UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______ to _______
Commission file number 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2761672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common stock, No par value: 7,822,278 shares outstanding as of
July 31, 2001.
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including Capitol's
consolidated financial statements, Management's Discussion and Analysis of
Financial Condition and Results of Operations and in documents incorporated into
this document by reference that are not historical facts, including, without
limitation, statements of future expectations, projections of results of
operations and financial condition, statements of future economic performance
and other forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, are subject to known and unknown
risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of Capitol and/or its subsidiaries and
other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "believe", and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of Capitol's efforts
to implement its business strategy, (ii) changes in interest rates, (iii)
legislation or regulatory requirements adversely impacting Capitol's banking
business and/or expansion strategy, (iv) adverse changes in business conditions
or inflation, (v) general economic conditions, either nationally or regionally,
which are less favorable than expected and that result in, among other things, a
deterioration in credit quality and/or loan performance and collectability, (vi)
competitive pressures among financial institutions, (vii) changes in securities
markets, (viii) actions of competitors of Capitol's banks and Capitol's ability
to respond to such actions, (ix) the cost of capital, which may depend in part
on Capitol's asset quality, prospects and outlook, (x) changes in governmental
regulation, tax rates and similar matters, and (xi) other risks detailed in
Capitol's other filings with the Securities and Exchange Commission. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. All subsequent written or oral forward-looking statements
attributable to Capitol or persons acting on its behalf are expressly qualified
in their entirety by the foregoing factors. Investors and other interested
parties are cautioned not to place undue reliance on such statements, which
speak as of the date of such statements. Capitol undertakes no obligation to
release publicly any revisions to these forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of unanticipated events.
Page
----
Item 1. Financial Statements:
Consolidated balance sheets - June 30, 2001 and
December 31, 2000. 3
Consolidated statements of income - Three months and
six months ended June 30, 2001 and 2000. 4
Consolidated statements of changes in stockholders'
equity - Six months ended June 30, 2001 and 2000. 5
Consolidated statements of cash flows - Six months ended
June 30, 2001 and 2000. 6
Notes to consolidated financial statements. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 2. Changes in Securities and Use of Proceeds. 19
Item 3. Defaults Upon Senior Securities. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
Page 2 of 20
PART I, ITEM 1
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of June 30, 2001 and December 31, 2000
June 30 December 31
2001 2000
----------- -----------
(in thousands)
ASSETS
Cash and due from banks $ 82,578 $ 71,480
Interest-bearing deposits with banks 21,657 17,027
Federal funds sold 87,593 54,277
----------- -----------
Total cash and cash equivalents 191,828 142,784
Loans held for resale 42,622 21,322
Investment securities:
Available for sale, carried at market value 36,397 62,292
Held for long-term investment, carried at
amortized cost which approximates
market value 7,582 6,634
----------- -----------
Total investment securities 43,979 68,926
Portfolio loans:
Commercial 1,373,666 1,173,736
Real estate mortgage 117,678 113,324
Installment 73,322 68,738
----------- -----------
Total portfolio loans 1,564,666 1,355,798
Less allowance for loan losses (20,420) (17,449)
----------- -----------
Net portfolio loans 1,544,246 1,338,349
Premises and equipment, net 17,212 14,651
Accrued interest income 9,830 9,778
Excess of cost over net assets
of acquired subsidiaries 7,090 6,348
Other assets 25,160 27,918
----------- -----------
TOTAL ASSETS $ 1,881,967 $ 1,630,076
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 244,435 $ 209,023
Interest-bearing 1,385,142 1,191,876
----------- -----------
Total deposits 1,629,577 1,400,899
Debt obligations 71,288 58,150
Accrued interest on deposits and
other liabilities 14,754 13,721
----------- -----------
Total liabilities 1,715,619 1,472,770
GUARANTEED PREFERRED BENEFICIAL
INTERESTS IN THE CORPORATION'S
SUBORDINATED DEBENTURES 24,345 24,327
MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES 66,238 62,575
STOCKHOLDERS' EQUITY Common stock, no par value:
25,000,000 shares authorized;
issued and outstanding: 2001 - 7,822,278 shares
2000 - 7,673,363 shares 67,615 65,939
Retained earnings 10,004 6,569
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) 142 (108)
----------- -----------
77,761 72,400
Less note receivable from exercise of stock options
and unallocated ESOP shares (1,996) (1,996)
----------- -----------
Total stockholders' equity 75,765 70,404
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,881,967 $ 1,630,076
=========== ===========
Page 3 of 20
CAPITOL BANCORP LTD.
Consolidated Statements of Income
For the Three Months and Six Months Ended June 30, 2001 and 2000
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Interest income:
Portfolio loans (including fees) $ 36,504 $ 29,413 $ 71,508 $ 55,783
Loans held for resale 637 176 1,234 272
Taxable investment securities 521 1,160 1,347 2,355
Federal funds sold 862 1,040 1,877 1,940
Interest-bearing deposits with banks and other 290 190 589 358
Dividends on investment securities 80 62 153 122
-------- -------- -------- --------
Total interest income 38,894 32,041 76,708 60,830
Interest expense:
Demand deposits 4,195 3,768 8,509 7,134
Savings deposits 403 421 837 829
Time deposits 12,782 10,056 25,734 18,924
Debt obligations and other 1,801 1,439 3,464 2,821
-------- -------- -------- --------
Total interest expense 19,181 15,684 38,544 29,708
-------- -------- -------- --------
Net interest income 19,713 16,357 38,164 31,122
Provision for loan losses 1,697 2,004 3,321 3,366
-------- -------- -------- --------
Net interest income after provision for loan losses 18,016 14,353 34,843 27,756
Noninterest income:
Service charges on deposit accounts 810 491 1,520 952
Trust fee income 526 270 1,009 532
Fees from origination of non-portfolio residential
mortgage loans 789 259 1,391 556
Realized gains on sale of investment
securities available for sale -- 114 3 110
Other 364 363 689 674
-------- -------- -------- --------
Total noninterest income 2,489 1,497 4,612 2,824
Noninterest expense:
Salaries and employee benefits 9,730 7,077 18,743 13,809
Occupancy 1,328 1,104 2,703 2,147
Equipment rent, depreciation and maintenance 1,114 993 2,150 1,941
Deposit insurance premiums 63 66 119 113
Other 3,856 3,721 7,774 7,174
-------- -------- -------- --------
Total noninterest expense 16,091 12,961 31,489 25,184
-------- -------- -------- --------
Income before federal income taxes and minority interest 4,414 2,889 7,966 5,396
Federal income taxes 1,370 995 2,801 1,892
-------- -------- -------- --------
Income before minority interest 3,044 1,894 5,165 3,504
Credit (charge) resulting from minority interest in net
losses (income) of consolidated subsidiaries (444) 36 (182) 144
-------- -------- -------- --------
NET INCOME $ 2,600 $ 1,930 $ 4,983 $ 3,648
======== ======== ======== ========
NET INCOME PER SHARE -- Note C
Page 4 of 20
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2001 and 2000
(in thousands except share data)
Note
Receivable
from Exercise
of Stock
Accumulated Options and
Other Unallocated
Common Retained Comprehensive ESOP
Stock Earnings Income Shares Total
-------- -------- -------- -------- --------
Six Months Ended June 30, 2000
Balances at January 1, 2000 $ 56,648 $ 1,068 $ (907) $ (2,141) $ 54,668
Issuance of 10,734 shares of common stock
upon exercise of stock options 83 83
Proceeds from sale of 266,783 shares of common stock
and 53,352 warrants to purchase common stock 2,930 2,930
Issuance of 124,855 shares of common stock to
acquire minority interest in bank subsidiary 1,337 1,337
Cash dividends paid (1,242) (1,242)
Components of comprehensive income:
Net income for the period 3,648 3,648
Market value adjustment for investment
securities available for sale (net of
income tax effect) (35) (35)
--------
Comprehensive income for the period 3,613
-------- -------- -------- -------- --------
BALANCES AT JUNE 30, 2000 $ 60,998 $ 3,474 $ (942) $ (2,141) $ 61,389
======== ======== ======== ======== ========
Six Months Ended June 30, 2001
Balances at January 1, 2001 $ 65,939 $ 6,569 $ (108) $ (1,996) $ 70,404
Proceeds from sale of 130,000 shares
of common stock and 32,500 warrants to
purchase common stock 1,495 1,495
Issuance of 1,873 shares of common stock
upon exercise of warrants 20 20
Issuance of 17,043 shares of common stock
upon exercise of stock options 161 161
Cash dividends paid (1,548) (1,548)
Components of comprehensive income:
Net income for the period 4,983 4,983
Market value adjustment for investment
securities available for sale (net of
income tax effect) 250 250
--------
Comprehensive income for the period 5,233
-------- -------- -------- -------- --------
BALANCES AT JUNE 30, 2001 $ 67,615 $ 10,004 $ 142 $ (1,996) $ 75,765
======== ======== ======== ======== ========
Page 5 of 20
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2000
2001 2000
--------- ---------
(in thousands)
OPERATING ACTIVITIES
Net income $ 4,983 $ 3,648
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 3,321 3,366
Depreciation of premises and equipment 1,692 1,592
Amortization of goodwill and other intangibles 386 245
Net accretion of investment security discounts (31) (38)
Loss on sale of premises and equipment 105 1
Minority interest in net income (loss) of consolidated subsidiaries 182 (144)
Originations and purchases of loans held for resale (298,386) (81,805)
Proceeds from sales of loans held for resale 277,086 76,415
Decrease (increase) in accrued interest income and other assets 1,298 (5,188)
Increase (decrease) in accrued interest and other liabilities 1,033 (119)
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES (8,331) (2,027)
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale 500 1,096
Proceeds from maturities of investment securities
available for sale 43,298 53,883
Purchases of investment securities available for sale (18,454) (25,894)
Net increase in portfolio loans (209,218) (153,181)
Proceeds from sales of premises and equipment 292 14
Purchases of premises and equipment (4,650) (1,212)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (188,232) (125,294)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 132,261 75,937
Net increase in certificates of deposit 96,417 103,130
Net borrowings (payments) on debt obligations 13,138 (10,300)
Resources provided by minority interests 3,663 5,972
Net proceeds from issuance of common stock 1,676 3,013
Cash dividends paid (1,548) (1,242)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 245,607 176,510
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 49,044 49,189
Cash and cash equivalents at beginning of period 142,784 104,306
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 191,828 $ 153,495
========= =========
Page 6 of 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD.
NOTE A -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Capitol
Bancorp Ltd. ("Capitol") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q. Accordingly, they do not include all information and
footnotes necessary for a fair presentation of consolidated financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Capitol
considers necessary for a fair presentation of the interim periods.
The results of operations for the six-month period ended June 30, 2001 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2001.
The consolidated balance sheet as of December 31, 2000 was derived from
audited consolidated financial statements as of that date. Certain 2000 amounts
have been reclassified to conform to the 2001 presentation.
NOTE B -- NEW BANKS AND PENDING BANK APPLICATIONS
Sunrise Bank of San Diego, located in San Diego, California, opened in
January 2001. It is majority-owned by Sunrise Capital Corporation which is
majority-owned by Sun Community Bancorp Limited, a subsidiary of Capitol.
At June 30, 2001, efforts were underway for formation of new banks in
California and Nevada.
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Page 7 of 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - CONTINUED
NOTE C -- NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator--net income for the period $2,600,000 $1,930,000 $4,983,000 $3,648,000
========== ========== ========== ==========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic earnings per share) 7,807,442 7,060,085 7,742,229 6,956,590
Effect of dilutive securities--stock options 155,574 38,609 120,280 28,732
---------- ---------- ---------- ----------
Denominator for dilutive net income per share--
Weighted average number of common shares and
potential dilution 7,963,016 7,098,694 7,862,509 6,985,322
========== ========== ========== ==========
Net income per share:
Basic $ 0.33 $ 0.27 $ 0.64 $ 0.52
========== ========== ========== ==========
Diluted $ 0.33 $ 0.27 $ 0.63 $ 0.52
========== ========== ========== ==========
NOTE D -- PRIVATE PLACEMENT OF COMMON STOCK
In March 2001, Capitol completed a private placement of 130,000 shares of
common stock and 32,500 warrants (each such warrant permitting the holder to
purchase one share of common stock prior to the expiration date of the warrant
in March 2003). Proceeds from the offering approximated $1.5 million and will be
used for debt retirement and additional investment in bank development
activities.
NOTE E -- IMPACT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (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 are included in income, or in
comprehensive income, depending on whether the instrument qualifies for hedge
accounting and the type of hedging instrument involved. This new standard became
effective January 1, 2001 and had no effect on Capitol's financial statements.
In early July 2001, the Securities and Exchange Commission, American
Institute of Certified Public Accountants and Federal Financial Institutions
Examination Council each issued new guidance (some of which remains to be
finalized) on accounting for loan loss reserves (also known as allowances for
loan losses). While the new guidance does not change prior accounting rules in
this area, it provides additional clarification and guidance on how such
reserves and allowances may be documented by management.
Page 8 of 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - CONTINUED
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS (CONTINUED)
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires
that all business combinations be accounted for under a prior standard of
purchase accounting, eliminating the so-called pooling-method which was used to
account for some business combinations. Statement No. 141 requires that the
purchase method be used for business combinations initiated after June 30, 2001.
This new standard is not expected to have a material effect on Capitol's
consolidated financial statements.
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead to be reviewed for impairment. Amortization of
goodwill ceases upon adoption of the Statement, which for most companies, will
be January 1, 2002. This new standard requires that goodwill be reviewed
periodically for impairment and, accordingly, impairment adjustments of goodwill
be charged against earnings, when determined. Management has not completed its
analysis of this new standard, however, its preliminary review has concluded
that, upon implementation, future amortization of goodwill will be reduced or
eliminated.
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.
NOTE F -- SUBSEQUENT EVENTS
In July 2001, Capitol participated in two private placements of pooled
trust-preferred securities. One is a variable rate security totaling $15 million
and the second is a fixed-rate security of $10 million. Both have similar terms
(due in 2031) and, subject to certain provisions, may be repaid early. Net
proceeds from these transactions approximated $25 million and will be used for
debt repayment, bank development and other corporate purposes. These securities
are expected to be treated as elements of capital for regulatory purposes.
[The remainder of this page intentionally left blank]
Page 9 of 20
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Total assets approximated $1.88 billion at June 30, 2001, an increase of
$250 million from the December 31, 2000 level of $1.63 billion. The balance
sheets include Capitol and its consolidated subsidiaries.
Portfolio loans increased during the six-month period by approximately $209
million. Loan growth was funded primarily by higher levels of time deposits. The
majority of portfolio loan growth occurred in commercial loans, which increased
approximately $200 million, consistent with the banks' emphasis on commercial
lending activities. Portfolio loan growth in 2001 is net of about $20.2 million
of commercial loans sold to other financial institutions. Loans held for resale
(principally residential mortgage loans to be sold in secondary markets) nearly
doubled in the first half of 2001, mainly due to higher loan origination volumes
during periods of lower interest rates.
The allowance for loan losses at June 30, 2001 approximated $20.4 million
or 1.31% of total portfolio loans, a slight increase from the year-end 2000
ratio of 1.29%.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the loan portfolio at the
balance sheet date. Management's determination of the adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors.
[The remainder of this page intentionally left blank]
Page 10 of 20
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the interim periods (in thousands):
2001 2000
---------- ----------
Allowance for loan losses at January 1 $ 17,449 $ 12,639
Loans charged-off:
Commercial 477 1,093
Real estate mortgage 10 67
Installment 139 68
---------- ----------
Total charge-offs 626 1,228
Recoveries:
Commercial 258 154
Real estate mortgage 3 4
Installment 15 9
---------- ----------
Total recoveries 276 167
---------- ----------
Net charge-offs 350 1,061
Additions to allowance charged to expense 3,321 3,366
---------- ----------
Allowance for loan losses at June 30 $ 20,420 $ 14,944
========== ==========
Average total portfolio loans for period ended June 30 $1,463,142 $1,135,410
========== ==========
Ratio of net charge-offs (annualized) to average
portfolio loans outstanding 0.04% 0.19%
========== ==========
For internal purposes, management allocates the allowance to all loan
classifications. The amounts allocated in the following table (in thousands),
include all loans for which, based on Capitol's loan rating system, management
has concerns, and should not be interpreted as an indication of future
charge-offs. In addition, amounts allocated are not intended to reflect amounts
that may be available for future losses.
June 30, 2001 December 31, 2000
----------------------- -----------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
---------- ----- ---------- -----
Commercial $ 11,005 0.70% $ 8,307 0.61%
Real estate mortgage 200 0.01 147 0.01
Installment 560 0.04 551 0.04
Unallocated 8,655 0.55 8,444 0.62
---------- ----- ---------- -----
Total allowance for loan losses $ 20,420 1.31% $ 17,449 1.29%
========== ===== ========== =====
Total portfolio
loans outstanding $1,564,666 $1,355,798
========== ==========
Page 11 of 20
In addition to the allowance for loan losses, certain commercial loans in
Michigan and Indiana are enrolled in state-sponsored loan programs and have
additional reserves established to provide for loss protection. At June 30,
2001, total loans under these programs approximated $33.7 million. Reserves
related to these loans, which are represented by earmarked funds on deposit at
some of the bank subsidiaries, approximated $1.5 million and are not included in
the allowance for loan losses. In 2001, the Michigan agency announced revised
plans to terminate its loan program in 2002.
Impaired loans (i.e., loans for which there is a reasonable probability
that borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material in 2000 and through
June 30, 2001.
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
June 30 Dec 31
2001 2000
------- -------
Nonaccrual loans:
Commercial $ 6,444 $ 4,082
Real estate 388 163
Installment 112 171
------- -------
Total nonaccrual loans 6,944 4,416
Past due (>90 days) loans:
Commercial 2,770 1,656
Real estate 972 534
Installment 378 151
------- -------
Total past due loans 4,120 2,341
------- -------
Total nonperforming loans $11,064 $ 6,757
======= =======
Nonperforming loans increased approximately $4.3 million during the
six-month period ended June 30, 2001. Most of the nonaccrual loans at June 30,
2001 are a small number of loans in various stages of resolution which
management believes to be adequately collateralized or otherwise appropriately
considered in its determination of the adequacy of the allowance for loan
losses.
Other real estate owned (generally real estate acquired through foreclosure
or a deed in lieu of foreclosure and classified as a component of other assets)
approximated $2.2 million at June 30, 2001 and $3.1 million at December 31,
2000.
Page 12 of 20
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming loans and certain ratios
(dollars in thousands):
Allowance as a
Percentage
Total Allowance for Nonperforming of Total
Portfolio Loans Loan Losses Loans Portfolio Loans
----------------------- ------------------ ----------------- ----------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
2001 2000 2001 2000 2001 2000 2001 2000
---------- ---------- ------- ------- ------- ------- ------ ------
Ann Arbor Commerce Bank $ 215,342 $ 208,114 $ 2,929 $ 2,810 $ 909 $ 799 1.36% 1.35%
Brighton Commerce Bank 59,113 53,886 680 602 1.15 1.12
Capitol National Bank 131,990 130,384 1,925 1,757 1,702 805 1.46 1.35
Detroit Commerce Bank(1) 27,050 21,081 314 245 390 1 1.16 1.16
Grand Haven Bank 75,599 67,419 999 861 713 474 1.32 1.28
Kent Commerce Bank 49,882 40,346 579 444 55 73 1.16 1.10
Macomb Community Bank 90,622 86,886 1,035 964 73 1.14 1.11
Muskegon Commerce Bank 61,674 55,431 716 617 801 125 1.16 1.11
Oakland Commerce Bank 82,662 79,598 1,086 971 600 515 1.31 1.22
Paragon Bank & Trust 75,787 64,820 890 807 894 507 1.17 1.24
Portage Commerce Bank 111,842 112,674 1,463 1,496 2,644 1,651 1.31 1.33
Indiana Community Bancorp Limited:
Elkhart Community Bank(1) 26,380 17,968 396 270 1.50 1.50
Goshen Community Bank(1) 13,430 2,383 202 36 1.50 1.51
Sun Community Bancorp Limited:
Arrowhead Community Bank(1) 17,263 4,724 259 71 1.50 1.50
Bank of Tucson 83,806 75,359 1,154 1,023 1.38 1.36
Camelback Community Bank 45,837 37,822 614 483 250 1.34 1.28
East Valley Community Bank(1) 26,627 25,937 423 357 225 1.59 1.38
Mesa Bank(1) 38,201 28,930 478 374 27 1.25 1.29
Southern Arizona Community Bank(1) 40,218 36,135 503 434 1.25 1.20
Valley First Community Bank 43,816 42,759 697 663 185 306 1.59 1.55
Yuma Community Bank(1) 11,363 800 173 13 1.52 1.62
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 31,600 17,052 474 257 240 241 1.50 1.41
Desert Community Bank(1) 42,912 29,426 644 441 1,290 1,089 1.50 1.50
Red Rock Community Bank(1) 56,242 38,666 844 586 1.50 1.52
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 25,844 16,259 349 238 1.35 1.46
Sunrise Bank of Arizona(1) 55,063 59,465 733 650 84 35 1.33 1.09
Sunrise Bank of San Diego(1) 24,137 326 1.35
Other, net 364 1,474 (465) (21) 9 109
---------- ---------- ------- ------- ------- ------- ----- -----
Consolidated $1,564,666 $1,355,798 $20,420 $17,449 $11,064 $ 6,757 1.31% 1.29%
========== ========== ======= ======= ======= ======= ===== =====
- ----------
(1) As a condition of charter approval, bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years of
operations.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2001 amounted to $4,983,000
($.63 per diluted share), an increase from the $3,648,000 ($.52 per share)
earned from operations during the corresponding period of 2000.
Second quarter 2001 earnings were a new record level of revenue and net
income. This period was benefited by strong bank performance coupled with
earnings from Sun Community Bancorp, the southwestern bank development
affiliate.
Page 13 of 20
Operating results (in thousands) were as follows:
Six months ended June 30
------------------------------------------------------------
Total Assets Return on Return on
----------------------- Net Income Beginning Equity Average Assets
June 30 Dec 31 ------------------ ----------------- ----------------
2001 2000 2001 2000 2001 2000 2001 2000
---------- ---------- ------- ------- ------- ------- ------ ------
Ann Arbor Commerce Bank $ 252,467 $ 242,180 $ 2,002 $ 1,741 22.98% 22.53% 1.61% 1.59%
Brighton Commerce Bank 68,832 62,431 257 235 9.50 10.03 .81 .84
Capitol National Bank 158,761 148,385 1,194 1,102 21.47 22.17 1.57 1.57
Detroit Commerce Bank 33,902 30,269 (86) 1 n/a .08 n/a .01
Grand Haven Bank 85,145 76,644 460 557 15.57 20.85 1.13 1.52
Kent Commerce Bank 55,171 45,288 (26) 45 n/a 2.56 n/a .21
Macomb Community Bank 108,917 100,597 526 546 11.82 13.64 .98 1.01
Muskegon Commerce Bank 68,681 61,867 360 253 12.40 13.13 1.08 .96
Oakland Commerce Bank 104,799 97,099 695 368 18.46 9.91 1.34 .78
Paragon Bank & Trust 88,012 79,504 227 277 7.21 8.36 .54 .63
Portage Commerce Bank 131,092 128,802 801 935 16.75 21.15 1.24 1.47
Indiana Community Bancorp Limited:
Elkhart Community Bank 30,718 24,259 (64) (165) n/a n/a n/a n/a
Goshen Community Bank(1) 19,292 8,402 (254) n/a n/a n/a n/a n/a
Sun Community Bancorp Limited:
Arrowhead Community Bank(1) 21,378 8,091 (275) n/a n/a n/a n/a n/a
Bank of Tucson 111,206 98,285 1,037 982 24.24 28.31 2.02 2.24
Camelback Community Bank 56,280 49,364 208 55 10.50 3.32 .83 .30
East Valley Community Bank 37,721 34,393 (73) (396) n/a n/a n/a n/a
Mesa Bank 44,804 36,529 183 69 8.83 3.56 .90 .49
Southern Arizona Community Bank 48,172 40,156 113 36 5.76 1.93 .50 .23
Valley First Community Bank 51,443 53,081 252 50 9.57 2.42 .90 .22
Yuma Community Bank(1) 16,286 5,064 (310) n/a n/a n/a n/a n/a
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 35,038 26,060 (49) (252) n/a n/a n/a n/a
Desert Community Bank 49,910 35,511 43 (150) 1.93 n/a .21 n/a
Red Rock Community Bank 66,608 44,193 378 (54) 9.55 n/a 1.33 n/a
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 39,021 19,762 70 (240) 3.87 n/a .48 n/a
Sunrise Bank of Arizona 63,279 63,930 238 42 9.33 1.99 .74 .21
Sunrise Bank of San Diego(2) 29,174 n/a (743) n/a n/a n/a n/a n/a
Other, net 5,858 9,930 (2,181) (2,389) n/a n/a n/a n/a
---------- ---------- ------- ------- ------- ------- ----- -----
Consolidated $1,881,967 $1,630,076 $ 4,983 $ 3,648 14.16% 13.34% .57% .52%
========== ========== ======= ======= ======= ======= ===== =====
- ----------
n/a Not applicable
(1) Commenced operations as DE NOVO banks in 2000.
(2) Commenced operations as a DE NOVO bank in 2001.
Net interest income increased 22.6% during the six-month period versus the
corresponding period of 2000. This increase is attributable to the expansion in
number of banks and the banks' growth.
Noninterest income increased in 2001 to $4.6 million for the six-month
period, as compared with $2.8 million in 2000. Service charge revenue and trust
fee income both increased due to volume in the 2001 period by 59.7% and 89.7%,
respectively, compared to 2000. Fees from origination of non-portfolio
residential mortgage loans more than doubled in the 2001 period, compared to
2000, due to higher volume resulting from periods of lower interest rates.
Provisions for loan losses approximated $3,321,000 for the six months ended
June 30, 2001 compared to $3,366,000 during the corresponding 2000 period. The
provisions for loan losses are based upon management's analysis of the allowance
for loan losses, as previously discussed.
Page 14 of 20
Noninterest expense for the six months ended June 30, 2001 approximated $32
million compared with $25 million in 2000. The increase in noninterest expense
is associated with newly formed banks, growth and increases in general operating
costs. Increases in both employee compensation and occupancy mostly relate to
the growth in the number of banks within the consolidated group.
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $228.7 million for the
six-month 2001 period, compared to $179.1 million in 2000. Such growth occurred
in all deposit categories, with the majority coming from time deposits.
Capitol's banks generally do not rely on brokered deposits as a key funding
source; brokered deposits approximated $118 million as of June 30, 2001, or
about 7.2% of total deposits. Brokered deposits, as a funding source, have
increased in recent periods, due to competitive environments and increased
depositor usage of the Internet, and may similarly increase in future periods.
Noninterest-bearing deposits approximated 15% of total deposits at June 30,
2001 and December 31, 2000. Levels of noninterest-bearing deposits fluctuate
based on customers' transaction activity.
Interim 2001 deposit growth was deployed primarily into commercial loans,
consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $191.8 million or 10.2% of total
assets at June 30, 2001 as compared with $142.8 million or 8.8% of total assets
at December 31, 2000. As liquidity levels vary continuously based on customer
activities, amounts of cash and cash equivalents can vary widely at any given
point in time. Management believes the banks' liquidity position at June 30,
2001 is adequate to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity
is the banks' marketable investment securities. Liquidity needs have not
historically necessitated the sale of investments in order to meet funding
requirements. The banks also have not engaged in active trading of their
investments and have no intention of doing so in the foreseeable future. At June
30, 2001 and December 31, 2000, the banks had approximately $36 million and $62
million, respectively, of investment securities classified as available for sale
which can be utilized to meet various liquidity needs as they arise. During the
first quarter of 2001, available-for-sale securities aggregating $500,000 were
sold.
Some of the Corporation's banks have secured lines of credit with Federal
Home Loan Bank. Borrowings thereunder approximated $47 million and additional
borrowing capacity approximated $16.4 million at June 30, 2001. At June 30,
2001, Capitol had unused lines of credit from an unrelated financial institution
aggregating $10.6 million.
Capitol's Board of Directors recently approved a third quarter cash
dividend of $.10 per share (payable September 4, 2001 to shareholders of record
as of August 1, 2001), following cash dividends of $.10 per share paid June 1
and March 1, 2001 ($.09 per share in the corresponding periods of 2000).
Page 15 of 20
In March 2001, Capitol completed a private placement of 130,000 shares of
common stock and 32,500 warrants (each such warrant permitting the holder to
purchase one share of common stock prior to the expiration date of the warrant,
March 2003). Proceeds from the offering approximated $1.5 million and will be
used for debt retirement and additional investment in bank development
activities.
Capitol and its banks are subject to complex regulatory capital
requirements, which require maintaining certain minimum capital ratios. These
ratio measurements, in addition to certain other requirements, are used by
regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. Capitol and each of its banks are
in compliance with the regulatory requirements and management expects to
maintain such compliance.
Stockholders' equity, as a percentage of total assets, approximated 4.0% at
June 30, 2001, a slight decrease from the beginning of the year ratio of 4.3%.
Total capital funds (Capitol's stockholders' equity, plus minority interests in
consolidated subsidiaries, plus guaranteed preferred beneficial interests in the
Corporation's subordinated debentures) aggregated $166.3 million or 8.84% of
total assets at June 30, 2001. The following table summarizes the amounts (in
thousands) and related ratios of individually significant subsidiaries (total
assets of $130 million or more at the beginning of 2001) and consolidated
regulatory capital position at June 30, 2001:
Sun
Ann Arbor Capitol Community
Commerce National Bancorp
Bank Bank Limited Consolidated
------------ ------------ ------------ ------------
Total capital to total assets:
Minimum required amount >= $ 10,099 >= $ 6,350 >= $ 27,087 >= $ 75,279
Actual amount $ 18,618 $ 11,531 $ 56,150 $ 75,765
Ratio 7.37% 7.26% 8.29% 4.03%
Tier I capital to risk-weighted assets:
Minimum required amount(1) >= $ 8,380 >= $ 5,204 >= $ 23,058 >= $ 63,734
Actual amount $ 18,605 $ 11,524 $ 81,858 $159,100
Ratio 8.88% 8.86% 14.20% 9.99%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) >= $ 16,759 >= $ 10,409 >= $ 46,115 >= $127,468
Amount required to meet "Well-Capitalized"
category(3) >= $ 20,949 >= $ 13,011 >= $ 57,644 >= $159,336
Actual amount $ 21,227 $ 13,154 $ 89,064 $179,023
Ratio 10.13% 10.11% 15.45% 11.24%
- ----------
(1) The minimum required ratio of Tier I capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier I and Tier II capital to risk-weighted
assets is 8%.
(3) In order to be classified as a "well-capitalized" institution, the ratio of
Tier I and Tier II capital to risk-weighted assets must be 10% or more.
Page 16 of 20
Capitol's operating strategy continues to be focused on the ongoing growth
and maturity of its existing banks, coupled with new bank expansion in selected
markets as opportunities arise. Accordingly, Capitol may invest in or otherwise
develop additional banks in future periods, subject to economic conditions and
other factors, although the timing of such additional banking units, if any, is
uncertain. Such future new banks and/or additions of other operating units could
be either wholly-owned, majority-owned or otherwise controlled by Capitol. At
June 30, 2001, plans were in process for formation of new banks in California
and Nevada.
In July 2001, Capitol participated in two private placements of pooled
trust-preferred securities. One is a variable rate security totaling $15 million
and the second is a fixed-rate security of $10 million. Both have similar terms
(due in 2031) and, subject to certain provisions, may be repaid early. Net
proceeds from these transactions approximated $25 million and will be used for
debt repayment, bank development and other corporate purposes. These securities
are expected to be treated as elements of capital for regulatory purposes.
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 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.
In January 2001, the Open Market Committee of the Federal Reserve Board
decreased interbank interest rates on two separate dates, for a total decrease
of 100 basis points. In March 2001, another 50 basis points decrease was
initiated by the Federal Reserve, followed by decreases of 50 basis points in
both April and May 2001 and 25 basis points in June 2001.
Because variable rate loans reprice more rapidly than interest-bearing
deposits, such market interest rate decreases compressed net interest margins at
Capitol's banks in 2001. As the Open Market Committee continues to influence
interest rates and other economic policy in 2001, including the potential of
additional rate decreases, net interest margins may become more compressed
(having an adverse impact on earnings) as the year progresses.
Start-up banks generally incur operating losses during their early periods
of operations. Recently-formed start-up banks are expected to detract from
consolidated earnings performance and additional start-up banks formed in 2001
and beyond will similarly negatively impact short-term profitability. Capitol's
Board of Directors has determined to reduce the rate of start-ups in the near
term in contrast to the previous three years.
General economic conditions also have a significant impact on both the
results of operations and the financial condition of financial institutions.
Page 17 of 20
Widespread media reports of concerns about the health of the domestic
economy have continued in early 2001. While local economic conditions appear to
indicate a weakening environment, loan losses in this 2001 period have decreased
significantly in comparison to the level with the prior year's period. In 2001,
however, nonperforming loans have increased and it is anticipated that levels of
nonperforming loans and related loan losses may trend upward further as economic
conditions, locally and nationally, evolve.
IMPACT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (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 are included in income, or in
comprehensive income, depending on whether the instrument qualifies for hedge
accounting and the type of hedging instrument involved. This new standard became
effective January 1, 2001 and, because Capitol and its banks have not typically
entered into derivative contracts either to hedge existing risks or for
speculative purposes, it had no effect on Capitol's financial statements.
In early July 2001, the Securities and Exchange Commission, American
Institute of Certified Public Accountants and Federal Financial Institutions
Examination Council each issued new guidance (some of which remains to be
finalized) on accounting for loan loss reserves (also known as allowances for
loan losses). While the new guidance does not change prior accounting rules in
this area, it provides additional clarification and guidance on how such
reserves and allowances may be documented by management.
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires
that all business combinations be accounted for under a prior standard of
purchase accounting, eliminating the so-called pooling-method which was used to
account for some business combinations. Statement No. 141 requires that the
purchase method be used for business combinations initiated after June 30, 2001.
This new standard is not expected to have a material effect on Capitol's
consolidated financial statements.
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead to be reviewed for impairment. Amortization of
goodwill ceases upon adoption of the Statement, which for most companies, will
be January 1, 2002. This new standard requires that goodwill be reviewed
periodically for impairment and, accordingly, impairment adjustments of goodwill
be charged against earnings, when determined. Management has not completed its
analysis of this new standard, however, its preliminary review has concluded
that, upon implementation, future amortization of goodwill will be reduced or
eliminated.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Capitol's financial statements.
Page 18 of 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Capitol and its subsidiaries are parties to certain ordinary,
routine litigation incidental to their business. In the opinion of
management, liabilities arising from such litigation would not have a
material effect on Capitol's consolidated financial position or results
of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 2001.
[The remainder of this page intentionally left blank]
Page 19 of 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL BANCORP LTD.
(Registrant)
/s/ Joseph D. Reid
--------------------------------------
Joseph D. Reid
Chairman, President and CEO
(duly authorized to sign on behalf
of the registrant)
/s/ Lee W. Hendrickson
--------------------------------------
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Date: August 14, 2001
Page 20 of 20