1
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, 1998 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.
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: $84,940,336 as of February 17, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 6,344,886 as of
February 17, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
See Cross-Reference Sheet
2
CAPITOL BANCORP LTD.
Form 10-K
Fiscal Year Ended: December 31, 1998
CROSS REFERENCE SHEET
ITEM OF FORM 10-K INCORPORATION BY REFERENCE FROM:
- ----------------- --------------------------------
PART I
------
Item 1, Business Pages 22-24, 31-35, 45 and 58-60,
Annual Report
Item 2, Properties Pages 3-19 and 51, Annual Report, and
Pages 14-15, Proxy Statement
PART II
Item 5, Market for Registrant's Pages 20-21, 52-55 and 64, Annual Report
Common Equity and
Related Stockholder Matters
Item 6, Selected Financial Data Page 20, Annual Report
Item 7, Management's Discussion Pages 22-39, Annual Report
and Analysis of Financial
Condition and Results of
Operations
Item 7a, Quantitative and Qualitative Pages 31-35 and 39, Annual Report
Disclosures About Market
Risk
Item 8, Financial Statements and Pages 40-63 and 20, Annual Report
Supplementary Data
PART III
Item 10, Directors and Executive Pages 4-7, Proxy Statement, and
Officers of the Registrant Pages 2 and 64, Annual Report
Item 11, Executive Compensation Pages 8-14, Proxy Statement
Item 12, Security Ownership of Pages 3-7, 10 and 13, Proxy Statement
Certain Beneficial
Owners and Management
Item 13, Certain Relationships Pages 14-15, Proxy Statement
and Related Transactions
PART IV
Item 14, Exhibits, Financial Statement Pages 40-63, Annual Report
Schedules and Reports on
Form 8-K
KEY:
- ----
"Annual Report" means the 1998 Annual Report of the Registrant provided to
Stockholders and the Commission pursuant to Rule 14a-3(b).
"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-
3
CAPITOL BANCORP LTD.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business...............................................................................................4
ITEM 2. Properties............................................................................................14
ITEM 3. Legal Proceedings.....................................................................................14
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................14
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................15
ITEM 6. Selected Financial Data...............................................................................15
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................15
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................15
ITEM 8. Financial Statements and Supplementary Data...........................................................15
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................15
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-
4
PART I
Item 1, Business.
a. General development of business:
Incorporated by reference from Pages 45-46, 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 45-46, 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 Page 45, Annual Report, under the
caption "Note A--Nature of Operations, Basis of Presentation and Principles of
Consolidation", Pages 31-35, Annual Report, under the caption "Trends Affecting
Operations" and Pages 29-31, Annual Report, under the caption "Liquidity,
Capital Resources and Capital Adequacy".
At December 31, 1998, the Corporation and its subsidiaries employed 307
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 53, Annual Report, under the caption "Note
I--Trust-Preferred Securities".
The following tables (Tables A to G, inclusive), present certain
statistical information regarding the Corporation's business.
-4-
5
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A)
CAPITOL BANCORP LTD.
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 sets forth the daily average balances for the
major asset and liability categories and the actual related interest income and
expense (in thousands) and average yield/cost for the years ended December 31,
1998, 1997, and 1996.
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) 3.39% 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 1.18 X
================= ==============
Year Ended December 31
1996
----------------------------------------------
Interest (1)
Average Income/ Average
Balance Expense Yield/Cost
----------------------------------------------
ASSETS
Investment securities:
U.S. Treasury and government agencies $39,549 $2,234 5.65%
States and political subdivisions (2) 207 18 8.70%
Other 2,510 372 14.82%
Interest-bearing deposits with banks 474 42 8.86%
Federal funds sold 32,318 1,541 4.77%
Loans held for resale 10,737 818 7.62%
Portfolio loans (3) 318,491 31,454 9.88%
-------------- ------------ --------------
Total Interest-Earning
Assets/Interest Income 404,286 36,479 9.02%
Allowance for loan losses (deduct) (4,095)
Cash and due from banks 14,149
Premises and equipment, net 3,188
Other assets 12,734
--------------
Total Assets $430,262
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $35,288 $1,384 3.92%
Time deposits under $100,000 160,502 9,555 5.95%
Time deposits of $100,000 or more 66,106 3,935 5.95%
Other interest-bearing deposits 69,818 2,418 3.46%
Debt obligations 8,625 496 5.75%
Other 12
-------------- ------------ --------------
Total Interest-Bearing
Liabilities/Interest Expense 340,339 17,800 5.23%
Capitol Trust I preferred securities - - -
-------------- ------------ --------------
340,339 17,800 5.23%
Noninterest-bearing demand deposits 44,727
Accrued interest on deposits and
other liabilities 4,166
Minority interest in consolidated subsidiaries 2,439
Stockholders' equity 38,591
--------------
Total Liabilities and
Stockholders' Equity $430,262
============== ------------
Net Interest Income $18,679
============
Interest Rate Spread (4) 3.79%
==============
Net Yield on Interest-Earning Assets (5) 4.62%
==============
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.19 X
=================
(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 is based on net interest income as a percentage of average total
interest-earning assets.
-5-
6
CHANGES IN NET INTEREST INCOME (TABLE B)
CAPITOL BANCORP LTD.
The following table summarizes the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Corporation's net interest income during the
periods indicated. The change in interest attributable 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.
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
On Deposits:
Savings (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
======== ======== ======== ======== ======== ========
Year Ended December 31
---------------------------------
1996 compared to 1995
---------------------------------
Volume Rate Net Total
-------- -------- ---------
Increase (Decrease) In Interest Income:
Investment securities:
U.S. Treasury and government agencies $ 253 ($35) $ 218
States and political subdivisions (2) 10 8
Other (18) 182 164
Interest-bearing deposits with banks 4 28 32
Federal funds sold 444 (356) 88
Loans held for resale 399 119 518
Portfolio loans 5,239 299 5,538
-------- -------- --------
Total 6,319 247 6,566
Increase (Decrease) In Interest Expense
On Deposits:
Savings 99 37 136
Time deposits under $100,000 1,830 25 1,855
Time deposits of $100,000 or more 736 (117) 619
Other interest-bearing deposits 348 (227) 121
Debt obligations 98 (94) 4
Other (14) (14)
Capitol Trust I preferred securities
-------- -------- --------
Total 3,097 (376) 2,721
-------- -------- --------
Increase (Decrease) in Net
Interest Income $ 3,222 $ 623 $ 3,845
======== ======== ========
-6-
7
INVESTMENT PORTFOLIO (TABLE C)
CAPITOL BANCORP LTD.
The following table sets forth the amortized cost and market value of investment
securities as of December 31, 1998, 1997 and 1996 (in thousands):
December 31
-----------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- -------------- --------------
U.S. Treasury and government agencies $80,445 $80,667 $60,430 $60,650
States and political subdivisions 2,897 2,930 1,610 1,603
Other:
Corporate bonds
Federal Reserve Bank stock 116 116 116 116
Federal Home Loan Bank stock 1,431 1,431 1,073 1,073
Corporate stock (1) 1,003 1,003 1,028 1,028
Other investments 317 317
------------- ------------- -------------- --------------
Total other securities 2,867 2,867 2,217 2,217
------------- ------------- -------------- --------------
Total investments $86,209 $86,464 $64,257 $64,470
============= ============= ============== ==============
December 31
------------------------------
1996
------------------------------
Amortized Market
Cost Value
------------- -------------
U.S. Treasury and government agencies $46,162 $46,221
States and political subdivisions 100 100
Other:
Corporate bonds 301 300
Federal Reserve Bank stock 116 116
Federal Home Loan Bank stock 984 984
Corporate stock (1) 1,003 1,003
Other investments
------------- -------------
Total other securities 2,404 2,403
------------- -------------
Total investments $48,666 $48,724
============= =============
(1) Consists primarily of investment in the common stock of Access BIDCO,
Incorporated.
The following table sets forth the amortized cost, relative maturities and
weighted average yields of investment securities at December 31, 1998 (in
thousands):
U.S. Treasury and States and Political
Government Agencies Subdivisions Other
-------------------------------------------------------------------------------
Weighted Weighted Weighted Total
Amortized Average Amortized Average Amortized Average Carrying
Cost Yield Cost Yield Cost Yield Amount
------------- ------------ ------------- ------------- ------------ ----------- ------------
Maturity:
Due in one year or less $40,653 5.11% $40,653
Due after one year but within
five years 35,448 5.77% $2,296 5.27% 37,744
Due after five years but within
ten years 2,089 6.94% 2,089
Due after ten years 2,255 6.71% 601 5.11% 2,856
Without stated maturities $2,867 * 2,867
------------- ------------- ------------ ------------
Total $80,445 $2,897 $2,867 $86,209
============= ============= ============ ============
* 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,
1998:
U.S. Treasury securities 6 months
U.S. Agencies 3 years 9 months
States and political subdivisions 5 years 5 months
-7-
8
LOAN PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D)
CAPITOL BANCORP LTD.
Portfolio Loans outstanding as of the end of each period are shown in the
following table according to type of loan (in thousands):
December 31
---------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Commercial - real estate $417,296 57.62% $262,157 52.14% $180,310 50.42%
Commercial - other 173,055 23.89% 133,781 26.61% 103,151 28.84%
-------------- ------------- -------------- ------------- -------------- -------------
Total commercial loans 590,351 81.51% 395,938 78.75% 283,461 79.26%
Real estate mortgage 80,808 11.16% 66,630 13.25% 53,712 15.02%
Installment 53,121 7.33% 40,187 7.99% 20,450 5.72%
-------------- ------------- -------------- ------------- -------------- -------------
Total portfolio loans $724,280 100.00% $502,755 100.00% $357,623 100.00%
============== ============= ============== ============= ============== =============
December 31
---------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Commercial - real estate $140,462 49.55% $99,330 41.12%
Commercial - other 81,699 28.82% 83,391 34.52%
-------------- ------------- -------------- -------------
Total commercial loans 222,161 78.37% 182,721 75.63%
Real estate mortgage 48,954 17.27% 47,260 19.56%
Installment 12,356 4.36% 11,602 4.80%
-------------- ------------- -------------- -------------
Total portfolio loans $283,471 100.00% $241,583 100.00%
============== ============= ============== =============
The following table presents (in thousands) the remaining maturity of portfolio
loans outstanding at December 31, 1998 according to scheduled repayments of
principal.
Aggregate maturities of portfolio loan balances which are due:
Fixed Variable
Rate Rate Total
-------------- ------------- --------------
In one year or less $193,788 $222,031 $415,819
After one year but within five years 283,085 6,775 289,860
After five years 5,403 5,956 11,359
Non-accrual loans (classified as variable rate) 7,242 7,242
-------------- ------------- --------------
Total $482,276 $242,004 $724,280
============== ============= ==============
The following summarizes, in general, the Corporation'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,
1998, approximately 15% 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
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-
9
TABLE D, CONTINUED
CAPITOL BANCORP LTD.
The aggregate amount of nonperforming portfolio loans is set forth in the
following table. 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 Corporation'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 the Corporation'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 nonperforming loans
(including loans in nonaccrual status) had performed in accordance with their
contractual terms during the year, additional interest income of $398,000 would
have been recorded in 1998. Interest income recognized on loans in nonaccrual
status in 1998 operations approximated $58,000. At December 31, 1998, there were
no material amounts of loans which were restructured or otherwise renegotiated
as a concession to troubled borrowers. Of the nonperforming loans at December
31, 1998, $1.6 million is guaranteed by an agency of the federal government.
December 31
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Nonperforming loans: (in thousands)
Nonaccrual loans: Commercial $2,608 $2,570 $928 $438 $1,121
Real estate 199 59 107 115 156
Installment 185 59 22 28 43
----------- ----------- ----------- ----------- -----------
Total Nonaccrual loans 2,992 2,688 1,057 581 1,320
Past due loans: Commercial 3,963 897 1,009 379 146
Real estate 183 401 549 299 424
Installment 104 25 84 82 40
----------- ----------- ----------- ----------- -----------
Total past due loans 4,250 1,323 1,642 760 610
----------- ----------- ----------- ----------- -----------
Total nonperforming loans $7,242 $4,011 $2,699 $1,341 $1,930
=========== =========== =========== =========== ===========
Nonperforming loans as a percentage
of total portfolio loans 1.00% 0.80% 0.75% 0.47% 0.80%
=========== =========== =========== =========== ===========
Nonperforming loans as a percentage
of total assets 0.71% 0.58% 0.55% 0.35% 0.61%
=========== =========== =========== =========== ===========
Allowance for loan losses as a
percentage of nonperforming loans 121.75% 155.30% 169.62% 274.94% 166.84%
=========== =========== =========== =========== ===========
The table below summarizes activity in other real estate owned, including
transfers to and from the loan portfolio and subsequent payments on or sales of
the property, for each period (in thousands):
Year Ended December 31
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Other real estate owned at January 1 $165 $313 $972 $1,255 $1,364
Properties acquired in restructure
of loans or in lieu of foreclosure 612 1,635 1,658
Properties sold (161) (128) (520) (1,714) (1,455)
Payments received from borrowers or
tenants, credited to carrying amount (75) (10) (47) (300)
Other changes, net (10) (92) (204) (12)
----------- ----------- ----------- ----------- -----------
Other real estate owned at December 31 $541 $165 $313 $972 $1,255
=========== =========== =========== =========== ===========
Other real estate owned reserve at January 1 $0 $0 $0 $64 $0
Net charge-offs 64 64
----------- ----------- ----------- ----------- -----------
Other real estate owned reserve at December 31 $0 $0 $0 $0 $64
=========== =========== =========== =========== ===========
Other real estate owned is valued at the lower of fair value or cost (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-
10
SUMMARY OF LOAN LOSS EXPERIENCE (TABLE E)
CAPITOL BANCORP LTD.
The table below summarizes portfolio loan balances, daily average loan balances,
changes in the allowance for loan losses arising from loans charged-off and
recoveries on loans previously charged-off, by loan category, and additions to
the allowance for loan losses through provisions charged to expense, as of the
end of each period.
Year Ended December 31
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Allowance for loan losses at January 1 $ 6,229 $ 4,578 $ 3,687 $ 3,220 $ 2,500
Allowance of acquired bank 515
Loans charged-off:
Commercial 1,165 551 308 547 339
Real estate 9 117 35 9
Installment 131 49 94 47 36
-------- -------- -------- -------- --------
Total charge-offs 1,305 717 437 594 384
Recoveries:
Commercial 336 288 119 178 106
Real estate 4 18 8 3 3
Installment 30 13 5 41 7
-------- -------- -------- -------- --------
Total recoveries 370 319 132 222 116
-------- -------- -------- -------- --------
Net charge-offs 935 398 305 372 268
Additions to allowance charged to expense 3,523 2,049 1,196 839 473
-------- -------- -------- -------- --------
Allowance for loan losses at December 31 $ 8,817 $ 6,229 $ 4,578 $ 3,687 $ 3,220
======== ======== ======== ======== ========
Total portfolio loans outstanding at December 31 $724,280 $502,755 $357,623 $283,471 $241,583
======== ======== ======== ======== ========
Ratio of allowance for loan losses to
portfolio loans outstanding 1.22% 1.24% 1.28% 1.30% 1.33%
======== ======== ======== ======== ========
Average total portfolio loans for the year $605,923 $425,664 $318,491 $264,919 $203,924
======== ======== ======== ======== ========
Ratio of net charge-offs to average
portfolio loans outstanding 0.15% 0.09% 0.10% 0.14% 0.13%
======== ======== ======== ======== ========
-10-
11
TABLE E, CONTINUED
CAPITOL BANCORP LTD.
The allowance for loan losses has been established as a general allowance for
future losses on the loan portfolio. For internal purposes, management allocates
the allowance to all loan classifications. The amounts allocated in the
following table, which includes all loans for which, based on the Corporation'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.
December 31
--------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- -------- -------- -------
(in thousands)
Commercial $ 4,501 $ 2,875 $ 2,281 $ 1,726 $ 1,831
Real estate mortgage 127 103 67 67 55
Installment 262 185 100 57 61
Unallocated 3,927 3,066 2,130 1,837 1,273
-------- -------- -------- -------- --------
Total Allowance for Loan Losses $ 8,817 $ 6,229 $ 4,578 $ 3,687 $ 3,220
======== ======== ======== ======== ========
Total portfolio loans outstanding $724,280 $502,755 $357,623 $283,471 $241,583
======== ======== ======== ======== ========
Percent of allowance to portfolio loans outstanding 1.22% 1.24% 1.28% 1.30% 1.33%
======== ======== ======== ======== ========
In addition to the Corporation's 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 banks. Loans participating
in this program and related reserves approximated $24.9 million and $2 million,
respectively, at December 31, 1998. Such reserve amounts are separate and
excluded from the allowance for loan losses.
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12
AVERAGE DEPOSITS (TABLE F)
CAPITOL BANCORP LTD.
The following table presents the average balances of deposits (in thousands) and
the average rates of interest paid for the years ended December 31, 1998, 1997
and 1996:
December 31
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------ -----------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------- ---- ------- ---- ------- ----
Noninterest-bearing demand deposits $94,077 $62,166 $44,727
Savings deposits 37,517 3.96% 38,496 4.01% 35,288 3.92%
Time deposits under $100,000 259,916 6.20% 200,108 6.09% 160,502 5.95%
Time deposits of $100,000 or more 165,627 5.63% 104,501 5.99% 66,106 5.95%
Other interest-bearing deposits 189,707 3.80% 110,395 3.72% 69,818 3.46%
-------- -------- --------
Total deposits $746,844 $515,666 $376,441
======== ======== ========
The following table sets forth 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, 1998 (in thousands):
Three months or less $81,468
Three months to twelve months 100,540
Over 12 months 39,092
--------
$221,100
========
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13
FINANCIAL RATIOS (TABLE G)
CAPITOL BANCORP LTD.
The following table shows the ratio of net income to average stockholders'
equity, average total assets and certain other ratios for the years ended
December 31, 1998, 1997 and 1996:
Year Ended December 31
----------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Net Income as a percentage of:
Average stockholders' equity 10.19% 13.28% 12.01%
Average total assets 0.55% 0.96% 1.08%
Average stockholders' equity as
a percentage of average total assets 5.36% 7.22% 8.97%
Dividend payout ratio (cash dividends per share
as a percentage of net income per share) (1):
Basic 45.00% 32.97% 29.41%
Diluted 46.25% 34.09% 30.49%
(1) As restated to reflect the Corporation's 1998 6-for-5 stock split as if it
had occurred at the beginning of the periods presented.
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14
Item 2, Properties.
Substantially all of the Corporation's office locations are leased.
Each of the Corporation's banks operate from a single location, except Capitol
National Bank (which has one branch location in Okemos, Michigan). The addresses
of each bank's main office are stated on pages 3-19, 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 the Corporation 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 51, Annual Report, under the caption "Note
F--Premises and Equipment" and Pages 14-15, Proxy Statement, from the 9th to
11th paragraph thereunder under the caption "Certain Relationships and Related
Transactions".
Management believes the Corporation's and the banks' offices to be in
good and adequate condition and adequately covered by insurance.
Item 3, Legal Proceedings.
As of December 31, 1998, there were no material pending legal
proceedings to which the Corporation 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 the Corporation.
Item 4, Submission of Matters to a Vote of Security Holders.
During the fourth quarter of 1998, no matters were submitted to a vote
by security holders.
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15
PART II
Item 5, Market for Registrant's Common Equity and Related Stockholder Matters.
A. Market Information:
Incorporated by reference from Page 21, Annual Report, under
the caption "Information Regarding the Corporation's Common Stock",
Pages 53-55, Annual Report, under the caption "Note J--Common Stock and
Stock Options" and Page 64, Annual Report, under the caption
"Shareholder Information".
B. Holders:
Incorporated by reference from first sentence of third
paragraph on Page 21, Annual Report, under the caption "Information
Regarding the Corporation's Common Stock".
C. Dividends:
Incorporated by reference from Page 20, Annual Report, under
the caption "Quarterly Results of Operations" and subcaption "Cash
dividends paid per share", Pages 58-60, Annual Report, under the
caption "Note O--Dividend Limitations of Subsidiaries and Other Capital
Requirements" and the first full paragraph commencing on Page 53,
Annual Report, under the caption "Note H--Debt Obligations".
Item 6, Selected Financial Data.
Incorporated by reference from Page 20, Annual Report, under the
caption "Selected Consolidated Financial Data" under the column heading "As of
and for the Year Ended December 31, 1998, 1997, 1996, 1995, and 1994".
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference from Pages 22-38, Annual Report, under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Page 39, Annual Report, under the caption "Forward Looking
Statements".
Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Incorporated by reference from Pages 31-35, Annual Report, under the
caption "Trends Affecting Operations" and Page 39, Annual Report, under the
caption "Forward Looking Statements".
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
Annual Report.
Incorporated by reference from Page 20, Annual Report, under the
caption "Quarterly Results of Operations".
Item 9, Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
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16
PART III
Item 10, Directors and Executive Officers of the Registrant.
Incorporated by reference from Pages 4-7, Proxy Statement, under the
caption "Election of Directors" (excluding Mr. Epolito) and Page 64, Annual
Report, under the caption "Officers of the Corporation".
Item 11, Executive Compensation.
Incorporated by reference from Pages 9-13, Proxy Statement; Page 8,
Proxy Statement, the second paragraph under the caption "Meetings of the Board
of Directors" and Page 14, Proxy Statement, the first five paragraphs under the
caption "Certain Relationships and Related Transactions".
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 4-7, Proxy
Statement, under the caption "Election of Directors" and Page 10, Proxy
Statement, under the captions "Employee Stock Ownership Plan" and "Employee
Retirement 401(k) Plan" and Page 13, Proxy Statement, under the caption
"Directors Deferred Compensation Plan".
Item 13, Certain Relationships and Related Transactions.
Incorporated by reference from Pages 14-15, Proxy Statement, under the
caption "Certain Relationships and Related Transactions".
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17
PART IV
Item 14, Exhibits, Financial Statement Schedules and Reports on Form 8-K.
A. Exhibits:
The following consolidated financial statements of Capitol
Bancorp Ltd. and subsidiaries and report of independent auditors
included on Pages 40-63 of the Annual Report of the registrant to its
stockholders for the year ended December 31, 1998, are incorporated by
reference in Item 7:
Report of Independent Auditors
Consolidated balance sheets--December 31, 1998 and 1997.
Consolidated statements of income--Years ended December 31,
1998, 1997 and 1996.
Consolidated statements of changes in stockholders'
equity--Years ended December 31, 1998, 1997 and 1996.
Consolidated statements of cash flows--Years ended December
31, 1998, 1997 and 1996.
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 1998, no reports on Form 8-K were filed by
the registrant.
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18
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 Senior 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 February 4, 1999.
\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
- --------------------------------- -------------------------------
David O'Leary, Secretary and Director Louis G. Allen, Director
\s\ Paul R. Ballard \s\ David L. Becker
- --------------------------------- -------------------------------
Paul R. Ballard, Executive David L. Becker, Director
Vice President and Director
\s\ Douglas E. Crist \s\ Richard G. Dorner
- --------------------------------- -------------------------------
Douglas E. Crist, Director Richard G. Dorner, Director
\s\ Gary A. Falkenberg
- --------------------------------- -------------------------------
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 \s\ Michael L. Kasten
- --------------------------------- -------------------------------
L. Douglas Johns, Director Michael L. Kasten, Director
\s\ James R. Kaye \s\ Leonard Maas
- --------------------------------- -------------------------------
James R. Kaye, Director Leonard Maas, Director
\s\ Lyle W. Miller
- ---------------------------------
Lyle W. Miller, Director
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19
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 (15)
(c) Subordinated Debenture (15)
(d) Amended and Restated Trust Agreement
dated December 18, 1997 (15)
(e) Preferred Security Certificate dated
December 18, 1997 (15)
(f) Preferred Securities Guarantee Agreement
of Capitol Trust I dated December 18, 1997 (15)
(g) Agreement as to Expenses and Liabilities
of Capitol Trust I (15)
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
(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
(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)
(g) Amendment to Employment Agreement
of Joseph D. Reid, dated October
2, 1989 (3)
-19-
20
PAGE NUMBER OR
INCORPORATED BY
EXHIBIT NO. DESCRIPTION REFERENCE FROM:
- ----------- ----------- ---------------
10 Material Contracts--continued:
(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)
13 Annual Report to Security Holders (16)
21 Subsidiaries of the Registrant
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
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.
-20-
21
KEY - CONTINUED:
- ----------------
(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) Form 10-KSB for the year ended December 31, 1996, filed March 21, 1997.
(15) Post Effective Amendment No.1 to Form S-3, Reg. No. 333-41215 and
333-41215-01 filed February 9, 1998.
(16) Proxy statement of Registrant in Schedule 14A filed pursuant to
Rule 14a-101.
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