CAPITOL BANCORP REPORTS IMPROVED CORE OPERATING RESULTS
LANSING, Mich. and PHOENIX, Ariz.: March 4, 2011: Exclusive of a one-time non-cash write-off of all remaining goodwill, a net loss of $26.8 million was incurred for the fourth quarter of 2010, an improvement of more than 50 percent from the preceding quarterly period. Several key factors contributed to significantly improved operating results:
| · | The provision for loan losses decreased 68 percent from the corresponding period of 2009 and 51 percent from the third quarter of 2010. |
| · | Costs associated with foreclosed properties and other real estate owned decreased 80 percent from the fourth quarter of 2009 and 62 percent from the third quarter of 2010. |
| · | Employee compensation and benefits expense decreased 20 percent from the fourth quarter of 2009 and of 16 percent from the third quarter of 2010. |
Consolidated assets declined 31 percent to $3.5 billion at December 31, 2010 from the $5.1 billion reported at December 31, 2009, as a result of bank divestitures and balance-sheet deleveraging strategies. Total portfolio loans approximated $2.7 billion at December 31, 2010, an approximate 15 percent decline for the year. Deposits reflected an approximate 14 percent decline to $3 billion from $3.5 billion reported at December 31, 2009; however, the Corporation’s continued focus on core funding sources resulted in an ongoing favorable improvement in deposit mix as noninterest-bearing deposits approximated 17 percent of total deposits compared to 14 percent at year-end 2009.
Capitol’s Chairman and CEO Joseph D. Reid said, “We continue to focus on risk management and enhancing balance-sheet strength, while improving liquidity. These improvements have resulted from several regional consolidations and multiple bank divestitures over the past eighteen months. In December 2010, we announced a comprehensive capital strategy with the operating objectives of deleveraging our consolidated balance sheet, reducing nonearning assets and strategically redeploying capital to those affiliates weakened by the economic environment. We completed the first phase of this comprehensive strategy in January 2011 with the addition of $19.5 million in capital from the exchange of some of our trust-preferred securities for
previously-unissued common stock and have taken steps to implement the next steps through an increase in the authorized shares of the capital stock of the Corporation, the potential for exchange offers for our development subsidiaries and shareholders’ authorization for a potential reverse stock split in the future. The current challenges remain significant and the burdens represented by elevated levels of nonperforming assets continue to consume capital and managerial resources; however, we are encouraged that these efforts and others will support the Corporation as it continues to weather the storm and return to fundamental performance over time.”
“We are cautiously encouraged by both redeployment of capital resources from divestiture efforts and preliminary signs of recent positive trends in asset quality and operating performance. Nonperforming assets, although still elevated, reflect a second consecutive quarter of decline after six consecutive quarters of adverse growth. The decline in the fourth quarter of 2010 (when compared to the preceding quarter) approximated 1.9 percent. Combining the aggregate quarter-end level of non-performing assets with net charge-offs for each of the past eight quarters, also reflects a second consecutive quarterly decline, measuring an approximate 7% decrease during the fourth quarter of 2010. We remain hopeful these trendlines may be a harbinger of continued improving fundamentals.”
“Net loan charge-offs, which also continue to be elevated, reflected another quarter of active management and resolution-oriented focus, while the full-year 2010 provision for loan losses continued to exceed net charge-offs. The allowance for loan losses approximated 5.52 percent of portfolio loans at December 31, 2010, a significant increase from the 3.57 percent level at year-end 2009 and a significant increase during these difficult times from the 4.94 percent level at September 30, 2010,” added Mr. Reid.
“Divestiture activities have resulted in the sale of 14 institutions, eliminating more than $1.2 billion of assets. Six additional transactions are pending, with assets approximating $345 million. Beyond the combined approximate $1.5 billion of assets involved in such divestitures, ongoing discussions continue in both the divestiture and capital-reallocation arenas to address the deterioration that has occurred in capital. We expect to communicate additional developments as they arise, as all strategic alternatives and prospective sources of support are being actively explored,” said Mr. Reid.
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Quarterly Performance
Core operating results (in $1,000s) are summarized as follows for 2010:
| | | Three Months Ended | |
| | | December 31 | | | September 30(1) | | | June 30 | | | March 31 | |
| | | | | | | | | | | | | |
| Net loss from continuing operations | | $ | (91,826 | ) | | $ | (59,516 | ) | | $ | (50,718 | ) | | $ | (61,940 | ) |
| Add back: | | | | | | | | | | | | | | | | |
| Provision for loan losses | | | 22,420 | | | | 45,885 | | | | 44,600 | | | | 50,100 | |
Costs associated with foreclosed properties and other real estate owned | | | 5,544 | | | | 14,645 | | | | 8,905 | | | | 12,085 | |
| Goodwill impairment | | | 64,505 | | | | -- | | | | -- | | | | -- | |
| | | | | | | | | | | | | | | | | |
| Core operating results | | $ | 643 | | | $ | 1,014 | | | $ | 2,787 | | | $ | 245 | |
| | | | | | | | | | | | | | | | | |
(1) As restated. | | | | | | | | | | | | | | | | |
The foregoing analysis illustrates that core operating results have remained positive throughout 2010. Such results, however, underscore the need to improve operating performance through increased revenues and reduced operating costs.
In the fourth quarter of 2010, consolidated net operating revenues from continuing operations decreased modestly to approximately $32.2 million from $35.6 million for the corresponding period of 2009. Ongoing margin pressures, consistent with a low interest-rate environment, adversely impacted by elevated levels of nonperforming assets, resulted in an 8.6 percent decline in net interest income. The net interest margin decreased to 2.94 percent for the three months ended December 31, 2010 from 3.04 percent for 2009’s comparable period, and 3.01 percent on a linked-quarter basis. Cash and cash equivalents were $565 million, or nearly 16 percent of consolidated total assets at December 31, 2010, reflecting continued focus on liquidity. Other noninterest income totaled $7.3 million, compared to approximately $8.5 million in the comparable 2009 period, a modest 6.2 percent increase versus the $6.9 million reported on a linked-quarter basis. However, core noninterest revenue components continue to decline, in part attributable to Capitol’s deleveraging efforts.
The Corporation continues to emphasize the reduction of operating expenses. Noninterest expenses, although reflecting notable declines in “controllable” salary costs and core operating expenses, increased year-over-year to approximately $103 million in the quarter ended December 31, 2010, primarily as a result of the aforementioned $64.5 million non-cash goodwill impairment. Excluding goodwill impairment charges, year-over-year total operating expenses declined from $74.2 million in 2009’s fourth quarter to approximately $38.5 million in 2010. This improvement was largely driven by a significant decrease in costs associated with foreclosed properties and other real estate owned, which approximated $5.5 million in the fourth quarter of 2010, compared to $27.2 million in the corresponding 2009 period. FDIC insurance premiums and other regulatory fees increased from $3.7 million in 2009’s fourth quarter to approximately $4.2 million in the most recent three-month period. Combined, these two expense areas measured $9.7 million in the most recent quarter, a substantial decrease from the combined approximate $31 million level during the corresponding period of 2009 and the $18.4 million recorded linked-quarter. More importantly, on a core, controllable-expense basis, year-over-year salary costs declined significantly from $19.9 million in the 2009 period to approximately $15.9
million in 2010’s fourth quarter and on a linked-quarter basis reflected a 16 percent contraction from the $19 million figure recorded for the three months ended September 30, 2010.
The Corporation performs its annual review for potential impairment of goodwill in the fourth quarter. Based on its assessment of goodwill, management determined it to be impaired and, accordingly, recorded a one-time non-cash impairment charge of $64.5 million to fully write-off such goodwill as of December 31, 2010.
The fourth quarter 2010 provision for loan losses decreased to $22.4 million from $69.5 million for the corresponding period of 2009. During the fourth quarter of 2010, net loan charge-offs totaled $27.9 million, a significant decrease from 2009’s corresponding level of $50.9 million and continued improvement when compared with the first three quarters ($40.9 million, $33.4 million, and $42.4 million, respectively) of 2010, as the Corporation continues to aggressively manage its nonperforming loans.
Adverse bank performance in the Arizona, Great Lakes and Nevada regions and the continued high level of the provision for loan losses were major reasons for the core operating net loss in the 2010 period.
As announced yesterday, Capitol’s unaudited condensed consolidated financial statements for the three months and nine months ended September 30, 2010 have been revised to reflect an additional provision for loan losses of $11.7 million resulting from Michigan Commerce Bank’s amended regulatory financial statements as of and for the period ended September 30, 2010 filed on February 22, 2011. Michigan Commerce Bank is a significant subsidiary of Capitol. Michigan Commerce Bank’s amendment of its regulatory financial statements as of and for the period ended September 30, 2010 to increase its allowance for loan losses and related provision for loan losses resulted from a recently-completed joint examination of the bank by the Federal Deposit Insurance Corporation and the Office of Financial and Insurance Regulation of the State of Michigan. Such examination commenced in September 2010. The bank’s decision to amend its interim financial statements was based on discussion with those regulatory agencies regarding expectations that certain examination findings, including a change in estimate regarding the bank’s allowance for loan losses as of September 30, 2010, would require such amendment; however, the bank has not yet received the related examination report.
Results for the Year
Net operating revenues approximated $124.6 million for the year ended December 31, 2010, a 3.5 percent decrease compared to $129.1 million in 2009. The provision for loan losses of $156.9 million for 2010 decreased from $175.2 million in 2009, and continued to exceed net charge-offs, resulting in an approximate $17.6 million increase in the allowance for loan losses while portfolio loans decreased about $464 million. The net loss per common share for the year ended December 31, 2010 was $11.16, versus $11.28 reported for the corresponding period in 2009. Excluding non-cash goodwill impairment charges, the net loss per common share was $7.96 for 2010 compared to $11.08 in 2009.
Noninterest expenses expanded 19 percent to $241.8 million, due to the aforementioned goodwill impairment charge in the fourth quarter of 2010. However, excluding non-cash goodwill impairment charges, noninterest expenses of $177.3 million in 2010 reflected an approximate 11.6 percent decrease from $200.5 million in 2009. For 2010, costs associated with foreclosed properties and other real estate owned decreased to $40.4 million from nearly $45 million
reported in 2009, while FDIC insurance premiums and other regulatory fees increased from approximately $13 million in 2009 to $15.7 million in 2010. Reflecting Capitol’s continued conservative credit approach and significant increase in the allowance for loan losses, the provision for loans losses for the year exceeded net charge-offs, reflecting a 1.1x coverage ratio.
Balance Sheet
Divestiture efforts and ongoing balance-sheet deleveraging are focused on strengthening consolidated capital ratios, although the Corporation continues to be classified as “undercapitalized.” As of December 31, 2010, Capitol has a $190.3 million valuation allowance related to deferred tax assets, which may be utilized upon a return to significant core profitability.
Net loan charge-offs of 4.05 percent of average loans (annualized) for the fourth quarter of 2010 represented a decrease from the 5.68 percent in the corresponding period of 2009 and the 4.89 percent on a linked-quarter basis. The ratio of nonperforming loans to total portfolio loans was 11.90 percent at December 31, 2010 compared to 10.46 percent reported at September 30, 2010 and 7.60 percent at December 31, 2009. The ratio of total nonperforming assets to total assets increased to 12.03 percent at December 31, 2010 from 10.62 percent reported at September 30, 2010 and 8.17 percent at December 31, 2009 as the modest declines in aggregate nonperforming assets reported in the past two quarters were outpaced by the dramatic shrinkage in the Corporation’s consolidated balance sheet.
The continuing increase in the nonperforming assets ratio is attributable to borrower stress and delinquency, coupled with limited markets for the sale of real estate, especially in the states of Arizona, Michigan and Nevada, hindering the disposition of such assets. While recent activity reflected some encouragement in the trend of declining level of nonperforming loans in both the Arizona Region (a $13.6 million decline, linked-quarter) and Great Lakes Region (a $13.4 million decline, linked-quarter), both regions continue to reflect materially elevated levels of nonperforming assets. However, modest declines in nonperforming loans experienced in both Arizona and the Great Lakes Region were partially offset by continued deterioration in the Nevada Region. The coverage ratio of the allowance for loan losses in relation to nonperforming loans approximated 46.4 percent at December 31, 2010, consistent with levels reported in recent quarters and a slight decrease from the approximate 47.2 percent reported linked-quarter. The allowance for loan losses as a percentage of portfolio loans increased materially, from 3.57 percent at year-end 2009 to 5.52 percent at December 31, 2010. Reflecting the Corporation’s intent to maintain a conservative allowance for loan losses and balance sheet strength, the provisions for loan losses continued to exceed the heightened level of charge-off activity during 2010.
Comprehensive Capital Strategy
In December 2010, Capitol announced a comprehensive capital strategy focused on the enhancement of the Corporation’s capital levels. Those initiatives are designed to augment Capitol’s existing strategic efforts focused on affiliate divestitures, operational cost savings, balance sheet deleveraging and liquidity. Capitol successfully completed the first of these capital initiatives, an offer to exchange outstanding trust-preferred securities for previously-unissued shares of Capitol’s common stock. On January 31, 2011, those exchanges resulted in an additional $19.5 million of equity for Capitol, the issuance of approximately 19.5 million previously-unissued shares of Capitol’s common stock and the elimination of approximately $2 million of annual interest expense in future periods. By increasing its capital through that
exchange and other contemplated components of its capital strategy, Capitol expects flexibility to prospectively seek market opportunities and implement longer-term operating strategies that may be pursued at the appropriate time.
Affiliate Bank Divestitures and Regional Bank Consolidations
Capitol previously announced plans to sell its controlling interests in several affiliate banks. In December, Capitol completed the sale of its interest in its Arizona-based affiliate Southern Arizona Community Bank and, in January 2011, Capitol completed the sale of another Arizona-based affiliate, Bank of Tucson’s main office. These transactions consisted of approximately $270 million of assets and reallocated nearly $25 million of capital for reinvestment in bank affiliates. Capitol also announced, in late 2010 and early 2011, agreements to sell its interests in California-based Bank of Feather River, North Carolina-based Community Bank of Rowan and Oregon-based High Desert Bank. Those transactions, in addition to three other pending transactions involving affiliates in Indiana, Nevada and Texas, reflect six divestitures awaiting regulatory approvals (and other contingencies) and represent $345 million of assets and the opportunity to reallocate nearly $18 million of capital to other banks within the Capitol Bancorp network. The six pending divestitures are anticipated to be completed in 2011.
During 2010, regional charter consolidations were completed in California, Georgia, Indiana, Michigan, Nevada and Washington, following 2009 charter consolidations in Arizona and Michigan. To date, the regional consolidation effort has resulted in the consolidation of 27 charters into seven geographically-concentrated banks.
Mr. Reid further stated, “These bank divestitures and regional consolidations address several key strategic initiatives of deleveraging our consolidated balance sheet and enabling the reallocation of equity capital to other affiliates still challenged by current economic conditions.”
About Capitol Bancorp Limited
Capitol Bancorp Limited (OTCQB: CBCR) is a community banking company, with a national network of separately chartered banks with operations in 14 states. Founded in 1988, the Corporation has executive offices in Lansing, Michigan, and Phoenix, Arizona.
