LANSING, Mich. and PHOENIX, Ariz.: August 11, 2011: - A net loss of $16.4 million, or ($0.40) per share, was reported for the second quarter of 2011, compared to a net loss of $41.0 million, or ($1.98) per share, for the corresponding period in 2010. The following key factors contributed to these significantly improved operating results.
| Ø | After removing the impact of bank divestitures: |
| · | The provision for loan losses decreased nearly 85 percent from the corresponding period of 2010 and nearly 53 percent from the first quarter of 2011. |
| · | Employee compensation and benefits expense decreased nearly 14 percent from the second quarter of 2010. |
| · | Total operating expenses declined more than 13 percent year-over-year and nearly 19 percent when excluding costs associated with problem asset resolution. |
| Ø | An improvement of 11 basis points in net interest margin year-over-year to approximately 3 percent for the second quarter despite the combined impact of bank divestitures, a turbulent economic environment and challenges in many of the markets where the Corporation’s banks operate. |
Consolidated assets declined nearly 38 percent to $2.9 billion at June 30, 2011 from the $4.7 billion reported at June 30, 2010, and nearly 8 percent on a linked-quarter basis from the nearly $3.2 billion reported for the first quarter of 2011, as a result of bank divestitures and balance-sheet deleveraging strategies. Eliminating the effect of bank divestitures, total portfolio loans decreased nearly 19 percent to $2.0 billion at June 30, 2011, from $2.5 billion reported for the corresponding period in 2010. Despite this decline, due to early signs of some economic stability in certain markets, the Corporation has been able to prudently enhance the earning-asset profile and slightly improve net interest margin. Deposits reflected a 20 percent decline to nearly $2.4 billion from approximately $3.0 billion reported at June 30, 2010, eliminating the effect of bank divestitures; however, the Corporation’s continued focus on core funding sources resulted in an ongoing favorable improvement in deposit mix as noninterest-bearing deposits were in
excess of 17 percent of total deposits at June 30, 2011, compared to less than 16 percent at year-end.
Capitol’s Chairman and CEO Joseph D. Reid said, “Our efforts are focused on addressing the challenges that we continue to face in multiple markets. We continue to work on deleveraging the consolidated balance sheet and reallocating equity capital across our affiliate bank network, while also focusing on efficiently managing corporate risk and improving liquidity. Although declines have been evidenced in recent quarters, the levels of nonperforming assets remain elevated and the management of those assets requires significant attention and resources. We are confident that appropriate steps are being taken through regional consolidations and bank divestiture efforts to address the deterioration that has occurred in capital and we are cautiously encouraged by recent positive trends in asset quality and operating performance.”
“Nonperforming assets reflect a fourth consecutive quarter of decline after six consecutive quarters of adverse growth. While we experienced a more modest 3 percent decline on a linked-quarter basis, nonperforming assets have declined nearly 7 percent from year-end and 13 percent from the year-ago period. In addition, nonperforming loans are down approximately 10 percent from year-end and 18 percent from June 30, 2010.”
“Net loan charge-offs, which also continue to be elevated, reflected another quarter of active management and resolution-oriented focus, declining to $17.6 million from nearly $23.9 million linked-quarter and $30.5 million in the year-ago period. Tied to our continuing efforts to build balance sheet strength, the allowance for loan losses was 5.60 percent of portfolio loans at June 30, 2011, consistent with year-end levels, despite a modest decline in nonperforming assets and a significant increase from the 4.44 percent level for the corresponding period in 2010,” added Mr. Reid.
“Divestiture activities have resulted in the sale of 18 institutions, eliminating nearly $1.8 billion of assets. Six additional transactions are pending, with assets approximating more than $345 million. Beyond the combined $2.1 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 equity capital. We expect to communicate additional developments as they arise, as all strategic alternatives and prospective sources of support are being actively and aggressively explored,” said Mr. Reid.
Quarterly Performance
In the second quarter of 2011, consolidated net operating revenues from continuing operations increased to $24.8 million from $24.2 million for the corresponding period of 2010. The net interest margin increased slightly to 2.99 percent for the three months ended June 30, 2011 from 2.88 percent for 2010’s comparable period, while net interest margin decreased from 3.15 percent on a linked-quarter basis. Cash and cash equivalents were $453 million, or 15 percent of consolidated total assets at June 30, 2011 (and up slightly from the 13 percent level recorded at year-end, when eliminating the impact of bank divestitures). The Corporation continues to focus on liquidity to manage its balance sheet during challenging economic times and other constraints despite the negative short-term effect on net interest income and other noninterest traditional fee revenue. Other noninterest income totaled $5.7 million, compared to nearly $4.4 million in the comparable 2010 period. Core noninterest revenue components, consisting of service charges on deposit accounts, and trust and mortgage fees, continue to decline, partly attributable to Capitol’s divestiture activities.
The Corporation continues to reduce operating expenses. Total noninterest expenses decreased in the recent quarter to nearly $35.2 million from $40.6 million for the three months ended June 30, 2010, after eliminating the impact of bank divestitures. Costs associated with foreclosed properties and other real estate owned increased marginally to $9.3 million in the second quarter of 2011, as the Corporation continues to work through problem asset resolution, compared to nearly $8.6 million in the corresponding 2010 period. FDIC insurance premiums and other regulatory fees decreased from nearly $3.7 million in 2010’s second quarter to approximately $2.6 million in the most recent three-month period. Combined, these two expense areas totaled $11.9 million in the most recent quarter, a decrease from the combined $12.2 million level during the corresponding period of 2010. Further, on a core, controllable-expense basis, year-over-year compensation costs declined approximately 14 percent, from nearly $16 million in the 2010 period to $13.8 million in 2011’s second quarter.
The second quarter 2011 provision for loan losses decreased dramatically to approximately $6.4 million from nearly $41.6 million for the corresponding period of 2010 and approximately $13.5 million on a linked-quarter basis, after the impact of bank divestitures. During the second quarter of 2011, net loan charge-offs totaled $17.6 million, a significant decrease from 2010’s corresponding level of $30.5 million and last quarter’s $23.9 million and continued improvement when compared with the elevated levels in 2010, as the Corporation continues to aggressively manage its nonperforming loans.
Adverse bank performance primarily in the Arizona, Michigan and Nevada markets, and the continued higher than historical level of costs associated with problem asset resolution system-wide were major reasons for the core operating net loss in the three-month period. However, Capitol is encouraged that aggregate levels of nonperforming loans reflected notable declines in the second quarter when compared to year-end: Arizona (down 15.9 percent), Michigan (down 11.2 percent) and Nevada (down 3.2 percent).
Six-Month Performance
Net operating revenues approximated $66.2 million for the six months ended June 30, 2011, compared to the approximate $50.7 million for the year-ago period, an increase fueled almost exclusively by the nearly $17 million gain on an exchange of trust preferred securities recorded in the first quarter of 2011. Excluding this significant component, and other more modest gain-on-sale activities in the periods, core operating revenue consisting of net interest income and traditional fee revenues was consistent with the year-ago period, after removing the impact of the divestiture activities. While continued divestiture activity and significant deleveraging of Capitol’s operations, coupled with measures designed to enhance liquidity levels during these challenging times, has contributed to the reduction in core operating revenues, an ongoing system-wide focus on asset mix and funding sources has helped mitigate these declines. The provision for loan losses of $19.8 million for the first six months of 2011 was a significant decrease from the approximate $87.2 million for the comparable 2010 period. When factoring in the first quarter’s modest profit, driven by the aforementioned gain on the exchange of trust preferred securities, the Corporation reported a net loss of $16.1 million for the first six months of 2011, a notable improvement from the $88.9 million loss reported in 2010’s comparable period. On a per share basis, the net loss for the first half of 2011 was $0.44, a dramatic improvement versus the $4.67 reported for the corresponding period in 2010.
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.” The challenges, and multiple efforts to address this capital-restoration priority, remain ongoing. As of June 30, 2011, Capitol has a $210.3 million valuation allowance related to deferred tax assets, which may be released upon a return to significant core profitability. In July, Capitol announced that it had adopted a Tax Benefits Preservation Plan designed to preserve substantial tax assets. This plan is similar to tax benefit preservation plans adopted by other public companies with significant tax attributes. The purpose of such a plan is to protect Capitol’s ability to carry forward its net operating losses and certain other tax attributes for utilization in certain circumstances to offset future taxable income and reduce its federal income tax liability.
Net loan charge-offs of 3.32 percent of average loans (annualized) for the second quarter of 2011 represented a decrease from the 3.64 percent in the corresponding period of 2010 and the 3.78 percent on a linked-quarter basis. The ratio of nonperforming loans to total portfolio loans was 13.23 percent at June 30, 2011, still significantly elevated from the 9.93 percent at June 30, 2010. The ratio of total nonperforming assets to total assets increased to 12.65 percent at June 30, 2011 from 12.58 percent reported at March 31, 2011 and 9.86 percent at June 30, 2010. Despite the increase in these ratios due to the significant deleveraging of the consolidated balance sheet that has occurred over the past two years, the Corporation experienced declines in both the percentage and aggregate levels of nonperforming loans and nonperforming assets (decreases of 3.2 percent and 2.9 percent, respectively, from March 31, 2011, or approximately $8.9 million and $11.1 million, respectively), after removing the impact of the bank divestitures.
The continuing increase in the nonperforming assets ratio is attributable to borrower stress and delinquency, coupled with limited outlets for the sale of real estate, especially in the Arizona, Michigan and Nevada markets, hindering the disposition of such assets. While recent activity reflected some encouragement in the trend of a declining level of nonperforming loans in the Arizona Region (a $5.3 million decline from year-end), the Great Lakes Region (a $16.0 million decline from year-end) and the Nevada Region (a $2.8 million decline from year-end), all three regions continue to reflect materially elevated levels of nonperforming assets. The coverage ratio of the allowance for loan losses in relation to nonperforming loans was 42.3 percent at June 30, 2011, fairly consistent with levels reported in recent quarters. The allowance for loan losses as a percentage of portfolio loans increased materially, from 4.44 percent at June 30, 2010 to 5.60 percent at June 30, 2011, but remained relatively flat with the 5.58 percent recorded in the previous quarter.
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 $2.4 million of annual interest expense in future periods. Additional prospective debt-for-equity exchanges are being assessed, as well as potential external capital sources that the Corporation
continues to pursue. Given Capitol’s current low equity levels, the inability to successfully access these potential new capital resources could threaten the Corporation’s ability to continue as a going concern.
Affiliate Bank Divestitures and Regional Bank Consolidations
Capitol previously announced plans to sell its controlling interests in several affiliate banks. During the second quarter, Capitol completed the divestiture of North Carolina-based Community Bank of Rowan. After the close of the second quarter, Capitol also announced the completion of the sale of California-based Sunrise Bank and Washington-based Bank of the Northwest. These three recent transactions consisted of approximately $520 million of assets and reallocated nearly $29 million of capital for reinvestment in bank affiliates, with most of this activity occurring after the close of the second quarter of 2011.
Capitol has also entered into agreements to sell its interests in six additional affiliates in various regions of the country. Those transactions, pending regulatory approvals (and other contingencies), represent more than $345 million of assets and the opportunity to reallocate approximately $14 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, and additional potential charter consolidations are being assessed.
About Capitol Bancorp Limited
Capitol Bancorp Limited is a community banking company, with a national network of separately chartered banks with operations in 13 states. Founded in 1988, the Corporation has executive offices in Lansing, Michigan, and Phoenix, Arizona.
