income $47,365
=======
Interest Rate Spread (4) 3.71%
=====
Net Yield on Interest-Earning Assets (5) 4.44%
=====
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.17 X
==========
Year Ended December 31
----------------------------------------------------------------------
1998 1997
--------------------------------- ----------------------------------
Interest (1) Interest (1)
Average Income/ Average Average Income/ Average
Balance Expense Yield/Cost Balance Expense Yield/Cost
--------------------------------- ----------------------------------
ASSETS
Investment securities:
U.S. Treasury and government agencies $ 62,247 $ 3,688 5.92% $ 56,604 $ 3,516 6.21%
States and political subdivisions (2) 1,609 77 4.79% 239 14 5.86%
Other 2,679 111 4.14% 2,342 211 9.01%
Interest-bearing deposits with banks 9,034 118 1.31% 1,158 19 1.64%
Federal funds sold 93,310 5,013 5.37% 50,948 2,805 5.51%
Loans held for resale 20,188 1,529 7.57% 7,122 536 7.53%
Portfolio loans (3) 605,923 59,132 9.76% 425,664 42,448 9.97%
-------- ------- ---- -------- ------- ----
Total interest-earning
assets/interest income 794,990 69,668 8.76% 544,077 49,549 9.11%
Allowance for loan losses (deduct) (7,371) (5,294)
Cash and due from banks 30,000 19,159
Premises and equipment, net 8,836 6,045
Other assets 20,861 15,828
-------- --------
Total Assets $847,316 $579,815
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $37,517 1,487 3.96% $38,496 1,544 4.01%
Time deposits under $100,000 259,916 16,119 6.20% 200,108 12,187 6.09%
Time deposits of $100,000 or more 165,627 9,331 5.63% 104,501 6,257 5.99%
Other interest-bearing deposits 189,707 7,211 3.80% 110,395 4,111 3.72%
Debt obligations 4,751 271 5.70% 9,003 753 8.36%
Other 106
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities/interest expense 657,518 34,525 5.25% 462,503 24,852 5.37%
Capitol Trust I preferred securities 24,192 2,145 8.87% 822 -- --
-------- ------- ---- -------- ------- ----
681,710 36,670 5.38% 463,325 24,852 5.36%
Noninterest-bearing demand deposits 94,077 62,166
Accrued interest on deposits and
other liabilities 7,267 4,421
Minority interest in consolidated
subsidiaries 18,830 8,047
Stockholders' equity 45,432 41,856
-------- --------
Total liabilities and
stockholders' equity $847,316 $579,815
======== ------- ======== -------
Net interest income $32,998 $24,697
======= =======
Interest Rate Spread (4) 3.38% 3.75%
==== ====
Net Yield on Interest-Earning Assets (5) 4.15% 4.54%
==== ====
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.17 X 1.17 X
======== ========
</TABLE>
(1) Average yield/cost is determined by dividing the actual interest
income/expense by the daily average balance of the asset or liability
category.
(2) Tax equivalent yield.
(3) Average balance of loans includes non-accrual loans.
(4) Interest rate spread represents the average yield on interest-earning
assets less the average cost of interest-bearing liabilities.
(5) Net yield on interest-earning assets is based on net interest income as a
percentage of average total interest-earning assets.
-5-
<PAGE>
CHANGES IN NET INTEREST INCOME (TABLE B)
CAPITOL BANCORP LIMITED
The table below summarizes the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Capitol's net interest income during the periods
indicated (in $1,000s). The change in interest attributed to volume is
calculated by multiplying the annual change in volume by the prior year's rate.
The change in interest attributable to rate is calculated by multiplying the
annual change in rate by the current year's average balance. Any variance
attributable jointly to volume and rate changes has been allocated to each
category based on the percentage of each to the total change in both categories.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1999 compared to 1998
--------------------------------------
Volume Rate Net Total
-------- ------- ---------
<S> <C> <C> <C>
Increase (decrease) in interest income:
Investment securities:
U.S. Treasury and government agencies $ 929 $ (28) $ 901
States and political subdivisions (0) (4) (4)
Other 101 (22) 79
Interest-bearing deposits with banks 3 423 426
Federal funds sold (608) (133) (741)
Loans held for resale (182) 17 (165)
Portfolio loans 26,016 (2,578) 23,438
-------- ------- --------
Total 26,259 (2,325) 23,934
Increase (decrease) in interest
expense deposits:
Savings deposits 210 (150) 60
Time deposits under $100,000 1,598 (1,973) (375)
Time deposits of $100,000 or more 4,903 (800) 4,103
Other interest-bearing deposits 3,305 687 3,992
Debt obligations 1,437 364 1,801
Other (106) 87 (19)
Capitol Trust I preferred securities 7 (2) 5
-------- ------- --------
Total 11,354 (1,787) 9,567
-------- ------- --------
Increase (decrease) in net
interest income $ 14,905 $ (538) $ 14,367
======== ======= ========
Year Ended December 31
----------------------------------------------------------------------
1998 compared to 1997 1997 compared to 1996
---------------------------------- --------------------------------
Volume Rate Net Total Volume Rate Net Total
-------- ------- --------- -------- ----- ---------
Increase (decrease) in interest income:
Investment securities:
U.S. Treasury and government agencies $ 350 $ (178) $ 172 $ 965 $ 317 $ 1,282
States and political subdivisions 80 (17) 63 3 (7) (4)
Other 30 (130) (100) (25) (136) (161)
Interest-bearing deposits with banks 129 (30) 99 61 (84) (23)
Federal funds sold 2,334 (126) 2,208 888 376 1,264
Loans held for resale 984 9 993 (276) (6) (282)
Portfolio loans 17,972 (1,288) 16,684 10,589 405 10,994
-------- ------- -------- -------- ----- --------
Total 21,879 (1,760) 20,119 12,205 865 13,070
Increase (decrease) in interest
expense deposits:
Savings deposits (39) (18) (57) 126 34 160
Time deposits under $100,000 3,642 290 3,932 2,352 280 2,632
Time deposits of $100,000 or more 3,661 (587) 3,074 2,280 42 2,322
Other interest-bearing deposits 2,950 150 3,100 1,406 287 1,693
Debt obligations (355) (127) (482) 22 235 257
Other 106 106 (12) (12)
Capitol Trust I preferred securities 2,145 2,145
-------- ------- -------- -------- ----- --------
Total 12,110 (292) 11,818 6,174 878 7,052
-------- ------- -------- -------- ----- --------
Increase (decrease) in net
interest income $ 9,769 $(1,468) $ 8,301 $ 6,031 $ (13) $ 6,018
======== ======= ======== ======== ===== ========
</TABLE>
-6-
<PAGE>
INVESTMENT PORTFOLIO (TABLE C)
CAPITOL BANCORP LIMITED
The table below shows amortized cost and market value of investment securities
as of year end 1999, 1998 and 1997 (in $1,000s):
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government agencies $100,211 $ 98,860 $80,445 $80,667 $60,430 $60,650
States and political subdivisions 2,537 2,515 2,897 2,930 1,610 1,603
Corporate bonds 602 600
Other investments 539 539
Other:
Federal Reserve Bank stock 266 266 116 116 116 116
Federal Home Loan Bank stock 2,862 2,862 1,431 1,431 1,073 1,073
Corporate stock 1,003 1,003 1,003 1,003 1,028 1,028
Other investments 500 500 317 317
-------- -------- ------- ------- ------- -------
Total other securities 4,631 4,631 2,867 2,867 2,217 2,217
-------- -------- ------- ------- ------- -------
Total investments $108,520 $107,145 $86,209 $86,464 $64,257 $64,470
======== ======== ======= ======= ======= =======
</TABLE>
The table below shows the amortized cost, relative maturities and weighted
average yields of investment securities at December 31, 1999 (in $1,000s):
<TABLE>
<CAPTION>
U.S. Treasury and States and Political
Government Agencies Subdivisions Other
--------------------- --------------------- ---------------------
Weighted Weighted Weighted Total
Amortized Average Amortized Average Amortized Average Amortized
Cost Yield Cost Yield Cost Yield Cost
---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Maturity:
Due in one year or less $ 45,398 5.21% $ 25 3.14% $ 890 5.10% $ 46,313
Due after one year but within
five years 50,668 5.76% 1,911 5.11% 251 6.88% 52,830
Due after five years but within
ten years 2,002 6.54% 101 5.40% 2,103
Due after ten years 2,143 6.49% 500 5.00% 2,643
Without stated maturities 4,631 * 4,631
-------- ------ ------ --------
Total $100,211 $2,537 $5,772 $108,520
======== ====== ====== ========
</TABLE>
* Investment securities which do not have stated maturities (corporate stock,
Federal Reserve Bank and Federal Home Loan Bank stock) do not have stated
yields or rates of return and such rates of return vary from time to time.
Following is a summary of the weighted average maturities of investment
securities (exclusive of securities without stated maturities) at December 31,
1999:
U.S. Treasury securities 7 months
U.S. Agencies 2 years 5 months
States and political subdivisions 5 years 0 months
-7-
<PAGE>
LOAN PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D)
CAPITOL BANCORP LIMITED
Portfolio loans outstanding as of the end of each period are shown below (in
$1,000s):
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial - real estate $ 627,029 59.76% $417,296 57.62% $262,157 52.14% $180,310 50.42% $140,462 49.55%
Commercial - other 247,531 23.59% 173,055 23.89% 133,781 26.61% 103,151 28.84% 81,699 28.82%
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total commercial loans 874,560 83.35% 590,351 81.51% 395,938 78.75% 283,461 79.26% 222,161 78.37%
Real estate mortgage 96,000 9.15% 80,808 11.16% 66,630 13.25% 53,712 15.02% 48,954 17.27%
Installment 78,644 7.50% 53,121 7.33% 40,187 7.99% 20,450 5.72% 12,356 4.36%
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total portfolio loans $1,049,204 100.00% $724,280 100.00% $502,755 100.00% $357,623 100.00% $283,471 100.00%
========== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The table below summarizes (in $1,000s) the remaining maturity of portfolio
loans outstanding at December 31, 1999 according to scheduled repayments of
principal:
Aggregate maturities of portfolio loan Fixed Variable
balances which are due: Rate Rate Total
-------- -------- ----------
In one year or less $188,633 $351,360 $ 539,993
After one year but within five years 429,340 55,169 484,509
After five years 11,114 10,676 21,790
Nonaccrual loans 2,912 2,912
-------- -------- ----------
Total $629,087 $420,117 $1,049,204
======== ======== ==========
The following summarizes, in general, Capitol's various loan classifications:
Commercial - real estate
Comprised of a broad mix of business use and multi-family housing
properties, including office, retail, warehouse and light industrial uses.
A typical loan size approximates $500,000 and, at December 31, 1999,
approximately 25% of such properties were owner-occupied.
Commercial - other
Includes a range of business credit products, current asset lines of credit
and equipment term loans. These products bear higher inherent economic risk
than other types of lending activities. A typical loan size approximates
$250,000, and multiple account relationships serve to reduce such risks.
Real Estate Mortgage
Includes single family residential loans held for permanent portfolio, and
home equity lines of credit. Risks are nominal, borne out by loss
experience, housing economic data and loan-to-value percentages.
Installment
Includes a broad range of consumer credit products, secured by automobiles,
boats, etc., with typical consumer credit risks.
All loans are subject to underwriting procedures commensurate with the loan
size, nature of collateral, industry trends, risks and experience factors.
Appropriate collateral is required for most loans, as is documented evidence of
debt repayment sources.
-8-
<PAGE>
TABLE D, CONTINUED
CAPITOL BANCORP LIMITED
The aggregate amount of nonperforming portfolio loans is shown below.
Nonperforming loans comprise (a) loans accounted for on a nonaccrual basis, and
(b) loans contractually past due 90 days or more as to principal and interest
payments (but not included in nonaccrual loans in (a) above) and consist
primarily of commercial real estate loans. Nonperforming portfolio loans include
all loans for which, based on the Capitol's loan rating system, management has
concerns. Loans are placed in nonaccrual status when, in management's opinion,
there is a reasonable probability of not collecting 100% of future principal and
interest payments. In addition, certain loans, although current based on
Capitol's rating criteria, are placed in nonaccrual status. Generally, loans are
placed in nonaccrual status when they become 90 days delinquent; however,
management may elect to continue the accrual of interest in certain
circumstances. When interest accruals are discontinued, interest previously
accrued (but unpaid) is reversed. If non- performing loans (including loans in
nonaccrual status) had performed in accordance with their contractual terms
during the year, additional interest income of $635,000 would have been recorded
in 1999. Interest income recognized on loans in nonaccrual status in 1999
operations approximated $33,000. At December 31, 1999, there were no material
amounts of loans which were restructured or otherwise renegotiated as a
concession to troubled borrowers.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Nonperforming loans: (in $1,000s)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: Commercial $ 2,709 $ 2,608 $ 2,570 $ 928 $ 438
Real estate 103 199 59 107 115
Installment 100 185 59 22 28
------- ------- ------- ------- -------
Total nonaccrual loans 2,912 2,992 2,688 1,057 581
Past due loans: Commercial 834 3,963 897 1,009 379
Real estate 196 183 401 549 299
Installment 182 104 25 84 82
------- ------- ------- ------- -------
Total past due loans 1,212 4,250 1,323 1,642 760
------- ------- ------- ------- -------
Total nonperforming loans $ 4,124 $ 7,242 $ 4,011 $ 2,699 $ 1,341
======= ======= ======= ======= =======
Nonperforming loans as a percentage
of total portfolio loans 0.39% 1.00% 0.80% 0.75% 0.47%
======= ======= ======= ======= =======
Nonperforming loans as a percentage
of total assets 0.32% 0.71% 0.58% 0.55% 0.35%
======= ======= ======= ======= =======
Allowance for loan losses as a
percentage of nonperforming loans 306.47% 121.75% 155.30% 169.62% 274.94%
======= ======= ======= ======= =======
</TABLE>
The table below summarizes activity in other real estate owned (in $1,000s):
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Other real estate owned at January 1 $ 541 $ 165 $ 313 $ 972 $ 1,255
Properties acquired in restructure
of loans or in lieu of foreclosure 3,426 612 1,635
Properties sold (376) (161) (128) (520) (1,714)
Payments received from borrowers or
tenants, credited to carrying amount (75) (10) (47)
Other changes, net 23 (10) (92) (204)
------- ------- ------- ------- -------
Other real estate owned at December 31 $ 3,614 $ 541 $ 165 $ 313 $ 972
======= ======= ======= ======= =======
Other real estate owned loss reserve at
January 1 $ 0 $ 0 $ 0 $ 0 $ 64
Net charge-offs 64
------- ------- ------- ------- -------
Other real estate owned loss reserve
at December 31 $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= =======
</TABLE>
Of the other real estate owned at December 31, 1999, one property, with a
carrying value of $2.7 million is partially guaranteed by an agency of the
federal government. Other real estate owned is valued at the lower of cost or
fair value (net of estimated selling cost) at the date of transfer/ acquisition.
Management performs a periodic analysis of estimated fair values to determine
potential impairment of other real estate owned.
-9-
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE (TABLE E)
CAPITOL BANCORP LIMITED
The table below summarizes changes in the allowance for loan losses and related
portfolio data and ratios each period:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
(in $1,000s)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at January 1 $ 8,817 $ 6,229 $ 4,578 $ 3,687 $ 3,220
Loans charged-off:
Commercial 1,201 1,165 551 308 547
Real estate 9 117 35
Installment 97 131 49 94 47
---------- -------- -------- -------- --------
Total charge-offs 1,298 1,305 717 437 594
Recoveries:
Commercial 391 336 288 119 178
Real estate 6 4 18 8 3
Installment 13 30 13 5 41
---------- -------- -------- -------- --------
Total recoveries 410 370 319 132 222
---------- -------- -------- -------- --------
Net charge-offs 888 935 398 305 372
Additions to allowance charged to expense 4,710 3,523 2,049 1,196 839
---------- -------- -------- -------- --------
Allowance for loan losses at December 31 $ 12,639 $ 8,817 $ 6,229 $ 4,578 $ 3,687
========== ======== ======== ======== ========
Total portfolio loans outstanding at December 31 $1,049,204 $724,280 $502,755 $357,623 $283,471
========== ======== ======== ======== ========
Ratio of allowance for loan losses to
portfolio loans outstanding 1.20% 1.22% 1.24% 1.28% 1.30%
========== ======== ======== ======== ========
Average total portfolio loans for the year $ 872,481 $605,923 $425,664 $318,491 $264,919
========== ======== ======== ======== ========
Ratio of net charge-offs to average
portfolio loans outstanding 0.10% 0.15% 0.09% 0.10% 0.14%
========== ======== ======== ======== ========
</TABLE>
The allowance for loan losses has been established as a general allowance for
losses on the loan portfolio estimated at the balance sheet date. For internal
purposes, management allocates the allowance to all loan classifications. The
amounts allocated in the following table, which include all loans which, based
on Capitol's loan rating system, management has concerns, should not be
interpreted as an indication of future charge-offs and the amounts allocated are
not intended to reflect the amount that may be available for future losses since
the allowance is a general allowance.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
(in $1,000s)
<S> <C> <C> <C> <C> <C>
Commercial $ 5,965 $ 4,501 $ 2,875 $ 2,281 $ 1,726
Real estate mortgage 165 127 103 67 67
Installment 385 262 185 100 57
Unallocated 6,124 3,927 3,066 2,130 1,837
---------- -------- -------- -------- --------
Total allowance for loan losses $ 12,639 $ 8,817 $ 6,229 $ 4,578 $ 3,687
========== ======== ======== ======== ========
Total portfolio loans outstanding $1,049,204 $724,280 $502,755 $357,623 $283,471
========== ======== ======== ======== ========
Ratio of allowance to portfolio loans
outstanding 1.20% 1.22% 1.24% 1.28% 1.30%
========== ======== ======== ======== ========
</TABLE>
In addition to the allowance for loan losses, certain commercial loans
participate in a loan program sponsored by the State of Michigan. Under that
program, the governmental unit shares loss exposure on such loans by funding
reserves which are placed as deposits at the bank. Loans participating in this
program and related reserves approximated $34.3 million and $2 million,
respectively, at December 31, 1999. Such reserve amounts are separate and
excluded from the allowance for loan losses.
-10-
<PAGE>
AVERAGE DEPOSITS (TABLE F)
CAPITOL BANCORP LIMITED
The table below summarizes the average balances of deposits (in $1,000s) and the
average rates of interest for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $130,457 $ 94,077 $ 62,166
Savings deposits 42,828 3.61% 37,517 3.96% 38,496 4.01%
Time deposits under $100,000 285,683 5.51% 259,916 6.20% 200,108 6.09%
Time deposits of $100,000 or more 252,713 5.32% 165,627 5.63% 104,501 5.99%
Other interest-bearing deposits 276,670 4.05% 189,707 3.80% 110,395 3.72%
-------- -------- --------
Total deposits $988,351 $746,844 $515,666
======== ======== ========
</TABLE>
The table below shows the amount of time certificates of deposit issued in
amounts of $100,000 or more, by time remaining until maturity, which were
outstanding at December 31, 1999 (in $1,000s):
Three months or less $110,804
Three months to twelve months 163,698
Over 12 months 35,571
--------
Total $310,073
========
-11-
<PAGE>
FINANCIAL RATIOS (TABLE G)
CAPITOL BANCORP LIMITED
Year Ended December 31
----------------------------
1999 1998 1997
---- ---- ----
Net Income as a percentage of:
Average stockholders' equity 10.66% 10.19% 13.28%
Average total assets 0.47% 0.55% 0.96%
Average stockholders' equity as
a percentage of average total assets 4.44% 5.36% 7.22%
Dividend payout ratio (cash dividends per share
as a percentage of net income per share):
Basic 42.86% 45.00% 32.97%
Diluted 43.37% 46.25% 34.09%
-12-
<PAGE>
ITEM 2. PROPERTIES.
Substantially all of the office locations are leased. Each of Capitol's
banks operate from a single location, except Capitol National Bank (which has
one branch location in Okemos, Michigan) and Sunrise Bank of Arizona (which had
a loan production office in Albuquerque, New Mexico at year end 1999). The
addresses of each bank's main office are stated on pages 6-26, Marketing Section
of Annual Report, which are incorporated herein by reference.
Ann Arbor Commerce Bank, in 1998, and Portage Commerce Bank, in 1997,
relocated their main offices to substantially larger leased facilities
(approximately 18,000 and 10,000 square feet, respectively) in response to asset
growth and to better serve customers.
Most of the other bank subsidiaries' facilities are generally small (i.e.,
less than 10,000 square feet), first floor offices with convenient access to
parking.
Some of the banks have drive-up customer service. The banks are typically
located in or near high traffic centers of commerce in their respective
communities. Customer service is enhanced through utilization of ATMs to process
some customer-initiated transactions and some of the banks also make available a
courier service to pick up transactions at customers' locations.
The principal offices of Capitol are located within the same building as
Capitol National Bank in Lansing, Michigan. Those headquarters include
administrative, operations, accounting, and executive staff and the
Corporation's data center.
Sun Community Bancorp Limited (a second-tier, 51%-owned bank holding
company headquartered in Arizona) occupies executive office space adjacent to
Camelback Community Bank in Phoenix.
Certain of the office locations are leased from related parties.
Incorporated by reference from Page 34, Financial Information Section of Annual
Report, under the caption "Note F--Premises and Equipment" and Pages 13-14,
Proxy Statement, from the 1st to 3rd paragraph thereunder under the caption
"Certain Relationships and Related Transactions".
Management believes Capitol's and its banks' offices to be in good and
adequate condition and adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1999, there were no material pending legal proceedings
to which Capitol or its subsidiaries is a party or to which any of its property
was subject, except for proceedings which arise in the ordinary course of
business. In the opinion of management, pending legal proceedings will not have
a material effect on the consolidated financial position or results of
operations of Capitol.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 1999, no matters were submitted to a vote by
security holders.
-13-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
A. Market Information:
Incorporated by reference from Page 3, Financial Information Section
of Annual Report, under the caption "Information Regarding Capitol's Common
Stock", Pages 36-38, Financial Information Section of Annual Report, under
the caption "Note J--Common Stock and Stock Options" and Page 28, Marketing
Section of Annual Report, under the caption "Shareholder Information".
B. Holders:
Incorporated by reference from first sentence of third paragraph on
Page 3, Financial Information Section of Annual Report, under the caption
"Information Regarding Capitol's Common Stock".
C. Dividends:
Incorporated by reference from Page 22, Financial Information Section
of Annual Report, under the caption "Quarterly Results of Operations" and
subcaption "Cash dividends paid per share", Pages 42-43, Financial
Information Section of Annual Report, under the caption "Note O--Dividend
Limitations of Subsidiaries and Other Capital Requirements" and the first
full paragraph commencing on Page 30, Financial Information Section of
Annual Report, under the caption "Note H--Debt Obligations".
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference from Page 2, Financial Information Section of
Annual Report, under the caption "Selected Consolidated Financial Data" under
the column heading "As of and for the Year Ended December 31, 1999, 1998, 1997,
1996, and 1995".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Incorporated by reference from Pages 5-21, Financial Information Section of
Annual Report, under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Page 4, Financial Information
Section of Annual Report, under the caption "Forward Looking Statements".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Incorporated by reference from Pages 17-20, Financial Information Section
of Annual Report, under the caption "Trends Affecting Operations" and Page 4,
Financial Information Section of Annual Report, under the caption "Forward
Looking Statements".
-14-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 (under subcaption "A. Exhibits") of this Form 10-K for specific
description of financial statements incorporated by reference from Financial
Information Section of Annual Report.
Incorporated by reference from Page 2, Financial Information Section of
Annual Report, under the caption "Quarterly Results of Operations".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-15-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from Pages 4-5, Proxy Statement, under the
caption "Election of Directors" and Pages 4-5, Marketing Section of Annual
Report, under the caption "Officers of the Corporation".
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from Pages 8-12, Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from Page 3, Proxy Statement, under the caption
"Voting Securities and Principal Holders Thereof", Pages 4-5, Proxy Statement,
under the caption "Election of Directors" and Page 8, Proxy Statement, third
paragraph under the caption "Meetings of the Board of Directors".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from Pages 13-14, Proxy Statement, under the
caption "Certain Relationships and Related Transactions".
-16-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. Exhibits:
The following consolidated financial statements of Capitol Bancorp
Limited and subsidiaries and report of independent auditors included on
Pages 22-46 of the Financial Information Section of Annual Report of the
registrant to its stockholders for the year ended December 31, 1999, are
incorporated by reference in Item 8:
Report of Independent Auditors.
Consolidated balance sheets--December 31, 1999 and 1998.
Consolidated statements of income--Years ended December 31, 1999, 1998
and 1997.
Consolidated statements of changes in stockholders' equity--Years
ended December 31, 1999, 1998 and 1997.
Consolidated statements of cash flows--Years ended December 31, 1999,
1998 and 1997.
Notes to consolidated financial statements.
All financial statements and schedules have been incorporated by
reference from the Annual Report or are included in Management's Discussion
and Analysis of Financial Condition and Results of Operations. No schedules
are included here because they are either not required, not applicable or
the required information is contained elsewhere.
B. Reports on Form 8-K:
During the fourth quarter of 1999, no reports on Form 8-K were filed
by the registrant.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITOL BANCORP LTD.
Registrant
By: /s/ Joseph D. Reid By: /s/ Lee W. Hendrickson
----------------------------- ---------------------------------
Joseph D. Reid Lee W. Hendrickson
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant as
Directors of the Corporation on March 20, 2000.
/s/ Joseph D. Reid /s/ Robert C. Carr
- ------------------------------------- ---------------------------------
Joseph D. Reid, Chairman, President, Robert C. Carr, Executive Vice
Chief Executive Officer and Director President, Treasurer and Director
/s/ David O'Leary /s/ Louis G. Allen
- ------------------------------------- ---------------------------------
David O'Leary, Secretary and Director Louis G. Allen, Director
/s/ Paul R. Ballard
- ------------------------------------- ---------------------------------
Paul R. Ballard, Executive David L. Becker, Director
Vice President and Director
/s/ James C. Epolito
- ------------------------------------- ---------------------------------
Douglas E. Crist, Director James C. Epolito, Director
/s/ Gary A. Falkenberg /s/ Joel I. Ferguson
- ------------------------------------- ---------------------------------
Gary A. Falkenberg, Director Joel I. Ferguson, Director
/s/ Kathleen A. Gaskin /s/ H. Nicholas Genova
- ------------------------------------- ---------------------------------
Kathleen A. Gaskin, Director H. Nicholas Genova, Director
/s/ L. Douglas Johns
- ------------------------------------- ---------------------------------
L. Douglas Johns, Director Michael L. Kasten, Director
/s/ Lyle W. Miller
- ------------------------------------- ---------------------------------
Leonard Maas, Director Lyle W. Miller, Director
-18-
<PAGE>
EXHIBIT INDEX
Page Number or
Incorporated by
Exhibit No. Description Reference From:
- ----------- ----------- ---------------
3 Articles of Incorporation and
Bylaws (1)
4 Instruments Defining the Rights
of Security Holders:
(a) Common Stock Certificate (1)
(b) Indenture dated December 18, 1997 (14)
(c) Subordinated Debenture (14)
(d) Amended and Restated Trust Agreement
dated December 18, 1997 (14)
(e) Preferred Security Certificate dated
December 18, 1997 (14)
(f) Preferred Securities Guarantee Agreement
of Capitol Trust I dated December 18, 1997 (14)
(g) Agreement as to Expenses and Liabilities
of Capitol Trust I (14)
10 Material Contracts:
(a) Joseph D. Reid Employment
Agreement (as amended effective
January 1, 1989) (2)
(b) Profit Sharing/401(k) Plan
(as amended and restated April 1, 1995) (13)
(b1) First and Second Amendments to Profit Sharing/
401(k) Plan (15)
(b2) Third, Fourth and Fifth Amendments to Profit
Sharing/401(k) Plan
(c) Lease Agreement with Business &
Trade Center, Ltd. (11)
(d) Employee Stock Ownership Plan
(as amended and restated February
10, 1994) (12)
(d1) Second and Third Amendments to Employee
Stock Ownership Plan (15)
(d2) Fourth Amendment to Employee Stock
Ownership Plan
(e) Employment Agreements with
Robert C. Carr, John C. Smythe,
and Charles J. McDonald (2)
(f) Executive Supplemental Income
Agreements with Robert C. Carr,
Paul R. Ballard, Richard G. Dorner,
James R. Kaye, Scott G. Kling,
John D. Groothuis, David K. Powers,
John C. Smythe and Charles J.
McDonald (13)
-19-
<PAGE>
Page Number or
Incorporated by
Exhibit No. Description Reference From:
- ----------- ----------- --------------
10 Material Contracts--continued:
(g) Amendment to Employment Agreement
of Joseph D. Reid, dated October
2, 1989 (3)
(h) Consolidation Agreement between
the Corporation and Portage
Commerce Bank (4)
(i) Amendment to Employment Agreement
of Joseph D. Reid, dated
January 30, 1990 (5)
(j) Employment Agreements with
Paul R. Ballard and Richard G.
Dorner (6)
(k) Employment Agreement with
David K. Powers (7)
(l) Definitive Exchange Agreement and
Closing Memorandum between the
Registrant and United Savings
Bank, FSB (8)
(m) Employment Agreement with James
R. Kaye (9)
(n) Definitive Exchange Agreement
between the Registrant and
Financial Center Corporation (10)
(o) Employment Agreement by and between Sun
Community Bancorp Limited and Joseph D.
Reid. (Exhibit 10.1 of Sun Community
Bancorp Limited) (16)
(p) Employment Agreement by and between Sun
Community Bancorp Limited and John S.
Lewis. (Exhibit 10.7 of Sun Community
Bancorp Limited) (16)
(q) Anti-dilution Agreement by and between Sun
Community Bancorp Limited and Capitol
Bancorp Ltd. (Exhibit 10.10 of Sun
Community Bancorp Limited) (16)
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
-20-
<PAGE>
KEY:
(1) Form S-18, Reg. No. 33-24728C, filed September 15, 1988.
(2) Form S-1, Reg. No. 33-30492, filed August 14, 1989.
(3) Amendment No. 1 to Form S-1, Reg. No. 33-31323, filed November 20, 1989.
(4) Form S-1, Reg. No. 33-31323, filed September 29, 1989.
(5) Originally filed as exhibit to Form 10-K for year ended December 31,
1989, filed March 30, 1990; refiled as exhibit to Form 10-KSB for year
ended December 31, 1995, filed March 14, 1996, due to time limit for
incorporation by reference pursuant to Regulation SB Item 10(f).
(6) Originally filed as exhibit to Form 10-K for year ended December 31,
1990, filed March 6, 1991; refiled as exhibit to Form 10-KSB for year
ended December 31, 1995, filed March 14, 1996, due to time limit for
incorporation by reference pursuant to Regulation SB Item 10(f).
(7) Form 10-K for year ended December 31, 1991, filed February 28, 1992.
(8) Form 8-K dated July 15, 1992, as amended under Form 8 on September 14,
1992.
(9) Form 10-KSB for year ended December 31, 1992, filed February 25, 1993.
(10) Form S-4, Reg. No. 33-73474, filed December 27, 1993.
(11) Form 10-KSB for year ended December 31, 1993, filed March 14, 1994.
(12) Form 10-KSB for year ended December 31, 1994, filed March 15, 1995.
(13) Form 10-KSB for the year ended December 31, 1995, filed March 14, 1996.
(14) Post Effective Amendment No.1 to Form S-3, Reg. No. 333-41215 and
333-41215-01 filed February 9, 1998.
(15) Form 10-K for year ended December 31, 1998, filed March 17, 1999.
(16) Amendment No. 2 to the Registration Statement on Form S-1 of Sun Community
Bancorp Limited (Registration No. 333-76719) dated June 15, 1999.
-21-
THIRD AMENDMENT TO THE
CAPITOL BANCORP, LTD.
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is
hereby amended effective January 1, 1999 by adding the following participating
employers at the end of the list therein contained:
Name of Type of State of Date of
Employer Entity Organization Participation
-------- ------ ------------ -------------
Southern Arizona
Community Bank Banking Corp. Arizona January 1, 1999
CAPITOL BANCORP LIMITED
Dated: December 17, 1998 By: /s/ Joseph D. Reid
------------------------------------
Joseph D Reid
Chairman and CEO
SOUTHERN ARIZONA
COMMUNITY BANK
Dated: December 17, 1998 By: /s/ Michael Hannley
------------------------------------
Michael Hannley
Secretary
<PAGE>
THE FOURTH AMENDMENT TO THE
CAPITOL BANCORP, LTD.
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is
hereby amended effective January 1, 1999 by adding the following participating
employers at the end of the list therein contained:
Name of Type of State of Date of
Employer Entity Organization Participation
-------- ------ ------------ -------------
Camelback
Community Bank Banking Corp. Arizona January 1, 1999
CAPITOL BANCORP LIMITED
Dated: December 15, 1998 By: /s/ Joseph D. Reid
------------------------------------
Joseph D Reid
Chairman and CEO
CAMELBACK COMMUNITY BANK
Dated: December 16, 1998 By: /s/ Shirley Agnos
------------------------------------
Shirley Agnos
Secretary
<PAGE>
FIFTH AMENDMENT TO THE
CAPITOL BANCORP, LTD.
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is
hereby amended effective July 1, 1999 by adding the following participating
employers at the end of the list therein contained:
Name of Type of State of Date of
Employer Entity Organization Participation
-------- ------ ------------ -------------
Detroit Commerce Bank Banking Corp. Michigan July 1, 1999
Mesa Bank Banking Corp. Arizona July 1, 1999
Sunrise Bank of Arizona Banking Corp. Arizona July 1, 1999
CAPITOL BANCORP LIMITED
Dated: June 30, 1999 By: /s/ Joseph D. Reid
------------------------------------
Joseph D Reid
Chairman and CEO
DETROIT COMMERCE BANK
Dated: June 8, 1999 By: /s/ Linda A. Watters
------------------------------------
Linda A. Watters
President and CEO
MESA BANK
Dated: June 22, 1999 By: /s/ Neil Barna
------------------------------------
Neil Barna
President
SUNRISE BANK OF ARIZONA
Dated: June 21, 1999 By: /s/ William D. Hinz II
------------------------------------
William D. Hinz II
President
FOURTH AMENDMENT TO THE
CAPITOL BANCORP, LTD.
EMPLOYEE STOCK OWNERSHIP PLAN
The Capitol Bancorp, Ltd. Employee Stock Ownership Plan is hereby amended
effective January 1, 1999 by adding the following participating employers at the
end of the list therein contained:
Name of Type of State of Date of
Employer Entity Organization Participation
-------- ------ ------------ -------------
Detroit Commerce Bank Banking Corp. Michigan January 1, 1999
CAPITOL BANCORP LIMITED
Dated: June 30, 1999 By: /s/ Joseph D. Reid
------------------------------------
Joseph D Reid
Chairman and CEO
DETROIT COMMERCE BANK
Dated: June 8, 1999 By: /s/ Linda A. Watters
------------------------------------
Linda A. Watters
President and CEO
Capitol Bancorp Limited
To Our Shareholders
I am pleased to report the progress Capitol Bancorp Limited achieved during the
past year and the unfolding of our development efforts during the course of this
year.
Bank Development
Consolidated assets for the Corporation grew more than 27% during 1999, totaling
$1.3 billion. This significant growth rate is consistent with our efforts over
the past several years. In 1998, assets increased approximately 50%. In 1997,
the growth rate exceeded 40% and, in 1996, the growth rate represented a 28%
increase. We expect that in calendar year 2000 we will continue to experience
significant growth.
In Arizona, we opened East Valley Community Bank in the city of Chandler with
Becky Jackson as President. This bank represents the seventh Arizona bank
fostered through our bank development affiliate, Sun Community Bancorp Limited.
A most noteworthy event for Sun in 1999 was the successful completion of a
public offering and a listing on the NASDAQ exchange. On July 2, Sun completed
its IPO, raising over $25 million to support its current growth plan.
In Nevada, our bank development affiliate Nevada Community Bancorp Limited,
commenced operations with $10 million of start-up capital. Under the leadership
of Tom Mangione, two new Nevada Community banks were organized and opened during
the year. Desert Community Bank, directed by President Jim Howard, opened for
business in August and Red Rock Community Bank, operated by President Steve
Mallory, opened for business in November. Both of these banks are located in the
Las Vegas market and have demonstrated strong, early performance as de novo
financial institutions.
In Indiana, our bank development affiliate, Indiana Community Bancorp Limited,
was capitalized at $5 million. Under the leadership of Bob Carr who, in addition
to his duties as Executive Vice President of Capitol, serves as President of the
Indiana bank development company, Elkhart Community Bank opened for business in
September. Steve Brown serves as President of the new bank. This southward
expansion from Michigan is efficient in that its close proximity to our Michigan
market allows for easy consolidation of operations support and oversight.
In New Mexico, Sunrise Capital Corporation was organized as a bank development
company specializing in government guaranteed small business (SBA) lending.
Encouraged by the early success of its wholly-owned bank, Sunrise Bank of
Arizona, Sunrise Capital Corporation raised an additional $3 million for the
purpose of expanding the model to other states. Bill Hinz II, President of
Sunrise Bank of Arizona and Chief Operating Officer for Sunrise Capital
Corporation, is an instrumental part of this effort.
In summary, calendar year 1999 marked the following:
* Capitalization and operation of three new bank development companies
* Opening of four new community banks
* A successful public offering for our Sun affiliate
Not as evident, but clearly as important, were the initial efforts expended
during the course of 1999 for success in the year 2000.
1
<PAGE>
In Arizona, Sun Community Bancorp, under the direction of John S. Lewis, is in
the early stages of development of a new bank in the western portion of the
valley which represents the Greater Phoenix market.
We have enhanced the efficiencies of all of our individual banks through the
recruitment of Dave Dutton as Executive Vice President and Chief Information
Officer for both Sun and Capitol. Dave has restructured the processing centers
and directed the planning and oversight for construction of a state-of-the-art
Operations Center to support both anticipated growth in new banks and future
technology advancements. Dave's arrival as a member of the team marks a
significant, positive event for the future success of Capitol and all of its
affiliates.
In Nevada, Tom Mangione nears completion of the development efforts for our
third Nevada affiliate, Black Mountain Community Bank, to be located in
Henderson.
In Indiana, Bob Carr is well along in completion of the development efforts for
our second Indiana affiliate bank which will be located in Goshen.
In the Sunrise Bank Group two additional financial institutions are in various
stages of development. The second Sunrise bank is slated to open as Sunrise Bank
of Albuquerque in the first quarter of 2000, and a third bank in San Diego is
looking for a mid-year commencement.
The Corporation completed early 2000 formation of two California bank
development companies, First California Northern Bancorp and First California
Southern Bancorp, with impressive leadership teams. Board members include
nationally prominent banking leaders Joe Stiglich, former Vice Chair of Wells
Fargo, Kathleen Lucier, who headed Wells Fargo's Southwest operations and Kathy
Munro, formerly President of Bank of America, Southwest Region. With their
guidance, we expect to identify exceptional opportunities for new community
banks in the California market.
Earnings Performance
Consolidated earnings for 1999 continued to improve with operating income of
$5.6 million. This represents a 21% increase over 1998 net income of $4.6
million. Rapid development of our Sun affiliate resulted in an anticipated loss
which affected the bottom line of Capitol Bancorp in an amount approximating
$812,000. We expect that Sun will report profitability for the year 2000 which
should have a material and positive impact on the total consolidated earnings
performance of the Corporation.
Moreover, our aggressive development strategy for year 2000 should not serve as
a significant "take away" from consolidated earnings performance, due to the
unique capital structure of our affiliated bank development companies where
most, if not all, immediate bank development activities will occur.
Our Mission-"Smaller Banks-Bigger Service"
Capitol Bancorp is a uniquely structured affiliation of community banks. Each
bank is small, typically having only one location, and is focused on meeting the
banking needs of entrepreneurs, professionals, and other individuals seeking
better service. Each bank has full local decision making authority in making
loans and delivery of other banking services. Each bank is managed by an on-site
President and management team under the direction of its local Board of
Directors which is comprised of business leaders from the bank's community. This
2
<PAGE>
structure best describes Capitol's bank development philosophy which we have
labeled as Shared Vision. This philosophy encompasses a commitment to community
banking emphasizing local leadership and investment, with the shared resources
of an efficient management team.
The future of community banking is challenged by the competitive necessity of
state-of-the-art technology, competitive pricing from both bank and non-bank
resources and the increasing expenses associated with a dynamic regulatory
environment. These challenges are in sharp contrast to the single demonstrable
advantage which a community bank has over its competitors, that being a
"relationship driven" customer base. Separately operated independent community
banks are burdened with these competitive disadvantages as the high price to be
paid for the preservation of their "relationship" orientation. However,
community banks of the future must be able to successfully neutralize the
disadvantages of expenses associated with "independence." Our Corporation is
focused on preserving the best attributes of community banking while at the same
time eliminating the competitive disadvantages through our unique structure of
affiliated banks. The consolidation of operational activities has served to
economize operating overhead. Our relationship banking strength is preserved.
This is the essence of our philosophy of Shared Vision.
Early returns on our strategic model serve as the best evidence of our expected
long-term success. Your investment in this strategy is also mine.
We look forward to increasing success in the coming years and value your
continued support.
Sincerely,
Joseph D. Reid
Chairman, President and CEO
Board of Directors
Louis G. Allen
Private Banker
Retired
Paul R. Ballard
President and CEO
Portage Commerce Bank
David L. Becker
Director
Becker Insurance Agency, P.C.
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
Douglas E. Crist
President
Developers of SW Florida, Inc.
James C. Epolito
President and CEO
The Accident Fund Company
3
<PAGE>
Gary A. Falkenberg, D.O.
Physician
Joel I. Ferguson
Chairman
Ferguson Development, L.L.C.
Kathleen A. Gaskin
Associate Broker
and State Appraiser
Tomie Raines, Inc. Realtors
H. Nicholas Genova
Chairman and CEO
Washtenaw News Co., Inc.
Lewis D. Johns
President
Mid-Michigan Investment Company
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Leonard Maas
President
Gillisse Construction Company
Lyle W. Miller
President
Servco, Inc.
David O'Leary
Chairman
O'Leary Paint Company
Joseph D. Reid
Chairman, President and CEO
Capitol Bancorp Ltd.
Officers of the Corporation
Joseph D. Reid
Chairman, President
and CEO
David O'Leary
Secretary
Paul R. Ballard
Executive Vice President
Robert C. Carr
Executive Vice President
and Treasurer
4
<PAGE>
David J. Dutton
Executive Vice President and Chief Information Officer
Lee W. Hendrickson
Executive Vice President
and Chief Financial Officer
Michael M. Moran
Executive Vice President
of Corporate Development
David K. Powers
Executive Vice President
Bruce A. Thomas
Executive Vice President
and Chief Operating Officer
Cristin Reid English
General Counsel
Carl C. Farrar
Senior Vice President
John C. Smythe
Senior Vice President
Marie D. Walker
Senior Vice President
and Controller
Marc A. Deur
Vice President
Janet L. Hardin
Vice President
Stephanie A. Maat
Vice President
Charles J. McDonald
Vice President
Linda D. Pavona
Vice President
William E. Rheaume
Senior Counsel
5
<PAGE>
Ann Arbor Commerce Bank
2950 State Street South o Ann Arbor, MI 48104 o (734) 887-3100
Decades ago, community banks listened to and met the unique needs of their
customers and their community. Ann Arbor Commerce Bank has accepted the
challenge to retain the best of the past and respond to today's rapidly changing
business environment.
As individuals and businesses we must make the best use of our resources--time,
energy and money. Through our affiliation with Capitol Bancorp, we are able to
direct our resources toward meeting the needs of our customers. The community
banks within Capitol Bancorp share many behind-the-scenes operations, such as
check imaging and auditing. Consolidating these resources for development,
expansion, safety and soundness greatly benefits each community bank and
strengthens the unit as a whole.
Working collectively allows us to focus on our individual communities and
enables us to serve on community boards from Arbor Hospice to the Art Center,
New Enterprise Forum to Neighborhood Senior Services, along with countless
others.
This concept is as unique as each individual bank. The balance is maintained by
focusing on our respective communities while at the same time maximizing our
shared resources.
Richard G. Dorner
President and CEO
Board of Directors
Mary Lincoln Campbell
Principal
Enterprise Development Fund
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
Richard G. Dorner
President and CEO
Ann Arbor Commerce Bank
James A. Fajen
Attorney at Law
Fajen & Miller, P.L.L.C.
James W. Finn
Chairman and CEO
Finn's - JM&J Insurance
Agency, Inc.
H. Nicholas Genova
Chairman and CEO
Washtenaw News Co., Inc.
Richard M. Greene
Consultant, Mortgage Banking
Richard Greene Point Training
Marilyn D. Katz-Pek
General Managing Partner
Biotechnology Business Consultants, L.L.P.
James C. Keen
President
Cliff Keen Athletic
David W. Lutton
President
Charles Reinhart Company Realtors
Fritz Seyferth
Chief Operating Officer and Partner
Innovative Leather Technologies, L.L.C.
6
<PAGE>
Carl Van Appledorn, M.D.
Vice President
Urological Surgery Associates, P.C.
Warren E. Wright
Chairman and Partner
Renosol Corporation
Officers
James A. Fajen
Chairman of the Board
Warren E. Wright
Secretary
Richard G. Dorner
President and CEO
Clifford G. Sheldon
Executive Vice President
Brian F. Picknell
Senior Vice President
Louise A. Morse
Vice President and Cashier
John Nixon III
Vice President
Trust and Investment Services
Richard G. Tice
Vice President
7
<PAGE>
Bank of Tucson
4400 E. Broadway * Tucson, AZ 85711 * (520) 321-4500
Bank of Tucson's motto is "Small Bank, Big Difference." As a result of our
affiliation with the Sun family of banks, we can be as small as we want to be
and as large as we need to be. Our customers receive major advantages not
available in big bank environments because of our unique corporate structure.
During the past year, Bank of Tucson continued to add to its already significant
loan portfolio in the form of commercial real estate, residential and
construction loans. By participating loans with our affiliates, we recently
provided construction financing of a $6.5 million Holiday Inn Express and a $4.5
million office project, while giving equal attention to the renovation of a
small medical complex and many other loans requiring creative financing.
Bank of Tucson has exceeded what most three-year old banks would hope to
achieve. Yet, we aren't even close to our potential. We have dubbed the coming
year "Success 2000 - Reaching New Heights." Keep an eye on Bank of Tucson -
we're focused on being the best!
Michael F. Hannley
President and CEO
Board of Directors
Bruce I. Ash
Vice President
Paul Ash Management, L.L.C.
Slivy Edmonds Cotton
Chairman and CEO
Perpetua, Inc.
Michael J. Devine
Attorney at Law
Brian K. English
Attorney at Law
The English Law Firm
William A. Estes, Jr.
President
TEM Corp.
Richard N. Flynn
President
Flynn & Associates
Michael F. Hannley
President and CEO
Bank of Tucson
Michael J. Harris
Broker
Tucson Realty and Trust Company
8
<PAGE>
Richard F. Imwalle
President
University of Arizona Foundation
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Burton J. Kinerk
Attorney at Law
Kinerk, Beal, Schmidt & Dyer, P.C.
Humberto S. Lopez
President
HSL Properties, Inc.
Lyn M. Papanikolas
Business Consultant
Officers
Richard F. Imwalle
Chairman of the Board
Michael J. Devine
Vice Chairman
Richard N. Flynn
Secretary
Michael F. Hannley
President and CEO
C. David Foust
Executive Vice President and CCO
Barbara A. Sadler
Vice President
Charlene F. Schumaker
Vice President
Sandi L. Smithe
Vice President
9
<PAGE>
Brighton Commerce Bank
8700 North Second Street * Brighton, MI 48116 * (810) 220-1199
Brighton Commerce Bank, which just celebrated its third anniversay, is able to
boast that it is still the only local community bank offering the highly
personalized service our customers have come to expect.
Our position as one of the many banks to benefit from being a part of the
Capitol Bancorp family is highlighted by our recent stock conversion.
Shareholders who initially participated in our start-up effort alongside Capitol
Bancorp are now enjoying ownership as part of the entire corporation through
that original investment in Brighton Commerce Bank.
As our shareholders benefit from Brighton Commerce Bank's affiliation with a
network of banks across Michigan and beyond, so do our customers. A large loan
which a bank our size would not be able to offer, is easily accommodated through
cooperation with our affiliate banks. Similarly, customers receive a premium in
the sophisticated and customer-friendly service we are able to provide at a
reasonable cost due to economies of scale derived from sharing the technical
support Capitol Bancorp centrally provides to all of its banks. Our stand-alone
counterparts struggle to keep up with the technology of which our family
membership allows us to take advantage.
Gary T. Nickerson, Sr.
President and CEO
Board of Directors
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
John C. Codere
President
Brighton Block & Concrete, Inc.
Michael B. Corrigan
President
Corrigan Oil Co., Inc.
Scott C. Griffith
President and Co-Owner
ERA Griffith Realty
William LaMarra
President and CEO
Excelda Manufacturing
Mark A. Latterman
President
Latterman & Associates, P.C.
Piet W. Lindhout
Director and CEO
Lindhout Associates
Gary T. Nickerson, Sr.
President and CEO
Brighton Commerce Bank
Candice G. Randolph
Senior Vice President
and Cashier
Brighton Commerce Bank
Mitchell J. Stanley
President
Mickey Stanley and Associates
10
<PAGE>
James A. Winchel
President and Owner
Colt Park Insurance Agency, Inc.
Officers
Robert C. Carr
Chairman of the Board
Michael B. Corrigan
Vice Chairman and Secretary
Gary T. Nickerson, Sr.
President and CEO
Candice G. Randolph
Senior Vice President
and Cashier
William R. Anderson
Vice President
Joseph M. Petrucci
Vice President
11
<PAGE>
Camelback Community Bank
2777 E. Camelback Rd. * Phoenix, AZ 85016 * (602) 224-5800
Since 1999 marked our first full year in operation, it was particularly
gratifying to end the year profitably. With the support of the Capitol Bancorp
family, Camelback Community Bank proved once again that the strategy of autonomy
and affiliation brings powerful results.
We are particularly proud of our community involvement, most notably of our
Investing Heart in Our Community awards, which recognize young people for their
volunteer activities. The participation by nonprofit organizations who nominated
teens, community leaders who chose the winners and the teens themselves, was
amazing. Our staff's community service throughout the year was equally amazing,
and included involvement in organizations to assist with issues ranging from
domestic violence, children and cancer prevention. As the 1998 Athena Award
recipient, I spoke to dozens of community groups, providing many opportunities
to position our bank as a community leader.
Through my recent election to the American Bankers Association Board of
Directors, I am committed to ensuring that community banking grows and prospers
in the years to come. Our affiliation with Capitol Bancorp ensures that
Camelback Community Bank will be at the forefront of that opportunity.
Barbara J. Ralston
President
Board of Directors
Shirley A. Agnos
President
Arizona Town Hall
Michael J. Devine
Attorney at Law
Cristin Reid English
General Counsel
Sun Community Bancorp Limited
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Gregory M. Kruzel
Attorney at Law
Braun-Becker-Kruzel
John S. Lewis
President
Sun Community Bancorp Limited
Tammy A. Linn
Special Projects
Governor Jane Dee Hull
Susan C. Mulligan
Certified Public Accountant
Miller Wagner Business Services, Inc.
Earl A. Petznik
President and CEO
Northside Hay Company
William J. Post
CEO
Arizona Public Service Co.
Barbara J. Ralston
President
Camelback Community Bank
12
<PAGE>
Dan A. Robledo
President and CEO
Lawyer's Title of Arizona, Inc.
Mary Jane Rynd
CPA and Partner
Rynd, Carneal and Ewing
Jacqueline J. Steiner
Community Volunteer
Officers
Dan A. Robledo
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
Barbara J. Ralston
President
Rob Boosman
Executive Vice President
and CCO
Betty L. Cornish
Vice President
Tim Himstreet
Vice President
Sondra K. Koskela
Vice President
Patrick B. Westman
Vice President
13
<PAGE>
Capitol National Bank
One Business & Trade Center * 200 Washington Square North
Lansing, MI 48933 * (517) 484-5080
Capitol National Bank is known for providing very personal, customer-driven
services. As a banking partner, we get to know our customers and determine what
they need. We then devise ways of making their banking easier, friendlier and
more efficient.
Our affiliation with Capitol Bancorp enables us to offer the best of a smaller
relationship-type bank with the resources and technologies of a much larger
financial institution. As an example, we are able to grow with our commercial
customers by providing expanded lending services utilizing our family of
affiliated banks. We are also able to provide our customers with
state-of-the-art check imaging technology that would normally be cost
prohibitive for a small community bank.
Being members of the same community as our customer base, we have many
opportunities to network and work together in terms of both human and financial
resources to improve our community by participating in civic and volunteer
organizations.
The small bank, big service attitude makes Capitol National Bank a significant
competitor and a good corporate citizen in our market area.
John C. Smythe
President and CEO
Board of Directors
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
Nan Elizabeth Casey
Attorney at Law
Casey & Boog, P.C.
Charles J. Clark
President
Clark Construction Company
Brian K. English
Attorney at Law
The English Law Firm
Patrick F. Hayes
President
F. D. Hayes Electric
Richard A. Henderson
President
Henderson & Associates, P.C.
J. Christopher Holman
Publisher
Greater Lansing Business Monthly
Kevin A. Kelly
Managing Director
Michigan State Medical Society
Mark A. Latterman
President
Latterman & Associates, P.C.
Bruce J. Maguire, III
President and Treasurer
Spartan Oil Corporation
14
<PAGE>
Charles J. McDonald
Executive Vice President
and Cashier
Capitol National Bank
John O'Leary
Co-President
O'Leary Paint Company
Patricia A. Reynolds
President
Capital Region Community Foundation
John C. Smythe
President and CEO
Capitol National Bank
Officers
Robert C. Carr
Chairman of the Board
Mark A. Latterman
Vice Chairman
Patrick F. Hayes
Secretary
John C. Smythe
President and CEO
Charles J. McDonald
Executive Vice President
and Cashier
John R. Farquhar
Vice President
David E. Feldpausch
Vice President
Lori Garcia
Vice President
15
<PAGE>
Desert Community Bank
3740 S. Pecos-McLeod * Las Vegas, NV 89121 * (702) 938-0500
Desert Community Bank is the first bank opened by Nevada Community Bancorp
Limited, an affiliate of Capitol Bancorp and Sun Community Bancorp. If our
experience is any indication, the Sun Community model is a welcome addition to
the Las Vegas business community. Our efforts in the first four months of
operation attracted about $18 million in assets. After year-end 1999, our
business development efforts culminated in attracting the two largest single
accounts in Sun Community history - both in the same day.
Our choice of geographic location did not follow the trend in Las Vegas toward
the high-growth suburban areas; rather we opted to locate in the city, avoiding
the competition rampant among banks in the suburbs and choosing to serve the
businesses who felt abandoned by this recent phenomena. These business customers
are thankful, supportive and fiercely loyal to Desert Community Bank.
Community leadership demonstrates our gratitude to Las Vegas. In particular, we
are spearheading the Coalition of Community Banks in negotiations with the city
to establish much needed low-income housing. Our participation in other
important organizations from downtown redevelopment to scouting is a critical
component of our community bank vision.
James W. Howard
President
Board of Directors
Robert J. Andrews
COO
New-Com, Inc.
Michael J. Devine
Attorney at Law
Rose M. K. Dominguez
President
Discovery Travel
Tom Grimmett
Owner
Grimmett & Company
Garry L. Hayes
President
Law Office of Garry L. Hayes
James W. Howard
President
Desert Community Bank
Charles L. Lasky
President
Lasky, Fifarek & Hogan, P.C.
Thomas C. Mangione
President and COO
Nevada Community Bancorp Limited
Greg McKinley
Vice President
Cragin & Pike, Inc.
Leland Pace
Managing Partner
Stewart, Archibald & Barney, L.L.P.
Greg J. Paulk
President
M.M.C., Inc.
16
<PAGE>
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp Limited
Joseph D. Soderberg, M.D.
Physician
Summit Anesthesiology
Stephen D. Stiver
President
Stiver Car Care
Officers
Joseph D. Reid
Chairman of the Board
Charles L. Lasky
Secretary
Thomas C. Mangione
Chief Executive Officer
James W. Howard
President
Kent L. Harding
Executive Vice President
and CCO
Rodney Chaney
Senior Vice President
Susan Pucciarelli
Senior Vice President
Cheryl Fricker
Vice President
Eileen Hagler
Vice President
17
<PAGE>
Detroit Commerce Bank
645 Griswold * Suite 70 * Detroit, MI 48226 * (313) 967-9700
The early success of Detroit Commerce Bank is largely due to its affiliation
with Capitol Bancorp Ltd. As a small community bank in a large urban market,
expectations are very high relative to the delivery of quality products and
services. Through our network of over twenty banks, all focused on common goals,
we are able to provide each customer with the highest level of personalized
customer service. The synergies derived from our affiliation of banks enable
Detroit Commerce Bank to deliver competitive products at a competitive price
without sacrificing size for quality of service.
The downtown Detroit landscape is changing rapidly as automobile manufacturers
position their products to compete in a global market. City officials are
reaching out to collaborate with corporate partners and private investors. New
housing projects, renovation of historic buildings and the relocation of
Compuware's Corporate Headquarters to downtown Detroit will bring thousands of
people into the central business district over the next several years.
Culturally, Detroit is thriving - only New York City has more theatre seats!
As one customer said in a letter to the bank, "visiting Detroit Commerce Bank is
like stepping back in time, remembering the days when the teller always knew
your name and you were like a `member of the club' no matter how small your
holdings were."
That says it all!
Linda A. Watters
President and CEO
Board of Directors
Ralph J. Burrell
President
Symcon
Vivian Carpenter, Ph. D.
Associate Professor/
Assistant Dean, CPA
Florida A & M University
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
Donald M. Davis, Jr.
Vice President, Human Resources
Health Alliance Plan
Douglas H. Graham
Director of Economic Development
Detroit Renaissance
Joseph D. Reid
Chairman, President and CEO
Capitol Bancorp Ltd.
Martha K. Richardson
President
Services Marketing
Specialists, Inc.
James F. Stapleton
President
B & R Consultants
18
<PAGE>
Linda A. Watters
President and CEO
Detroit Commerce Bank
Officers
Joseph D. Reid
Chairman of the Board
Robert C. Carr
Secretary
Linda A. Watters
President and CEO
Valora L. Jackson
Vice President
Richard J. Nowel
Vice President
19
<PAGE>
East Valley Community Bank
1940 N. Alma School Road * Chandler, Arizona 85224 * (480) 726-6500
As the newest Sun Community bank in Arizona, East Valley Community Bank is proud
to be part of the family. Since opening our doors at mid-year, we have
concentrated on a grassroots approach to spread our message. Our involvement in
the local Chambers of Commerce, Boys and Girls Clubs, Chandler/Gilbert YMCA,
National Association of Women Business Owners and Chandler Leadership have been
excellent tools for business development, while satisfying our desire to bring
real community spirit to our bank.
Grassroots efforts were also important to our one-to-one relationship building
efforts. Our slogan, Always Rising to Meet Your Needs, was captured in our early
morning deliveries of fresh cinnamon rolls to local businesses. The cinnamon
rolls, delivered by none other than my mother, have been well received,
attracting priceless publicity and goodwill.
Located in the family-centered East Valley of metropolitan Phoenix, our approach
to banking mirrors our community. At East Valley Community Bank, banking is a
family affair.
Rebecca M. Jackson
President
Board of Directors
Mary E. Contreras
Owner and Agent
State Farm Insurance Agency
Michael J. Devine
Attorney at Law
David L. Heuermann
President
Axis Mortgage & Investments, L.L.C.
L. Christine Hutchings
Realtor
Re/Max 100 Realtors
Rebecca M. Jackson
President
East Valley Community Bank
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
20
<PAGE>
Martha S. Martin
Chief Executive Officer
Spectrum Astro, Inc.
Thomas A. Padilla
Fiscal Planning Analyst
Arizona State University
Darra L. Rayndon
Principal and President
Rayndon & Longfellow, P.C.
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp Limited
James C. Stratton
Chief Executive Officer
Boys and Girls Clubs of Scottsdale
Joseph A. Tameron
Partner
Skinner. Tameron, & Company, L.L.P.
Officers
Joseph D. Reid
Chairman of the Board
and CEO
Rebecca M. Jackson
President
J. Dennis Kennedy
Executive Vice President
and CCO
Christina I. McCallum
Senior Vice President
James Patrick Blaine
Vice President
Charles M. Ertl
Vice President
21
<PAGE>
Elkhart Community Bank
303 South Third Street * Elkhart, IN 46516 * (219) 295-9600
Elkhart Community Bank is located in one of America's greatest entrepreneurial
communities. As the thirteenth largest city in the state with a population of
44,000, Elkhart ranks second in manufacturing space. Elkhart Community Bank
opened its doors in September 1999 and is one of nine commercial banks doing
business in the community.
We are actively promoting the theme smaller bank, bigger service and catering to
small business and professional clients. Almost 75% of the businesses in town do
not borrow more than $500,000, and the other banks seem to be concentrating on
the larger 25%. We are the only bank in town that is actively seeking the
smaller business clients, and are the only bank willing to give them the time
and advice necessary to become trusted advisors. We are also implementing a
courier service to further differentiate ourselves and make us the most
convenient bank in town.
Elkhart Community Bank is poised to become the small business bank of choice in
Elkhart, Indiana.
Steven L. Brown
President
Board of Directors
Paul R. Ballard
President and CEO
Portage Commerce Bank
Nancy B. Banks
Local Philanthropist
R. Steven Bennett
President
Voyager Products, Inc.
Kenneth W. Brink
Treasurer
Hart Housing Group, Inc.
Steven L. Brown
President
Elkhart Community Bank
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
Andrew W. Frech
Chairman and CEO
Ancon Construction Co., Inc.
Curtis T. Hill, Jr.
Attorney at Law
Elkhart County Prosecuting Attorney's Office
22
<PAGE>
Richard J. Jensen
Vice President
Elkhart General Hospital
Richard L. Max, Sr.
President and General Manager
Heart City Enterprises
Myrl D. Nofziger
President
Hoogenboom Nofziger
Brian J. Smith
CPA and President
The Heritage Group
Officers
Robert C. Carr
Chairman of the Board
and CEO
Steven L. Brown
President
23
<PAGE>
Grand Haven Bank
15 South Second Street * Grand Haven, MI 49417 * (616) 846-1930
Grand Haven Bank has worked diligently to establish its identity as the
community bank of the Tri-Cities. The bank has become known as a place where
people are acknowledged by name and greeted in a friendly manner. Whether our
customer is dreaming of home ownership (we had the privilege of making $20
million in mortgage loans in 1999) or discussing small business ventures, we
believe the most important support we can provide is that of friend, financial
partner and consultant.
While small in stature, our west Michigan based bank has access to a support and
technological base that rivals the "megabanks." Our check imaging capability,
telephone banking, courier service, loan funding network and electronic banking
services are unsurpassed in the industry. Most importantly, this affiliation
allows us to do what we at Grand Haven Bank do best; work one on one with our
customers to meet their individual needs.
We feel this formula of on-site, friendly decision-makers combined with
unparalleled backroom support and technological advances will ensure continued
success.
John D. Groothuis
President and CEO
Board of Directors
Paul R. Ballard
President and CEO
Portage Commerce Bank
Stanley L. Boelkins
Owner and Appraiser
Boelkins & Associates
Peter E. Bolline
Owner
Wood Specialties Co.
Brad J. Fortenbacher
President
Tri-Cast, Inc.
John D. Groothuis
President and CEO
Grand Haven Bank
24
<PAGE>
Mark A. Kleist
Attorney at Law and Treasurer
Scholten and Fant, P.C.
Steven L. Maas
Vice President
Gillisse Construction Company
Calvin D. Meeusen
Certified Public Accountant
Arnold W. Redeker, Jr.
Partner and Vice President
Redeker Ford, Inc.
Robert J. Trameri
Chairman
Paragon Bank & Trust
John P. Van Eenenaam
Attorney at Law
Scholten and Fant, P.C.
Gerald A. Witherell
President
Oakes Agency, Inc.
officers
John P. Van Eenenaam
Chairman of the Board
Paul R. Ballard
Vice Chairman
Arnold W. Redeker, Jr.
Secretary
John D. Groothuis
President and CEO
Sherry J. Patterson
Vice President
25
<PAGE>
Kent Commerce Bank
4050 Lake Drive, SE * Grand Rapids, MI 49546 * (616) 974-0200
The growth and initial success of Kent Commerce Bank is largely due to the
relationships we've built, both with our customers and with Capitol Bancorp.
Our affiliation with Capitol gives us access to the latest technology and the
most efficient operating systems not available to most community banks. Because
of this partnership, we are able to offer products such as telephone banking,
check imaging, and trust and investment services, which are not found at your
typical small bank. In addition, the combined size of our affiliate banks gives
us the lending capabilities to accommodate our clients' needs.
Relationships with our customers are very important. Any bank can perform
routine, day-to-day transactions. What most of them can't do is establish and
maintain personal, professional relationships which are so important in business
today. In Kent Commerce Bank's two years of operation, we have retained every
loan customer that we developed. That speaks to the value of relationship
banking.
Strong customer relationships cemented by the strength of Capitol Bancorp - what
an exciting combination!
David E. Veen
President and CEO
Board of Directors
James M. Badaluco
Vice President
S.J. Wisinski & Company
Paul R. Ballard
President and CEO
Portage Commerce Bank
Paul S. Buiten
Chairman
Buiten, Tamblin, Steensma
& Associates, Inc.
Julius Duthler
Chief Executive Officer
Duthler Ford Sales, Inc.
Kevin J. Einfeld
President
BDR, Inc.
Grant J. Gruel
Attorney at Law and Partner
Gruel, Mills, Nims & Pylman
Gary D. Hensch
Certified Public Accountant
Harold A. Marks
Partner
Prangley Marks L.L.P.
26
<PAGE>
Dale R. Medema
President
Medema's Carpet & Interiors, Inc.
Calvin D. Meeusen
Certified Public Accountant
John H. Pleune
President
Pleune Service Company, Inc.
Mary L. Ursul
General Counsel
Spectrum Health
David E. Veen
President and CEO
Kent Commerce Bank
Michael C. Walton
Attorney At Law
Tolley, VandenBosch &
Walton, Korolewicz &
Brengle, P.C.
Officers
Paul R. Ballard
Chairman of the Board
David E. Veen
President and CEO
Michael P. Boelens
Vice President
John J. Coder
Vice President
M. Martine Kaluske
Vice President and Cashier
27
<PAGE>
Macomb Community Bank
16000 Hall Road, Suite 102 * Clinton Twp., MI 48038 * (810) 228-1600
Macomb Community Bank's three year success story is a testament to its close
affiliation with Capitol Bancorp and the countless relationships built upon a
spirit of trust and fellowship with a community long acknowledged for hard work,
family values and time honored traditions.
Our banking group can best be described as a cohesive team of dedicated
professionals. We listen, care and share our ideas among peers, colleagues and
customers. Everything we practice is focused toward making banking a more
convenient and satisfying experience for our community.
Even in an environment of rapid expansion, we at Macomb are motivated and
challenged primarily from public sentiment, which still prefers to conduct
banking activities in a smaller, more personalized forum.
Macomb Community Bank is managed by experienced bankers and a locally based
Board of Directors. Continuity of operation, local decision makers, familiar
friendly faces and a president deeply committed to community service, are
"trademarks" of our family of community banks, expertly supported by Capitol
Bancorp.
While large financial conglomerates continue to change the dynamics of banking
practices, our leadership recognizes the importance of an independent local
presence and easy customer accessibility to senior management; elements Macomb
Community Bank deems essential to our continued prosperity in the new
millennium.
Stephen C. Tarczy
President and CEO
Board of Directors
Eugene J. Agnone, Jr., M.D.
Medical Oncologist
Gerald J. Carnago
CPA, Attorney, Partner
Carnago & Associates, P.C.
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
Christina D'Alessandro
Vice President
Villa Custom Homes, Inc.
Ronald G. Forster
Treasurer
Arkay Manufacturing, Inc.
James R. Kaye
President and CEO
Oakland Commerce Bank
David F. Keown
Building Official
Washington Township
Sam A. Locricchio
Executive Vice President
Macomb Community Bank
28
<PAGE>
Delia Rendon-Martin
Co-Owner
Martin Enterprises
Vito Munaco
Owner and Operator
WEMCO
James A. Patrona
President and Owner
Universal Press & Machinery, Inc.
Stephen C. Tarczy
President and CEO
Macomb Community Bank
Officers
Robert C. Carr
Chairman of the Board
Ronald G. Forster
Vice Chairman
Stephen C. Tarczy
President and CEO
Sam A. Locricchio
Executive Vice President
and Secretary
29
<PAGE>
Mesa Bank
63 East Main Street * Suite 100 * Mesa, AZ 85201 * (480) 649-5100
The Sun Community model calls for newly-chartered banks to hit black ink long
before the national average of nearly three years. The desire for excellence is
alive and well at Mesa Bank where we achieved profitability during our tenth
full month of operation. Customer confidence is soaring and the Mesa Bank team
is gearing up for an even more amazing 2000.
Success as a community bank means understanding local business needs. In this
booming economy, our customers need loans to build or expand their business
locations, finance equipment and to obtain construction loans for their homes.
Mesa Bank responded with an aggressive lending program designed to offer
affordable rates and attractive options, larger loans through participation with
our family of banks and a unique residential construction loan program that
provided assistance to over 150 proud homeowners.
Mesa Bank's track record is a testament to the entrepreneurial model that Sun
Community banks embrace. Our commitment to community, understanding of business
needs and creative service approach provides us with the tools to continue our
success.
Neil R. Barna
President
Board of Directors
Neil R. Barna
President
Mesa Bank
Michael J. Devine
Attorney at Law
Debra L. Duvall, Ed. D.
Assistant Superintendent
Mesa Public Schools
Brian K. English
Attorney at Law
The English Law Firm
Robert R. Evans, Sr.
Partner
Evans Management Company
Stewart A. Hogue
Owner
Commercial Lithographers
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
30
<PAGE>
Philip S. Kellis
Managing Partner
Dobson Ranch Inn and Resort
John S. Lewis
President
Sun Community Bancorp Limited
Ruth L. Nesbitt
Community Volunteer
James A. Schmidt
CPA and Executive Director
Nelson Lambson & Co., P.L.C.
Daniel P. Skinner
Owner and Manager
LeBaron and Carroll LSI, Inc.
Terry D. Turk
President
Sun American Mortgage Co.
Officers
Robert R. Evans, Sr.
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
Neil R. Barna
President
David D. Fortune
Executive Vice President
and CCO
Daniel R. Laux
Vice President
31
<PAGE>
Muskegon Commerce Bank
255 Seminole Road * Muskegon, MI 49444 * (231) 737-4431
Muskegon Commerce Bank has successfully established an identity in the Muskegon
market that is based on excellent customer service. We're still small enough
that we can greet our customers by name when they come in to our bank, yet we're
fortunate to be part of a larger family of banks that provides us with a strong
support network. Customers come to us because we have people that they like to
bank with and products that fit their needs. They stay with us because our
service is unbeatable.
Our "smallness" helps us to provide more personal attention to the retail side
of the bank through our courier service and our medical lockbox service. Our
lenders are excellent business development officers that are well known in our
market.
Being part of a family of community banks gives us an advantage over other small
banks in the areas of marketing, lending and administrative support. We have the
technical expertise of a much larger bank without the overhead.
Robert J. McCarthy
President and CEO
Board of Directors
Paul R. Ballard
President and CEO
Portage Commerce Bank
William C. Cooper
President
Omni Fitness Club
Thomas F. DeVoursney
President and CEO
Pliant Plastics
Ronald R. Gossett
Vice Chairman
Muskegon Commerce Bank
Robert D. Jewell
Chairman
Baker College System
32
<PAGE>
Charles E. Johnson II
Retired Chairman and CEO
SPX Corporation
Christopher L. Kelly
Attorney at Law
Parmenter O'Toole
Daniel Kuznar
Owner
Quality Tool &
Stamping Co., Inc.
Robert J. McCarthy
President and CEO
Muskegon Commerce Bank
Joseph D. Reid
Chairman, President and CEO
Capitol Bancorp Ltd.
Patricia J. Roy, D.O.
Co-Owner and President
Roy and Rosema, P.C.
James S. Tyler
President
Tyler Sales Co., Inc.
Officers
Joseph D. Reid
Chairman of the Board
Ronald R. Gossett
Vice Chairman
Robert J. McCarthy
President and CEO
Bruce A. May
Vice President
David W. Seppala
Vice President
33
<PAGE>
Oakland Commerce Bank
31731 Northwestern Hwy. o Farmington Hills, MI 48334 o (248) 855-0550
Oakland Commerce Bank is fortunate to be part of the team created by Capitol
Bancorp's bank development strategy.
The current state-wide family of banks has provided us the opportunity to draw
on a deep experience pool. This has enabled us to work with and accommodate
customers whose industry type or needs may have historically been unfamiliar to
us. We have also benefited from an enhanced product menu and delivery system.
While we enjoy the many positives of being a small singular entity, the
economics derived from our team affiliation has enabled Oakland Commerce to
provide our customers virtually all products and services that, normally, would
only be available from a big bank. We can also meet the ever growing capacity
needs of our customers that simply could not be met by that small singular
entity.
Equally as important is that our delivery system has been so dramatically
expanded. This has contributed to our earning the reputation of being the bank
that moves fast and smart, delivers on its promises, and always treats its
customers with respect.
James R. Kaye
President and CEO
Board of Directors
Mark A. Aiello
Attorney at Law
Raymond & Prokop, P.C.
Donald A. Bosco
President
Donald A. Bosco Building, Inc.
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
Mark B. Churella
President and CEO
FDI Group
Leon S. Cohan
Counsel to the Firm
Barris, Scott, Denn & Driker
Michael J. Devine
Attorney at Law
Jeffrey L. Hauswirth
CPA, CVA, and Principal
Jenkins, Magnus, Volk & Carroll, P.C.
34
<PAGE>
James R. Kaye
President and CEO
Oakland Commerce Bank
Ihor J. Kuczer
Senior Vice President
Oakland Commerce Bank
David F. Lau, J.D. CLU
Chartered Financial Consultant and Owner
Lau & Lau Associates, L.L.C.
Jeffrey M. Leib
Attorney at Law
Leib, Leib & Kramer, P.C.
Akram Namou
Certified Public Accountant
Julius L. Pallone
President
J.L. Pallone Associates
Francine Pegues
Regional Sales Director
Blue Cross Blue Shield
of Michigan
Officers
Michael J. Devine
Chairman of the Board
James R. Kaye
President and CEO
Ihor J. Kuczer
Senior Vice President
and Secretary
Thomas K. Perkins
Vice President
35
<PAGE>
Paragon Bank & Trust
301 Hoover Boulevard * Holland, MI 49423 * (616) 394-9600
The consolidation of banks in the Holland market over the past few years has
created a significant void in delivering financial services. Former local banks
now have a national focus and corresponding impersonal service. Paragon, as a
small community bank, is able to know each customer personally and provide
financial services that are unique to their requirements. We are able, through
affiliation with Capitol Bancorp, to be at the forefront of bank technology that
is not available to other community banks. Paragon is an example of the adage
that "smaller is better" in being your bank.
During the past year Paragon Trust and Investment Services has implemented a
number of improvements. These changes enhance our ability to serve the
investment needs of clients throughout all of Capitol Bancorp's affiliate banks.
We have added personnel to a number of key affiliate bank sites. The trust
department's focus is to complement product offerings of the individual banks by
offering allied financial services in a highly competitive financial
marketplace.
Scott G. Kling
President and CEO
Board of Directors
Paul R. Ballard
President and CEO
Portage Commerce Bank
Robert J. Bates
Physician
Western Michigan Urological Associates, P.C.
Charles A. Brower
CPA and Partner
DeLong & Brower, P.C.
Jack L. DeWitt
President
Request Foods, Inc.
Scott Diepenhorst
Principal
SD & Associates, Inc.
Paul Elzinga
Co-Chairman and Director of
Business Development
Elzinga & Volkers, Inc.
Eric J. Hoogstra
Senior Vice President-Trust
Paragon Bank & Trust
Susan K. Hutchinson
Owner
Hutchinson's Stores for Children
Lawrence D. Kerkstra
President and CEO
Kerkstra Precast, Inc.
Scott G. Kling
President and CEO
Paragon Bank & Trust
36
<PAGE>
Leonard Maas
President
Gillisse Construction Company
Mitchell W. Padnos
Executive Vice President
Louis Padnos Iron & Metal Company
Richard H. Ruch
Director Emeritus
Richard G. Swaney
Attorney at Law
Swaney & Thomas, P.C.
Robert J. Trameri
Chairman
Paragon Bank & Trust
Officers
Robert J. Trameri
Chairman of the Board
Richard G. Swaney
Vice Chairman of the Board
Scott G. Kling
President and CEO
Eric J. Hoogstra
Senior Vice President
Trust and Investment Services
Jane Riemersma
Vice President
Randall R. Smith
Vice President
Dean R. Weerstra
Vice President
Trust and Investment Services
37
<PAGE>
Portage Commerce Bank
800 East Milham Road * Portage, MI 49002 * (616) 323-2200
Portage Commerce Bank earnings showed a healthy increase over last year. This
growth in profits, on a percentage basis, was more than twice our rate of growth
in total assets.
The increase in our profitability is due, in part, to the continued improvement
in the level of support services provided by Capitol Bancorp. This allows our
bank to offer a broad range of banking products to our customer base in a manner
that retains the unique qualities of Portage Commerce Bank as a locally operated
community bank.
With our focus on commercial loan relationships, we have seen many of our
business customers grow and prosper. We have been able to meet the lending needs
of our larger customers through the ability to share loan opportunities with our
affiliate banks in the Capitol Bancorp family. This process is transparent to
the customer as all loan payments are serviced locally at our bank.
We are committed to our local community and have established a reputation for
excellent personal service. We look forward to continued growth in the coming
year.
Paul R. Ballard
President and CEO
Board of Directors
Paul R. Ballard
President and CEO
Portage Commerce Bank
David L. Becker
Director
Becker Insurance Agency, P.C.
Thomas R. Berglund
Physician
Portage Physicians
John M. Brink
Brink, Key & Chludzinski, P.C.
Patricia E. Dolan
Partner
Portage Commerce Investors, L.L.C.
Alan A. Halpern, M.D.
President
Michigan Orthopedic
Surgery & Rehab, Inc.
Robert L. Johnson
Secretary and Treasurer
Medallion Properties, Inc.
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Paul M. Lane, Ph.D.
Grand Valley State University
William J. Longjohn
Vice President
Midwest Business Exchange
38
<PAGE>
John W. Martens
Certified Public Accountant
Officers
Michael L. Kasten
Chairman of the Board
William J. Longjohn
Vice Chairman and Secretary
Paul R. Ballard
President and CEO
Allan T. Reiff
Senior Vice President
Gary T. Adams
Vice President
Kenneth R. Blough
Vice President
Kimberlee M. Ferris
Vice President
Colette G. Lewis
Vice President
James V. Lunarde
Vice President
Mark K. MacLellan
Vice President
Cheryl M. Popp
Vice President and Cashier
Hank B. Storr
Vice President
39
<PAGE>
Red Rock Community Bank
10000 W. Charleston, Suite 100 * Las Vegas, NV 89135 * (702) 948-7500
With just a month of operation during 1999, Red Rock Community Bank has already
experienced a tremendous outpouring of support from our community and the Sun
Community family. Las Vegas is one of the fastest growing markets in the
country, but still enjoys a small town feel within its business core. All of our
banking professionals and board members are veterans in the community, with a
loyal following. Upon opening our doors, we were inundated with customers who
couldn't wait to find a bank where personal service and stability were
available. We are proud to offer both at Red Rock Community Bank.
Our geographic location is an asset to our bank, with nearly 300 potential
customers in our office complex and several high-end housing developments in the
surrounding area. We have aligned with several developers and homebuilders in
the area to facilitate introductions to homebuyers.
As 2000 begins, Red Rock Community Bank enjoys the energy of the dynamic Sun
Community family and the tremendous opportunities ahead.
Steven E. Mallory
President
Board of Directors
Judith A. Banks
Vice President
Talbot of Nevada
Eric L. Colvin
Secretary and Treasurer
Marnell Corrao Associates, Inc.
Michael J. Devine
Attorney at Law
Molly K. Hamrick
Vice President and CFO
Coldwell Banker Premier Realty
Phillip G. Hardy, Jr.
Vice President
and Project Manager
Hardy Painting and Drywall
James Harris
Vice President
Harris Insurance Services
Kathryn D. Justyn
Chief Executive Officer
Universal Health Services
Summerlin Hospital Medical Center
Keith W. Langlands
CPA and Partner
O'Bannon Wallace Langlands
& Neuman, L.L.P.
Charles L. Lasky
President
Lasky, Fifarek & Hogan, P.C.
Steven E. Mallory
President
Red Rock Community Bank
40
<PAGE>
Thomas C. Mangione
President and COO
Nevada Community Bancorp Limited
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp
Limited
Frederick P. Waid
Principal
SBG Group, L.L.C.
Officers
Joseph D. Reid
Chairman of the Board
Charles L. Lasky
Secretary
Thomas C. Mangione
Chief Executive Officer
Steven E. Mallory
President
James Wojewodka
Executive Vice President
and CCO
Mary E. Davis
Senior Vice President
Susan E. Daleiden
Vice President
Theresa L. Hartke
Vice President
41
<PAGE>
Southern Arizona Community Bank
6400 N. Oracle Rd * Tucson, AZ 85704 * (520) 219-5000
Growth at Southern Arizona Community Bank is a testament to the wisdom of the
Sun Community model. The bank's excellent performance this past twelve months is
evidenced by a 108% increase in assets, a 166% increase in deposits and a very
impressive 600% increase in loans outstanding. Our commitment to small and
medium sized business and professional clients proved fruitful.
Our board and staff, with a combined 400 years of banking experience, provided
solid reasons to bank at Southern Arizona Community Bank. We reached out into
the northwest Tucson community, supporting civic organizations and adopting
community causes, with the desired results. In just over one year of operation,
our bank has grown to be a sought-after resource for local businesses.
We look forward to continuing our pattern of growth in the coming year. The
foundation we have built has set a solid course for the new millennium.
John P. Lewis
President
Board of Directors
William R. Assenmacher
President
T. A. Caid Industries, Inc.
Jody A. Comstock
Physician and Owner
Skin Spectrum
Thomas F. Cordell
Marketing Media Specialist
University of Arizona, ECAT
Michael J. Devine
Attorney at Law
Robert A. Elliott
President and Owner
Robert A. Elliott, Inc.
Brian K. English
Attorney at Law
The English Law Firm
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Yoram Levy
Project Manager
Diamond Ventures, Inc.
42
<PAGE>
John P. Lewis
President
Southern Arizona Community Bank
John S. Lewis
President
Sun Community Bancorp Limited
Jim Livengood
Director of Athletics
University of Arizona
James A. Mather
Certified Public Accountant
and Attorney at Law
Louise M. Thomas
President
Events Made Special
Paul A. Zucarelli
President
Gordon, Zucarelli and Handley Insurance
Officers
Paul A. Zucarelli
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
John P. Lewis
President
Michael J. Trueba
Executive Vice President
and CCO
Teresa R. Gomez
Vice President
James C. Latta
Vice President
43
<PAGE>
Sunrise Bank of Arizona
4350 East Camelback Road * Suite 100A * Phoenix, AZ 85018 * (602) 956-6250
1999 was a year of tremendous opportunity for Sunrise Bank of Arizona. We
continued to differentiate our bank from the competition, as well as our
affiliates, with our targeted growth strategy and and emphasis on real estate
lending. The pipeline for SBA loans grew steadily and Sunrise was the only
Arizona bank to receive its preferred lender or "PLP" designation from the Small
Business Administration in 1999, speeding the approval and underwriting process.
Loan growth of $23 million was well balanced with deposit growth of nearly $26
million.
Our success and the unique nature of the Sunrise concept led to creation of
Sunrise Capital Corporation, a bank development company whose purpose is to
establish similar real estate focused banks in targeted geographic markets. In
anticipation of our second bank, we opened a loan production office in
Albuquerque, New Mexico, funding nearly $3 million in loans in late 1999. With
at least two more banks on the drawing board, we can leverage our underwriting
staff and PLP designation for greater efficiency and better margins.
2000 will bring increased focus on deposit relationships. Garth Jax, former NFL
linebacker, joined our team as Vice President and Relationship Manager, after a
distinguished career in community relations for the Arizona Cardinals. We look
forward to great things from Garth and our new banks as we enter the new
millennium.
William D. Hinz, II
President
Board of Directors
Sandra A. Abalos
President
Abalos and Associates, P.C.
Michael J. Devine
Attorney at Law
Brian K. English
Attorney at Law
The English Law Firm
Howard J. Hickey, III
Executive Vice President
Sunrise Bank of Arizona
William D. Hinz, II
President
Sunrise Bank of Arizona
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John T. Katsenes
Manager
Katsenes Enterprises
Kevin B. Kinerk
Executive Vice President
Sunrise Bank of Arizona
44
<PAGE>
G. D. "Rab" Paquette
President
Commercial Blueprint Company
Joseph D. Reid
Chairman and CEO
Sun Community Bancorp Limited
Mark Steig, D.D.S.
Orthodontist
Mark Steig, D.D.S., P.C.
James R. Wentworth
Principal
Wentworth, Webb and Postal, L.L.C.
Officers
Joseph D. Reid
Chairman of the Board and CEO
William D. Hinz, II
President
Howard J. Hickey, III
Executive Vice President
Kevin B. Kinerk
Executive Vice President
Marian B. Creel
Vice President
J. Garth Jax
Vice President
Douglas N. Reynolds
Vice President and CCO
Leonard C. Zazula
Vice President
45
<PAGE>
Valley First Community Bank
7501 East McCormick Parkway * North Court, Suite 105N Scottsdale, AZ 85258-3495
* (480) 596-0883
Valley First Community Bank marked its second anniversary in 1999. This
represents our first full calendar year of profitability. Through hard work and
sound strategy, we have positioned the Bank for continued success.
In addition to the dedication of our Board of Directors, the Bank has benefited
significantly from its Business Advisory Council made up of local business
owners and professionals, who serve as our ambassadors within the city of
Scottsdale. Like our Board, the Advisory Council has provided significant
guidance toward our success.
Our emphasis on profitability has not compromised our parallel commitment to
this community. Banks are routinely graded on their community citizenship under
the authority of the Community Reinvestment Act which is administered by our
primary regulators. I am pleased to report to you that Valley First Community
Bank received a CRA rating of Outstanding. Among the many community activities
in which we are involved, we are especially pleased with the efforts of our
employees. For the second year, our employees teamed with customers to make the
holidays brighter for children from domestic violence situations.
As we enter the third calendar year of operations as a start-up bank, we are
encouraged by the many opportunities for success which exist in our community.
Unlike large institutions, our focus is business retention more than growth.
This is a part of our operating philosophy "Smaller Bank - Bigger Service."
Gary W. Hickel
President
Board of Directors
W. Craig Berger
President
W. Craig Berger Financial Services, Ltd.
Marilyn D. Cummings
Realtor
Russ Lyon Realty Company
Michael J. Devine
Attorney at Law
W. Randy Fitzpatrick
Certified Public Accountant
Fitzpatrick , Hopkins, Kelly and Leonhard, P.L.C.
Patrick J. Harris
Skill Golf, Inc.
Gary W. Hickel
President
Valley First Community Bank
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John S. Lewis
President
Sun Community Bancorp Limited
46
<PAGE>
Donald J. Mahoney
Managing Director
Trammel Crow Company
Gordon D. Murphy
Chairman
Esperanca, Inc.
Harry Rosenzweig, Jr.
Co-Owner
Harry's Fine Jewelry
Patricia B. Ternes
Certified Financial Planner
Dain Rauscher Incorporated
Officers
Gordon D. Murphy
Chairman of the Board
Joseph D. Reid
Chief Executive Officer
Patrick J. Harris
Secretary
Gary W. Hickel
President
Edward T. Williams
Executive Vice President
and CCO
Jeffrey S. Birkelo
Vice President
Lance K. Wise
Vice President
47
<PAGE>
Affiliated Bank Development Companies
Sun Community Bancorp Limited
board of directors
Michael J. Devine
Attorney at Law
Richard N. Flynn
President
Flynn & Associates
Michael F. Hannley
President and CEO
Bank of Tucson
Michael J. Harris
Broker
Tucson Realty & Trust Company
Gary W. Hickel
President
Valley First Community Bank
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John S. Lewis
President
Sun Community Bancorp Limited
Humberto S. Lopez
President
HSL Properties, Inc.
Kathryn L. Munro
Partner
Tahoma Venture Fund
Joseph D. Reid
Chairman, President and CEO
Capitol Bancorp Ltd. and
Chairman and CEO
Sun Community Bancorp Limited
48
<PAGE>
Ronald K. Sable
CEO
Concord Solutions, L.L.C.
Officers
Joseph D. Reid
Chairman of the Board
and CEO
Michael L. Kasten
Vice Chairman
Richard N. Flynn
Secretary
John S. Lewis
President
David J. Dutton
Executive Vice President and
Chief Information Officer
Michael F. Hannley
Executive Vice President
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Gary W. Hickel
Executive Vice President
Gerry J. Smith
Executive Vice President
Cristin Reid English
General Counsel
Patricia L. Stone
Senior Vice President
Leonard C. Zazula
Senior Vice President
Katherine P. Bowden
Vice President and
Regional Controller
Paige E. Mulhollan
Vice President and
Corporate Controller
Greg E. Patten
Vice President
49
<PAGE>
Darryl Tenenbaum
Vice President
Nevada Community Bancorp Limited
Board of Directors
Glenn C. Christenson
EVP, CFO and CAO
Station Casinos, Inc.
Michael J. Devine
Attorney at Law
Cristin Reid English
General Counsel
Nevada Community Bancorp Limited
Joel I. Ferguson
Chairman
Ferguson Development, L.L.C.
Michael F. Hannley
President and CEO
Bank of Tucson
Mark A. James
Senior Partner/State Senator
James, Driggs, Walch, Santoro, Kearney, Johnson & Thompson
Lewis D. Johns
President
Mid-Michigan Investment Company
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
Larry W. Kifer
Chairman and CEO
Algiers Hotel
John S. Lewis
President
Sun Community Bancorp Limited
Humberto S. Lopez
President
HSL Properties, Inc.
Thomas C. Mangione
President and COO
Nevada Community Bancorp Limited
50
<PAGE>
Joseph D. Reid
Chairman and CEO
Nevada Community Bancorp Limited
Edward D. Smith
President
Smith-Christensen Enterprises
officers
Joseph D. Reid
Chairman and CEO
Michael J. Devine
Vice Chairman
Michael F. Hannley
Secretary
Thomas C. Mangione
President and COO
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Cristin Reid English
General Counsel
Sunrise Capital Corporation
Board of Directors
Michael J. Devine
Attorney at Law
Cristin Reid English
General Counsel
Sunrise Capital Corporation
Gary W. Hickel
President
Valley First Community Bank
William D. Hinz, II
President
Sunrise Bank of Arizona
Michael L. Kasten
Managing Partner
Kasten Investments, L.L.C.
John S. Lewis
President
Sun Community Bancorp Limited
51
<PAGE>
Joseph D. Reid
Chairman and CEO
Sunrise Capital Corporation
Douglas N. Reynolds
Vice President and CCO
Sunrise Bank of Arizona
Officers
Joseph D. Reid
Chairman, President and CEO
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
William D. Hinz, II
Executive Vice President
and COO
Cristin Reid English
General Counsel
Indiana Community Bancorp Limited
Board of Directors
Paul R. Ballard
President and CEO
Portage Commerce Bank
Robert C. Carr
Executive Vice President
Capitol Bancorp Ltd.
J. Christopher Chocola
Chairman of the Board
CTB, Inc.
Myrl D. Nofziger
President
Hoogenboom Nofziger
Joseph D. Reid
Chairman, President and CEO
Capitol Bancorp Ltd.
Larry Schrock
President
Deutsch Kase Haus, Inc.
52
<PAGE>
Officers
Joseph D. Reid
Chairman of the Board
and CEO
Robert C. Carr
President
Paul R. Ballard
Executive Vice President
and COO
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Cristin Reid English
General Counsel
Other Corporate Information
Corporate Office
One Business & Trade Center
200 Washington Square North
Lansing, Michigan 48933
(517) 487-6555
www.capitolbancorp.com
Independent Auditors
BDO Seidman, LLP
Grand Rapids, Michigan
Shareholder Information
Annual Meeting
Capitol's Annual Meeting will be held on Thursday, May 4, 2000 at 4:00 p.m. at
the Lansing Center, located at 333 E. Michigan Avenue, Lansing, Michigan.
Shareholder Investment Plan
Capitol offers its shareholders an easy and affordable way to invest in
Capitol's common stock through the Shareholder Investment Program. The program's
benefits include reinvestment of dividends in additional common stock, direct
deposit of dividends, ability to purchase as little as $50 in common stock as
frequently as once a month, and the option to make transfers or gifts of
Capitol's common stock to another person. Participation in the program is
voluntary, and all shareholders are eligible. Purchases under the program are
not currently subject to any brokerage fees or commissions. For further
information regarding Capitol's Shareholder Investment Program or a copy of its
prospectus, informational brochure and enrollment materials, contact UMB Bank,
n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555.
53
<PAGE>
Common Stock Trading Information
Capitol's common stock trades on the Nasdaq National Market Tier of The Nasdaq
Stock MarketSM under the trading symbol CBCL.
The following brokerage firms make a market in the common stock of Capitol:
Robert W. Baird & Co., Inc.
Milwaukee, Wisconsin
First of Michigan Corporation
Detroit, Michigan
First Union Securities
Richmond, Virginia
Herzog, Heine, Geduld, Inc.
Detroit, Michigan
Keefe, Bruyette & Woods, Inc.
New York, New York
U.S. Bancorp Piper Jaffray
Minneapolis, Minnesota
Raymond James & Associates, Inc.
St. Petersburg, Florida
Sherwood Securities Corporation
New York, New York
Spear, Leeds & Kellogg
New York, New York
Stifel, Nicolaus & Company, Inc.
St. Louis, Missouri
Common Stock Transfer Agent
UMB Bank, n.a.
928 Grand Avenue
P.O. Box 410064
Kansas City, Missouri 64141-0064
(800) 884-4225
Trust-Preferred Securities Trading Information
Preferred securities of Capitol Trust I (a subsidiary of Capitol) trade on the
Nasdaq Stock MarketSM under the trading symbol "CBCLP".
The following brokerage firms make a market in the trust-preferred securities of
Capitol Trust I:
Robert W. Baird & Co., Inc. - Milwaukee, Wisconsin
Howe Barnes Investments, Inc. - Chicago, Illinois
Stifel, Nicolaus & Company, Inc. - St. Louis, Missouri
Trust Preferred Securities Trustee
Bank One Investment Management Group - Chicago, Illinois
54
<PAGE>
[CAPITOL BANCORP LIMITED LOGO]
Capitol Bancorp Limited
Financial Information Section
of
1999 Annual Report to Shareholders
One Business & Trade Center
200 Washington Square North
Lansing, MI 48933
(517) 487-6555
<PAGE>
TABLE OF CONTENTS
Selected Consolidated Financial Data......................................... 2
Information Regarding Capitol's Common Stock................................. 3
Availability of Form 10-K and Certain Other Reports.......................... 3
Responsibility For Financial Statements...................................... 4
Cautionary Statement Regarding Forward-Looking Statements.................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations:
The Business of Capitol and Its Banks.................................... 5
Capitol's Structure...................................................... 6
Recent Developments...................................................... 8
Banking Technology at Capitol............................................ 9
1999 Financial Overview.................................................. 9
Changes in Consolidated Financial Position............................... 9
Consolidated Results of Operations....................................... 12
Liquidity, Capital Resources and Capital Adequacy........................ 14
Trends Affecting Operations.............................................. 17
Century Date Change...................................................... 20
New Accounting Standards................................................. 21
Report of Independent Auditors............................................... 22
Consolidated Financial Statements:
Consolidated Balance Sheets.............................................. 23
Consolidated Statements of Income........................................ 24
Consolidated Statements of Changes in Stockholders' Equity............... 25
Consolidated Statements of Cash Flows.................................... 26
Notes to Consolidated Financial Statements............................... 27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in $1,000s, except per share data)
<TABLE>
<CAPTION>
As of and for the Year Ended December 31
-----------------------------------------------------------
1999(1) 1998(2) 1997(3) 1996(4) 1995(5)
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
For the year:
Interest income $ 93,602 $ 69,668 $ 49,549 $ 36,479 $ 29,914
Interest expense 46,237 36,670 24,852 17,800 15,079
Net interest income 47,365 32,998 24,697 18,679 14,835
Provision for loan losses 4,710 3,523 2,049 1,196 839
Noninterest income 4,714 3,558 2,157 1,705 1,272
Noninterest expense 40,257 26,325 16,721 12,307 10,460
Income before cumulative
effect of change in
accounting principle 5,606(6) 4,628 5,557 4,636 3,073
Net income 5,409 4,628 5,557 4,636 3,073
Net income per share:
Basic .84 .74 .91 .85 .63
Diluted .83 .72 .88 .82 .62
Cash dividends paid per share .36 .33 .30 .25 .19
At end of year:
Total assets $1,305,987 $1,024,444 $690,556 $492,263 $384,070
Total earning assets 1,227,976 953,315 641,561 455,502 357,446
Portfolio loans 1,049,204 724,280 502,755 357,623 283,471
Deposits 1,112,793 890,890 604,407 436,166 340,287
Debt obligations 47,400 23,600 6,500 8,712
Trust-preferred securities 24,291 24,255 24,126
Minority interests in
consolidated subsidiaries 54,593 27,576 11,020 4,731
Stockholders' equity 54,668 49,292 45,032 40,159 30,865
Quarterly Results of Operations
----------------------------------------
First Second Third Fourth Total for
Quarter Quarter Quarter Quarter the Year
------- ------- ------- ------- --------
Year ended December 31, 1999:(1) $20,491 $21,918 $24,561 $26,632 $93,602
Interest income 10,601 10,850 11,800 12,986 46,237
Interest expense 9,890 11,068 12,761 13,646 47,365
Net interest income 809 901 1,221 1,779 4,710
Provision for loan losses
Income before income taxes and
cumulative effect of change in
accounting principle 2,104 2,433 2,091 2,191 8,819
Income before cumulative effect
of change in accounting principle 1,339(6) 1,503 1,336 1,428 5,606
Net income 1,142 1,503 1,336 1,428 5,409
Net income per share:
Basic .18 .24 .21 .21 .84
Diluted .18 .23 .21 .21 .83
Cash dividends paid per share .09 .09 .09 .09 .36
Year ended December 31, 1998:(2)
Interest income $15,016 $16,756 $18,430 $19,466 $69,668
Interest expense 7,870 8,767 9,719 10,314 36,670
Net interest income 7,146 7,989 8,711 9,152 32,998
Provision for loan losses 825 833 800 1,065 3,523
Income before income taxes 1,031 2,179 2,313 1,689 7,212
Net income 633 1,384 1,510 1,101 4,628
Net income per share:
Basic .10 .22 .24 .17 .74
Diluted .10 .21 .23 .17 .72
Cash dividends paid per share .083 .083 .083 .083 .333
</TABLE>
- ----------
(1) Includes East Valley Community Bank effective June 1999 (located in
Chandler, Arizona and majority-owned by Sun Community Bancorp Limited);
1
<PAGE>
Desert Community Bank (August 1999) and Red Rock Community Bank (November
1999), both located in Las Vegas, Nevada and majority-owned by Nevada
Community Bancorp Limited (formed in 1999 and majority-owned by Sun); and
Elkhart Community Bank effective September 1999 (located in Elkhart,
Indiana) and majority-owned by Indiana Community Bancorp Limited (formed in
1999 and majority-owned by Capitol).
(2) Includes Kent Commerce Bank effective January 1998 and Detroit Commerce
Bank effective December 1998, both located in Michigan and majority-owned
by Capitol and, in Arizona, Camelback Community Bank (effective May 1998),
Southern Arizona Community Bank (effective August 1998), Mesa Bank
(effective October 1998) and Sunrise Bank of Arizona (effective December
1998), majority-owned DE NOVO bank subsidiaries of Sun Community Bancorp
Limited.
(3) Includes Brighton Commerce Bank, effective January 1997, and Muskegon
Commerce Bank, effective December 1997, which are 59% and 51% owned by
Capitol, respectively. Also includes Valley First Community Bank, effective
June 1997, which is 51% owned by Sun, a second-tier holding company 51%
owned by Capitol and formed in May 1997.
(4) Includes Bank of Tucson and Macomb Community Bank, effective June 1996 and
September 1996, respectively, both of which are 51% owned by Capitol (Bank
of Tucson became a wholly-owned subsidiary of Sun in May 1997). Macomb
Community Bank became wholly-owned by Capitol effective September 30, 1999.
(5) Capitol formed Grand Haven Bank as a DE NOVO bank effective May 1, 1995
(formerly a branch of Paragon Bank & Trust, which was acquired in 1994).
Effective March 31, 1995, Capitol sold a majority interest in Amera
Mortgage Corporation (formerly Mortgage Connection, Inc., acquired in
1992); for periods after March 31, 1995, Capitol's remaining investment has
been accounted for under the equity method.
(6) Implementation of a new accounting standard which required the write-off of
previously capitalized start-up costs resulted in a one-time charge of
$197,000 (net of income tax effect) or $.03 per share effective January 1,
1999.
1A
<PAGE>
INFORMATION REGARDING CAPITOL'S COMMON STOCK
Capitol's common stock is traded on the National Market Tier of The Nasdaq Stock
MarketSM under the symbol "CBCL". Market quotations regarding the range of high
and low sales prices of Capitol's common stock, which reflect inter-dealer
prices without retail mark-up, mark-down or commissions, were as follows:
1999 1998
----------------- ------------------
Low High Low High
------- ------- ------- --------
Quarter Ended:
March 31 $ 18.000 $ 21.750 $ 20.833 $ 25.625
June 30 16.875 20.000 20.104 25.417
September 30 10.875 18.625 18.333 21.667
December 31 9.625 14.625 16.250 22.500
During 1999 and 1998, Capitol paid quarterly cash dividends of $0.09 and $0.083
per share, respectively.
As of February 9, 2000, there were 2,711 beneficial holders of Capitol's common
stock, based on information supplied to Capitol from its stock transfer agent
and other sources. At that date, 6,894,376 shares of common stock were
outstanding. Capitol's stock transfer agent is UMB Bank, n.a., 928 Grand Ave.,
P.O. Box 410064, Kansas City, Missouri 64141-0064 (telephone 800-884-4225).
Capitol has a Shareholder Investment Program which offers a variety of
convenient features including dividend reinvestment, certain fee-free
transactions, certificate safekeeping and other benefits. For a copy of the
program prospectus, informational brochure and enrollment materials, contact UMB
Bank, n.a. at (800) 884-4225 or Capitol at (517) 487-6555.
In addition to Capitol's common stock, trust-preferred securities of Capitol
Trust I (a subsidiary of Capitol) are also traded on the National Market Tier of
The Nasdaq Stock MarketSM under the symbol "CBCLP". Those trust-preferred
securities consist of 2,530,000, 8.5% cumulative preferred securities, with a
liquidation amount of $10 per preferred security. The trust-preferred securities
are guaranteed by Capitol and mature in 2027, are callable after 2002 and may be
extended to 2036 if certain conditions are met.
AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS
A copy of Capitol's 1999 report on Form 10-K, without exhibits, is available to
holders of its common stock or trust-preferred securities without charge, upon
written request. Form 10-K includes certain statistical and other information
regarding Capitol and its business. Requests to obtain Form 10-K should be
addressed to Linda D. Pavona, Vice President, Capitol Bancorp Ltd., One Business
& Trade Center, 200 Washington Square North, Lansing, Michigan 48933.
Form 10-K, and certain other periodic reports, are filed with the Securities and
Exchange Commission (SEC). The SEC maintains an internet web site that contains
reports, proxy and information statements and other information regarding
companies which file electronically (which includes Capitol). The SEC's web site
address is http:\\www.sec.gov. Capitol's filings with the SEC can also be
accessed through Capitol's web site, http:\\www.capitolbancorp.com.
3
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Capitol's management is responsible for the preparation of the consolidated
financial statements and all other information appearing in this annual report.
The financial statements have been prepared in accordance with generally
accepted accounting principles.
Capitol's management is also responsible for establishing and maintaining the
internal control structure of Capitol, its banks and its bank development
subsidiaries. The general objectives of the internal control structure are to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are executed in
accordance with generally accepted accounting principles. In fulfilling this
objective, management has various control procedures in place which include, but
are not limited to, review and approval of transactions, a code of ethical
conduct for employees, internal auditing and an annual audit of Capitol's
consolidated financial statements performed by a qualified independent audit
firm. Management believes the internal control structure of Capitol to be
adequate and that there are no material weaknesses in internal control.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this annual report, including the
consolidated financial statements, management's discussion and analysis of
financial condition and results of operations and other portions of this annual
report that are not historical facts, including, without limitation, statements
of performance and other forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, are subject to known and
unknown risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of 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", "will", "believe", and similar expressions
also are intended to identify forward-looking statements. Important factors
which may cause actual results to differ from those contemplated in such
forward-looking statements include, but are not limited to: (i) the results of
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) changes in management, 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.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Most of this section discusses items of importance regarding Capitol's financial
statements which appear elsewhere in this report. In order to obtain a full
understanding of this discussion, it is important to read it with those
financial statements. However, before discussing the financial statements and
related highlights, an introductory section includes some important background
information about the business of Capitol and its banks, Capitol's structure and
recent developments.
THE BUSINESS OF CAPITOL AND ITS BANKS
Capitol defines itself as a BANK DEVELOPMENT COMPANY. In the highly regulated
business of banking, it is viewed by governmental agencies as a bank holding
company. Capitol views bank DEVELOPMENT as a much more dynamic activity than the
regulatory label for bank holding companies.
Bank development at Capitol is the business of mentoring, monitoring and
managing its investments in community banks. Bank development is also the
activity of adding new banks through startup, or DE NOVO, formation or through
other affiliation efforts, such as acquiring existing banks.
The banks have similar characteristics:
* Each bank has an on-site president and management team, as local
decision makers.
* Each bank has a local board of directors which has actual authority
over the bank.
* Each bank generally operates from only one office location.
* Each bank can fully meet customers' needs anywhere, anytime through
bankers on call, courier services, telephone banking and other
delivery methods.
* Each bank has access to an efficient back-room processing facility and
leading edge technology through shared resources.
Capitol's banks seek the profitable customer relationships which are often
displaced through mergers, mass marketing and megabanks with an impersonal
approach to handling customers. The banks are focused on commercial banking
activities, emphasizing business customers, although they also offer a complete
array of financial products and services.
Each bank has a separate charter. A bank charter is similar to articles of
incorporation and enables each bank to exist as a distinct legal entity. Most of
these banks are state-chartered which means they are organized under a
particular state's banking laws. All of the banks are FDIC insured, and some are
members of the Federal Reserve system. Banks are highly regulated by state and
federal agencies. Because each bank has its own charter, each bank is examined
by both state and federal agencies as a separate and distinct legal entity for
safety, soundness and compliance with banking laws and regulations.
At December 31, 1999, Capitol consisted of 21 community banks, with locations in
5 states.
5
<PAGE>
Capitol's bank development philosophy is one of "SHARED VISION" which
encompasses a commitment to community banking emphasizing local leadership and
investment, with the shared resources of efficient management. Capitol provides
shared resources to its banks which includes common data processing systems,
centralized item processing, loan review, internal audit, credit administration,
accounting and risk management.
CAPITOL'S STRUCTURE
The organizational structure of Capitol is very complex. It is a mixture of
banks which Capitol owns directly and others which are owned indirectly through
subsidiary bank development companies. Additionally, Capitol's direct and
indirect ownership percentages of these entities differ.
To simplify the overall entity structure, Capitol's bank development activity
may be viewed on these levels:
Capitol Bancorp Limited
(Bank Development Company)
Michigan bank Indiana bank Southwestern bank
development through development through development through
11 majority-owned Indiana Community Sun Community Bancorp
community banks Bancorp Limited Limited and affiliates
Capitol's 11 Michigan banks range in ownership from 51% to 100%. They range in
age from one year to 17 years. Their size varies from $28 million in assets to
$215 million. These banks are all located in dynamic markets across the lower
peninsula of Michigan in a band about 180 miles wide and 75 miles north and
south from that line, in the state's most populous and active economic region.
Of these banks, 9 were begun as start-up operations and 2 were acquisitions.
Administratively, Capitol mentors, monitors and manages its Michigan banks on a
regional basis:
<TABLE>
<CAPTION>
Michigan Bank Development
East Michigan Banks West Michigan Banks
<S> <C> <C> <C>
Capitol National Bank Macomb Community Bank Portage Commerce Bank Muskegon Commerce Bank
(Lansing -- 1982) (Clinton Township -- 1996) (Portage -- 1988) (Muskegon -- 1997)
100% owned 100% owned 100% owned 51% owned
Ann Arbor Commerce Bank Brighton Commerce Bank Paragon Bank & Trust Kent Commerce Bank
(Ann Arbor -- 1990) (Brighton -- 1997) (Holland -- 1994) (Grand Rapids -- 1998)
100% owned 100% owned 100% owned 51% owned
Oakland Commerce Bank Detroit Commerce Bank Grand Haven Bank
(Farmington Hills -- 1992) (Detroit -- 1998) (Grand Haven -- 1995)
100% owned 100% owned 100% owned
</TABLE>
Indiana Community Bancorp is 51% owned by Capitol and was formed in 1999 to
focus on developing banks in Indiana. Its first bank, Elkhart Community Bank, is
51% owned by that bank development company and opened in September 1999. A
second Indiana bank is likely to open in the first half of 2000. Total assets of
Indiana Community Bancorp were about $12 million at year end 1999.
Sun Community Bancorp is a young company and has become a particularly
significant part of Capitol's overall bank development strategy. Headquartered
in Phoenix, Arizona, it is a public company which is carrying out all of its
6
<PAGE>
current bank development activities in the southwestern region of the United
States. At year end 1999, its consolidated assets were $300 million ($135
million at year end 1998). It is also comprised of a combination of
directly-owned banks and bank development subsidiaries:
<TABLE>
<CAPTION>
Sun Community Bancorp Limited
(Southwestern Bank Development)
51% owned by Capitol Bancorp
<S> <C> <C>
Arizona Bank development Nevada bank development through Sunrise Capital Corporation, multi-
through 6 majority- Nevada Community Bancorp state bank development emphasizing
owned community banks Limited and its 2 majority- specialized lending (SBA) through 1
owned community banks majority-owned community bank
</TABLE>
The current group of banks comprising bank development in Arizona follows:
Arizona Bank Development
(direct subsidiaries of
Sun Community Bancorp Limited)
Bank of Tucson Mesa Bank
(Tucson -- 1996) (Mesa -- 1998)
100% ownership by Sun 53% ownership by Sun
Valley First Camelback
Community Bank Community Bank
(Scottsdale -- 1997) (Phoenix -- 1998)
52% ownership by Sun 55% ownership by Sun
Southern Arizona East Valley
Community Bank Community Bank
(Tucson -- 1998) (Chandler -- 1999)
51% ownership by Sun 88% ownership by Sun
All of these banks are very young. The most mature bank of the group, Bank of
Tucson, completed its 36th month of operation in June 1999. The youngest bank,
East Valley Community Bank, opened in June 1999. These banks range in size from
about $11 million in assets to $82 million at year end 1999. Four of the banks
are located in or near greater Phoenix, while two are located in Tucson.
Bank development activities in Nevada are carried out through Nevada Community
Bancorp Limited, which is 51% owned by Sun, and was formed in 1999:
Nevada Community Bancorp Limited
51% owned by Sun
Desert Community Bank Red Rock Community Bank
(Las Vegas -- 1999) (Las Vegas -- 1999)
51% ownership by NCBL 51% ownership by NCBL
7
<PAGE>
Both of the Nevada banks opened in the second half of 1999 and a third Las Vegas
area bank is expected to open in the first half of 2000. For their brief period
of operation in 1999, the two banks' combined total assets exceeded $30 million
at year end.
Sunrise Capital Corporation is a newly formed subsidiary company, 57% owned by
Sun. It is focused on developing banks in several states with a slightly
different emphasis on commercial lending than the other bank affiliates of
Capitol and Sun. As of year end 1999 it has one bank subsidiary, Sunrise Bank of
Arizona, which is majority owned and located in Phoenix. As its initials would
imply, Sunrise Bank of Arizona is focused on offering loan products structured
through the SBA, or US Small Business Administration, in addition to the full
array of typical bank products. Sunrise Capital Corporation commenced operations
in late 1999 when it completed a share exchange transaction involving Sunrise
Bank of Arizona, previously a 51% owned subsidiary of Sun.
In 1999, a loan production office of Sunrise Bank of Arizona was established in
Albuquerque, New Mexico. It will evolve into Sunrise Bank of Albuquerque (in
organization), which is expected to open in the first half of 2000.
All of the banks and subsidiary bank development companies are combined, or
consolidated, for financial reporting purposes because Capitol has ownership
control of them either directly or indirectly. Current accounting rules require
consolidated reporting when one entity has majority voting control of another.
The reporting entity is the parent organization and entities which are
majority-owned by the parent are subsidiaries. In the circumstances of Capitol,
this parent and subsidiary relationship applies also to second and third tier
subsidiaries which have consolidated subsidiaries of their own.
The accounting rules in this area are also complex and complicate gaining an
understanding of consolidated financial statements. For example, consolidated
balance sheets include all of the combined entities' assets and liabilities,
without an adjustment for the percentage of ownership by the parent. On the
other hand, consolidated net income includes all of the combined entities'
operating results, but only to the extent of the parent's ownership percentage.
RECENT DEVELOPMENTS
Because of the number of banks and bank development companies added in 1999 and
1998, comparing financial results for those and prior periods is difficult.
In 1999, a total of 7 entities were added to the consolidated group. This number
consists of 4 new banks and 3 new bank development companies. In 1998, there
were six new banks added to the group.
At year end 1999, applications for two banks (one in Nevada and one in New
Mexico) were pending, awaiting regulatory approval and capitalization.
Management expects that at least three applications for permission to form new
banks will be filed in early 2000 (one each in the states of Arizona, California
and Indiana). Additionally, two bank development companies (which will become
8
<PAGE>
majority-owned subsidiaries of Sun) are expected to commence operations in two
regions within the state of California.
In early 2000, Capitol announced that it is augmenting its bank development
activities to include a more focused and proactive acquisition strategy whereby
it may add banks in two ways in the future--through startup or acquisition.
Obviously, future acquisitions--if any--will depend upon opportunities and
economic conditions, among other things.
BANKING TECHNOLOGY AT CAPITOL
The use of high technology banking systems is key to the delivery of accurate
and timely customer service. Capitol currently operates two data processing
sites, located in Lansing, Michigan and Phoenix, Arizona. The Lansing site
handles item processing for the banks located in Michigan and Indiana, while the
Phoenix data center processes all activity for the banks located in the
southwest. Both sites use mainframe computers and software which are nearly
identical. While physically separate, both sites function under common
management and leadership.
With the century date change, or Y2K, now successfully completed, implementation
of Internet-based banking capabilities is in process.
1999 FINANCIAL OVERVIEW
Capitol completed 1999 with total assets exceeding $1.3 billion, an increase of
more than 27% over year end 1998 amounts.
Consolidated operating earnings for 1999 exceeded $5.6 million, 21% higher than
1998's net income of $4.6 million.
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Total assets have grown significantly from $691 million at the end of 1997, to
over $1 billion at year end 1998 and reaching $1.3 billion at the end of 1999.
This rapid asset growth is the result of adding new banks and the ongoing growth
and evolution of Capitol's more mature banks. A majority of the banks reported
strong asset growth in 1999.
TOTAL ASSETS
($ millions)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
384 492 691 1,024 1,306
At year end 1999, total assets of the four banks formed in 1999 approximated $55
million. The banks formed in 1998 reported total assets of $178 million at the
end of 1999, an increase of $94 million during the year. Total assets of the
9
<PAGE>
three banks which became two years old in 1999 grew 37% to $148 million. Both
banks formed in 1996 continued strong asset growth of 30% in 1999, achieving
total assets of $181 million. The most mature group of banks, those formed
before 1996, reported total assets of $725 million at year end 1999, an increase
of about 3% for the year.
The total assets of each bank, the consolidated totals and ownership percentages
are summarized below as of year end 1999 (in $1,000s):
<TABLE>
<CAPTION>
Percentage Ownership By Total Assets
-------------------------- ----------------
Capitol Sun 3rd Tier 1999 1998
------- --- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank 100% $ 214,955 $ 196,446
Brighton Commerce Bank 59% 55,400 42,871
Capitol National Bank 100% 133,179 136,776
Detroit Commerce Bank 93% 28,160 18,620
Grand Haven Bank 100% 72,915 66,872
Kent Commerce Bank 51% 38,865 31,587
Macomb Community Bank 100% 99,214 76,044
Muskegon Commerce Bank 51% 47,405 28,552
Oakland Commerce Bank 100% 93,065 108,747
Paragon Bank & Trust 100% 87,259 86,692
Portage Commerce Bank 100% 123,398 110,867
Indiana Community Bancorp Limited: 51%
Elkhart Community Bank 10,798
Sun Community Bancorp Limited: 51%
Bank of Tucson 100% 82,113 63,860
Camelback Community Bank 55% 30,254 10,017
East Valley Community Bank 88% 10,757
Mesa Bank 53% 24,738 6,192
Southern Arizona Community Bank 51% 25,778 12,395
Valley First Community Bank 52% 45,678 36,588
Nevada Community Bancorp Limited: 51%
Desert Community Bank 51% 17,839
Red Rock Community Bank 51% 15,596
Sunrise Capital Corporation: 57%
Sunrise Bank of Arizona 100% 30,615 5,411
Other, net 18,006 (14,093)
---------- ----------
Consolidated totals $1,305,987 $1,024,444
========== ==========
</TABLE>
Most of the consolidated assets consist of loans. Net portfolio loans surpassed
the $1 billion mark near the end of 1999, or about 79% of total consolidated
assets at the end of the year.
TOTAL LOANS
($ millions)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
283 358 503 724 1,049
The banks emphasize commercial loans, consistent with their focus on serving
small to mid-sized business customers. The majority of commercial loans are
secured by real estate. Commercial loans comprise $875 million or 83% of total
portfolio loans at year end 1999, slightly more than the 81.5% ratio in 1998.
Loan growth in 1999 was significant--$325 million or a growth rate of 45% for
10
<PAGE>
the year. The pace of loan growth in 1999 is slightly more than the 44% growth
rate experienced in 1998.
Asset quality has remained strong in this record period of economic stability
and expansion. Nonperforming loans, which consist of loans more than 90 days
past due and loans on nonaccrual status, approximated $4 million at year end
1999, compared to $7 million in 1998. The decrease in 1999 is mainly from one
lending relationship, classified as nonperforming in 1998, for which the amount
outstanding was reduced through foreclosure of the underlying real estate in
1999. The foreclosed real estate, which approximates $2.7 million, is classified
as a component of other assets and may be sold in 2000 upon expiration of the
redemption period.
The banks maintain an allowance for loan losses to absorb estimated losses in
the loan portfolio at the balance sheet date. At December 31, 1999, the
allowance for loan losses approximated $12.6 million or 1.20% of portfolio
loans, compared to $8.8 million or 1.22% in 1998. The following table summarizes
portfolio loans, the allowance for loan losses and its ratio, and nonperforming
loans (in $1,000s):
<TABLE>
<CAPTION>
Allowance as a
Allowance for Nonperforming % of Total
Total Portfolio Loans Loan Losses Loans Portfolio Loans
--------------------- --------------- -------------- ------------
1999 1998 1999 1998 1999 1998 1999 1998
---------- -------- ------- ------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $ 186,022 $154,060 $ 2,511 $2,080 $ 492 $ 662 1.35% 1.35%
Brighton Commerce Bank 46,673 34,024 467 341 1.00% 1.00%
Capitol National Bank 120,097 104,333 1,581 1,406 769 880 1.32% 1.35%
Detroit Commerce Bank 20,694 506 209 6 1.01% 1.19%
Grand Haven Bank 61,498 57,057 802 682 257 62 1.30% 1.20%
Kent Commerce Bank 36,429 22,930 365 250 1.00% 1.09%
Macomb Community Bank 69,570 40,426 696 405 9 1.00% 1.00%
Muskegon Commerce Bank 41,848 24,491 419 245 13 1 1.00% 1.00%
Oakland Commerce Bank 77,192 63,261 880 724 1,504 2,032 1.14% 1.14%
Paragon Bank & Trust 69,752 63,417 804 732 64 2,936 1.15% 1.15%
Portage Commerce Bank 107,792 90,589 1,386 1,150 982 669 1.29% 1.27%
Indiana Community Bancorp Limited:
Elkhart Community Bank 4,042 48 1.19%
Sun Community Bancorp Limited:
Bank of Tucson 59,088 37,899 725 392 1.23% 1.03%
Camelback Community Bank 22,731 3,246 228 33 1.00% 1.02%
East Valley Community Bank 4,335 44 1.01%
Mesa Bank 18,884 1,386 189 14 1.00% 1.01%
Southern Arizona Community Bank 20,610 2,925 207 30 1.00% 1.03%
Valley First Community Bank 36,334 20,879 418 209 34 1.15% 1.00%
Nevada Community Bancorp Limited:
Desert Community Bank 11,438 154 1.35%
Red Rock Community Bank 7,861 156 1.98%
Sunrise Capital Corporation:
Sunrise Bank of Arizona 24,952 1,745 250 18 1.00% 1.03%
Other, net 1,362 1,106 100 100
---------- -------- ------- ------ ------ ------ ---- ----
Consolidated totals $1,049,204 $724,280 $12,639 $8,817 $4,124 $7,242 1.20% 1.22%
========== ======== ======= ====== ====== ====== ==== ====
</TABLE>
The allowance for loan losses is maintained at a level believed adequate by
management. It is analyzed quarterly by each bank. The adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentration of
credit), past loss experience, current economic conditions, loan commitments
outstanding, regulatory requirements and other factors.
11
<PAGE>
The allowance ratio has decreased in the past three years, mainly due to the
addition of new banks to the consolidated group. New banks, as a condition of
charter approval, are required to maintain an allowance ratio of not less than
1% for their first three years of operations. Because they are new banks with
new or unseasoned loans and no prior loss history, 1% is often used as the
amount of the allowance, particularly in the earliest years of operation. This
reduces the consolidated ratio, even though larger and more mature banks
maintain higher allowance ratios.
In addition to the recorded allowance, some Michigan banks have loans which are
enrolled in a state-sponsored program which provides supplemental loss
protection through earmarked deposits kept at the participating banks by a state
agency. Loans in this program totaled $34 million at year end 1999 and the
amount of the loss reserves available for those loans amounted to $2 million.
CONSOLIDATED RESULTS OF OPERATIONS
Revenue growth has been significant. In 1999, total revenues exceeded $98
million, a 34% increase over the 1998 revenue level of $73 million. The primary
revenue source is interest income from loans. Net interest income is the
difference between total interest income and interest expense on deposits and
borrowings. The following graphs summarize growth in total revenue (which
includes noninterest income like some fees and service charges) and net interest
income:
TOTAL REVENUES
($ thousands)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
31,186 38,184 51,706 73,226 98,316
NET INTEREST INCOME
($ thousands)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
14,835 18,679 24,697 32,998 47,365
Most of the 1999 revenues, $60.5 million or about 62%, came from the most mature
banks--those formed prior to 1996. That group experienced revenue growth of 21%
in 1998 and about 10% in 1999. Banks formed in 1997 and 1996 reported 1999
revenues of $25 million or slightly more than 25% of the consolidated total.
Rates of 1999 revenue growth for banks started in 1996 were 53% and, for the
12
<PAGE>
ones started in 1997, 71%. The youngest banks, those formed in 1999 and 1998,
generated 1999 revenues totaling $12 million or about 12% of total revenues.
Growth in the categories of interest income and interest expense as well as
noninterest income and noninterest expense, is the result of the addition of new
banks during the periods presented and the ongoing growth of Capitol's more
mature banks. Growth in interest expense is mainly due to higher levels of
interest-bearing deposits which fund growth at each of the banks, coupled with
recent increases in interest rates.
The largest component of noninterest expense is salaries, wages and benefits,
which has increased significantly due to the larger number of banks and bank
development subsidiaries.
The following table summarizes net income for each of the banks and on a
consolidated basis and the related rates of return on average assets and equity,
where applicable (in $1,000s):
<TABLE>
<CAPTION>
Return on Average
Net Income Return on Average Equity Assets
---------------------- --------------------- --------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ann Arbor Commerce Bank $2,730 $2,125 $1,869 19.15% 19.13% 23.36% 1.35% 1.32% 1.58%
Brighton Commerce Bank 455 (48) (505) 10.33% 0.91%
Capitol National Bank 2,162 2,012 1,804 21.76% 21.62% 21.41% 1.66% 1.69% 1.64%
Detroit Commerce Bank (341) (21)
Grand Haven Bank 955 615 341 18.99% 14.19% 10.53% 1.34% 1.11% 0.85%
Kent Commerce Bank (61) (415)
Macomb Community Bank 712 323 (83) 10.25% 7.16% 0.83% 0.56%
Muskegon Commerce Bank 189 (191) (25) 5.97% 0.49%
Oakland Commerce Bank 1,010 866 917 14.58% 13.77% 16.39% 1.03% 0.90% 1.18%
Paragon Bank & Trust 352 678 701 5.47% 11.35% 13.80% 0.42% 0.82% 1.04%
Portage Commerce Bank 1,775 1,393 1,168 21.40% 20.38% 20.83% 1.54% 1.34% 1.38%
Indiana Community Bancorp
Limited:
Elkhart Community Bank (223)
Sun Community Bancorp Limited:
Bank of Tucson 1,086 776 150 16.63% 12.73% 2.88% 1.48% 1.25% 0.47%
Camelback Community Bank (520) (370)
East Valley Community Bank (673)
Mesa Bank (207) (118)
Southern Arizona Community Bank (546) (252)
Valley First Community Bank 36 (81) (245) 0.87% 0.10%
Nevada Community Bancorp
Limited:
Desert Community Bank (358)
Red Rock Community Bank (269)
Sunrise Capital Corporation:
Sunrise Bank of Arizona (634) (26)
Other, net (2,221) (2,638) (535)
------ ------ ------ ----- ----- ----- ---- ---- ----
Consolidated totals $5,409 $4,628 $5,557 10.66% 10.19% 13.28% 0.47% 0.55% 0.96%
====== ====== ====== ===== ===== ===== ==== ==== ====
</TABLE>
Provisions for loan losses also increased significantly during recent years,
commensurate with the growth in the number of banks and loans.
During 1999, a new accounting standard required the write-off of previously
capitalized start-up costs, which is discussed in a later section of this
narrative. It is reflected as a cumulative effect of a change in accounting
principle in the consolidated statement of income, and amounted to $.03 per
share.
13
<PAGE>
NET INCOME
($ millions)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
3.1 4.6 5.6 4.6 5.4
Net income in 1998 was adversely impacted by losses relating to check kiting
activity by a loan customer which decreased net income by $600,000. Net income
in 1999 is slightly lower than 1997 mainly due to the initial negative impact of
start-up banks.
Income per share, before the cumulative-effect adjustment, was $.87 per basic
and $.86 per diluted share in 1999, compared to $.74 per basic and $.72 per
diluted share in 1998.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
Liquidity for financial institutions consists of cash and cash equivalents,
marketable investment securities and loans held for resale. These categories
totaled $216 million at year end 1999, or about 17% of total assets. This
compares to $271 million or 26% of total assets at year end 1998.
Liquidity varies significantly daily, based on customer activity. The change in
the liquidity ratio is the result of more assets being deployed into loans,
consistent with the strategy of maximizing interest income. Rates of interest
income on liquid assets are typically less than rates the banks achieve from
commercial loans.
An additional cause for the 1999 change in the liquidity ratio is due to a large
reduction from $37 million to $9 million in the category of loans held for
resale. These are residential mortgage loans underwritten to secondary market
standards and sold into the secondary market. The volume of these loans, which
included refinancings, decreased significantly in the second half of 1999 due to
increases in interest rates.
Investment securities are a source of liquidity. Most of the investment
securities portfolio is classified as available for sale. The banks generally
have not sold investments to meet liquidity needs. Also, to the extent needs
warrant, the banks may sell loans from time to time.
The primary source of funds for the banks is deposits. The banks emphasize
interest-bearing time deposits as part of their funding strategy. The banks also
seek noninterest-bearing deposits, or checking accounts, which reduce the banks'
cost of funds. Noninterest-bearing deposits were about 13% of total deposits at
year end 1999 and increased $26 million during the year.
14
<PAGE>
TOTAL DEPOSITS
($ millions)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
340 436 604 891 1,113
In recent periods, banks in general have experienced some difficulty in
obtaining additional deposits to fuel growth. Capitol's banks have had similar
experiences in their individual markets. As deposit pricing has become more
competitively aggressive, deposit growth is achievable, but at a higher price,
shrinking net interest margins.
To supplement their funding sources, some of the banks have obtained secured
lines of credit from the Federal Home Loan Bank system. At year end 1999, a
total of $16 million was borrowed under those facilities and additional
borrowing availability approximated $12.8 million. Some of the banks also have
smaller unsecured lines of credit with their correspondent banks. Borrowings
under these facilities are generally at short-term market rates of interest and,
although the repayment dates can be extended, are generally outstanding for
brief periods of time.
Some of the banks also obtained temporary secured lines of credit through the
Federal Reserve Bank system near year end 1999, as an added resource to meet
customers' needs for cash at the century date change. Since no unusual or
additional cash needs arose, those lines of credit were terminated by the banks
in early 2000.
Capitol has lines of credit aggregating $35 million from an unaffiliated bank.
At year end 1999, a total of $29.9 million was borrowed under this facility.
These secured borrowings mature within the first half of 2000 and are expected
to be renewed. Net borrowings under this facility approximated $20.3 million in
1999 and were used to fund investments in new banks and additional investment in
existing banks. Capitol borrowed $13 million in 1999 to fund its purchase of 51%
of the public offering of Sun's common stock.
In July 1999, Sun became a public company through a $26 million initial public
offering (IPO) of its common stock. The proceeds from Sun's IPO will be mainly
used to fund the bank development activity at Sun and its subsidiaries. Capitol
purchased 51% of the offering, maintaining its majority ownership of Sun.
A significant source of capital has been investments provided by minority
shareholders in the subsidiaries which are consolidated for financial reporting
purposes. Total minority interests in consolidated subsidiaries amounted to
$54.6 million at year end 1999, an increase of $27 million from the $27.6
million level at year end 1998. These minority interests approximated $11
15
<PAGE>
million at the end of 1997. The increases in these periods are the result of
Capitol's strategy of starting new banks and bank development companies with
less than 100% ownership by Capitol. The 1999 increase also includes the impact
of Sun's IPO.
One of the majority-owned banks became 100% owned in 1999. When Macomb Community
Bank reached its 36th month of operation in September 1999, Capitol offered the
minority owners of Macomb an opportunity to exchange their Macomb shares for
shares of Capitol. The exchange ratio was based on 150% of Macomb's adjusted
book value and was completed effective September 30, 1999. As a result of the
share exchange, the minority owners of Macomb became shareholders of Capitol.
About 225,000 new shares of Capitol's common stock were issued in this
transaction.
A similar share exchange occurred with the minority shareholders of Brighton
Commerce Bank, upon the bank reaching its 36th month of operation in January
2000. The Brighton share exchange became effective January 31, 2000 and about
125,000 new shares of Capitol's common stock were issued in this 2000
transaction.
Future share exchanges with minority interests of other banks in the
consolidated group, if any, will depend upon whether Capitol offers such an
exchange and whether minority holders vote in favor of it on a transaction by
transaction basis.
As mentioned previously, Capitol recently announced expansion of its bank
development strategy to include a more specific consideration of acquisition
opportunities. Future acquisitions, if any, are likely to be structured as share
exchange transactions, using Capitol's common stock.
Total stockholders' equity approximated $54.7 million at year end 1999, an
increase of $5.4 million for the year. The book value per share of common stock
was $8.08 at year end 1999, compared with $7.77 at year end 1998. Cash dividends
of $.36 were paid in 1999, compared to $.33 in 1998. Future payment of dividends
is subject to approval by Capitol's board of directors and capital adequacy.
Capitol's capital structure consists of these primary elements:
* Trust preferred securities which were issued in 1997,
* Minority interests in consolidated subsidiaries, and
* Stockholders' equity.
TOTAL CAPITALIZATION
($ millions)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Stockholders' Equity 30.9 40.2 45.0 49.3 54.7
Minority Interests 0.0 4.7 11.0 27.6 54.6
Trust Preferred Securities 0.0 0.0 24.1 24.3 24.3
16
<PAGE>
Total capitalization at year end 1999 amounted to $133.6 million or 10.2% of
total assets. This compares to $101.1 million at year end 1998.
Capitol and each of its banks and bank development subsidiaries are subject to a
complex series of regulatory rules and requirements which require specific
levels of capital adequacy at the bank level and on a consolidated basis. Under
those rules and regulations, banks are categorized as WELL CAPITALIZED,
ADEQUATELY CAPITALIZED or INADEQUATELY CAPITALIZED using several ratio
measurements, including a risk-weighting approach to assets and commitments.
Banks falling into the INADEQUATELY CAPITALIZED category are subject to the
prompt corrective action provisions of the FDIC Improvement Act, which can
result in significant regulatory agency intervention and other adverse action.
Although it is permissible to maintain capital adequacy at the ADEQUATELY
CAPITALIZED level, Capitol operates with the objective of its banks meeting the
WELL CAPITALIZED standard. The well capitalized banks benefit from lower FDIC
deposit insurance costs and less restrictive limitations on some banking
activities.
New banks, as a condition of regulatory charter approval, are required to
maintain higher ratios of capital adequacy. Generally, they are required to keep
a ratio of capital to total assets of not less than 8% for their first three
years of operation.
In the opinion of management, all of the affiliated banks met the criteria to be
classified as WELL CAPITALIZED at year end 1999.
TRENDS AFFECTING OPERATIONS
The most significant trends which can impact the financial condition and results
of operations of financial institutions are changes in market rates of interest
and changes in general economic conditions.
Changes in interest rates, either up or down, have an impact on net interest
income (plus or minus), depending on the direction and timing of such changes.
At any point in time, there is an unfavorable imbalance between interest
rate-sensitive assets and interest rate-sensitive liabilities. This means that
when interest rates change, the timing and magnitude of the effect of such
interest rate changes can alter the relationship between asset yields and the
cost of funds. This timing difference between interest rate-sensitive assets and
interest rate-sensitive liabilities is characterized as a "gap" which is
quantified by the distribution of rate-sensitive amounts within various time
periods in which they reprice or mature. The following table summarizes the
consolidated financial position in relation to "gap" at December 31, 1999 (in
$1,000s):
17
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity
----------------------------------------------
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
--------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 50,524 $ 50,524
Interest-bearing bank deposits 12,025 12,025
Loans held for resale 9,078 9,078
Investment securities 40,889 $ 17,084 $ 42,274 $ 6,898 107,145
Portfolio loans:
Commercial 389,883 104,416 375,720 4,541 874,560
Real estate mortgage 26,939 11,568 50,099 7,394 96,000
Installment 10,288 16,833 49,405 2,118 78,644
Non-earning assets 2,343 78,011
--------- --------- -------- --------- ----------
Total assets $ 539,626 $ 149,901 $519,841 $ 20,951 $1,305,987
========= ========= ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Time deposits over $100,000 $ 110,804 $ 163,698 $ 35,571 $ 310,073
Time deposits under $100,000 61,745 169,382 57,894 $ 188 289,209
All other interest-bearing deposits 366,475 366,475
--------- --------- -------- --------- ----------
Total interest-bearing deposits 539,024 333,080 93,465 188 965,757
Debt obligations 42,400 5,000 47,400
Noninterest-bearing liabilities 159,278
Capitol Trust I preferred securities 24,291 24,291
Minority interests in consolidated
subsidiaries 54,593
Stockholders' equity 54,668
--------- --------- -------- --------- ----------
Total liabilities and stockholders' equity $ 581,424 $ 338,080 $ 93,465 $ 24,479 $1,305,987
========= ========= ======== ========= ==========
Interest rate sensitive period gap $ (41,798) $(188,179) $426,376 $ (3,528)
========= ========= ======== =========
Interest rate sensitive cumulative gap $ (41,798) $(229,977) $196,399 $ 192,871
========= ========= ======== =========
Period rate sensitive assets/period rate
sensitive liabilities 0.93 0.44 5.56 0.86
Cumulative rate sensitive assets/cumulative
rate sensitive liabilities 0.93 0.75 1.19 1.19
Cumulative gap to total assets (3.20)% (17.61)% 15.04% 14.77%
</TABLE>
The "gap" changes daily based upon changes in the underlying assets and
liabilities at the banks. Analyzing exposure to interest rate risk is prone to
imprecision because the "gap" is constantly changing, the "gap" differs at each
of the banks, and it is difficult to predict the timing, amount and direction of
future changes in market interest rates and the corresponding effect on customer
behavior.
The banks endeavor to manage and monitor interest rate risk in concert with
market conditions and risk parameters. Management strives to maintain a
reasonably balanced position of interest rate-sensitive assets and liabilities.
The banks have not engaged in speculative positions through the use of
derivatives in anticipation of interest rate movements. In these most recent
periods of relatively lower interest rates, the banks have emphasized variable
rate loans and time deposits to the extent possible in a competitive
environment; however, competitive influences often result in making fixed rate
18
<PAGE>
loans, although the banks seek to limit the duration of such loans. Similarly,
low interest rates generally make competition more intense for deposits, since
loan demand will typically increase during periods of lower rates and,
accordingly, result in higher interest costs on deposits, adversely impacting
interest margins. Future interest rates and the impact on earnings are difficult
to predict. In addition to interest rate risk relating to interest-bearing
assets and liabilities, changes in interest rates also can impact future
transaction volume of loans and deposits at the banks. For activities which are
influenced by levels of interest rates for transaction volume (for example,
origination of residential mortgage loans), pricing margins and demand can
become impacted significantly by changes in interest rates.
As a means of monitoring and managing exposure to interest rate risk, management
uses a computerized simulation model which is intended to estimate pro forma
effects of changes in interest rates. Using the simulation model, the following
table illustrates, on a consolidated basis, changes which would occur in annual
levels of interest income, interest expense and net interest income (in $1,000s)
assuming one hundred and two hundred basis point ("bp") parallel increases and
decreases in interest rates:
Pro Forma Effect Pro Forma Effect
Pro Forma of Interest of Interest
Assuming No Rate Increases Rate Decreases
Change in ------------------- ----------------
Interest Rates +100 bp +200 bp -100 bp -200 bp
-------------- -------- -------- ------- -------
Interest income $104,440 $110,071 $115,697 $ 98,810 $93,356
Interest expense 51,045 57,347 63,649 44,744 38,442
-------- -------- -------- ------- -------
Net interest income $ 53,395 $ 52,724 $ 52,048 $ 54,066 $54,914
======== ======== ======== ======== =======
The pro forma analysis above is intended to quantify theoretical changes in
interest income based on stated assumptions. The pro forma analysis excludes the
effect of numerous other variables such as borrowers' ability to repay loans,
the ability of banks to obtain deposits in a radically changed interest-rate
environment and how management would revise its asset and liability management
priorities in concert with rate changes.
Simulation modeling techniques are inherently flawed and inaccurate due to the
number of variables and due to the fact that the actual effects of changes in
interest rates are subject to some variables (for example, customer behavior)
which simulation models cannot effectively predict. Therefore, actual future
results will differ from pro forma simulation model analyses and such
differences may be significant.
General economic conditions also have a significant impact on both the results
of operations and the financial condition of financial institutions. Economic
conditions nationally and in the banks' local markets have remained relatively
stable and positive. Local economic conditions, and to some extent national
economic conditions, have a significant impact on levels of loan demand as well
as the ability of borrowers to repay loans and the availability of funds for
customers to make deposits. Throughout 1999, 1998 and 1997, the U.S. economy
continued to produce the longest peacetime economic expansion in history. With
worldwide economic conditions currently unstable, the duration of the current
economic expansion period in the United States is questionable.
19
<PAGE>
Continuing consolidation of the banking industry on a national basis, and in the
markets of Capitol's banks, has presented opportunities for growth. As a result
of consolidation of the banking industry, coupled with the closure of branch
locations by larger institutions and conversion of customer relationships into
perceived `commodities' by the larger banks, many customer relationships have
been displaced, generating opportunities for development by the banks. For many
retail customers, banking services have become a commodity in an environment
that is dominated by larger mega-bank or mass-merchandising institutions. For
the professional, entrepreneur and other customers seeking a more
service-oriented, customized banking relationship, Capitol's banks fill that
need through their focus on single-location banks with full, local
decision-making authority. As the banks focus on service delivery and keeping
their size at a manageable level, only a modest market share of deposits and
loan activity is necessary to achieve profitability and investor-oriented
earnings performance.
Start-up banks generally incur operating losses during their early periods of
operations. Recently-formed start-up banks will detract from consolidated
earnings performance and additional start-up banks formed in 2000 and beyond
will similarly negatively impact short-term profitability. On a consolidated
basis, such operating losses reduce net income by the pro rata share of
Capitol's ownership percentage in those banks. When those banks become
profitable, their operating results will contribute to consolidated earnings to
the extent of Capitol's ownership percentage.
Commercial banks continue to be subject to significant regulatory requirements
which impact current and future operations. In addition to the extent of
regulatory interaction with financial institutions, extensive rules and
regulations governing lending activities, deposit gathering and capital adequacy
(to name a few), translate into a significant cost burden of financial
institution regulation. Such costs include the significant amount of management
time and expense which is incurred in maintaining compliance and developing
systems for compliance with those rules and regulations as well as the cost of
examinations, audits and other compliance activities. The future of financial
institution regulation, and its costs, is uncertain and difficult to predict.
Premiums for FDIC insurance have historically been significant costs of doing
business as financial institutions, but in recent years, deposit insurance
premiums have been maintained at a stable and modest level. Future deposit
insurance premium levels are difficult to predict inasmuch as deposit insurance
premiums will be determined based on general economic conditions, the relative
health of the banking and financial institution industry and other unpredictable
factors. It is reasonable to expect that deposit insurance premiums will
increase at some point in the future.
CENTURY DATE CHANGE
Throughout 1999, significant attention was drawn to the century date change and
concerns about whether banks were prepared. Media hype, coupled with regulatory
anxiety, reached a crescendo near the end of the year. What was predicted by
some media to become a catastrophic disaster of computer failures, proved to be
a nonevent. Throughout 1998 and 1999, the banks were subjected to repeated
examinations of year 2000 readiness by bank regulatory agencies and incurred
consolidated costs of about $500,000.
20
<PAGE>
Capitol and its banks were well prepared, far in advance of the regulatory
initiatives, and are 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.
NEW ACCOUNTING STANDARDS
Certain new accounting standards became applicable to Capitol during 1999.
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 other comprehensive income, depending
on whether the instrument qualifies for hedge accounting and the type of hedging
instrument involved. This new accounting standard, as amended in June 1999, 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 the
consolidated financial statements.
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position 98-1, "Costs of Computer Software Developed or Obtained for Internal
Use." It requires capitalization of certain costs of development of software and
had no effect on Capitol's financial statements when implemented in 1999.
The AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." It requires start-up costs and organizational costs to be charged
to expense when incurred. The initial application of the statement required a
cumulative effect adjustment for those companies that had previously capitalized
start-up and organization costs and became effective in 1999. Implementation of
this new standard has been reflected as a cumulative effect of an accounting
change as of January 1, 1999, resulting in a one-time charge of $.03 per share
in the consolidated statement of income.
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 in future periods.
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Capitol Bancorp Ltd.
We have audited the accompanying consolidated balance sheets of Capitol Bancorp
Ltd. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capitol Bancorp Ltd.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
In accordance with a new accounting standard, as more fully described in Note B
to the consolidated financial statements, the Corporation changed its method of
accounting for start-up and organization costs effective January 1, 1999.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2000
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31
--------------------------
1999 1998
----------- -----------
(in $1,000s)
ASSETS
Cash and due from banks $ 41,757 $ 45,263
Interest-bearing deposits with banks 12,025 1,732
Federal funds sold 50,524 104,050
----------- -----------
Cash and cash equivalents 104,306 151,045
Loans held for resale 9,078 36,789
Investment securities--Note C:
Available for sale 102,514 83,597
Held for long-term investment (at amortized
cost which approximates market value) 4,631 2,867
----------- -----------
Total investment securities 107,145 86,464
Portfolio loans, less allowance for loan losses
of $12,639 in 1999 and $8,817 in 1998--Note D 1,036,565 715,463
Premises and equipment--Note F 14,396 11,646
Accrued interest income 7,206 5,100
Excess of cost over net assets of
acquired subsidiaries 3,652 2,626
Other assets 23,639 15,311
----------- -----------
TOTAL ASSETS $ 1,305,987 $ 1,024,444
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 147,036 $ 120,986
Interest-bearing--Note G 965,757 769,904
----------- -----------
Total deposits 1,112,793 890,890
Debt obligations--Note H 47,400 23,600
Accrued interest on deposits
and other liabilities 12,242 8,831
----------- -----------
Total liabilities 1,172,435 923,321
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE
CORPORATION'S SUBORDINATED DEBENTURES--Note I 24,291 24,255
MINORITY INTERESTS IN CONSOLIDATE
SUBSIDIARIES--Note A 54,593 27,576
STOCKHOLDERS' EQUITY--Notes J and O:
Common stock, no par value, 25,000,000 shares
authorized; issued and outstanding:
1999--6,769,521 shares
1998--6,344,886 shares 56,648 51,868
Retained earnings 1,068 (2,019)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) (907) 168
----------- -----------
56,809 50,017
Less note receivable from exercise of stock
options and unallocated ESOP shares--Notes J and K (2,141) (725)
----------- -----------
Total stockholders' equity 54,668 49,292
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,305,987 $ 1,024,444
=========== ===========
See notes to consolidated financial statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1999 1998 1997
-------- -------- --------
(in $1,000s, except per share data)
<S> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 82,570 $ 59,132 $ 42,448
Loans held for resale 1,364 1,529 536
Taxable investment securities 4,589 3,765 3,525
Federal funds sold 4,272 5,013 2,805
Interest-bearing deposits with banks and other 617 118 33
Dividends on investment securities 190 111 202
-------- -------- --------
Total interest income 93,602 69,668 49,549
Interest expense:
Demand deposits 11,203 7,211 4,111
Savings deposits 1,547 1,487 1,544
Time deposits 29,178 25,450 18,445
Debt obligations 4,214 2,486 752
Other 95 36
-------- -------- --------
Total interest expense 46,237 36,670 24,852
-------- -------- --------
Net interest income 47,365 32,998 24,697
Provision for loan losses--Note D 4,710 3,523 2,049
-------- -------- --------
Net interest income after provision for
loan losses 42,655 29,475 22,648
Noninterest income:
Service charges on deposit accounts 1,574 1,202 859
Trust fee income 760 472 355
Fees from origination of non-portfolio
residential mortgage loans 1,373 1,383 298
Realized gain on sale of investment
securities available for sale 15 2 69
Other 992 499 576
-------- -------- --------
Total noninterest income 4,714 3,558 2,157
Noninterest expense:
Salaries and employee benefits 21,212 13,376 8,394
Occupancy 3,561 2,373 1,421
Equipment rent, depreciation and maintenance 3,988 3,030 2,052
Deposit insurance premiums 152 121 88
Other 11,344 7,425 4,766
-------- -------- --------
Total noninterest expense 40,257 26,325 16,721
-------- -------- --------
Income before minority interest,
federal income taxes and cumulative effect of
change in accounting principle 7,112 6,708 8,084
Federal income taxes--Note L 3,213 2,584 2,888
-------- -------- --------
Income before minority interest and cumulative
effect of change in accounting principle 3,899 4,124 5,196
Minority interest in net losses of consolidated
subsidiaries 1,707 504 361
-------- -------- --------
Income before cumulative effect of change in
accounting principle 5,606 4,628 5,557
Cumulative effect of change in
accounting principle--Note B (197) -- --
-------- -------- --------
NET INCOME $ 5,409 $ 4,628 $ 5,557
======== ======== ========
NET INCOME PER SHARE--Note Q
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN $1,000s)
<TABLE>
<CAPTION>
Note
Receivable
from Exercise
Accumulated of Stock
Other Options and
Common Retained Comprehensive Unallocated
Stock Earnings Income ESOP Shares Total
----- -------- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $ 34,972 $ 5,150 $ 37 $ 40,159
Issuance of 189,728 shares of common stock
upon exercise of warrants 1,292 1,292
Issuance of 75,758 shares of common stock
upon exercise of stock options 619 $(1,015) (396)
Issuance of 566,676 shares of common stock
upon distribution of 10% stock dividend 13,429 (13,429)
Allocation of shares to ESOP participants'
accounts 145 145
Cash dividends paid ($.30 per share) (1,831) (1,831)
Components of comprehensive income:
Net income for 1997 5,557 5,557
Market value adjustment for investment
securities available for sale (net of
tax effect) 106 106
--------
Total comprehensive income for 1997 5,663
-------- -------- ------- ------- --------
BALANCES AT DECEMBER 31, 1997 50,312 (4,553) 143 (870) 45,032
Issuance of 73,852 shares of common stock
upon exercise of stock options 816 816
Issuance of 33,205 shares of common stock to
acquire minority interest in bank subsidiary 745 745
Allocation of shares to ESOP participants'
accounts 145 145
Cash dividends paid ($.33 per share) (2,094) (2,094)
Cash in lieu of fractional shares upon issuance
of stock split (5) (5)
Components of comprehensive income:
Net income for 1998 4,628 4,628
Market value adjustment for investment
securities available for sale (net of tax
effect) 25 25
--------
Total comprehensive income for 1998 4,653
-------- -------- ------- ------- --------
BALANCES AT DECEMBER 31, 1998 51,868 (2,019) 168 (725) 49,292
Issuance of 199,865 shares of common stock
upon exercise of stock options 1,786 (1,561) 225
Issuance of 224,770 shares of common stock to
acquire minority interest in bank subsidiary 2,994 2,994
Allocation of shares to ESOP participants'
accounts 145 145
Cash dividends paid ($.36 per share) (2,322) (2,322)
Components of comprehensive income:
Net income for 1999 5,409 5,409
Market value adjustment for investment
securities available for sale (net of tax
effect) (1,075) (1,075)
--------
Total comprehensive income for 1999 4,334
-------- -------- ------- ------- --------
BALANCES AT DECEMBER 31, 1999 $ 56,648 $ 1,068 $ (907) $(2,141) $ 54,668
======== ======== ======= ======= ========
</TABLE>
See notes to consolidated financial statements
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1999 1998 1997
---- ---- ----
(in $1,000s)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,409 $ 4,628 $ 5,557
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Cumulative effect of change in accounting principle 197
Provision for loan losses 4,710 3,523 2,049
Depreciation of premises and equipment 2,913 2,025 1,325
Amortization of goodwill and other intangibles 318 225 193
Net accretion of investment security discounts (107) (174) (315)
Loss (gain) on sale of premises and equipment (25) 51 (486)
Minority interest in net losses of consolidated
subsidiaries (1,707) (504) (361)
Deferred income taxes (2,070) (1,657) (842)
Originations and purchases of loans held for resale (306,292) (361,769) (142,254)
Proceeds from sales of loans held for resale 334,003 336,406 137,577
Increase in accrued interest income and other assets (8,950) (2,314) (1,732)
Increase in accrued interest on deposits and other
liabilities 3,411 2,860 1,263
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 31,810 (16,700) 1,974
INVESTING ACTIVITIES
Proceeds from sales of investment securities available
for sale 3,000 1,005 5,943
Proceeds from maturities of investment securities
available for sale 82,020 64,266 34,262
Purchases of investment securities available for sale (107,224) (87,049) (55,481)
Net increase in portfolio loans (325,812) (222,460) (145,529)
Proceeds from sales of premises and equipment 665 38 407
Purchases of premises and equipment (6,303) (6,181) (4,376)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (353,654) (250,381) (164,774)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 119,437 137,953 74,259
Net increase in certificates of deposit 102,466 148,530 93,982
Net proceeds from (payments on) debt obligations 23,800 23,600 (6,500)
Resources provided by minority interest 31,718 16,556 6,289
Net proceeds from issuance of common stock 6 816 1,912
Net proceeds from issuance of trust-preferred securities 24,126
Cash dividends paid and payments in lieu of
fractional shares (2,322) (2,099) (1,831)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 275,105 325,356 192,237
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (46,739) 58,275 29,437
Cash and cash equivalents at beginning of year 151,045 92,770 63,333
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 104,306 $ 151,045 $ 92,770
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
Capitol Bancorp Ltd. (the "Corporation") is a multibank holding company.
Consolidated subsidiaries consist of the following:
<TABLE>
<CAPTION>
Percentage Year Formed
Affiliate Location Owned or Acquired
- ------------------------------------ -------------------------- ---------- ------------
<S> <C> <C> <C>
Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990
Brighton Commerce Bank Brighton, Michigan 59% 1997
Capitol National Bank Lansing, Michigan 100% 1982
Detroit Commerce Bank Detroit, Michigan 93% 1998
Grand Haven Bank Grand Haven, Michigan 100% 1995
Kent Commerce Bank Grand Rapids, Michigan 51% 1998
Macomb Community Bank Clinton Township, Michigan 100% 1996
Muskegon Commerce Bank Muskegon, Michigan 51% 1997
Oakland Commerce Bank Farmington Hills, Michigan 100% 1992
Paragon Bank & Trust Holland, Michigan 100% 1994
Portage Commerce Bank Portage, Michigan 100% 1988
Indiana Community Bancorp Limited: 51% 1999
Elkhart Community Bank Elkhart, Indiana 1999
Sun Community Bancorp Limited: 51% 1997
Bank of Tucson Tucson, Arizona 1996
Camelback Community Bank Phoenix, Arizona 1998
East Valley Community Bank Chandler, Arizona 1999
Mesa Bank Mesa, Arizona 1998
Southern Arizona Community Bank Tucson, Arizona 1998
Valley First Community Bank Scottsdale, Arizona 1997
Nevada Community Bancorp Limited: 1999
Desert Community Bank Las Vegas, Nevada 1999
Red Rock Community Bank Las Vegas, Nevada 1999
Sunrise Capital Corporation: 1999
Sunrise Bank of Arizona Phoenix, Arizona 1998
</TABLE>
Sun Community Bancorp Limited ("Sun") was formed in 1997 and became a
majority-owned subsidiary as a result of a share exchange with the shareholders
of Bank of Tucson. In that share exchange, Bank of Tucson (previously a
majority-owned direct subsidiary of Capitol Bancorp) then became a wholly-owned
subsidiary of Sun. Consolidated subsidiaries of Sun, exclusive of Bank of
Tucson, are majority-owned by Sun (ranging from 51% to 88%). Sun is the majority
owner of Nevada Community Bancorp and Sunrise Capital Corporation which each
have majority-owned bank subsidiaries. Sun became a public company in 1999
through an initial public offering of common stock aggregating $26 million,
including $13 million invested by Capitol Bancorp.
Macomb Community Bank, previously a 51% owned subsidiary, became wholly-owned by
the Corporation effective September 30, 1999, through a share exchange
transaction (with an approximate fair value of $3 million) with Macomb's
minority shareholders.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION--CONTINUED
The Corporation and its subsidiaries are engaged in a single business
activity--banking. The bank affiliates provide a full range of banking services
to individuals, businesses and other customers located in their respective
communities. Each of the banks generally operate from a single location and
focus their activities on meeting the various credit and other banking needs of
entrepreneurs, professionals and other high net-worth individuals. A variety of
deposit products are offered, including checking, savings, money market,
individual retirement accounts and certificates of deposit. In addition, trust
and investment services are offered through Paragon Bank & Trust. The principal
markets for the banks' financial services are the communities in which they are
located and the areas immediately surrounding those communities. In addition to
commercial banking units, mortgage banking activities are offered through Amera
Mortgage Corporation, a 49% owned affiliate, and Sun Community Mortgage Company,
a wholly-owned subsidiary of Bank of Tucson.
Each bank is viewed by management as being a separately identifiable business or
segment from the perspective of monitoring performance and allocation of
financial resources. Although the banks operate independently and are managed
and monitored separately, each bank is substantially similar in terms of
business focus, type of customers, products and services. Further, each of the
banks and the Corporation are subject to substantially similar laws and
regulations unique to the banking industry. Accordingly, the Corporation's
consolidated financial statements reflect the presentation of segment
information on an aggregated basis.
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after elimination of intercompany accounts
and transactions, and after giving effect to applicable minority interests.
Banks formed or otherwise acquired during 1997, 1998 and 1999 are included in
the consolidated financial statements for periods after joining the consolidated
group. Certain 1998 and 1997 amounts have been reclassified to conform to the
1999 presentation.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
LOANS HELD FOR RESALE: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the aggregate lower of cost or market.
INVESTMENT SECURITIES: Investment securities available for sale (generally most
debt securities investments of the Corporation), are carried at market value
with unrealized gains and losses reported as a separate component of
stockholders' equity, net of tax effect (accumulated other comprehensive
income). All other investment securities are classified as held for long-term
investment and are carried at amortized cost which approximates market value
(see Note C). Investments are classified at the date of purchase based on
management's analysis of liquidity and other factors. The adjusted cost of the
specific securities sold is used to compute realized gains or losses. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Substantially all portfolio loans are made to borrowers in the
banks' geographic areas. Consistent with the banks' emphasis on business
lending, there are concentrations of credit in loans secured by commercial real
estate, equipment and other business assets. The maximum potential credit risk
to the Corporation, without regard to underlying collateral and guarantees, is
the total of loans and loan commitments outstanding. Management reduces the
Corporation's exposure to losses from credit risk by requiring collateral and/or
guarantees for loans granted and by monitoring concentrations of credit, in
addition to recording provisions for loan losses and maintaining an allowance
for loan losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated losses in the portfolio at the balance sheet
date. Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including potential impairment of individual loans
and concentrations of credit), past loss experience, current economic
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of portfolio
loans approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED SUBSIDIARIES: Goodwill is amortized
on a straight-line basis over various periods not to exceed 15 years. Management
periodically reviews long-lived assets, including associated goodwill, for
potential impairment based upon projected undiscounted net cash flows, when
applicable, and the related amortization periods.
OTHER REAL ESTATE: Other real estate (included as a component of other assets
and which, at December 31, 1999 and 1998 approximated $3,614,000 and $541,000,
respectively) comprises properties acquired through a foreclosure proceeding or
acceptance of a deed in lieu of foreclosure. These properties held for sale are
carried at the lower of cost or estimated fair value (net of estimated selling
cost) at the date acquired and are periodically reviewed for subsequent
impairment.
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon
granting of stock options, because such stock options are accounted for under
the provisions of Accounting Principles Board (APB) Opinion 25 and are granted
at an exercise price equal to the market price of common stock at grant date.
Pro forma disclosure of alternative accounting recognition is made elsewhere
herein (see Note J).
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Corporation's banks is not
included in the consolidated balance sheet because it is not an asset of the
banks or the Corporation. Trust fee income is recorded on the accrual method.
FEDERAL INCOME TAXES: The Corporation and subsidiaries owned 80% or more by the
Corporation file a consolidated federal income tax return. Deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax laws or
rates is recognized in income in the period that includes the enactment date.
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income and certain
other items which are charged or credited to stockholders' equity. For the
periods presented, the Corporation's only element of comprehensive income other
than net income was the net change in the market value adjustment for investment
securities available for sale. Accordingly, the elements and total of
comprehensive income are shown within the statement of changes in stockholders'
equity presented herein.
COSTS OF START-UP ACTIVITIES: In 1998, the American Institute of CPAs issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." It
requires start-up costs and organizational costs to be charged to expense when
incurred. The initial application of the statement required a cumulative effect
adjustment for those companies that had previously capitalized start-up and
organization costs effective January 1, 1999. In the circumstances of the
Corporation and its banks, this new accounting standard applies to previously
capitalized preopening and other start-up costs of its bank subsidiaries which,
net of amortization, approximated $1,149,000 at December 31, 1998 and were
classified as a component of other assets in the consolidated balance sheet.
Implementation of this standard is reflected as a cumulative effect of an
accounting change at January 1, 1999 (net of impact of minority interests and
income tax effect).
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE C--INVESTMENT SECURITIES
Investment securities consisted of the following at December 31 (in $1,000s):
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Available for sale:
United States Treasury securities $ 17,845 $ 17,787 $35,123 $35,307
United States government agency
securities 82,366 81,073 45,322 45,360
States and political subdivisions 2,537 2,515 2,897 2,930
Other 1,141 1,139
-------- -------- ------- -------
103,889 102,514 83,342 83,597
Held for long-term investment:
Federal Reserve Bank stock 266 266 116 116
Federal Home Loan Bank stock 2,862 2,862 1,431 1,431
Corporate stock 1,003 1,003 1,320 1,320
Other 500 500
-------- -------- ------- -------
4,631 4,631 2,867 2,867
-------- -------- ------- -------
$108,520 $107,145 $86,209 $86,464
======== ======== ======= =======
</TABLE>
At December 31, 1999, securities with a market value approximating $15.2 million
were pledged to secure public and trust deposits and for other purposes as
required by law.
Gross unrealized gains and losses on investment securities available for sale
were as follows at December 31 (in $1,000s):
1999 1998
-------------- --------------
Gains Losses Gains Losses
----- ------ ----- ------
United States Treasury securities $ 3 $ 60 $185 $ 1
United States government agency securities 13 1,306 131 93
States and political subdivisions 14 39 33
--- ------ ---- ---
$30 $1,405 $349 $94
=== ====== ==== ===
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE C--INVESTMENT SECURITIES--CONTINUED
Scheduled maturities of investment securities held as of December 31, 1999 were
as follows (in $1,000s):
Estimated
Amortized Market
Cost Value
---- -----
Due in one year or less $ 46,313 $ 46,289
After one year, through five years 52,830 51,664
After five years, through ten years 2,103 1,984
After ten years 2,643 2,577
Securities held for long-term investment,
without stated maturities 4,631 4,631
--------- ---------
$ 108,520 $ 107,145
========= =========
NOTE D--LOANS
Portfolio loans consisted of the following at December 31 (in $1,000s):
1999 1998
----------- ---------
Commercial $ 874,560 $ 590,351
Real estate mortgage 96,000 80,808
Installment 78,644 53,121
----------- ---------
Total portfolio loans 1,049,204 724,280
Less allowance for loan losses (12,639) (8,817)
----------- ---------
Net portfolio loans $ 1,036,565 $ 715,463
=========== =========
Transactions in the allowance for loan losses are summarized below (in $1,000s):
1999 1998 1997
-------- ------- -------
Balance at January 1 $ 8,817 $ 6,229 $ 4,578
Provision charged to operations 4,710 3,523 2,049
Loans charged off (deduction) (1,298) (1,305) (718)
Recoveries 410 370 320
-------- ------- -------
Balance at December 31 $ 12,639 $ 8,817 $ 6,229
======== ======= =======
Certain commercial loans are enrolled in a loan program sponsored by the State
of Michigan. Under that program, the governmental unit shares loss exposure on
such loans by funding reserves, which are placed as deposits at the banks. Loans
participating in this program and related reserves approximated $34,254,000 and
$1,966,000, respectively, at December 31, 1999 ($24,870,000 and $1,953,000,
respectively, at December 31, 1998). Such reserve amounts are separate and
excluded from the allowance for loan losses.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE D--LOANS--CONTINUED
At December 31, 1999 and 1998, impaired loans (i.e., loans for which there is a
reasonable probability that borrowers would be unable to repay all principal and
interest due under the contractual terms of the loan documents) were not
material.
NOTE E--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Corporation's banking subsidiaries make
loans to officers and directors of the Corporation and its subsidiaries
including their immediate families and companies in which they are principal
owners. At December 31, 1999 and 1998, total loans to these persons were $65.1
million and $59.9 million, respectively. During 1999, $48.4 million of new loans
were made to these persons and repayments totaled $43.2 million. Such loans are
made at the banking subsidiaries' normal credit terms.
Such officers and directors of the Corporation (and their associates, family
and/or affiliates) are also depositors of the banking subsidiaries. Such
deposits are similarly made at the banks' normal terms as to interest rate, term
and deposit insurance.
NOTE F--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31 (in $1,000s):
1999 1998
-------- --------
Land, buildings and improvements $ 3,269 $ 2,795
Leasehold improvements 5,458 3,789
Equipment and furniture 12,618 9,485
-------- --------
21,345 16,069
Less accumulated depreciation (6,949) (4,423)
-------- --------
$ 14,396 $ 11,646
======== ========
The Corporation and certain subsidiaries rent office space under operating
leases. Rent expense (net of sublease income) under these lease agreements
approximated $2,402,000, $1,577,000 and $958,000 (including rent expense of
$900,000, $893,000 and $506,000 under leases with related parties) in 1999,
1998, and 1997, respectively. Future minimum rental payments under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1999 aggregate $21,950,000, due as follows: $2,818,000
in 2000, $2,703,000 in 2001, $2,719,000 in 2002, $2,563,000 in 2003, $2,512,000
in 2004 and $8,635,000 thereafter.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $310.1
million and $221.1 million as of December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of such time deposits were as
follows (in $1,000s):
2000 $274,502
2001 22,051
2002 4,190
2003 7,494
2004 and thereafter 1,836
--------
$310,073
========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE H--DEBT OBLIGATIONS
Debt obligations consisted of the following at December 31 (in $1,000s):
1999 1998
------- -------
Federal funds purchased $ 1,500
Short-term borrowings from Federal
Home Loan Bank 16,000 $14,000
Notes payable to unaffiliated bank 29,900 9,600
------- -------
$47,400 $23,600
======= =======
Short-term borrowings from a Federal Home Loan Bank (FHLB) represent advances
secured by certain portfolio residential real estate mortgage loans and other
eligible collateral, which approximated $16 million at December 31, 1999. Such
advances become due at varying dates, generally within one year, and bear
interest at market short-term rates (approximately 5.13% at December 31, 1999).
At December 31, 1999, unused lines of credit under these facilities approximated
$12.8 million.
In addition to FHLB lines of credit, some of the banks obtained lines of credit
through the Federal Reserve Bank of Chicago in 1999, secured by a pledge of
assets. Those lines of credit, which approximated $10.6 million, were obtained
to provide alternative liquidity in the event of an emergency need in
conjunction with the century date change. Because those resources were
ultimately not needed, those lines of credit were terminated by the banks in
early 2000.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE H--DEBT OBLIGATIONS--CONTINUED
Notes payable to unaffiliated bank represents borrowings under lines of credit.
As amended and increased in 1999, up to $35 million can be borrowed pursuant to
a one-year revolving credit agreement which bears interest at a rate slightly
less than prime rate (effectively a weighted average rate of 8.18% at December
31, 1999), payable monthly. The credit facility is reviewed annually for
continuance and requires the Corporation, among other things, to maintain
certain minimum levels of capital, rates of return on assets and other ratios or
requirements and is secured by the common stock of certain bank subsidiaries.
Interest paid under this credit facility approximated $1,506,000 in 1999, $5,000
in 1998 and $562,000 in 1997.
NOTE I--TRUST-PREFERRED SECURITIES
On December 19, 1997, the Corporation and a subsidiary (Capitol Trust I)
completed a public offering of trust-preferred securities. Under the terms of
the offering, Capitol Trust I (of which the Corporation owns 100% of the common
interests of the Trust) issued 2,530,000 shares of preferred securities, $10
liquidation amount per preferred security. Gross proceeds from the offering
aggregated $25.3 million. Upon receipt of the proceeds of the offering, Capitol
Trust I purchased subordinated debentures of the Corporation of like amount,
which bear interest at 8.5% payable quarterly and which mature in 2027 (which
may be extended to 2036 if certain conditions are met) and are callable after
2002. The liquidation amount of the trust-preferred securities is guaranteed by
the Corporation.
Interest paid to the Trust by the Corporation (which is recorded as interest
expense in its consolidated financial statements) is distributed by the Trust to
the holders of the trust-preferred securities. Under certain conditions, the
Corporation may defer payment of interest on the subordinated debentures for
periods of up to five years.
Because Capitol Trust I is a subsidiary (due to the Corporation's ownership of
the common interests of the Trust), Capitol Trust I is consolidated with the
Corporation for financial reporting purposes. The amount of outstanding
trust-preferred securities (net of issuance costs which are being amortized over
the life of the securities) is classified between liabilities and equity in the
Corporation's consolidated balance sheet. Under current regulatory guidelines,
such trust-preferred securities are included as capital for purposes of meeting
certain ratio requirements.
NOTE J--COMMON STOCK AND STOCK OPTIONS
In December 1998 a 6-for-5 stock split occurred. In 1997, the Corporation issued
a stock dividend of 10%. All share and per share data have been restated to
reflect the stock split as if it had occurred at the beginning of the periods
presented. Per share data has been restated for stock dividends.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE J--COMMON STOCK AND STOCK OPTIONS--CONTINUED
Stock options have been granted to certain officers which provide for the
purchase of shares of common stock. Generally, stock options are granted at an
exercise price equal to the fair value of common stock on the grant date, expire
seven years after grant, and are currently exercisable.
Under the terms of an employment agreement with a certain director and executive
officer of the Corporation, options granted thereunder shall be increased when
the Corporation issues additional shares so that such options granted equal 15%
of outstanding shares prior to exercise. In 1999 the Corporation negotiated a
reduction of the executive officer's benefit from 15% to 10% with the resulting
5% issuable as a pool of stock options to be granted to other officers and
directors of the Corporation at the discretion of its Board of Directors. In
exchange for the reduced benefit to the executive officer, the Corporation
agreed to a one-time exercise of previously granted stock options with an
aggregate exercise price of $1.6 million funded by a note receivable of $1.9
million from the executive officer. The note bears interest at a fixed rate. As
part of the terms of this agreement, the executive officer's compensation will
be increased in an amount equal to the interest due on the note receivable.
Under certain circumstances, such as death of the executive officer, the note
will be forgiven. The death benefit is covered by company-owned life insurance.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Number Weighted
of Stock Average
Options Exercise Exercise
Outstanding Price Range Price
----------- -------------------- -----
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 604,883 $ 4.92 to $13.54 $ 8.57
Granted in 1997 149,384 12.40 to 25.10 21.20
Exercised in 1997 (75,758) 4.92 to 13.25 6.20
Expired in 1997 (6,653) 4.92 4.92
-------- -------------------- -------
Outstanding at December 31, 1997 671,856 4.92 to 25.10 11.63
Granted in 1998 18,710 17.23 to 24.38 20.94
Exercised in 1998 (73,852) 4.92 to 13.25 6.80
Expired/other in 1998 1,000
-------- -------------------- -------
Outstanding at December 31, 1998 617,714 4.92 to 25.10 12.48
Granted in 1999 74,113 12.63 to 13.48 13.07
Exercised in 1999 (199,865) 4.92 to 8.75 7.80
-------- -------------------- -------
Outstanding at December 31, 1999 491,962 $ 4.92 to $25.10 $ 14.51
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE J--COMMON STOCK AND STOCK OPTIONS--CONTINUED
As of December 31, 1999, stock options outstanding had a weighted average
remaining contractual life of 4.2 years. As of that date, stock options with an
exercise price of $15.00 or less had a weighted average exercise price of $6.40
and a weighted average remaining contractual life of 4.0 years; stock options
with an exercise price of more than $15.00 had a weighted average exercise price
of $24.53 and a weighted average remaining contractual life of 5 years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", establishes a fair value method of accounting for stock options
whereby compensation expense is recognized based on the computed fair value of
the options on the grant date. However, as permitted by Statement No. 123, the
Corporation accounts for its stock options under APB 25 and, therefore, does not
recognize compensation expense. By electing this alternative, certain pro forma
disclosures of the expense recognition provisions of Statement No. 123 are
required, which are as follows:
1999 1998 1997
---- ---- ----
Fair value assumptions:
Risk-free interest rate 6.5% 5.0% 7.5%
Dividend yield 2.0% 1.5% 2.0%
Stock price volatility .53 .41 .36
Expected option life 7 years 7 years 7 years
Pro forma net income (in thousands) $ 4,905 $ 4,521 $ 4,700
Pro forma net income per diluted share $ .76 $ .70 $ .74
NOTE K--EMPLOYEE RETIREMENT PLANS
The Corporation has a contributory employee retirement savings 401(k) plan which
covers substantially all full-time employees of the Corporation and certain
subsidiaries over age 21. The Plan provides for employer contributions in
amounts determined annually by the Corporation's board of directors. Eligible
employees make voluntary contributions to the Plan. Contributions to the Plan,
which are an employer match (50%, subject to certain limitations) for employee
contributions, charged to expense for the years ended December 31, 1999, 1998
and 1997 were $310,000, $182,000 and $111,000, respectively.
The Corporation also has a defined contribution employee stock ownership plan
(ESOP) which covers substantially all employees of the Corporation and certain
subsidiaries. Certain common stock purchases by the ESOP were financed by
long-term debt. ESOP contributions charged to expense in 1999, 1998 and 1997
approximated $217,000, $256,000 and $180,000 (including ESOP note payable
interest of $62,000, $74,000 and $51,000), respectively. Shares of common stock
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE K--EMPLOYEE RETIREMENT PLANS--CONTINUED
held by the ESOP which have not yet been allocated to participants' accounts are
shown as a reduction of stockholders' equity. As of December 31, 1999, the ESOP
held 167,000 shares of the Corporation's common stock which have been allocated
to participants' accounts and 48,500 shares of common stock (with an approximate
fair value of $503,000) which have not yet been allocated to participants'
accounts.
NOTE L--INCOME TAXES
Federal income taxes consist of the following components (in $1,000s):
1999 1998 1997
------- ------- -------
Current $ 4,813 $ 4,241 $ 3,730
Deferred credit (2,070) (1,657) (842)
------- ------- -------
$ 2,743 $ 2,584 $ 2,888
======= ======= =======
Federal income tax expense in 1999 shown above is net of the $470,000 federal
income tax benefit relating to the cumulative effect of the change in accounting
principle. Federal income taxes paid during 1999, 1998 and 1997 approximated
$5.1 million, $3.0 million and $3.6 million, respectively.
Differences between federal income tax expense recorded and amounts computed
using the statutory tax rate are reconciled below (in $1,000s):
1999 1998 1997
------- ------ -------
Federal income tax computed at
statutory rate of 34% $ 2,998 $ 2,452 $ 2,871
Tax effect of:
Cumulative effect of change in
accounting principle (470)
Amortization of goodwill 117 77 66
Other 98 55 (49)
------- ------- -------
$ 2,743 $ 2,584 $ 2,888
======= ======= =======
Net deferred income tax assets consisted of the following at December 31 (in
$1,000s):
1999 1998
------ -------
Allowance for loan losses $ 3,970 $ 2,726
Portion of subsidiaries' operating losses
applicable to minority interests 874 294
Deferred compensation 585 463
Market value adjustment for investment
securities available for sale 468 (80)
Other, net 1,360 1,236
------- -------
$ 7,257 $ 4,639
======= =======
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE L--INCOME TAXES--CONTINUED
Certain consolidated subsidiaries have net operating loss carryforwards which
may reduce income taxes payable in future periods. Such carryforwards
approximate $4.5 million at December 31, 1999, have been recognized for
financial reporting purposes and expire at varying dates through 2019.
NOTE M--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows at December 31 (in $1,000s):
<TABLE>
<CAPTION>
1999 1998
--------------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 104,306 $ 104,306 $ 151,045 $ 151,045
Loans held for resale 9,078 9,078 36,789 36,789
Investment securities:
Available for sale 102,514 102,514 83,597 83,597
Held for long-term investment 4,631 4,631 2,867 2,867
----------- ----------- --------- ---------
107,145 107,145 86,464 86,464
Portfolio loans:
Fixed rate 629,087 628,366 482,276 482,460
Variable rate 420,117 419,764 242,004 241,938
----------- ----------- --------- ---------
Total portfolio loans 1,049,204 1,048,130 724,280 724,398
Less allowance for loan losses (12,639) (12,639) (8,817) (8,817)
----------- ----------- --------- ---------
Net portfolio loans 1,036,565 1,035,491 715,463 715,581
Financial Liabilities:
Deposits:
Noninterest-bearing deposits 147,036 147,036 120,986 120,986
Interest-bearing deposits:
Demand accounts 366,475 366,703 247,139 247,188
Time certificates of deposit less
than $100,000 289,209 289,049 301,665 305,303
Time certificates of deposit of
$100,000 or more 310,073 309,892 221,100 223,766
----------- ----------- --------- ---------
Total interest-bearing deposits 965,757 965,644 769,904 776,257
----------- ----------- --------- ---------
Total deposits 1,112,793 1,112,680 890,890 897,243
Debt obligations 47,400 47,460 23,600 23,596
Trust-preferred securities 24,291 25,300 24,255 25,300
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE M--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--CONTINUED
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates on financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest (unless quoted market values or
other fair value information is more readily available). Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
NOTE N--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, loan commitments are made to accommodate the
financial needs of bank customers. Loan commitments include stand-by letters of
credit, lines of credit, and other commitments for commercial, installment and
mortgage loans. Stand-by letters of credit, when issued, commit the bank to make
payments on behalf of customers if certain specified future events occur and are
used infrequently by the banks ($11.6 million and $8.8 million outstanding at
December 31, 1999 and 1998, respectively). Other loan commitments outstanding
consist of unused lines of credit and approved, but unfunded, specific loan
commitments ($219.4 million and $145.0 million at December 31, 1999 and 1998,
respectively). These loan commitments (stand-by letters of credit and unfunded
loans) generally expire within one year and are reviewed periodically for
continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the banks' normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
The banking subsidiaries are required to maintain average reserve balances in
the form of cash on hand and balances due from the Federal Reserve Bank and
correspondent banks. The amount of reserve balances required as of December 31,
1999 and 1998 were $1.4 million and $1.8 million, respectively.
Deposits at each of the banks are insured up to the maximum amount covered by
FDIC insurance. Some of the banks have municipal government deposits which are
guaranteed by the Corporation ($31.1 million at December 31, 1999).
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to their parent in the form of cash dividends, loans or advances.
Subject to various regulatory capital requirements, bank subsidiaries' current
and retained earnings are available for distribution as dividends to the
Corporation (and other bank shareholders, as applicable) without prior approval
from regulatory authorities. Substantially all of the remaining net assets of
the subsidiaries are restricted as to payments to the Corporation.
Each bank and the Corporation are subject to certain other capital requirements.
Federal financial institution regulatory agencies have established certain
risk-based capital guidelines for banks and bank holding companies. Those
guidelines require all banks and bank holding companies to maintain certain
minimum ratios and related amounts based on `Tier 1' and `Tier 2' capital and
`risk-weighted assets' as defined and periodically prescribed by the respective
regulatory agencies. Failure to meet these capital requirements can result in
severe regulatory enforcement action or other adverse consequences for a
depository institution and, accordingly, could have a material impact on the
Corporation's consolidated financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgements by regulatory agencies with regard to
components, risk weighting and other factors.
As a condition of their charter approval, DE NOVO banks are generally required
to maintain a core capital (Tier 1) to assets ratio of not less than 8% and an
allowance for loan losses of not less than 1% for the first three years of
operations.
As of December 31, 1999, the most recent notifications received by the banks
from regulatory agencies have advised that the banks are classified as `well
capitalized' as defined by the applicable agencies. There are no conditions or
events since those notifications that management believes would change the
regulatory classification of the banks.
Management believes, as of December 31, 1999, that the Corporation and the banks
meet all capital adequacy requirements to which the entities are subject.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
The following table summarizes the amounts (in $1,000s) and related ratios of
the individually significant subsidiaries (assets of $130 million or more at
December 31, 1999) and consolidated regulatory capital position as of December
31, 1999 and 1998:
<TABLE>
<CAPTION>
Sun
Ann Arbor Capitol Community
Commerce National Bancorp
Bank Bank Limited Consolidated
---- ---- ------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Total capital to total assets:
Minimum required amount >=$ 8,598 >=$ 5,327 >=$12,016 >=$ 52,239
Actual amount $15,455 $ 9,940 $50,003 $ 56,809
Ratio 7.19% 7.46% 16.65% 4.35%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >=$ 6,940 >=$ 4,490 >=$11,089 >=$ 48,560
Actual amount $15,596 $10,011 $71,263 $130,744
Ratio 8.99% 8.92% 25.71% 10.78%
Combined Tier 1 and Tier 2 capital to
risk-weighted assets:
Minimum required amount(2) >=$13,879 >=$ 8,980 >=$22,178 >=$ 97,120
Amount required to meet
'Well-Capitalized' category(3) $17,349 $11,226 $27,723 $121,400
Actual amount $17,699 $11,416 $73,634 $141,040
Ratio 10.24% 10.17% 26.56% 11.62%
DECEMBER 31, 1998
Total capital to total assets:
Minimum required amount >=$ 7,858 >=$ 5,471 >=$ 5,411 >=$ 40,978
Actual amount $12,901 $ 9,759 $26,627 $ 50,017
Ratio 6.57% 7.14% 19.68% 4.88%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >=$ 5,898 >=$ 4,178 >=$ 3,397 >=$ 29,262
Actual amount $12,906 $ 9,750 $35,102 $ 98,143
Ratio 8.75% 9.34% 41.33% 13.42%
Combined Tier 1 and Tier 2 capital to
risk-weighted assets:
Minimum required amount(2) >=$11,797 >=$ 8,355 >=$ 6,795 >=$ 58,525
Amount required to meet
'Well-Capitalized' category(3) $14,746 $10,444 $ 8,494 $ 73,156
Actual amount $14,752 $11,057 $35,798 $106,842
Ratio 10.00% 10.59% 42.15% 14.60%
</TABLE>
(1) The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted
assets is 8%.
(3) In order to be classified as a `well-capitalized' institution, the ratio of
Tier 1 and Tier 2 capital to risk-weighted assets must be 10% or more.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE P--PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
Year Ended December 31
----------------------
1999 1998
-------- -------
(in $1,000s)
ASSETS
Cash on deposit with subsidiary banks $ 55 $ 1
Money market funds on deposit with subsidiary banks 173 4
Investment securities held for long-term investment 830 649
Investments in subsidiaries 102,021 75,673
Notes receivable 1,363 1,105
Investment in and advances to Amera Mortgage Corporation 2,343 3,037
Equipment and furniture, net 575 727
Excess of cost over net assets of acquired subsidiaries 2,587 2,172
Other assets 2,657 3,553
-------- -------
TOTAL ASSETS $112,604 $86,921
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 2,963 $ 2,992
Debt obligations payable to unaffiliated entities 29,900 9,600
Subordinated debentures 25,073 25,037
-------- -------
Total liabilities 57,936 37,629
Stockholders' equity 54,668 49,292
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $112,604 $86,921
======== =======
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
-------------------------------
1999 1998 1997
-------- ------- -------
(in $1,000s)
Income:
Dividends from subsidiaries $ 5,650 $ 2,600 $ 2,100
Intercompany fees 5,424 4,232 3,812
Interest 290 394 254
Other 34 (162) (183)
-------- ------- -------
Total income 11,398 7,064 5,983
Expenses:
Interest 3,770 2,311 660
Salaries and employee benefits 3,310 2,524 1,618
Occupancy 260 202 171
Amortization, equipment rent and depreciation 1,520 1,889 1,528
Other 1,295 1,606 926
-------- ------- -------
Total expenses 10,155 8,532 4,903
-------- ------- -------
1,243 (1,468) 1,080
Equity in undistributed net earnings of
consolidated subsidiaries 2,880 4,810 4,203
Federal income taxes (credit) (1,286) (1,286) (274)
-------- ------- -------
NET INCOME $ 5,409 $ 4,628 $ 5,557
======== ======= =======
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE P--PARENT COMPANY FINANCIAL INFORMATION--CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1999 1998 1997
-------- -------- --------
(in $1,000s)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,409 $ 4,628 $ 5,557
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed net earnings of subsidiaries (2,880) (4,810) (4,203)
Equity in net loss from Amera Mortgage Corporation 593 189 403
Depreciation and amortization 535 140 260
Decrease (increase) in amounts due from subsidiaries and
other assets 2,157 28 (1,520)
Increase (decrease) in accounts payable, accrued expenses
and other liabilities (29) 1,046 (43)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,785 1,221 454
INVESTING ACTIVITIES
Net cash investments in subsidiaries (23,397) (21,410) (8,450)
Net payments from (advances to) Amera Mortgage Corporation 101 (314) (485)
Purchases of investment securities (181) (316) (25)
Proceeds from sales of equipment and furniture 114 6
Purchases of equipment and furniture (183) (716) (99)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (23,546) (22,750) (9,059)
FINANCING ACTIVITIES
Net borrowings (payments) on debt obligations 20,300 9,600 (3,500)
Net proceeds from issuance of subordinated debentures 24,909
Net proceeds from issuance of common stock 6 816 1,912
Cash dividends paid and payments in lieu of fractional shares (2,322) (2,099) (1,831)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,984 8,317 21,490
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 223 (13,212) 12,885
Cash and cash equivalents at beginning of year 5 13,217 332
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 228 $ 5 $ 13,217
======== ======== ========
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE Q--NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows (in
$1,000s, except per share amounts):
1999 1998 1997
------ ------ ------
Numerator:
Income before cumulative effect of accounting
change $5,606 $4,628 $5,557
====== ====== ======
Net income $5,409 $4,628 $5,557
====== ====== ======
Denominator:
Weighted average number of shares outstanding
(denominator for basic earnings per share) 6,455 6,284 6,130
Effect of dilutive securities:
Warrants 16
Stock options 35 141 180
------ ------ ------
Potential dilution 35 141 196
------ ------ ------
Denominator for diluted earnings per share--weighted
average number of shares and potential dilution 6,490 6,425 6,326
====== ====== ======
Basic earnings per share:
Income before cumulative effect
of accounting change $ 0.87 $ 0.74 $ 0.91
====== ====== ======
Net income $ 0.84 $ 0.74 $ 0.91
====== ====== ======
Diluted earnings per share:
Income before cumulative effect
of accounting change $ 0.86 $ 0.72 $ 0.88
====== ====== ======
Net income $ 0.83 $ 0.72 $ 0.88
====== ====== ======
Additional disclosures regarding stock options are set forth in Note J.
NOTE R--JANUARY 2000 PURCHASE OF MINORITY INTEREST IN BANK
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.
46
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
CAPITOL BANCORP LTD.
DECEMBER 31, 1999
Page 1 of 2 State or Other
Jurisdiction
Name of Subsidiary of Incorporation
- ------------------ ----------------
CONSOLIDATED SUBSIDIARIES:
Ann Arbor Commerce Bank Michigan
Brighton Commerce Bank (59% owned) Michigan
Capitol National Bank United States
(national bank)
Detroit Commerce Bank (93% owned) Michigan
Grand Haven Bank Michigan
Kent Commerce Bank (51% owned) Michigan
Macomb Community Bank Michigan
Muskegon Commerce Bank (51% owned) Michigan
Oakland Commerce Bank Michigan
Paragon Bank & Trust Michigan
Portage Commerce Bank Michigan
Indiana Community Bancorp Limited (51% owned) Indiana
Elkhart Community Bank
(51% owned by Indiana Community Bancorp Limited) Indiana
Sun Community Bancorp Limited (51% owned) Arizona
Bank of Tucson
(100% owned by Sun Community Bancorp Limited) Arizona
Valley First Community Bank
(52% owned by Sun Community Bancorp Limited) Arizona
Camelback Community Bank
(55% owned by Sun Community Bancorp Limited) Arizona
East Valley Community Bank
(88% owned by Sun Community Bancorp Limited) Arizona
Southern Arizona Community Bank
(51% owned by Sun Community Bancorp Limited) Arizona
Mesa Bank
(53% owned by Sun Community Bancorp Limited) Arizona
Nevada Community Bancorp Limited
(51% owned by Sun Community Bancorp Limited) Nevada
Desert Community Bank
(51% owned by Nevada Community Bancorp Limited) Nevada
Red Rock Community Bank
(51% owned by Nevada Community Bancorp Limited) Nevada
Sunrise Capital Corporation
(57% owned by Sun Community Bancorp Limited) New Mexico
Sunrise Bank of Arizona
(100% owned by Sunrise Capital Corporation) Arizona
<PAGE>
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT - CONTINUED:
CAPITOL BANCORP LTD.
DECEMBER 31, 1999
Page 2 of 2 State or Other
Jurisdiction
Name of Subsidiary of Incorporation
- ------------------ ----------------
CONSOLIDATED SUBSIDIARIES - CONTINUED:
Capitol Trust I Delaware
Unconsolidated Subsidiary:
Amera Mortgage Corporation, Inc. Michigan
(49% owned equity method investee)
Inactive subsidiaries:
MOI, Inc. Michigan
(wholly-owned subsidiary of
Oakland Commerce Bank)
Financial Center Corporation Michigan
C.B. Services, Inc. Michigan
The following summarizes regulatory agencies of the registrant and its
subsidiaries:
The Corporation's state-chartered banks located in Michigan are regulated by the
Financial Institutions Bureau of the Michigan Department of Commerce. Capitol
National Bank, as a national bank, is regulated by the Office of the Comptroller
of the Currency. Bank subsidiaries located in the states Arizona, Nevada and
Indiana are state-chartered and are regulated by banking agencies of each of
those states. Each of the banking subsidiaries, as federally-insured depository
institutions, are also regulated by the Federal Deposit Insurance Corporation.
As a bank holding company, Capitol Bancorp Ltd. is regulated by the Federal
Reserve Board, which also regulates its nonbanking subsidiaries. Sun Community
Bancorp Limited, Nevada Community Bancorp Limited, Sunrise Capital Corporation
and Indiana Community Bancorp Limited are also regulated by the Federal Reserve
Board. In addition to the bank regulatory agencies, the registrant and its
subsidiaries are subject to regulation by other state and federal agencies.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Capitol Bancorp Ltd.
Lansing, Michigan
We hereby consent to the incorporation by reference and use of our report dated
January 31, 2000, which appears on page 22 of Capitol Bancorp Ltd.'s Annual
Report to shareholders (Financial Information Section) for the year ended
December 31, 1999, in that corporation's previously filed Form S-3 Registration
Statement No. 33-71774 for its Shareholder Investment Program.
BDO SEIDMAN, LLP
/s/ BDO Seidman, LLP
March 27, 2000
Grand Rapids, Michigan
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