Exhibit 13(b)
[LOGO] CAPITOL BANCORP LIMITED
Financial Information Section
of
2002 Annual Report to Shareholders
Capitol Bancorp Center 2777 East Camelback Road
200 Washington Square North Suite 375
Lansing, MI 48933 Phoenix, AZ 85016
(517) 487-6555 (602) 955-6100
TABLE OF CONTENTS
Selected Consolidated Financial Data..........................................................................2
Information Regarding Capitol's Common Stock..................................................................3
Availability of Form 10-K and Certain Other Reports...........................................................3
Other Corporate and Shareholder Information...................................................................4
Responsibility For Financial Statements.......................................................................5
Cautionary Statement Regarding Forward-Looking Statements.....................................................5
Management's Report on Internal Controls......................................................................6
Management's Discussion and Analysis of Financial Condition and Results of Operations:
The Business of Capitol and Its Banks.....................................................................7
Capitol's Structure.......................................................................................8
Banking Technology at Capitol.............................................................................9
Critical Accounting Policies.............................................................................10
Changes in Consolidated Financial Position...............................................................11
Consolidated Results of Operations.......................................................................15
Liquidity, Capital Resources and Capital Adequacy........................................................18
Trends Affecting Operations..............................................................................22
New Accounting Standards.................................................................................25
Consolidated Financial Statements:
Report of Independent Auditors...........................................................................26
Consolidated Balance Sheets..............................................................................27
Consolidated Statements of Income........................................................................28
Consolidated Statements of Changes in Stockholders' Equity...............................................29
Consolidated Statements of Cash Flows....................................................................30
Notes to Consolidated Financial Statements...............................................................31
1
SELECTED CONSOLIDATED FINANCIAL DATA
(in $1,000s, except per share data)
As of and for the Year Ended December 31
--------------------------------------------------------------------
2002(1) 2001(3) 2000(4) 1999(5) 1998(6)
---------- ---------- ---------- ---------- ----------
For the year:
Interest income $ 156,454 $ 153,797 $ 132,311 $ 93,602 $ 69,668
Interest expense 55,860 73,292 65,912 46,237 36,670
Net interest income 100,594 80,505 66,399 47,365 32,998
Provision for loan losses 12,676 8,167 7,216 4,710 3,523
Noninterest income 14,982 9,585 6,137 4,714 3,558
Noninterest expense 77,151 64,136 52,846 40,257 26,325
Income before cumulative effect of change
in accounting principle 16,653 10,718 8,035 5,606(7) 4,628
Net income 16,653 10,718 8,035 5,409 4,628
Net income per share:
Basic 1.64 1.38 1.14 .84 .74
Diluted 1.57 1.35 1.13 .83 .72
Cash dividends paid per share .44 .40 .36 .36 .33
At end of year:
Total assets $2,409,288 $2,044,006 $1,630,076 $1,305,987 $1,024,444
Total earning assets 2,226,969 1,920,621 1,517,350 1,227,976 953,315
Portfolio loans 1,991,372 1,734,589 1,355,798 1,049,204 724,280
Deposits 2,062,072 1,740,385 1,400,899 1,112,793 890,890
Debt obligations 93,398 89,911 58,150 47,400 23,600
Trust-preferred securities 51,583 48,621 24,327 24,291 24,255
Minority interests in consolidated subsidiaries 28,016(2) 70,673 62,575 54,593 27,576
Stockholders' equity 160,037(2) 80,172 70,404 54,668 49,292
Quarterly Results of Operations (unaudited)
----------------------------------------------------
Total for Fourth Third Second First
the Year Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------- ----------
Year ended December 31, 2002:(1)
Interest income $ 156,454 $ 40,176 $ 40,462 $ 38,561 $ 37,255
Interest expense 55,860 13,019 14,269 14,140 14,432
Net interest income 100,594 27,157 26,193 24,421 22,823
Provision for loan losses 12,676 3,984 3,918 2,684 2,090
Net income 16,653 5,249 4,447 3,913 3,044
Net income per share:
Basic 1.64 .47 .42 .37 .39
Diluted 1.57 .45 .40 .35 .38
Cash dividends paid per share .44 .12 .12 .10 .10
Year ended December 31, 2001:(3)
Interest income $ 153,797 $ 38,031 $ 39,058 $ 38,894 $ 37,814
Interest expense 73,292 16,398 18,350 19,181 19,363
Net interest income 80,505 21,633 20,708 19,713 18,451
Provision for loan losses 8,167 2,530 2,316 1,697 1,624
Net income 10,718 2,963 2,772 2,600 2,383
Net income per share:
Basic 1.38 .38 .35 .33 .31
Diluted 1.35 .37 .35 .33 .31
Cash dividends paid per share .40 .10 .10 .10 .10
(1) Includes Bank of Las Vegas (located in Las Vegas, Nevada), effective
February 2002 and Napa Community Bank (located in Napa, California),
effective March 2002.
(2) Reflects the January 2003 share exchange regarding the minority interest of
Nevada Community Bancorp Limited as if it had occurred on December 31,
2002.
(3) Includes Sunrise Bank of San Diego (located in San Diego, California),
effective January 2001.
(4) Includes Black Mountain Community Bank effective March 2000 (located in
Henderson, Nevada), Sunrise Bank of Albuquerque effective April 2000
(located in Albuquerque, New Mexico), Arrowhead Community Bank effective
September 2000 (located in Glendale, Arizona), Goshen Community Bank
effective September 2000 (located in Goshen, Indiana) and Yuma Community
Bank effective December 2000 (located in Yuma, Arizona).
(5) Includes East Valley Community Bank effective June 1999 (located in
Chandler, Arizona); Desert Community Bank (effective August 1999) and Red
Rock Community Bank (effective November 1999), both located in Las Vegas,
Nevada; and Elkhart Community Bank effective September 1999 (located in
Elkhart, Indiana).
(6) Includes Kent Commerce Bank effective January 1998 and Detroit Commerce
Bank effective December 1998, both located in Michigan and, in Arizona,
Camelback Community Bank (effective May 1998), Southern Arizona Community
Bank (effective August 1998), Mesa Bank (effective October 1998) and
Sunrise Bank of Arizona (effective December 1998).
(7) Implementation of a new accounting standard requiring the write-off of
previously capitalized start-up costs resulted in a one-time charge of
$197,000 (net of income tax effect) or $.03 per share effective January 1,
1999.
2
INFORMATION REGARDING CAPITOL'S COMMON STOCK
Capitol's common stock is traded on the National Market System of The Nasdaq
Stock MarketSM under the symbol "CBCL". Market quotations regarding the range of
high and low sales prices of Capitol's common stock, which reflect inter-dealer
prices without retail mark-up, mark-down or commissions, were as follows:
2002 2001
----------------- -----------------
Low High Low High
------- ------- ------- -------
Quarter Ended:
March 31 $13.300 $16.820 $ 9.688 $14.250
June 30 16.450 23.860 12.000 15.660
September 30 15.810 24.250 12.250 17.500
December 31 15.130 23.780 12.800 15.200
During 2002, Capitol paid cash dividends of $0.10 per share in the first and
second quarters and $0.12 per share in the third and fourth quarters. In 2001,
Capitol paid quarterly cash dividends of $0.10 per share.
As of March 17, 2003, there were 5,228 beneficial holders of Capitol's common
stock, based on information supplied to Capitol from its stock transfer agent
and other sources. At that date, 11,803,521 shares of common stock were
outstanding. Capitol's stock transfer agent is UMB Bank, n.a., 928 Grand Ave.,
P.O. Box 410064, Kansas City, Missouri 64141-0064 (telephone 800/884-4225). The
web site for UMB Bank, n.a. is HTTP:\\WWW.UMB.COM.
Capitol has a Shareholder Investment Program which offers a variety of
convenient features including dividend reinvestment, certain fee-free
transactions, certificate safekeeping and other benefits. For a copy of the
program prospectus, informational brochure and enrollment materials, contact UMB
Bank, n.a. at 800/884-4225 or Capitol at 517/487-6555.
In addition to Capitol's common stock, trust-preferred securities of Capitol
Trust I (a subsidiary of Capitol) are also traded on the National Market System
of The Nasdaq Stock MarketSM under the symbol "CBCLP". Those trust-preferred
securities consist of 2,530,000, 8.5% cumulative preferred securities, with a
liquidation amount of $10 per preferred security. The trust-preferred securities
are guaranteed by Capitol and mature in 2027, are callable after 2002 and may be
extended to 2036 if certain conditions are met.
AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS
A copy of Capitol's 2002 report on Form 10-K, without exhibits, is available to
holders of its common stock or trust-preferred securities without charge, upon
written request. Form 10-K includes certain statistical and other information
regarding Capitol and its business. Requests to obtain Form 10-K should be
addressed to Investor Relations, Capitol Bancorp Limited, Capitol Bancorp
Center, 200 Washington Square North, Lansing, Michigan 48933.
Form 10-K, and certain other periodic reports, are filed with the Securities and
Exchange Commission (SEC). The SEC maintains an internet web site that contains
reports, proxy and information statements and other information regarding
companies which file electronically (which includes Capitol). The SEC's web site
address is HTTP:\\WWW.SEC.GOV. Capitol's filings with the SEC are also available
at Capitol's web site, HTTP:\\WWW.CAPITOLBANCORP.COM.
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OTHER CORPORATE INFORMATION
CORPORATE OFFICES
Capitol Bancorp Center 2777 East Camelback Road
200 Washington Square North Suite 375
Lansing, Michigan 48933 Phoenix, Arizona 85016
517/487-6555 602/955-6100
www.capitolbancorp.com www.capitolbancorp.com
INDEPENDENT AUDITORS
BDO Seidman, LLP, Grand Rapids, Michigan
SHAREHOLDER INFORMATION
ANNUAL MEETING
Capitol's Annual Meeting will be held on Thursday, May 8, 2003 at 4:00 p.m. at
the Lansing Center, located at 333 E. Michigan Avenue, Lansing, Michigan.
COMMON STOCK TRADING INFORMATION
Capitol's common stock trades on the National Market System of the Nasdaq Stock
MarketSM under the trading symbol CBCL.
The following brokerage firms make a market in the common stock of Capitol:
AnPac Securities Group, Inc. - Atlanta, Georgia Knight Securities L.P. - Jersey City, New Jersey
Cincinnati Stock Exchange - Cincinnati, Ohio Merrill Lynch, Pierce, Fenner - New York, New York
Fahnestock & Co., Inc. - New York, New York Morgan Stanley & Co., Inc. - San Francisco, California
First Tennessee Securities - Memphis, Tennessee Robert W. Baird & Co., Inc. - Milwaukee, Wisconsin
Friedman Billings Ramsey & Co. - Arlington, Virginia Sandler O'Neill & Partners - New York, New York
Goldman, Sachs & Co. - New York, New York Schwab Capital Markets - San Francisco, California
Howe Barnes Investments, Inc. - Chicago, Illinois Stifel Nicolaus & Company, Inc. - St. Louis, Missouri
Keefe, Bruyette & Woods, Inc. - New York, New York Susquehanna Capital Group - Bala Cynwyd, Pennsylvania
COMMON STOCK TRANSFER AGENT
UMB Bank, n.a.
928 Grand Avenue
P.O. Box 410064
Kansas City, Missouri 64141-0064
800/884-4225
SHAREHOLDER INVESTMENT PROGRAM
Capitol offers an easy and affordable way to invest in Capitol's common stock
through its Shareholder Investment Program. The program's benefits include
reinvestment of dividends in additional common stock, direct deposit of
dividends, ability to purchase as little as $50 in common stock as frequently as
once a month, and the option to make transfers or gifts of Capitol's common
stock to another person. Participation in the program is voluntary and all
shareholders are eligible. Purchases under the program are not currently subject
to any brokerage fees or commissions. For further information regarding
Capitol's Shareholder Investment Program or a copy of the program's prospectus,
informational brochure and enrollment materials, contact UMB Bank, n.a. at
800/884-4225 or Capitol at 517/487-6555.
TRUST-PREFERRED SECURITIES TRADING INFORMATION
Preferred securities of Capitol Trust I (a subsidiary of Capitol) trade on the
Nasdaq Stock MarketSM under the trading symbol CBCLP.
TRUST-PREFERRED SECURITIES TRUSTEE
Bank One Investment Management Group - Chicago, Illinois
4
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Capitol's management is responsible for the preparation of the consolidated
financial statements and all other information appearing in this annual report.
The financial statements have been prepared in accordance with generally
accepted accounting principles and prevailing practices of the financial
institution industry in the United States of America.
Capitol's management is also responsible for establishing and maintaining the
internal control structure of Capitol, its banks and its bank development
affiliates. The general objectives of the internal control structure are to
provide management with reasonable assurance that assets are safeguarded against
loss from unauthorized use or disposition, and that transactions are completed
in accordance with generally accepted accounting principles in the United States
of America. In fulfilling this objective, management has various control
procedures in place which include review and approval of transactions, a code of
ethical conduct for employees, internal auditing and an annual audit of
Capitol's consolidated financial statements performed by a qualified independent
audit firm.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this annual report that are not historical
facts are forward-looking statements. Those forward-looking statements, within
the meaning of the Private Securities Litigation Reform Act of 1995, are subject
to known and unknown risks, uncertainties and other factors which may cause the
actual future results, performance or achievements of Capitol and/or its
subsidiaries and other operating units to differ materially from those
contemplated in such forward-looking statements. The words "intend", "expect",
"project", "estimate", "predict", "anticipate", "should", "will", "may",
"believe", and similar expressions also identify forward-looking statements.
Important factors which may cause actual results to differ from those
contemplated in such forward-looking statements include, but are not limited to:
(i) the results of Capitol's efforts to implement its business strategy, (ii)
changes in interest rates, (iii) legislation or regulatory requirements
adversely impacting Capitol's banking business and/or expansion strategy, (iv)
adverse changes in business conditions or inflation, (v) general economic
conditions, either nationally or regionally, which are less favorable than
expected and that result in, among other things, a deterioration in credit
quality and/or loan performance and collectability, (vi) competitive pressures
among financial institutions, (vii) changes in securities markets, (viii)
actions of competitors of Capitol's banks and Capitol's ability to respond to
such actions, (ix) the cost of capital, which may depend in part on Capitol's
asset quality, prospects and outlook, (x) changes in governmental regulation,
tax rates and similar matters, (xi) changes in management, and (xii) other risks
detailed in Capitol's other filings with the Securities and Exchange Commission.
If one or more of these risks or uncertainties materialize, or if 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.
5
MANAGEMENT'S REPORT ON INTERNAL CONTROLS
Capitol Bancorp's management is responsible for the preparation, integrity, and
fair presentation of the consolidated financial statements included in this
annual report. The consolidated financial statements and notes included in this
annual report have been prepared in conformity with accounting principles
generally accepted in the United States of America and necessarily include some
amounts that are based on management's best estimates and judgments.
We, as executive management of Capitol Bancorp, are responsible for establishing
and maintaining effective internal controls over financial reporting that are
designed to produce reliable financial statements in conformity with accounting
principles generally accepted in the United States of America. The systems of
internal controls over financial reporting as they relate to the financial
statements contain self-monitoring mechanisms, and compliance is tested and
evaluated through a program of internal audits and other checks and test
procedures. Actions are taken to correct potential deficiencies when identified.
Any system of internal controls, no matter how well designed, has inherent
limitations, including the possibility that controls can be circumvented or
overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effectiveness
may vary over time. Accordingly, any effective system of internal controls will
provide only reasonable assurance with respect to financial statement
preparation.
Capitol's Audit Committee, consisting entirely of outside directors, meets
regularly with management, internal auditors and Capitol's independent auditors,
and reviews audit plans and results, as well as management's actions taken in
discharging responsibilities for accounting, financial reporting, and internal
controls. BDO Seidman, LLP, independent auditors, and our internal auditors have
direct and confidential access to Capitol's Audit Committee at all times to
discuss the results of their examinations.
Management assessed the Corporation's system of internal control over financial
reporting as of December 31, 2002. Based on this assessment, management believes
that, as of December 31, 2002, its systems of internal controls over financial
reporting were adequate to meet those stated objectives of internal controls
over financial reporting.
/s/ Joseph D. Reid /s/ Lee W. Hendrickson
- ---------------------------- ----------------------------
Joseph D. Reid Lee W. Hendrickson
Chairman and CEO Chief Financial Officer
January 31, 2003
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Most of this section discusses items of importance regarding Capitol's financial
statements which appear elsewhere in this report. In order to obtain a full
understanding of this discussion, it is important to read it with those
financial statements. However, before discussing the financial statements and
related highlights, an introductory section includes some important background
information about the business of Capitol and its banks, Capitol's structure and
recent developments.
THE BUSINESS OF CAPITOL AND ITS BANKS
Capitol defines itself as a BANK DEVELOPMENT COMPANY. In the highly regulated
business of banking, it is viewed by governmental agencies as a "bank holding
company". Capitol views bank DEVELOPMENT as a much more dynamic activity than
the seemingly passive regulatory label for bank HOLDING companies.
Bank development at Capitol is the business of mentoring, monitoring and
managing its investments in community banks. Bank development is also the
activity of adding new banks through start-up, or DE NOVO, formation or through
other affiliation efforts, such as exploring acquisitions of existing banks.
Capitol's banks have similar characteristics:
* Each bank has an on-site president and management team, as local decision
makers.
* Each bank has a local board of directors which has actual authority over
the bank.
* Each bank predominately operates from a single office location.
* Each bank can fully meet customers' needs anywhere, anytime through
bankers-on-call, courier services, Internet and telephone banking and
other delivery methods.
* Each bank has access to an efficient back-room processing facility and
leading-edge technology through shared financial and operating
resources.
Capitol's banks seek the profitable customer relationships which are often
displaced through mergers, mass marketing and megabanks. Capitol's banks are
focused on commercial banking activities, emphasizing business customers,
although they also offer a complete array of financial products and services.
Each bank has a separate charter. A bank charter is similar to articles of
incorporation and enables each bank to exist as a distinct legal entity. Most of
these banks are state-chartered, which means they are organized under a
particular state's banking laws. All of the banks are FDIC-insured. Banks are
highly regulated by state and federal agencies. Because each bank has its own
charter, each bank is examined by both state and federal agencies as a separate
and distinct legal entity for safety, soundness and compliance with banking laws
and regulations.
At December 31, 2002, Capitol consisted of 29 community banks, operating in 8
states.
7
Capitol's bank development philosophy is one of "SHARED VISION", which
encompasses a commitment to community banking emphasizing local leadership and
investment, with the shared resources of efficient management. Capitol provides
these shared resources to its banks, including common data processing systems,
centralized item processing, loan review, internal audit, credit administration,
accounting, legal and risk management.
CAPITOL'S STRUCTURE
Capitol's structure is unique. Based on management's recent research, Capitol is
the second largest banking company in the United States, based on the number of
bank charters within its consolidated group. Of Capitol's twenty-nine banks,
most are directly owned by Capitol, and most of them are wholly-owned, as of
December 31, 2002.
At the beginning of 2002, Capitol's structure was much more complex. At that
time it had several second and third-tier subsidiary bank-development
subsidiaries (majority-owned by Capitol or by an affiliate) which, in turn, had
majority-owned bank subsidiaries. This complex structure was the result of
Capitol's significant bank-development expansion activities in the years of
1998-2001, which involved the formation of partially-owned bank-development
subsidiaries to form majority-owned DE NOVO banks.
That complex structure made it difficult to understand the component parts of
Capitol and how the multiple ownership tiers impacted consolidated operating
results. In response to that perceived difficulty and improved performance of
its maturing banks, Capitol's management embarked on a significant initiative in
2002 to simplify its structure by 'consolidating' the minority ownership of its
largest second and third-tier bank-development subsidiaries:
* Sun Community Bancorp Limited ...COMPLETED MARCH 31, 2002
* Sunrise Capital Corporation ...COMPLETED SEPTEMBER 30, 2002
* Indiana Community Bancorp Limited ...COMPLETED SEPTEMBER 30, 2002
* Nevada Community Bancorp Limited ...COMPLETED JANUARY 17, 2003
Each of these 'consolidations' involved Capitol issuing shares of its common
stock (previously unissued) in exchange for the minority interests of those
bank-development subsidiaries held by shareholders other than Capitol. Because
the Nevada share exchange was substantially complete at year end 2002, and
awaiting only the vote of its shareholders on January 17, 2003 (at which time it
was overwhelmingly approved, without any dissenting votes), it has been
reflected in Capitol's consolidated balance sheet as if it occurred on December
31, 2002.
With those bank-development subsidiaries becoming wholly-owned by Capitol, they
have subsequently been merged into Capitol and, accordingly, their direct bank
subsidiaries are now direct bank subsidiaries of Capitol.
The largest of these 'consolidation' transactions was the one involving Sun
Community Bancorp. Sun was formed by Capitol in 1997 and became a public company
in 1998, majority-owned by Capitol. Sun was the bank-development company focused
on Capitol's expansion in the Southwestern Region of the United States. Upon
completion of the 2002 share-consolidation with Capitol, Sun's executive offices
became Capitol's Western Regions' headquarters.
8
At year-end 2002, Capitol has one additional bank-development subsidiary which
is not discussed above. It is First California Northern Bancorp (majority-owned
by Capitol), which commenced operations in early 2002 and has one majority-owned
bank subsidiary. This bank-development company and its current subsidiary are in
their early stages of operation.
All of the banks and subsidiary bank-development companies are combined, or
consolidated, for financial reporting purposes because Capitol has ownership
control of them either directly or indirectly. Current accounting rules require
consolidated reporting when one entity has majority voting control of another.
The reporting entity is the parent organization and entities which are
majority-owned by the parent are subsidiaries. In the circumstances of Capitol,
this parent and subsidiary relationship applies also to second and third tier
subsidiaries which have consolidated subsidiaries of their own.
The accounting rules in this area inhibit an understanding of the consolidated
financial statements. For example, consolidated balance sheets include all of
the combined entities' assets and liabilities. On the other hand, the
consolidated income statement includes all of the combined entities, but
includes net income only to the extent of the parent's ownership percentage.
Because of the number of banks and bank development companies added in recent
periods, comparing financial results for those and prior periods is difficult.
In 2002, two new banks were added. In 2001, one new bank was added. In 2000, a
total of five new banks were added to the consolidated group. In 1999, four new
banks were added. In 1998, there were six new banks added to the group.
BANKING TECHNOLOGY AT CAPITOL
The use of high technology banking systems is key to the delivery of accurate
and timely customer service. Capitol currently operates two data processing
sites, located in Lansing, Michigan and Tempe, Arizona. The Lansing site handles
item processing for the banks located in the Great Lakes Region, while the Tempe
data center processes all activity for the banks located in the Western Regions.
Both sites use mainframe computers and software which are nearly identical.
While physically separate, both sites function under common management.
9
CRITICAL ACCOUNTING POLICIES
Capitol's most significant accounting policies are described in Note B of the
consolidated financial statements, beginning on page 33. Within those
significant polices are some which are particularly critical or crucial to a
reader's understanding of Capitol's financial position and results of
operations. Management believes Capitol's CRITICAL ACCOUNTING POLICIES to be the
following:
* USE OF ESTIMATES--Some very significant items (allowances for loan
losses, tax accruals and determinations of fair values or impairment,
for example) can have a pervasive impact on the reported financial
position and results of operations.
* CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES--Again, because of the
inherent subjectivity in estimating losses, actual variances from
estimates or subsequent changes to estimates can be significant. In
addition, many of Capitol's banks are quite young and do not have
seasoned loan portfolios or significant past loss experience upon
which to base current estimates of losses inherent in the loan
portfolio at a particular balance-sheet date. Despite regulatory
guidance and other standard-setting encouragement to reduce such loss
estimation techniques to a mathematical formula, the fact remains that
loss estimates require significant judgment on the part of management
and cannot be reduced to be a succinct standard or actuarial formula
in the context of Capitol's banks.
* ACCOUNTING FOR INCOME TAXES--Because of the level of taxation imposed
upon corporate entities, including banks, at the federal level (up to
35%, currently), measurement of income tax expense and related
liabilities and deferred tax assets have a material effect on
Capitol's financial statements. Further, some states in which
Capitol's banks are domiciled have income tax rates which exceed 10%.
* ACCOUNTING FOR GOODWILL--A new accounting standard was issued in 2002,
which changed the way companies account for goodwill. Capitol has
goodwill on its balance sheet, which represents the 'premium' it has
paid in conjunction with acquisition of minority interests in some of
its subsidiaries and some other prior acquisitions. In the
circumstances of Capitol, the new standard requires that goodwill will
no longer be amortized. Instead, goodwill will be reviewed at least
annually by management for impairment and impairment losses, if any,
will be charged against operations when known.
10
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Total assets have grown significantly to $2.4 billion at year-end 2002 from $1
billion at the end of 1998. This sustained pace of asset growth is the result of
adding new banks and the ongoing growth and evolution of Capitol's more mature
banks.
[GRAPH]
TOTAL ASSETS
($ millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
1,024 1,306 1,630 2,044 2,409
At year-end 2002, total combined assets of the three banks formed within the
last two years approximated $113 million ($38 million at December 31, 2001).
Banks formed in 2000 reported total assets of $234 million at the end of 2002,
an increase of $61 million during the year. Total assets of the four banks which
became three years old in 2002 grew 12% during the past year to $243 million.
The six banks formed in 1998 continued strong asset growth of 21% in 2002,
achieving total assets of $410 million. The most mature group of banks, those
formed before 1998, reported total assets of $1.4 billion at year-end 2002, an
increase of about 9% for the year.
[The remainder of this page intentionally left blank]
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The total assets and revenues of each bank, the consolidated totals and
ownership percentages are summarized below as of year-end 2002 and 2001 (in
$1,000s):
December 31, 2002
Percentage Ownership By Total Assets Total Revenues
------------------------- -------------------------- --------------------------
Capitol 2nd Tier 2002 2001 2002 2001
----------- ----------- ----------- ----------- ----------- -----------
Great Lakes Region:
Ann Arbor Commerce Bank 100% $ 309,152 $ 271,116 $ 22,890 $ 23,372
Brighton Commerce Bank 100% 78,382 70,530 5,689 5,608
Capitol National Bank 100% 206,130 173,177 13,032 13,196
Detroit Commerce Bank 100% 30,589 33,768 2,288 2,620
Grand Haven Bank 100% 123,505 98,740 9,226 7,822
Kent Commerce Bank 100% 73,801 66,873 5,797 4,763
Macomb Community Bank 100% 87,050 97,113 5,812 8,364
Muskegon Commerce Bank 100% 86,465 74,284 6,538 6,305
Oakland Commerce Bank 100% 115,916 115,249 7,568 8,681
Paragon Bank & Trust 100% 103,044 93,667 8,292 8,270
Portage Commerce Bank 100% 139,068 127,884 10,499 11,134
Elkhart Community Bank 51% 53,210 35,939 2,934 2,481
Goshen Community Bank 51% 38,115 28,681 2,305 1,215
----------- ----------- ----------- -----------
Great Lakes Region Total 1,444,427 1,287,021 102,870 103,831
Southwest Region:
Arrowhead Community Bank 87% 47,427 33,658 3,500 1,804
Bank of Tucson 100% 132,094 121,075 9,907 10,516
Camelback Community Bank 100% 82,387 67,210 6,052 5,161
East Valley Community Bank 100% 37,640 39,591 2,765 3,261
Mesa Bank 100% 66,312 52,308 5,036 4,277
Southern Arizona Community Bank 100% 75,253 55,423 5,011 4,107
Valley First Community Bank 100% 42,127 58,625 3,573 4,694
Yuma Community Bank 51% 38,214 23,202 2,623 1,244
Bank of Las Vegas 51%(1) 26,880 1,157
Black Mountain Community Bank 51%(1) 63,202 50,909 4,004 3,259
Desert Community Bank 51%(1) 55,170 56,844 4,183 4,341
Red Rock Community Bank 51%(1) 96,906 84,971 6,829 5,659
Sunrise Bank of Albuquerque 87% 46,898 35,984 2,840 2,851
Sunrise Bank of Arizona 100% 82,126 63,141 6,526 6,466
----------- ----------- ----------- -----------
Southwest Region Total 892,636 742,941 64,006 57,640
California Region:
Sunrise Bank of San Diego 64% 50,450 37,912 3,977 2,658
First California Northern Bancorp: 51%
Napa Community Bank 51% 36,042 1,241
----------- ----------- ----------- -----------
California Region Total 86,492 37,912 5,218 2,658
Other, net (14,267) (23,868) (658) (747)
----------- ----------- ----------- -----------
Consolidated totals $ 2,409,288 $ 2,044,006 $ 171,436 $ 163,382
=========== =========== =========== ===========
(1) Reflects the January 2003 share exchange regarding the minority interest of
Nevada Community Bancorp Limited as if it had occurred on December 31,
2002.
Most of the consolidated assets consist of loans. Portfolio loans approximated
$2 billion at year-end 2002, and net portfolio loans approximated 81.5% of total
consolidated assets, a slight decrease from 83.7% at year-end 2001.
[GRAPH]
TOTAL PORTFOLIO LOANS
($ millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
724 1,049 1,356 1,735 1,991
12
The banks emphasize commercial loans, consistent with their focus on serving
small to mid-sized business customers. The majority of commercial loans are
secured by real estate. Commercial loans approximated $1.8 billion or about
89.8% of total portfolio loans at year-end 2002, a slight increase from 88.5% at
the end of 2001. Loan growth in 2002 was $257 million, or a growth rate of
14.8%--somewhat less than the growth rate experienced in preceding years due, in
part, to softer economic conditions.
The banks maintain an allowance for loan losses to absorb estimated losses in
the loan portfolio at the balance sheet date. At December 31, 2002, the
allowance for loan losses approximated $29 million or 1.45% of portfolio loans,
compared to $23.2 million or 1.34% at the end of 2001. The allowance ratio was
increased in 2002 in response to higher levels of nonperforming loans and
potential problem loans. The following table summarizes portfolio loans, the
allowance for loan losses and its ratio, and nonperforming loans (in $1,000s):
Allowance as a
Allowance for Nonperforming % of Total
Total Portfolio Loans Loan Losses Loans Portfolio Loans
----------------------- ----------------------- ------------------------ ---------------
2002 2001 2002 2001 2002 2001 2002 2001
---------- ---------- ---------- ---------- ---------- ---------- ---- ----
Great Lakes Region:
Ann Arbor Commerce Bank $ 272,604 $ 233,920 $ 3,840 $ 3,219 $ 2,624 $ 1,960 1.41% 1.38%
Brighton Commerce Bank 68,239 60,984 851 732 170 227 1.25% 1.20%
Capitol National Bank 158,651 144,485 2,322 1,983 1,753 465 1.46% 1.37%
Detroit Commerce Bank 26,799 29,243 627 351 751 539 2.34% 1.20%
Grand Haven Bank 114,616 89,989 1,626 1,212 1,605 1,234 1.42% 1.35%
Kent Commerce Bank 68,848 63,782 830 766 293 55 1.21% 1.20%
Macomb Community Bank 73,915 79,844 1,136 1,088 3,012 1,431 1.54% 1.36%
Muskegon Commerce Bank 77,247 70,151 966 842 1,806 123 1.25% 1.20%
Oakland Commerce Bank 86,049 81,711 1,119 1,063 1,805 406 1.30% 1.30%
Paragon Bank & Trust 86,571 81,430 1,291 1,018 2,628 586 1.49% 1.25%
Portage Commerce Bank 129,710 109,393 1,815 1,550 3,135 2,845 1.40% 1.42%
Elkhart Community Bank 43,277 31,492 658 473 245 222 1.52% 1.50%
Goshen Community Bank 35,408 22,966 532 345 1.50% 1.50%
---------- ---------- ---------- ---------- ---------- ----------
Great Lakes Region Total 1,241,934 1,099,390 17,613 14,642 19,827 10,093
Southwest Region:
Arrowhead Community Bank 36,185 30,430 543 457 1.50% 1.50%
Bank of Tucson 90,176 88,218 1,461 1,224 187 407 1.62% 1.39%
Camelback Community Bank 63,516 56,555 960 743 232 334 1.51% 1.31%
East Valley Community Bank 25,932 27,402 389 423 17 432 1.50% 1.54%
Mesa Bank 55,588 45,672 834 594 242 542 1.50% 1.30%
Southern Arizona Community Bank 60,913 50,879 914 662 298 1.50% 1.30%
Valley First Community Bank 29,075 41,851 620 670 261 1,018 2.13% 1.60%
Yuma Community Bank 25,485 18,539 383 285 1.50% 1.54%
Bank of Las Vegas 19,404 292 1.50%
Black Mountain Community Bank 52,240 40,111 784 602 324 240 1.50% 1.50%
Desert Community Bank 43,351 50,361 675 806 734 989 1.56% 1.60%
Red Rock Community Bank 80,152 67,117 1,203 1,008 861 942 1.50% 1.50%
Sunrise Bank of Albuquerque 38,577 28,061 521 379 614 1.35% 1.35%
Sunrise Bank of Arizona 65,195 55,730 881 753 205 1,329 1.35% 1.35%
---------- ---------- ---------- ---------- ---------- ----------
Southwest Region Total 685,789 600,926 10,460 8,606 3,063 7,145
California Region:
Sunrise Bank of San Diego 39,116 32,910 577 455 1.48% 1.38%
First California Northern Bancorp:
Napa Community Bank 20,177 303 1.50%
---------- ---------- ---------- ---------- ---------- ----------
California Region Total 59,293 32,910 880 455 -0- -0-
Other, net 4,356 1,363 (465)
---------- ---------- ---------- ---------- ---------- ---------- ----- -----
Consolidated totals $1,991,372 $1,734,589 $ 28,953 $ 23,238 $ 22,890 $ 17,238 1.45% 1.34%
========== ========== ========== ========== ========== ========== ===== =====
13
Nonperforming loans, which consist of loans more than 90 days past due and loans
on nonaccrual status, approximated $22.9 million at year-end 2002, compared to
$17.2 million at the end of 2001, an increase of approximately $5.7 million.
Most of these 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.
In addition to the identification of nonperforming loans involving borrowers
with payment performance difficulties (i.e., nonaccrual loans and loans past-due
90 days or more), management utilizes an internal loan review process to
identify other potential problem loans which may warrant additional monitoring
or other attention. This loan review process is a continuous activity which
periodically updates internal loan classifications. At inception, all loans are
individually assigned a classification which grade the credits on a risk basis,
based on the type and discounted value of collateral, financial strength of the
borrower and guarantors and other factors such as nature of the borrowers'
business climate, local economic conditions and other subjective factors. The
loan classification process is fluid and subjective.
Potential problem loans include loans which are generally performing as agreed;
however, because of loan review's and/or lending staff's risk assessment,
increased monitoring is deemed appropriate. In addition, some loans are
identified for monitoring because of specific performance issues or other risk
factors requiring closer management and development of specific remedial action
plans.
At December 31, 2002, potential problem loans (including nonperforming loans)
approximated $98.5 million or about 5% of total consolidated portfolio loans.
Such totals typically approximate 4% to 5% of loans outstanding as an important
part of management's ongoing and augmented loan review activities which are
designed to early-identify loans which warrant close monitoring at the bank and
corporate credit-administration levels. It is important to note that these
potential problem loans do not necessarily have significant loss exposure (nor
are they necessarily deemed `impaired'), but rather are identified by management
in this manner to aid in loan administration and risk management. Management
believes these loans to be adequately considered in its evaluation of the
adequacy of the allowance for loan losses. Management believes, however, that
current general economic conditions may result in higher levels of future loan
losses, in comparison to previous years.
Loan loss experience through December 31, 2002 remained below industry
statistics, although nonperforming and other potential problem loans have
increased. Loan charge-offs in 2002 at Capitol increased significantly, from
approximately $3 million in 2001 and 2000 to $7.7 million. Management's
assessment of loans as of December 31, 2002 suggests future loss experience will
return to levels more closely approximating past experience.
14
How financial institutions establish their allowance for loan losses is an
important and critical accounting policy and process. 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. It is
analyzed quarterly by each bank. The adequacy of the allowance is an estimate
based on management's evaluation of the loan portfolio (including volume, amount
and composition, potential impairment of individual loans and concentration of
credit), past loss experience, current economic conditions, loan commitments
outstanding, regulatory requirements and other factors.
Standard-setting bodies, regulatory agencies and the SEC (Securities and
Exchange Commission) have, on an industry-wide basis, separately issued
proposals and other guidance in recent years on how the allowance for loan
losses should be estimated and documented. Estimation of requirements for the
allowance for loan losses is an inherently subjective process which involves
significant judgement by management of many variables potentially impacting
borrowers' ability to repay loans and the estimated values of underlying loan
collateral.
New banks, as a condition of charter approval, are required to maintain an
allowance ratio of not less than 1% for their first three years of operations.
Because they are new banks with new and unseasoned loans and no prior loss
history, 1% is often used as a starting point for the allowance, particularly in
the earliest years of operation. As some of the younger banks now have more
seasoned loan portfolios and the 1% regulatory requirement represents only an
absolute minimum, loan loss allowance ratios have been increased at Capitol's
banks based on management's estimates of loss potential inherent in the loan
portfolios at the balance sheet date.
CONSOLIDATED RESULTS OF OPERATIONS
Revenue growth has been significant. Total revenues grew to $171.4 million in
2002 from $73.2 million in 1998. The primary revenue source is interest income
from loans. Net interest income is the difference between total interest income
on loans and other earning assets and interest expense on deposits and
borrowings. The following graphs summarize growth in total revenue (which
includes noninterest income revenues such as fees and service charges) and net
interest income:
[GRAPH]
TOTAL REVENUES
($ millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
73.2 98.3 138.4 163.4 171.4
15
[GRAPH]
NET INTEREST INCOME
($ millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
33.0 47.4 66.4 80.5 100.6
Most of the 2002 revenues, $103 million or about 60%, came from the most mature
banks--those formed prior to 1998. Banks formed in 2000, 1999 and 1998 reported
2002 revenues of $62.7 million or 36% of the consolidated total. The youngest
banks, those formed in 2002 and 2001, generated 2002 revenues totaling $6.4
million or about 4% of total consolidated revenues.
Noninterest income increased about 56% in both 2002 and 2001. These increases
resulted from higher levels of service-charge revenue associated with growth in
the number of accounts and banks. A significant increase in noninterest income
was also due to revenues from origination of non-portfolio mortgage loans. These
revenues increased about 116% to $6.8 million in 2002 as homeowners took
advantage of interest rates that decreased to their lowest levels in more than
thirty years. Additional discussion about mortgage loan origination activity
appears in the next section of this narrative.
Growth in net interest income, noninterest income and noninterest expense, is
the result of the addition of new banks during the periods presented and the
ongoing growth of Capitol's more mature banks. Growth in net interest income,
however, was tempered by a decrease in yields on assets and a decrease in the
cost of interest-bearing funds which fund the growth at each of the banks. Net
interest margin decreased in 2001 mainly due to interest rate decreases
impacting interest income at a rate faster than decreases in interest rates paid
on deposits. In 2002, however, a more stable interest rate environment has
favorably impacted net interest margins at Capitol's banks from interest-bearing
deposits repricing at lower rates.
The largest component of noninterest expense is salaries and employee benefits,
which has increased significantly due to the larger number of banks and bank
development subsidiaries.
16
The following table summarizes net income for each of the banks, and on a
consolidated basis, the related rates of return on average equity and assets,
where applicable (in $1,000s):
Net Income Return on Average Equity Return on Average Assets
-------------------------------- -------------------------- --------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
-------- -------- -------- ------ ------ ------ ------ ------ ------
Great Lakes Region:
Ann Arbor Commerce Bank $ 5,022 $ 4,200 $ 3,508 22.40% 22.02% 21.43% 1.72% 1.64% 1.55%
Brighton Commerce Bank 973 597 534 15.26% 10.55% 10.22% 1.28% 0.90% 0.90%
Capitol National Bank 3,176 2,647 2,319 22.68% 22.04% 22.08% 1.69% 1.66% 1.63%
Detroit Commerce Bank (517) (187) 10 0.37% 0.03%
Grand Haven Bank 1,924 1,060 1,084 20.51% 15.39% 19.20% 1.67% 1.21% 1.46%
Kent Commerce Bank 992 113 130 13.72% 2.03% 3.21% 1.33% 0.20% 0.30%
Macomb Community Bank 530 1,145 1,212 5.47% 12.33% 14.41% 0.60% 1.08% 1.14%
Muskegon Commerce Bank 1,472 816 689 18.68% 12.73% 15.14% 1.83% 1.17% 1.23%
Oakland Commerce Bank 1,414 1,328 1,027 16.01% 16.62% 13.78% 1.32% 1.27% 1.08%
Paragon Bank & Trust 771 231 431 8.04% 3.23% 6.72% 0.77% 0.26% 0.50%
Portage Commerce Bank 2,005 1,556 1,552 18.69% 15.62% 16.76% 1.49% 1.21% 1.21%
Elkhart Community Bank 257 14 (229) 5.48% 0.30% 0.61% 0.04%
Goshen Community Bank 125 (413) (216) 2.83% 0.36%
-------- -------- --------
Great Lakes Region Total 18,144 13,107 12,051
Southwest Region:
Arrowhead Community Bank 117 (386) (419) 2.70% 0.27%
Bank of Tucson 2,312 2,095 2,149 21.87% 22.64% 27.69% 1.99% 1.89% 2.33%
Camelback Community Bank 714 534 297 9.74% 10.80% 8.22% 0.90% 0.93% 0.74%
East Valley Community Bank (336) 18 (532) 0.58% 0.05%
Mesa Bank 848 386 268 14.51% 8.53% 6.77% 1.44% 0.87% 0.85%
Southern Arizona Community Bank 668 320 169 10.67% 7.42% 4.44% 0.94% 0.67% 0.47%
Valley First Community Bank 113 328 88 1.99% 5.94% 1.82% 0.23% 0.61% 0.18%
Yuma Community Bank 147 (438) (176) 4.05% 0.43%
Bank of Las Vegas (611)
Black Mountain Community Bank 439 12 (468) 9.26% 0.27% 0.81% 0.03%
Desert Community Bank 209 35 (180) 4.16% 0.76% 0.35% 0.07%
Red Rock Community Bank 243 635 190 2.71% 7.64% 2.45% 0.26% 0.96% 0.62%
Sunrise Bank of Albuquerque (40) 28 (386) 0.77% 0.09%
Sunrise Bank of Arizona (194) 830 206 15.24% 4.64% 1.27% 0.43%
-------- -------- --------
Southwest Region Total 4,629 4,397 1,206
California Region:
Sunrise Bank of San Diego 342 (806) 4.53% 0.68%
First California Northern Bancorp:
Napa Community Bank (609)
-------- -------- --------
California Region Total (267) (806) -0-
Other, net (5,853) (5,980) (5,222)
-------- -------- -------- ------ ------ ------ ------ ------ ------
Consolidated totals $ 16,653 $ 10,718 $ 8,035 13.33% 15.22% 13.78% 0.75% 0.58% 0.55%
======== ======== ======== ====== ====== ====== ====== ====== ======
Provisions for loan losses also increased significantly during recent years,
commensurate with the growth in both the number of banks and loans, and trends
in asset quality and loan charge-offs.
[GRAPH]
NET INCOME
($ millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
4.6 5.4 8.0 10.7 16.7
17
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
Asset liquidity for financial institutions typically consists of cash and cash
equivalents, investment securities available for sale and loans held for resale.
These categories totaled $352 million at year-end 2002, or about 15% of total
assets. This compares to $262 million or 13% of total assets at year-end 2001.
Liquidity is important for financial institutions because of their need to meet
loan funding commitments, depositor withdrawal requests and various other
commitments discussed in the accompanying notes to consolidated financial
statements. Liquidity varies significantly daily, based on customer activity.
Most of the investment securities portfolio is classified as available for sale,
although the banks generally have not sold investments to meet liquidity needs.
Also, to the extent warranted, the banks may sell loans from time to time.
Loans held for resale approximated $75.4 million at December 31, 2002, an
increase of about 21% over year end 2001 levels. These loans are residential
real estate mortgages originated by the banks, primarily through Capitol's
mortgage affiliate, Amera Mortgage Corporation. These loans are subsequently
sold into the secondary market, rather than being held in the banks' portfolio,
to reduce interest rate risk. Loan origination volume in 2002 increased nearly
37%, to $891.5 million compared to $651.1 million in 2001 and $251 million in
2000. Most of this volume was achieved through record low interest rates and
Amera's working with Capitol's Great Lakes Region banks. Future volume will
depend on whether interest rates remain low and the strength of residential real
estate market conditions. In early 2003, Amera's activities have expanded to
include all of Capitol's affiliate banks.
The primary source of funds for the banks is deposits. The banks emphasize
interest-bearing time deposits as part of their funding strategy. The banks also
seek noninterest-bearing deposits, or checking accounts, which reduce the banks'
cost of funds. Noninterest-bearing deposits were about 17% of total deposits at
year-end 2002 (about 16% at year-end 2001) and increased $88 million, or 32%,
during the year.
[GRAPH]
TOTAL DEPOSITS
($ millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
891 1,113 1,401 1,740 2,062
18
In recent periods, many banks have experienced some competitive challenges in
obtaining additional deposits to fuel growth. Capitol's banks have had similar
experiences in their individual markets. As depositors have wider access to the
Internet and other real-time interest rate monitoring resources, deposit pricing
has become more competitive. Deposit growth is achievable, but at a competitive
price, with tight net interest margins, especially during these most recent
periods of low interest rates. The banks do not generally rely on brokered
deposits as a key funding source (approximately $200 million at year-end 2002 or
11.7% of interest-bearing deposits compared to 9.7% in 2001); however, brokered
deposits are a ready resource to help meet urgent funding needs, such as loan
commitments (which are discussed in greater detail in Note O of the consolidated
financial statements).
To supplement their funding sources, some of the banks have lines of credit from
the Federal Home Loan Bank system. At year-end 2002, a total of $79 million ($63
million at year-end 2001) was borrowed under those facilities and additional
borrowing availability approximated $15 million. Some of the banks also have
smaller lines of credit with their correspondent banks. Borrowings under these
facilities are generally at short-term market rates of interest and, although
the repayment dates can be extended, are generally outstanding for brief periods
of time.
Capitol has credit facilities aggregating $25 million from an unaffiliated bank.
At year-end 2002, a total of $12.5 million ($14.1 million at year-end 2001) was
borrowed under this facility. Borrowings under this credit facility were reduced
in 2002 and 2001 through use of available corporate funds within the
consolidated group.
Capitol's longer-term contractual obligations are disclosed in the notes to the
consolidated financial statements. Excluding time deposits of the banks, such
obligations consist principally of debt and lease obligations and
trust-preferred securities, summarized as follows (in $1,000s):
Payments Due by Period
--------------------------------
Within Within After
Total 1 Year 2-5 Years 5 Years
-------- -------- --------- --------
Debt obligations $ 93,398 $ 36,824 $ 20,074 $ 36,500
Rent commitments under noncancelable
leases 19,515 3,773 12,131 3,611
Trust-preferred securities 53,300 -- -- 53,300
-------- -------- -------- --------
Total $166,213 $ 40,597 $ 32,205 $ 93,411
======== ======== ======== ========
Loan commitments of Capitol's banks (stand-by letters of credit and unfunded
loans) generally expire within one year.
A significant source of capital has been investments provided by minority
shareholders in the subsidiaries which are consolidated for financial reporting
purposes. Total minority interests in consolidated subsidiaries amounted to
$28.0 million at year-end 2002, a decrease of $42.7 million from the $70.7
million level at year-end 2001. The decreases in minority interests in 2002
resulted mainly from Capitol consolidating the ownership of some of its
subsidiaries.
19
Three majority-owned bank-development subsidiaries became 100% owned in 2002. In
each of these transactions, the shares acquired from the minority shareholders
were exchanged for Capitol's common stock according to fixed, but differing,
exchange ratios. The exchange with Sun Community Bancorp (Sun) was completed
effective March 31, 2002 and resulted in the issuance of approximately 2.7
million Capitol shares. Share exchanges regarding Sunrise Capital Corporation
and Indiana Community Bancorp Limited were completed effective September 30,
2002 and resulted in the issuance of about 450,000 shares of Capitol.
Additionally, 383,000 Capitol shares were issued from the share exchange with
Nevada Community Bancorp Limited which was completed in January 2003; this
transaction has been reflected for balance-sheet purposes as if it occurred on
December 31, 2002.
Two majority-owned banks also became wholly-owned in 2002. Share exchange
transactions for Detroit Commerce Bank and East Valley Community Bank were
completed effective December 31, 2002. About 54,000 shares of Capitol's common
stock were issued in those transactions.
While it is likely that similar share exchange transactions, as a harvest
strategy to gain full ownership of some bank subsidiaries, may occur in the
future, any such transactions depend upon whether Capitol (or one of its
subsidiary bank holding companies) offers such an exchange and whether minority
shareholders vote in favor of it on a transaction-by-transaction basis.
Total stockholders' equity approximated $160.0 million at year-end 2002, an
increase of $79.9 million for the year. The 2002 increase in stockholders'
equity includes earnings (less dividends paid) and proceeds from the issuance of
common stock. A substantial portion of the increase in stockholders' equity was
the result of the previously-mentioned share-exchange transactions which reduced
minority interests in consolidated subsidiaries. The book value per share of
common stock was $13.72 at year-end 2002, compared with $10.24 at year-end 2001.
Cash dividends of $0.44 were paid in 2002, compared to $0.40 in 2001 and $0.36
in 2000. Future payment of dividends is subject to approval by Capitol's board
of directors, future operating performance and management's assessment of the
consolidated organization's capital adequacy.
[The remainder of this page intentionally left blank]
20
Capitol's capital structure consists of these primary elements:
* Trust-preferred securities,
* Minority interests in consolidated subsidiaries, and
* Stockholders' equity.
[GRAPH]
TOTAL CAPITALIZATION
($ millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
101.1 133.6 157.3 199.5 239.6
In June 2002, Capitol participated in the private placement of a pooled
trust-preferred security totaling $3 million. This is a variable rate security
with a thirty year term and, subject to certain provisions, may be repaid early.
In 2001, Capitol participated in two private placements of pooled
trust-preferred securities totaling $25 million. These securities, along with
Capitol Trust I (a $25 million public offering of trust-preferred securities in
1997), are treated as elements of capital for regulatory purposes.
Total capitalization at year-end 2002 amounted to $239.6 million or 9.9% of
total assets. This compares to $199.5 million or 9.8% at year-end 2001.
Capitol and each of its banks and bank development subsidiaries are subject to a
complex series of regulatory rules and requirements which require specific
levels of capital adequacy at both the bank level and on a consolidated basis.
Under those rules and regulations, banks are categorized as WELL CAPITALIZED,
ADEQUATELY CAPITALIZED or INADEQUATELY CAPITALIZED using several ratio
measurements, including a risk-weighting approach to assets and financial
commitments. Banks falling into the INADEQUATELY CAPITALIZED category are
subject to the prompt corrective action provisions of the FDIC Improvement Act,
which can result in significant regulatory agency intervention and other adverse
action. Although it is permissible to maintain capital adequacy at the
ADEQUATELY CAPITALIZED level, Capitol operates with the objective of its banks
meeting the WELL CAPITALIZED standard. The well capitalized banks benefit from
lower FDIC deposit insurance costs and less restrictive limitations on some
banking activities.
New banks, as a condition of regulatory charter approval, are required to
maintain higher ratios of capital adequacy. Generally, they are required to keep
a specific ratio of capital-to-average-total-assets of not less than 8% during
their first three years of operation.
In the opinion of management, all of the affiliated banks met the criteria to be
classified as WELL CAPITALIZED at year-end 2002.
21
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.
This timing difference between interest rate-sensitive assets and interest
rate-sensitive liabilities is characterized as a "gap" which is quantified by
the distribution of rate-sensitive amounts within various time periods in which
they reprice or mature. The following table summarizes the consolidated
financial position in relation to "gap" at December 31, 2002 (in $1,000s):
Interest Rate Sensitivity
---------------------------------------------------------
0 to 3 4 to 12 2 to 5 Over 5
Months Months Years Years Total
----------- ----------- ----------- ----------- -----------
ASSETS
Federal funds sold $ 83,737 $ 83,737
Interest-bearing bank deposits 42,301 42,301
Investment securities 500 $ 2,910 $ 17,524 $ 13,205 34,139
Portfolio loans:
Commercial 870,775 175,411 721,126 21,724 1,789,036
Real estate mortgage 64,469 15,170 42,354 5,862 127,855
Installment 10,494 14,765 47,645 1,577 74,481
Loans held for resale 75,420 75,420
Non-earning assets 182,319
----------- ----------- ----------- ----------- -----------
Total assets $ 1,147,696 $ 208,256 $ 828,649 $ 42,368 $ 2,409,288
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Time deposits under $100,000 $ 59,245 $ 137,045 $ 134,670 $ $ 330,960
Time deposits over $100,000 140,408 257,384 166,768 564,560
All other interest-bearing deposits 661,031 142,094 2,758 805,883
----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits 860,684 536,523 304,196 1,701,403
Debt obligations 24,750 12,074 20,074 36,500 93,398
Noninterest-bearing liabilities 374,851
Trust-preferred securities 17,471 34,112 51,583
Minority interests in consolidated subsidiaries 28,016
Stockholders' equity 160,037
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 902,905 $ 548,597 $ 324,270 $ 70,612 $ 2,409,288
=========== =========== =========== =========== ===========
Interest rate sensitive period gap $ 244,791 $ (340,341) $ 504,379 $ (28,244)
=========== =========== =========== ===========
Interest rate sensitive cumulative gap $ 244,791 $ (95,550) $ 408,829 $ 380,585
=========== =========== =========== ===========
Period rate sensitive assets/period rate
sensitive liabilities 1.27 0.38 2.56 0.60
Cumulative rate sensitive assets/cumulative
rate sensitive liabilities 1.27 0.93 1.23 1.21
Cumulative gap to total assets 10.16% (3.97)% 16.97% 15.80%
22
The "gap" changes daily based upon changes in the underlying assets and
liabilities at the banks. Analyzing exposure to interest rate risk is prone to
imprecision because the "gap" is constantly changing, the "gap" differs at each
of the banks, and it is difficult to predict the timing, amount and direction of
future changes in market interest rates and the potential corresponding effect
on customer behavior.
The banks endeavor to manage and monitor interest rate risk in concert with
market conditions and risk parameters. Management strives to maintain a
reasonably balanced position of interest rate-sensitive assets and liabilities.
The banks have not engaged in speculative positions, for example, through the
use of derivatives, in anticipation of interest rate movements. In periods of
relatively lower interest rates, the banks emphasize variable rate loans and
time deposits to the extent possible in a competitive environment; however,
competitive influences often result in making fixed rate loans, although the
banks seek to limit the duration of such loans. These most recent periods of
record low interest rates have created a huge volume of fixed-rate mortgage
refinancing activity; those loans are sold to the secondary market and are not
retained for the banks' loan portfolios. Similarly, low interest rates generally
make competition more intense for deposits, since loan demand will typically
increase during periods of lower rates and, accordingly, result in higher
interest costs on deposits as competitors bid-up rates, adversely impacting
interest margins. Future interest rates and the impact on earnings are difficult
to predict. In addition to interest rate risk relating to interest-bearing
assets and liabilities, changes in interest rates also can impact future
transaction volume of loans and deposits at the banks. For activities which are
influenced by levels of interest rates for transaction volume (for example,
origination of residential mortgage loans), pricing margins and demand can
become impacted significantly by changes in interest rates.
As a means of monitoring and managing exposure to interest rate risk, management
uses a computerized simulation model which is intended to estimate pro forma
effects of changes in interest rates. Using the simulation model, the following
table illustrates, on a consolidated basis, changes which would occur in annual
levels of interest income, interest expense and net interest income (in $1,000s)
assuming both one hundred and two hundred basis point ("bp") parallel increases
and decreases in interest rates:
Pro Forma Pro Forma Effect of Pro Forma Effect of
Assuming No Interest Rate Increases Interest Rate Decreases
Change in ----------------------- -----------------------
Interest Rates +100 bp +200 bp -100 bp -200 bp
-------------- -------- -------- -------- --------
Interest income $116,576 $127,323 $138,186 $105,908 $ 95,821
Interest expense 51,087 54,752 58,417 47,422 44,229
-------- -------- -------- -------- --------
Net interest income $ 65,489 $ 72,571 $ 79,769 $ 58,486 $ 51,592
======== ======== ======== ======== ========
The pro forma analysis above is intended to quantify theoretical changes in
interest income based on stated assumptions. The pro forma analysis excludes the
effect of numerous other variables such as borrowers' ability to repay loans,
the ability of banks to obtain deposits in a radically changed interest-rate
environment and how management would revise its asset and liability management
priorities in concert with rate changes.
23
In November 2002, the Open Market Committee of the Federal Reserve Board
decreased interbank interest rates by 50 basis points. During 2001, the Federal
Reserve decreased interbank interest rates 11 times, which was an unprecedented
action to reduce rates 475 basis points within a year. While the pro forma
analysis above is intended to estimate the impact of an immediate 100 and 200
basis point change in rates, actual results will be different. Those results
will differ (and may be materially different) because a sudden rate change in
market rates does not result in an instantaneous parallel shift in rates on
loans and deposits at banks. Further, any financial model intended to estimate
the impact of interest rate changes will not necessarily incorporate other
variables, including management's efforts to manage its asset and liability
interest rate sensitivity, nor customer behavior.
General economic conditions also have a significant impact on both the results
of operations and the financial condition of financial institutions. Local
economic conditions, and to some extent national economic conditions, have a
significant impact on levels of loan demand as well as the ability of borrowers
to repay loans and the availability of funds for customers to make deposits.
2001 marked the end of the longest peacetime economic expansion in U.S. history.
The terrorist acts of September 11, 2001, our Nation's subsequent war on
terrorism, the diagnosis of economic recession in the U.S., worldwide economic
and political instability, recent major business bankruptcies and their related
high-profile questionable accounting and financial reporting practices, raised
significant concerns over the near-term and longer-horizons for economic and
political uncertainty. 2002 ended with the United States' economy still mired in
recession and the threat of war looming. While there are some indications of an
improving economy, 2003 and beyond are very uncertain. At the time this
narrative was written, uncertainties of domestic economic health and global
stability preclude prediction of near-term trends and their potential effects.
Continuing consolidation of the banking industry on a national basis, and in the
markets of Capitol's banks, has presented opportunities for growth. As a result
of consolidation of the banking industry and the conversion of customer
relationships into perceived `commodities' by the larger banks, many customer
relationships have been displaced, generating opportunities for development by
Capitol's banks. For many retail customers, banking services have become a
commodity in an environment that is dominated by larger mega-bank or
mass-merchandising institutions. For the professional, entrepreneur and other
customers seeking a more service-oriented, customized banking relationship,
Capitol's banks fill that need through their focus on single-location banks with
full, local decision-making authority. As the banks focus on service delivery
and keeping their size at a manageable level, only a modest market share of
deposits and loan activity is necessary to achieve profitability and
investor-oriented earnings performance.
Start-up banks generally incur operating losses during their early periods of
operations. Recently-formed start-up banks will detract from consolidated
earnings performance and additional start-up banks formed in 2002 and beyond
will similarly negatively impact short-term profitability. On a consolidated
basis, such operating losses reduce net income by the pro rata share of
Capitol's ownership percentage in those banks. When those banks become
profitable, their operating results will contribute to consolidated earnings to
the extent of Capitol's ownership percentage.
24
Commercial banks continue to be subject to significant regulatory requirements
which impact current and future operations. In addition to the extent of
regulatory interaction with financial institutions, extensive rules and
regulations governing lending activities, deposit gathering and capital adequacy
(to name a few), translate into a significant cost burden of financial
institution regulation. Such costs include the significant amount of management
time and expense which is incurred in maintaining compliance and developing
systems for compliance with those rules and regulations as well as the cost of
examinations, audits and other compliance activities. The future of financial
institution regulation, and its costs, is uncertain and difficult to predict.
Premiums for FDIC insurance have historically been a significant cost of doing
business as financial institutions, but in the most recent years, deposit
insurance premiums have been maintained at a stable and modest level. Future
deposit insurance premium levels are difficult to predict inasmuch as deposit
insurance premiums will be determined based on general economic conditions, the
relative health of the banking and financial institution industry and other
unpredictable factors. It is reasonable to expect that deposit insurance
premiums may increase at some point in the future.
NEW ACCOUNTING STANDARDS
There were several new accounting standards which were issued or became
effective in 2002, in addition to some which have later effective dates. They
are listed and discussed in Note B of the consolidated financial statements,
beginning on page 36.
[The remainder of this page intentionally left blank]
25
Board of Directors and Stockholders
Capitol Bancorp Ltd.
We have audited the accompanying consolidated balance sheets of Capitol Bancorp
Ltd. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capitol Bancorp Ltd.
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note B to the consolidated financial statements, the Corporation
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2003
26
CONSOLIDATED BALANCE SHEETS
- December 31 -
2002 2001
----------- -----------
(in $1,000s)
ASSETS
Cash and due from banks $ 125,146 $ 83,833
Money market, mutual funds and interest-bearing deposits 42,301 10,999
Federal funds sold 83,737 68,859
----------- -----------
Cash and cash equivalents 251,184 163,691
Loans held for resale 75,420 62,487
Investment securities--Note C:
Available for sale, carried at market value 25,355 35,598
Held for long-term investment, carried at amortized
cost which approximates market value 8,784 8,089
----------- -----------
Total investment securities 34,139 43,687
Portfolio loans, less allowance for loan losses of $28,953 in
2002 and $23,238 in 2001--Note D 1,962,419 1,711,351
Premises and equipment--Note F 21,737 16,441
Accrued interest income 9,286 9,471
Goodwill and other intangibles 24,739 8,527
Other assets 30,364 28,351
----------- -----------
TOTAL ASSETS $ 2,409,288 $ 2,044,006
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 360,669 $ 272,593
Interest-bearing--Note G 1,701,403 1,467,792
----------- -----------
Total deposits 2,062,072 1,740,385
Debt obligations--Note H 93,398 89,911
Accrued interest on deposits and other liabilities 14,182 14,244
----------- -----------
Total liabilities 2,169,652 1,844,540
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE CORPORATION'S SUBORDINATED DEBENTURES
(Trust-Preferred Securities)--Note I 51,583 48,621
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES--Note A 28,016 70,673
STOCKHOLDERS' EQUITY--Notes H, J and P:
Common stock, no par value, 25,000,000 shares authorized;
issued and outstanding:
2002--11,663,412 shares--Notes J and S
2001--7,829,178 shares 135,234 67,692
Retained earnings 26,318 14,173
Market value adjustment (net of tax effect) for investment securities
available for sale (accumulated other comprehensive income) 191 158
----------- -----------
161,743 82,023
Less note receivable from exercise of stock options and unallocated
ESOP shares--Notes J and K (1,706) (1,851)
----------- -----------
Total stockholders' equity 160,037 80,172
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,409,288 $ 2,044,006
=========== ===========
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF INCOME
- Year Ended December 31 -
2002 2001 2000
--------- --------- ---------
(in $1,000s, except per share data)
Interest income:
Portfolio loans (including fees) $ 149,785 $ 144,417 $ 121,737
Loans held for resale 2,674 3,002 1,044
Taxable investment securities 1,422 2,201 4,353
Federal funds sold 1,376 3,186 3,985
Other 1,197 991 1,192
--------- --------- ---------
Total interest income 156,454 153,797 132,311
Interest expense:
Deposits 47,848 65,655 60,256
Debt obligations and other 8,012 7,637 5,656
--------- --------- ---------
Total interest expense 55,860 73,292 65,912
--------- --------- ---------
Net interest income 100,594 80,505 66,399
Provision for loan losses--Note D 12,676 8,167 7,216
--------- --------- ---------
Net interest income after provision
for loan losses 87,918 72,338 59,183
Noninterest income:
Service charges on deposit accounts 4,020 3,251 2,070
Trust fee income 2,434 1,839 1,077
Fees from origination of non-portfolio residential
mortgage loans 6,837 3,165 1,543
Other 1,691 1,330 1,447
--------- --------- ---------
Total noninterest income 14,982 9,585 6,137
Noninterest expense:
Salaries and employee benefits 47,454 37,970 28,995
Occupancy 6,528 5,772 4,681
Equipment rent, depreciation and maintenance 4,544 4,646 4,113
Other 18,625 15,748 15,057
--------- --------- ---------
Total noninterest expense 77,151 64,136 52,846
--------- --------- ---------
Income before federal income taxes and minority interest 25,749 17,787 12,474
Federal income taxes--Note L 8,701 5,824 4,289
--------- --------- ---------
Income before minority interest 17,048 11,963 8,185
Minority interest in net income of consolidated subsidiaries (395) (1,245) (150)
--------- --------- ---------
NET INCOME $ 16,653 $ 10,718 $ 8,035
========= ========= =========
NET INCOME PER SHARE--Note M:
Basic $ 1.64 $ 1.38 $ 1.14
========= ========= =========
Diluted $ 1.57 $ 1.35 $ 1.13
========= ========= =========
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN $1,000S)
Unallocated
Accumulated ESOP Shares and
Other Note Receivable
Common Retained Comprehensive From Sale of
Stock Earnings Income Common Stock Total
--------- --------- --------- ----------- ---------
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
Issuance of 626,325 shares of common stock to
acquire minority interests in bank subsidiaries 6,278 6,278
Proceeds from issuance of 266,783 shares of
common stock and 53,352 warrants 2,930 2,930
Allocation of shares to ESOP participants' accounts 145 145
Cash dividends paid ($.36 per share) (2,534) (2,534)
Components of comprehensive income:
Net income for 2000 8,035 8,035
Market value adjustment for investment securities
available for sale (net of income tax effect) 799 799
---------
Comprehensive income for 2000 8,834
--------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2000 65,939 6,569 (108) (1,996) 70,404
Proceeds from the sale of 130,000 shares of
common stock and 32,500 warrants to
purchase common stock 1,495 1,495
Issuance of 7,465 shares of common stock
upon exercise of warrants 82 82
Issuance of 18,350 shares of common stock
upon exercise of stock options 176 176
Allocation of shares to ESOP participants' accounts 145 145
Cash dividends paid ($.40 per share) (3,114) (3,114)
Components of comprehensive income:
Net income for 2001 10,718 10,718
Market value adjustment for investment securities
available for sale (net of income tax effect) 266 266
---------
Comprehensive income for 2001 10,984
--------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2001 67,692 14,173 158 (1,851) 80,172
Issuance of 3,606,306 shares of common stock to
acquire minority interests in bank and bank
holding-company subsidiaries 64,801 64,801
Issuance of 138,447 shares of common stock upon
exercise of stock options 1,693 1,693
Issuance of 54,859 shares of common stock upon
exercise of warrants 608 608
Issuance of 34,622 shares of common stock
in exchange for investment security 440 440
Allocation of shares to ESOP participants' accounts 145 145
Cash dividends paid ($.44 per share) (4,508) (4,508)
Components of comprehensive income:
Net income for 2002 16,653 16,653
Market value adjustment for investment securities
available for sale (net of income tax effect) 33 33
---------
Comprehensive income for 2002 16,686
--------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2002 $ 135,234 $ 26,318 $ 191 $ (1,706) $ 160,037
========= ========= ========= ========= =========
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
- Year Ended December 31 -
2002 2001 2000
--------- --------- ---------
(in $1,000s)
OPERATING ACTIVITIES
Net income $ 16,653 $ 10,718 $ 8,035
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 12,676 8,167 7,216
Depreciation of premises and equipment 3,451 3,340 3,178
Amortization of goodwill and other intangibles 399 979 561
Net accretion of investment security discounts (22) (94) (104)
Loss on sales of premises and equipment 64 100 11
Minority interest in net income of consolidated
subsidiaries 395 1,245 150
Deferred income taxes (2,224) (1,345) (1,312)
Originations and purchases of loans held for resale (891,498) (651,149) (251,157)
Proceeds from sales of loans held for resale 878,565 609,984 238,913
Increase in accrued interest income and other assets (2,187) (1,883) (9,178)
Increase (decrease) in accrued interest expense and
other liabilities (62) 523 1,479
--------- --------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 16,210 (19,415) (2,208)
INVESTING ACTIVITIES
Proceeds from sales of investment securities available
for sale 8,672 500 3,156
Proceeds from calls and maturities of investment
securities available for sale 67,938 67,393 71,882
Purchases of investment securities available for sale (66,989) (42,159) (35,503)
Net increase in portfolio loans (263,744) (381,169) (309,000)
Proceeds from sales of premises and equipment 60 306 22
Purchases of premises and equipment (8,871) (5,536) (3,466)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (262,934) (360,665) (272,909)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 271,571 268,677 125,178
Net increase in certificates of deposit 50,116 70,809 162,928
Net proceeds from debt obligations 3,487 31,761 10,750
Net proceeds from issuance of trust-preferred securities 2,899 24,248
Resources provided by minority interests 8,351 6,853 14,262
Net proceeds from issuance of common stock 2,301 1,753 3,011
Cash dividends paid (4,508) (3,114) (2,534)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 334,217 400,987 313,595
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 87,493 20,907 38,478
Cash and cash equivalents at beginning of year 163,691 142,784 104,306
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 251,184 $ 163,691 $ 142,784
========= ========= =========
See notes to consolidated financial statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
Capitol Bancorp Limited ("Capitol" or the "Corporation") is a multibank holding
company. Consolidated subsidiaries consist of the following:
Percentage
Owned at
December 31, Year Formed
Affiliate Location 2002 or Acquired
- ---------------------------------- -------------------------- ------------ -----------
Michigan Banks:
Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990
Brighton Commerce Bank Brighton, Michigan 100% 1997
Capitol National Bank Lansing, Michigan 100% 1982
Detroit Commerce Bank Detroit, Michigan 100% 1998
Grand Haven Bank Grand Haven, Michigan 100% 1995
Kent Commerce Bank Grand Rapids, Michigan 100% 1998
Macomb Community Bank Clinton Township, Michigan 100% 1996
Muskegon Commerce Bank Muskegon, Michigan 100% 1997
Oakland Commerce Bank Farmington Hills, Michigan 100% 1992
Paragon Bank & Trust Holland, Michigan 100% 1994
Portage Commerce Bank Portage, Michigan 100% 1988
Indiana Banks:
Elkhart Community Bank Elkhart, Indiana 51% 1999
Goshen Community Bank Goshen, Indiana 51% 2000
Arizona Banks:
Arrowhead Community Bank Glendale, Arizona 87% 2000
Bank of Tucson Tucson, Arizona 100% 1996
Camelback Community Bank Phoenix, Arizona 100% 1998
East Valley Community Bank Chandler, Arizona 100% 1999
Mesa Bank Mesa, Arizona 100% 1998
Southern Arizona Community Bank Tucson, Arizona 100% 1998
Valley First Community Bank Scottsdale, Arizona 100% 1997
Yuma Community Bank Yuma, Arizona 51% 2000
Nevada Banks:
Bank of Las Vegas Las Vegas, Nevada 51%(1) 2002
Black Mountain Community Bank Henderson, Nevada 51%(1) 2000
Desert Community Bank Las Vegas, Nevada 51%(1) 1999
Red Rock Community Bank Las Vegas, Nevada 51%(1) 1999
Sunrise Bank Group:
Sunrise Bank of Albuquerque Albuquerque, New Mexico 87% 2000
Sunrise Bank of Arizona Phoenix, Arizona 100% 1998
Sunrise Bank of San Diego San Diego, California 64% 2001
First California Northern Bancorp: Napa, California 51% 2001
Napa Community Bank Napa, California 2002
(1) Reflects the January 2003 share exchange regarding the minority interest of
Nevada Community Bancorp Limited as if it had occurred on December 31,
2002.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION--CONTINUED
Capitol views itself as a bank-development company. In recent years it has
engaged in the formation of DE NOVO banks through majority ownership made
directly by Capitol, or through a subsidiary bank-development company, with the
remainder of the banks' start-up capital provided by local investors in the
bank's community. When the DE NOVO bank reaches a point of development near its
third year of operation, Capitol may offer the bank's minority shareholders an
opportunity to exchange their bank shares for shares of Capitol. Capitol has
made similar exchange proposals regarding the minority interests of some of its
bank-development-company subsidiaries. In each instance, however, Capitol is
under no obligation to offer such a share exchange and such share exchange
proposals are generally subject to approval by the minority shareholders in each
proposed transaction.
Capitol and its subsidiaries are engaged in a single business activity--banking.
The bank affiliates provide a full range of banking services to individuals,
businesses and other customers located in their respective communities. Each of
the banks generally operate from a single location and focus their activities on
meeting the various credit and other banking needs of entrepreneurs,
professionals and other businesses and individuals. A variety of deposit
products are offered, including checking, savings, money market, individual
retirement accounts and certificates of deposit. In addition, trust and
investment services are offered through Paragon Bank & Trust. The principal
markets for the banks' financial services are the communities in which they are
located and the areas immediately surrounding those communities. In addition to
commercial banking units, mortgage banking activities are offered through Amera
Mortgage Corporation, a less than 50%-owned affiliate.
Each bank is viewed by management as being a separately identifiable business or
segment from the perspective of monitoring performance and allocation of
financial resources. Although the banks operate independently and are managed
and monitored separately, each bank is substantially similar in terms of
business focus, type of customers, products and services. Further, each of the
banks and the Corporation are subject to substantially similar laws and
regulations unique to the banking industry. Accordingly, the Corporation's
consolidated financial statements reflect the presentation of segment
information on an aggregated basis.
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries, after elimination of intercompany accounts
and transactions, and after giving effect to applicable minority interests.
Banks formed during 2000, 2001 and 2002 are included in the consolidated
financial statements for periods after joining the consolidated group. Certain
2001 and 2000 amounts have been reclassified to conform to the 2002
presentation.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES: The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks (interest-bearing and noninterest-bearing), money-market
funds and federal funds sold. Generally, federal funds transactions are entered
into for a one-day period.
LOANS HELD FOR RESALE: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the aggregate lower of cost or market. Fees from the origination
of loans held for resale are recognized in the period the loans are originated.
INVESTMENT SECURITIES: Investment securities available for sale (generally most
debt investment securities of Capitol's banks) are carried at market value with
unrealized gains and losses reported as a separate component of stockholders'
equity, net of tax effect (accumulated other comprehensive income). All other
investment securities are classified as held for long-term investment and are
carried at amortized cost which approximates market value (see Note C).
Investments are classified at the date of purchase based on management's
analysis of liquidity and other factors. The adjusted cost of the specific
securities sold is used to compute realized gains or losses. Premiums and
discounts are recognized in interest income using the interest method over the
period to maturity.
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Substantially all portfolio loans are made to borrowers in the
banks' geographic areas. Consistent with the banks' emphasis on business
lending, there are concentrations of credit in loans secured by commercial real
estate, equipment and other business assets. The maximum potential credit risk
to Capitol, without regard to underlying collateral and guarantees, is the total
of loans and loan commitments outstanding. Management reduces Capitol's exposure
to losses from credit risk by requiring collateral and/or guarantees for loans
granted and by monitoring concentrations of credit, in addition to recording
provisions for loan losses and maintaining an allowance for loan losses.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated losses inherent in the portfolio at the balance
sheet date. Management's determination of the adequacy of the allowance is an
estimate based on evaluation of the portfolio (including potential impairment of
individual loans and concentrations of credit), past loss experience, current
economic conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of portfolio
loans generally approximate the direct costs of successful loan originations.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation, which relates primarily to equipment and furniture with estimated
useful lives of approximately three to seven years, is computed principally by
the straight-line method. Buildings are generally depreciated on a straight-line
basis with estimated useful lives of approximately 40 years. Leasehold
improvements are generally depreciated over the respective lease term.
GOODWILL AND OTHER INTANGIBLES: Amortization of goodwill ceased, as required,
January 1, 2002, upon implementation of a new accounting standard (see "New
Accounting Standards" below). Goodwill is reviewed periodically by management
for impairment and, accordingly, impairment adjustments of goodwill are charged
against earnings, when determined. Other intangibles, which generally consist of
core deposit intangibles, are amortized over varying periods of less than 10
years and are not material.
OTHER REAL ESTATE: Other real estate (included as a component of other assets,
and at December 31, 2002 and 2001 approximated $4,605,000 and $3,044,000,
respectively) comprises properties acquired through a foreclosure proceeding or
acceptance of a deed in lieu of foreclosure. These properties held for sale are
carried at the lower of cost or estimated fair value (net of estimated selling
cost) at the date acquired and are periodically reviewed for subsequent
impairment.
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon
granting of stock options because such stock options are accounted for under the
provisions of Accounting Principles Board (APB) Opinion 25 (and related
interpretations) and are granted at an exercise price equal to the market price
of common stock at grant date.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, establishes an alternative fair value method of accounting for
stock options whereby compensation expense would be recognized based on the
computed fair value of the options on the grant date. By not electing this
alternative, certain pro forma disclosures of the expense recognition provisions
of Statement No. 123 are required, which are as follows:
2002 2001 2000
---- ---- ----
Fair value assumptions:
Risk-free interest rate 4.5% 5.0% 7.0%
Dividend yield 2.5% 2.8% 3.0%
Stock price volatility .46 .39 .83
Expected option life 7 years 7 years 7 years
Aggregate estimated fair value of
options granted (in thousands) $ 11,548 $ 95 $ 4,932
Net income (in thousands):
As reported 16,653 10,718 8,035
Pro forma 8,078 9,809 6,471
Net income per share:
Basic:
As reported 1.64 1.38 1.14
Pro forma 0.80 1.26 .92
Diluted:
As reported 1.57 1.35 1.13
Pro forma $ 0.76 $ 1.24 $ .91
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by Capitol's banks is not included in the
consolidated balance sheet because it is not an asset of the banks or Capitol.
Trust fee income is recorded on the accrual method.
FEDERAL INCOME TAXES: Capitol and subsidiaries owned 80% or more by Capitol file
a consolidated federal income tax return. Deferred income taxes are recognized
for the tax consequences of temporary differences by applying enacted tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred income taxes of a change in tax laws or rates is recognized
in income in the period that includes the enactment date.
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income and certain
other items which are charged or credited to stockholders' equity. For the
periods presented, Capitol's only element of comprehensive income other than net
income was the net change in the market value adjustment for investment
securities available for sale. Accordingly, the elements and total of
comprehensive income are shown within the statement of changes in stockholders'
equity presented herein.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
NEW ACCOUNTING STANDARDS: Financial Accounting Standards Board (FASB) Statement
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, requires that goodwill no longer
be amortized and charged against earnings, but instead be reviewed for
impairment. Amortization of goodwill ceased upon adoption of the Statement.
Capitol's previous business combinations (generally, acquisitions of minority
interests) have been accounted for using the purchase method. Upon
implementation, this new standard did not have a material effect on Capitol's
consolidated financial statements, other than the elimination of goodwill
amortization ($979,000 in 2001 and $561,000 in 2000) in future periods.
When goodwill is reviewed for potential impairment, impairment losses must be
charged against earnings if and when determined. Substantially all of Capitol's
recorded reporting-unit goodwill relates to acquisitions of minority interests
in consolidated subsidiaries. Such acquisitions have been made at modest
premiums in relation to the underlying fair value of net assets when acquired.
Based on management's review of recorded reporting-unit goodwill at the
transition date for Statement No. 142, January 1, 2002, and in the fourth
quarter of 2002, no impairment losses were identified as of those dates.
Statement No. 142 requires supplemental disclosure of historical information, as
adjusted to exclude amortization of goodwill no longer being amortized, which is
summarized below (in $1,000s except per share amounts):
Year Ended December 31
----------------------
2001 2000
--------- ---------
Net income, as reported $ 10,718 $ 8,035
Add back -- goodwill
amortization 979 561
--------- ---------
Net income, as adjusted $ 11,697 $ 8,596
========= =========
Net income per share,
as reported:
Basic $ 1.38 $ 1.14
========= =========
Diluted $ 1.35 $ 1.13
========= =========
Add back -- goodwill
amortization per share:
Basic $ 0.12 $ 0.08
========= =========
Diluted $ 0.12 $ 0.08
========= =========
Net income per share,
as adjusted:
Basic $ 1.50 $ 1.22
========= =========
Diluted $ 1.47 $ 1.21
========= =========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The FASB has also recently issued Statements No. 143 (ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS), No. 144 (ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS), No. 145 (which updates, clarifies and simplifies certain
existing accounting pronouncements--rescission of Statements No. 4, 44 and 64,
amendment of Statement No. 13 and technical corrections) and No. 146 (ACCOUNTING
FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES). These new standards have
varying effective dates in 2002 and 2003 and, based on management's analysis,
are not expected to have a material effect on Capitol's consolidated financial
statements, upon implementation.
Statement No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, amends prior
standards relating to some acquisitions of financial institutions, requiring
such transactions to be accounted for in accordance with Statements No. 141 and
142. It had no material effect on Capitol's consolidated financial statements,
upon implementation.
Statement No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, provides alternative methods of transition for a voluntary change to
the fair-value based method of accounting for stock-based employee compensation
and it amends the prior disclosure requirements of Statement No. 123 to require
more prominent and frequent disclosures about the effects of stock-based
compensation. As permitted, Capitol has retained its prior method of accounting
for stock-based employee compensation.
FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES AND INDEBTEDNESS OF OTHERS,
expands disclosures about obligations under certain guarantees and, in addition,
requires recording a liability for the fair value of the obligations undertaken
in issuing the guarantee, applicable to guarantees issued or modified after
December 31, 2002. Capitol's disclosure of guarantees is made in Note O. This
new guidance had no impact on Capitol's consolidated financial position or
results of operations, upon implementation.
FASB Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES,
clarifies when some entities previously not consolidated under prior accounting
guidance, should be. This new guidance, which was effective upon issuance in
January 2003, is not expected to have a material effect upon Capitol's
consolidated financial statements.
In 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
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 the calculation, adequacy and approval of the allowances should be
documented by management.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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 consolidated financial statements.
NOTE C--INVESTMENT SECURITIES
Investment securities consisted of the following at December 31 (in $1,000s):
2002 2001
-------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------- ------- ------- -------
Available for sale:
United States Treasury securities $ 2,505 $ 2,586 $ 3,704 $ 3,757
United States government agency
securities 22,460 22,668 30,253 30,429
States and political subdivisions 101 101 1,402 1,412
------- ------- ------- -------
25,066 25,355 35,359 35,598
Held for long-term investment:
Federal Reserve Bank stock 424 424 394 394
Federal Home Loan Bank stock 5,950 5,950 4,716 4,716
Corporate stock 1,075 1,075 895 895
Other 1,335 1,335 2,084 2,084
------- ------- ------- -------
8,784 8,784 8,089 8,089
------- ------- ------- -------
$33,850 $34,139 $43,448 $43,687
======= ======= ======= =======
At December 31, 2002, securities with a market value approximating $8.9 million
were pledged to secure public and trust deposits and for other purposes as
required by law. Investments in Federal Reserve Bank stock and Federal Home Loan
Bank stock are restricted and may only be resold to or redeemed by the issuer.
Gross unrealized gains and losses on investment securities available for sale
were as follows at December 31 (in $1,000s):
2002 2001
------------------ ------------------
Gains Losses Gains Losses
------- ------- ------- -------
United States Treasury securities $ 81 $ -- $ 53 $ --
United States government agency
securities 217 9 252 76
States and political subdivisions -- -- 10 --
------- ------- ------- -------
$ 298 $ 9 $ 315 $ 76
======= ======= ======= =======
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE C--INVESTMENT SECURITIES--CONTINUED
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
Scheduled maturities of investment securities held as of December 31, 2002 were
as follows (in $1,000s):
Estimated
Amortized Market
Cost Value
---------- ----------
Due in one year or less $ 3,411 $ 3,445
After one year, through five years 17,375 17,551
After five years, through ten years 1,765 1,783
After ten years 2,515 2,576
Securities held for long-term
investment, without stated maturities 8,784 8,784
---------- ----------
$ 33,850 $ 34,139
========== ==========
NOTE D--LOANS
Portfolio loans consisted of the following at December 31 (in $1,000s):
2002 2001
---------- ----------
Commercial $1,789,036 $1,535,451
Real estate mortgage 127,855 121,676
Installment 74,481 77,462
---------- ----------
Total portfolio loans 1,991,372 1,734,589
Less allowance for loan losses (28,953) (23,238)
---------- ----------
Net portfolio loans $1,962,419 $1,711,351
========== ==========
Transactions in the allowance for loan losses are summarized below (in $1,000s):
2002 2001 2000
---------- ---------- ----------
Balance at January 1 $ 23,238 $ 17,449 $ 12,639
Provision charged to operations 12,676 8,167 7,216
Loans charged off (deduction) (7,703) (2,929) (3,171)
Recoveries 742 551 765
---------- ---------- ----------
Balance at December 31 $ 28,953 $ 23,238 $ 17,449
========== ========== ==========
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE D--LOANS--CONTINUED
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. Nonperforming loans
(i.e., loans which are 90 days or more past due and loans on nonaccrual status)
are summarized below (in $1,000s):
December 31
-------------------
2002 2001
------- -------
Nonaccrual loans:
Commercial $15,444 $11,220
Real estate 560 356
Installment 613 466
------- -------
Total nonaccrual loans 16,617 12,042
Past due (>90 days) loans:
Commercial 5,728 4,290
Real estate 323 787
Installment 222 119
------- -------
Total past due loans 6,273 5,196
------- -------
Total nonperforming loans $22,890 $17,238
======= =======
If nonperforming loans had performed in accordance with their contractual terms
during the year, additional interest income of $1,514,000, $694,000 and $315,000
would have been recorded in 2002, 2001 and 2000, respectively. Interest income
recognized on loans in nonaccrual status in 2002, 2001 and 2000 operations
approximated $385,000, $513,000 and $205,000, respectively. At December 31,
2002, there were no material amounts of loans which were restructured or
otherwise renegotiated as a concession to troubled borrowers.
The amounts of the allowance for loan losses allocated in the following table
(in $1,000s) are based on management's estimate of losses inherent in the
portfolio at the balance sheet date, and should not be interpreted as an
indication of future charge-offs:
December 31, 2002 December 31, 2001
--------------------- ---------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
------- ------- ------- -------
Commercial $27,226 1.37% $20,570 1.19%
Real estate mortgage 1,009 0.05 1,630 0.09
Installment 718 0.03 1,038 0.06
------- ------- ------- -------
Total allowance for loan losses $28,953 1.45% $23,238 1.34%
======= ======= ======= =======
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE E--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, Capitol's banking subsidiaries make loans to
officers and directors of Capitol and its subsidiaries including their immediate
families and companies in which they are principal owners. At December 31, 2002
and 2001, total loans to these persons were $94.3 million and $80.9 million,
respectively. During 2002, $69.7 million of new loans were made to these persons
and repayments totaled $56.3 million. Such loans are made at the banking
subsidiaries' normal credit terms.
Officers and directors of Capitol (and their associates, family and/or
affiliates) are also depositors of the banking subsidiaries. Such deposits are
similarly made at the banks' normal terms as to interest rate, term and deposit
insurance.
NOTE F--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31 (in $1,000s):
2002 2001
-------- --------
Land, buildings and improvements $ 7,344 $ 6,274
Leasehold improvements 7,965 6,659
Equipment and furniture 20,120 15,014
-------- --------
35,429 27,947
Less accumulated depreciation (13,692) (11,506)
-------- --------
$ 21,737 $ 16,441
======== ========
Capitol and certain subsidiaries rent office space under operating leases. Rent
expense (net of sublease income) under these lease agreements approximated
$4,394,000, $3,652,000 and $3,064,000 (including rent expense of $1,457,000,
$1,138,000 and $1,034,000 under leases with related parties) in 2002, 2001 and
2000, respectively.
At December 31, 2002, future minimum rental payments under operating leases that
have initial or remaining noncancelable lease terms in excess of one year were
as follows (in $1,000s):
2003 $ 3,773
2004 3,414
2005 3,210
2006 3,055
2007 2,452
2008 and thereafter 3,611
--------
$ 19,515
========
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $564.6
million and $510.3 million as of December 31, 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of such time deposits were as
follows (in $1,000s):
2003 $ 397,792
2004 99,219
2005 45,538
2006 8,463
2007 and thereafter 13,548
---------
$ 564,560
=========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE H--DEBT OBLIGATIONS
Debt obligations consisted of the following at December 31 (in $1,000s):
2002 2001
------- -------
Borrowings from Federal Home
Loan Bank $79,198 $63,211
Notes payable to unaffiliated bank 12,500 14,100
Federal funds purchased 1,700 12,600
------- -------
$93,398 $89,911
======= =======
Borrowings from Federal Home Loan Bank (FHLB) represent advances secured by
certain portfolio residential real estate mortgage loans and other eligible
collateral. Such advances become due at varying dates and bear interest at
market short-term rates (approximately 3.94% at December 31, 2002). At December
31, 2002, unused lines of credit under these facilities approximated $15
million.
Notes payable to unaffiliated bank represents borrowings under a line of credit.
Up to $25 million can be borrowed pursuant to a one-year revolving credit
agreement which bears interest at a variable rate (4% at December 31, 2002),
payable monthly. $12.5 million was drawn on the line of credit at December 31,
2002. The credit facility is reviewed annually for continuance and requires
Capitol, among other things, to maintain certain minimum levels of capital,
rates of return on assets and other ratios or requirements and is secured by the
common stock of certain bank subsidiaries. For the periods presented, interest
paid on all debt obligations approximates amounts charged to expense.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE H--DEBT OBLIGATIONS--CONTINUED
At December 31, 2002, scheduled debt maturities were as follows (in $1,000s):
2003 $ 36,824
2004 9,600
2005 7,474
2006 1,000
2007 and thereafter 38,500
--------
$ 93,398
========
In addition to the foregoing, Capitol has guaranteed some obligations of its
subsidiaries (see Note O).
NOTE I--TRUST-PREFERRED SECURITIES
Trust-preferred securities represent interests in subordinated debentures of
Capitol which are summarized as follows:
Net Carrying Amount
Aggregate at December 31
Current Liquidation -------------------
Interest Scheduled Amount (in $1,000s)
Description Rate Maturity (in $1,000s) 2002 2001
- ----------- ---- -------- ------------ ---- ----
Capitol Trust I 8.50% fixed 2027 $25,300 $24,399 $24,363
Capitol Trust II 10.25% fixed 2031 10,000 9,713 9,703
Capitol Statutory Trust III 5.34% variable 2031 15,000 14,570 14,555
Capitol Trust IV 5.43% variable 2032 3,000 2,901
------- ------- -------
$53,300 $51,583 $48,621
======= ======= =======
Securities of Capitol Trust I were issued in a 1997 public offering. Capitol
Trust II and Capitol Statutory Trust III were formed in 2001 in conjunction with
private placements of pooled trust-preferred securities. Capitol Trust IV was
similarly formed in 2002. Each of these securities have similar terms and,
subject to certain provisions, may be called by the issuer five years after
issuance. The liquidation amount of these securities is guaranteed by Capitol.
Interest paid to the Trusts by Capitol (which is recorded as interest expense in
its consolidated financial statements) is distributed by the Trusts to the
holders of the trust-preferred securities. Under certain conditions, Capitol may
defer payment of interest on the subordinated debentures for periods of up to
five years.
Because these Trusts are subsidiaries (due to Capitol's ownership of the common
interests of the Trusts), they are consolidated for financial reporting
purposes. The amount of outstanding trust-preferred securities (net of issuance
costs which are being amortized over the life of the securities) is classified
between liabilities and equity in Capitol's consolidated balance sheet. Under
current regulatory guidelines, such trust-preferred securities are included as
capital for purposes of meeting certain ratio requirements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE J--COMMON STOCK, WARRANTS AND STOCK OPTIONS
At December 31, 2002, a share exchange proposal was pending regarding the
minority interests of Nevada Community Bancorp Limited. This share exchange
proposal was subject to approval by Nevada's shareholders (other than Capitol)
at a meeting held on January 17, 2003, at which time the share exchange was
approved. Capitol has reflected the Nevada share exchange, for purposes of its
consolidated balance sheet, as if the share exchange occurred on December 31,
2002. Such share exchange resulted in Capitol issuing approximately 383,000
shares of its previously unissued common stock.
At December 31, 2002, approximately 30,000 warrants for the purchase of common
stock were outstanding. Each warrant permits the holder to purchase a share of
Capitol's common stock at an exercise price of $11.50 and expires in 2003.
Stock options have been granted to certain officers and directors which provide
for the purchase of shares of common stock. Generally, stock options are granted
at an exercise price equal to the fair value of common stock on the grant date.
Of the stock options granted in 2000, pursuant to the Corporation's 2000 Stock
Option Plan, 563,435 vest over a three-year period; the remainder are fully
vested and currently exercisable. All such stock options expire seven years
after the date granted.
Under the terms of an employment agreement with a certain director and executive
officer of Capitol, options granted thereunder shall be increased when the
Corporation issues additional shares so that such options granted equal 15% of
outstanding shares prior to exercise. In 1999, Capitol negotiated a reduction of
the executive officer's benefit from 15% to 10%. In exchange for the reduced
benefit to the executive officer, Capitol agreed to a one-time exercise of
previously granted stock options with an aggregate exercise price of $1.6
million funded by a note receivable of $1.9 million from the executive officer.
The note bears interest at a fixed rate over its ten-year term. As part of the
terms of this agreement, the executive officer's compensation will be increased
in an amount equal to the interest due on the note receivable. Under certain
circumstances, such as death of the executive officer, the note will be
forgiven. The death benefit is covered by company-owned life insurance. The note
receivable was repaid subsequent to December 31, 2002.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE J--COMMON STOCK, WARRANTS AND STOCK OPTIONS--CONTINUED
Stock option activity is summarized as follows:
Number Weighted
of Stock Average
Options Exercise Exercise
Outstanding Price Range Price
----------- ------------------ ------
Outstanding at January 1, 2000 491,962 $ 4.92 to $25.10 $14.51
Granted in 2000 722,934 9.88 to 12.50 10.86
Exercised in 2000 (10,734) 4.92 to 7.72 6.48
--------- ------------------ ------
Outstanding at December 31, 2000 1,204,162 4.92 to 25.10 12.39
Granted in 2001 17,311 11.50 to 14.48 11.95
Exercised in 2001 (18,350) 4.92 to 11.00 7.18
--------- ------------------ ------
Outstanding at December 31, 2001 1,203,123 4.92 to 25.10 12.46
Granted in 2002 1,669,004 13.50 to 23.24 16.39
Exercised in 2002 (138,447) 8.17 to 16.17 9.68
Cancelled or expired in 2002 (185,144)
--------- ------------------ ------
Outstanding at December 31, 2002 2,548,536 $ 4.92 to $25.10 $15.23
As of December 31, 2002, stock options outstanding had a weighted average
remaining contractual life of 4.9 years. The following table summarizes stock
options outstanding segregated by exercise price range:
Weighted Average
-------------------------
Remaining
Exercise Price Number Exercise Contractual
Range Outstanding Price Life
----- ----------- ----- ----
Less than $10.00 104,793 $ 9.10 3.0 years
$10.00 to 14.99 1,031,269 12.57 4.6 years
$15.00 to 19.99 1,204,076 16.60 5.0 years
$20.00 to 24.99 107,772 22.11 6.6 years
$25.00 or more 100,626 $ 25.10 2.0 years
---------
2,548,536
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE K--EMPLOYEE RETIREMENT PLANS
Capitol has a contributory employee retirement savings 401(k) plan which covers
substantially all full-time employees of Capitol and certain subsidiaries over
age 21. The Plan provides for employer contributions in amounts determined
annually by Capitol's board of directors. Eligible employees make voluntary
contributions to the Plan. Contributions to the Plan, which are an employer
match (50%, subject to certain limitations) for employee contributions, charged
to expense for the years ended December 31, 2002, 2001 and 2000 were $717,000,
$691,000 and $475,000, respectively.
Capitol also has a defined contribution employee stock ownership plan (ESOP)
which covers substantially all employees of Capitol and certain subsidiaries.
Certain common stock purchases by the ESOP were financed by long-term debt. ESOP
contributions charged to expense in 2002, 2001 and 2000 approximated $405,000,
$525,000 and $180,000 (including ESOP note payable interest of $24,000, $37,000
and $49,000), respectively. Shares of common stock held by the ESOP which have
not yet been allocated to participants' accounts are shown as a reduction of
stockholders' equity. As of December 31, 2002, the ESOP held approximately
218,000 shares of Capitol's common stock which have been allocated to
participants' accounts and 18,000 shares of common stock with an approximate
fair value of $418,000 which have not yet been allocated to participants'
accounts.
NOTE L--INCOME TAXES
Federal income taxes consist of the following components (in $1,000s):
2002 2001 2000
-------- -------- --------
Current $ 10,925 $ 7,169 $ 5,601
Deferred credit (2,224) (1,345) (1,312)
-------- -------- --------
$ 8,701 $ 5,824 $ 4,289
======== ======== ========
Federal income taxes paid in 2002, 2001 and 2000 approximated $11.9 million,
$8.4 million and $5.1 million, respectively.
Differences between federal income tax expense recorded and amounts computed
using the statutory tax rate are reconciled below (in $1,000s):
2002 2001 2000
-------- -------- --------
Federal income tax computed at
statutory rate(1) $ 9,012 $ 6,048 $ 4,241
Tax effect of:
Amortization of goodwill and
other intangibles 139 333 180
Minority interest (213) (641) (77)
Adjustment of deferred income taxes
to effective tax rate of 35% (221)
Other (16) 84 (55)
-------- -------- --------
$ 8,701 $ 5,824 $ 4,289
======== ======== ========
(1) 35% in 2002 and 34% in 2001 and 2000.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE L--INCOME TAXES--CONTINUED
Net deferred income tax assets consisted of the following at December 31 (in
$1,000s):
2002 2001
-------- --------
Allowance for loan losses $ 8,541 $ 6,540
Net operating losses of subsidiaries 1,116 1,154
Deferred compensation 1,370 1,190
Market value adjustment for investment
securities available for sale (98) (81)
Other, net 643 562
-------- --------
$ 11,572 $ 9,365
======== ========
Certain consolidated subsidiaries have net operating loss carryforwards which
may reduce income taxes payable in future periods. Such carryforwards
approximate $3.2 million at December 31, 2002, have been recognized for
financial reporting purposes and expire at the following dates and amounts (in
$1,000s):
2019 $ 185
2020 364
2021 1,201
2022 1,438
-------
$ 3,188
=======
NOTE M--NET INCOME PER SHARE
The computations of basic and diluted net income per share were as follows (in
1,000s):
2002 2001 2000
------- ------- -------
Numerator--net income $16,653 $10,718 $ 8,035
======= ======= =======
Denominator:
Weighted average number of shares outstanding
(denominator for basic earnings per share) 10,139 7,784 7,065
Effect of dilutive securities:
Warrants 12 15 2
Stock options 449 136 45
------- ------- -------
Potential dilution 461 151 47
------- ------- -------
Denominator for diluted earnings per share--weighted
average number of shares and potential dilution 10,600 7,935 7,112
======= ======= =======
Number of antidilutive stock options excluded from
diluted earnings per share computation 243 159 347
======= ======= =======
Additional disclosures regarding stock options are set forth in Note J.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE N--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows at December 31 (in $1,000s):
2002 2001
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
Financial Assets:
Cash and cash equivalents $ 251,184 $ 251,184 $ 163,691 $ 163,691
Loans held for resale 75,420 75,420 62,487 62,487
Investment securities:
Available for sale 25,355 25,355 35,598 35,598
Held for long-term investment 8,784 8,784 8,089 8,089
----------- ----------- ----------- -----------
34,139 34,139 43,687 43,687
Portfolio loans:
Fixed rate 932,198 932,209 1,071,753 1,070,097
Variable rate 1,059,174 1,059,753 662,836 661,154
----------- ----------- ----------- -----------
Total portfolio loans 1,991,372 1,991,962 1,734,589 1,731,251
Less allowance for loan losses (28,953) (28,953) (23,238) (23,238)
----------- ----------- ----------- -----------
Net portfolio loans 1,962,419 1,963,009 1,711,351 1,708,013
Financial Liabilities:
Deposits:
Noninterest-bearing 360,669 360,669 272,593 272,593
Interest-bearing:
Demand accounts 805,883 807,182 620,842 620,468
Time certificates of less
than $100,000 330,960 331,852 336,680 336,729
Time certificates of
$100,000 or more 564,560 567,319 510,270 511,350
----------- ----------- ----------- -----------
Total interest-bearing 1,701,403 1,706,353 1,467,792 1,468,547
----------- ----------- ----------- -----------
Total deposits 2,062,072 2,067,022 1,740,385 1,741,140
Debt obligations 93,398 93,385 89,911 89,892
Trust-preferred securities 51,583 53,300 48,621 50,300
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates on financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest (unless quoted market values or
other fair value information is more readily available). Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE O--COMMITMENTS, GUARANTEES AND OTHER CONTINGENCIES
In the ordinary course of business, loan commitments are made to accommodate the
financial needs of bank customers. Loan commitments include stand-by letters of
credit, lines of credit, and other commitments for commercial, installment and
mortgage loans. Stand-by letters of credit, when issued, commit the bank to make
payments on behalf of customers if certain specified future events occur and are
used infrequently by the banks ($17.3 million and $19.2 million outstanding at
December 31, 2002 and 2001, respectively). Other loan commitments outstanding
consist of unused lines of credit and approved, but unfunded, specific loan
commitments ($455.6 million and $398.9 million at December 31, 2002 and 2001,
respectively). These loan commitments (stand-by letters of credit and unfunded
loans) generally expire within one year and are reviewed periodically for
continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the banks' normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment.
The banking subsidiaries are required to maintain average reserve balances in
the form of cash on hand and balances due from the Federal Reserve Bank and
correspondent banks. The amount of reserve balances required as of December 31,
2002 and 2001 were $3.5 million and $2.4 million, respectively.
Deposits at each of the banks are insured up to the maximum amount covered by
FDIC insurance. Some of the banks have municipal government deposits which are
guaranteed by Capitol ($16 million at December 31, 2002).
Capitol has guaranteed up to $7.5 million of secured borrowings by Amera
Mortgage Corporation, a less than 50%-owned affiliate.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE P--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to their parent in the form of cash dividends, loans or advances.
Subject to various regulatory capital requirements, bank subsidiaries' current
and retained earnings are available for distribution as dividends to Capitol
(and other bank shareholders, as applicable) without prior approval from
regulatory authorities. Substantially all of the remaining net assets of the
subsidiaries are restricted as to payments to Capitol.
Each bank and Capitol are subject to certain other capital requirements. Federal
financial institution regulatory agencies have established certain risk-based
capital guidelines for banks and bank holding companies. Those guidelines
require all banks and bank holding companies to maintain certain minimum ratios
and related amounts based on `Tier 1' and `Tier 2' capital and `risk-weighted
assets' as defined and periodically prescribed by the respective regulatory
agencies. Failure to meet these capital requirements can result in severe
regulatory enforcement action or other adverse consequences for a depository
institution and, accordingly, could have a material impact on Capitol's
consolidated financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgements by regulatory agencies with regard to
components, risk weighting and other factors.
As a condition of their charter approval, DE NOVO banks are generally required
to maintain a core capital (Tier 1) to average assets ratio of not less than 8%
and an allowance for loan losses of not less than 1% for the first three years
of operations.
As of December 31, 2002, the most recent notifications received by the banks
from regulatory agencies have advised that the banks are classified as `well
capitalized' as defined by the applicable agencies. There are no conditions or
events since those notifications that management believes would change the
regulatory classification of the banks.
Management believes, as of December 31, 2002, that Capitol and the banks meet
all capital adequacy requirements to which the entities are subject.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE P--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS--CONTINUED
The following table summarizes the amounts (in $1,000s) and related ratios of
the individually significant subsidiaries (assets of $200 million or more) and
consolidated regulatory capital position as of December 31, 2002 and 2001:
Ann Arbor Capitol
Commerce National
Bank Bank Consolidated
---- ---- ------------
December 31, 2002
Tier 1 capital to average total assets:
Minimum required amount >=$ 12,445 >=$ 8,092 >=$ 89,405
Actual amount $ 23,512 $ 14,631 $ 216,965
Ratio 7.56% 7.23% 9.71%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >=$ 10,707 >=$ 6,628 >=$ 82,506
Actual amount $ 23,512 $ 14,631 $ 216,965
Ratio 8.78% 8.83% 10.52%
Combined Tier 1 and Tier 2 capital to risk-
weighted assets:
Minimum required amount(2) >=$ 21,413 >=$ 13,256 >=$ 165,011
Amount required to meet 'Well-Capitalized'
category(3) $ 26,767 $ 16,569 $ 206,264
Actual amount $ 26,864 $ 16,705 $ 242,787
Ratio 10.04% 10.08% 11.77%
December 31, 2001
Tier 1 capital to average total assets:
Minimum required amount >=$ 10,860 >=$ 6,723 >=$ 74,096
Actual amount $ 20,970 $ 13,155 $ 189,555
Ratio 7.72% 7.83% 10.23%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >=$ 9,165 >=$ 5,848 >=$ 71,970
Actual amount $ 20,970 $ 13,155 $ 189,555
Ratio 9.15% 9.00% 10.54%
Combined Tier 1 and Tier 2 capital to risk-
weighted assets:
Minimum required amount(2) >=$ 18,329 >=$ 11,696 >=$ 143,941
Amount required to meet 'Well-Capitalized'
category(3) $ 22,912 $ 14,620 $ 179,926
Actual amount $ 23,838 $ 14,984 $ 213,263
Ratio 10.40% 10.25% 11.85%
(1) The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted
assets is 8%.
(3) In order to be classified as a 'well-capitalized' institution, the ratio of
Tier 1 and Tier 2 capital to risk-weighted assets must be 10% or more.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE Q--PARENT COMPANY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
- December 31 -
2002 2001
-------- --------
(in $1,000s)
Assets
Cash on deposit with subsidiary banks $ 1,642 $ 330
Money market funds on deposit with subsidiary banks 5,272 571
Time deposits with unaffiliated bank 110 107
Investment securities held for long-term investment 269
Investments in subsidiaries 197,851 140,447
Notes receivable 1,130 1,130
Investment in and advances to Amera Mortgage Corporation 889 1,459
Equipment and furniture, net 1,340 662
Goodwill and other intangibles 16,235 1,818
Other assets 7,073 5,514
-------- --------
Total assets $231,542 $152,307
======== ========
Liabilities and Stockholders' Equity
Accounts payable, accrued expenses and other liabilities $ 6,640 $ 3,732
Debt obligations payable to affiliates 4,900
Debt obligations payable to unaffiliated entities 12,500 14,100
Subordinated debentures 52,365 49,403
-------- --------
Total liabilities 71,505 72,135
Stockholders' equity 160,037 80,172
-------- --------
Total liabilities and stockholders' equity $231,542 $152,307
======== ========
CONDENSED STATEMENTS OF INCOME
- Year Ended December 31 -
2002 2001 2000
-------- -------- --------
(in $1,000s)
Income:
Dividends from subsidiaries $ 10,755 $ 7,896 $ 7,018
Intercompany fees 9,722 6,130 6,362
Interest 253 200 182
Other 51 69 139
-------- -------- --------
Total income 20,781 14,295 13,701
Expenses:
Interest 5,016 5,102 4,568
Salaries and employee benefits 7,662 4,997 4,154
Occupancy 590 399 333
Amortization, equipment rent and depreciation 963 1,086 1,212
Other 2,224 908 2,942
-------- -------- --------
Total expenses 16,455 12,492 13,209
-------- -------- --------
4,326 1,803 492
Equity in undistributed net earnings of
consolidated subsidiaries 9,861 6,496 5,232
Federal income taxes (credit) (2,466) (2,419) (2,311)
-------- -------- --------
Net income $ 16,653 $ 10,718 $ 8,035
======== ======== ========
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE Q--PARENT COMPANY FINANCIAL INFORMATION--CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
- Year Ended December 31 -
2002 2001 2000
-------- -------- --------
(in $1,000s)
OPERATING ACTIVITIES
Net income $ 16,653 $ 10,718 $ 8,035
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net earnings of subsidiaries (9,861) (6,496) (5,232)
Equity in net loss from Amera Mortgage Corporation 1,277
Depreciation and amortization 889 613 622
Loss on sale of premises and equipment 50
Decrease (increase) in amounts due from subsidiaries and
other assets 48,978 (1,061) 6,182
Increase in accounts payable, accrued expenses and other
liabilities 2,908 608 161
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,617 4,382 11,045
INVESTING ACTIVITIES
Net cash investments in subsidiaries (47,543) (18,598) (8,107)
Net payments from (advances to) Amera Mortgage Corporation 570 (213) (180)
Purchases of investment securities (440)
Proceeds from sales and maturities of securities 838 334 215
Proceeds from sales of equipment and furniture 100 1 5
Purchases of equipment and furniture (1,318) (268) (300)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (47,793) (18,744) (8,367)
FINANCING ACTIVITIES
Net payments on debt obligations (6,500) (8,050) (2,850)
Net proceeds from issuance of common stock 2,301 1,753 3,011
Net proceeds from issuance of subordinated debentures 2,899 24,248
Cash dividends paid (4,508) (3,114) (2,534)
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (5,808) 14,837 (2,373)
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 6,016 475 305
Cash and cash equivalents at beginning of year 1,008 533 228
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,024 $ 1,008 $ 533
======== ======== ========
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
NOTE R--ACQUISITION OF MINORITY INTERESTS
During 2002, several share-exchange transactions were completed, whereby certain
previously majority-owned consolidated subsidiaries became wholly-owned. These
share exchange transactions involved the issuance of previously unissued shares
of Capitol's common stock for the minority interests of the following
subsidiaries:
Number of Common
Entity Effective Date Shares Issued
------ -------------- -------------
Sun Community Bancorp Limited March 31, 2002 2,721,749
Sunrise Capital Corporation September 30, 2002 266,406
Indiana Community Bancorp Limited September 30, 2002 181,235
East Valley Community Bank December 31, 2002 37,827
Detroit Commerce Bank December 31, 2002 16,371
Had these acquisitions occurred at the beginning of 2002, consolidated net
income would have approximated $17 million and diluted earnings per share would
have been $1.20. Each of these acquisitions have been accounted for under the
purchase method of accounting.
During 2000, three banks which were previously majority-owned by Capitol
(Brighton Commerce Bank, Kent Commerce Bank and Muskegon Commerce Bank) became
wholly-owned, resulting from share exchange transactions with the banks'
minority shareholders. Had those acquisitions of minority interests occurred at
the beginning of 2000, consolidated net income would have approximated $7.9
million and diluted earnings per share would have been $1.04.
NOTE S--PENDING AND PROPOSED SHARE EXCHANGE TRANSACTIONS
As stated previously (see Note J), a share exchange proposal was pending at
December 31, 2002 regarding Nevada Community Bancorp Limited which was approved
by its shareholders in January 2003. For purposes of its consolidated balance
sheet, Capitol has reflected the Nevada share exchange as if it occurred on
December 31, 2002.
In early 2003, Capitol and the boards of directors of Red Rock Community Bank,
Desert Community Bank and Elkhart Community Bank (such banks being
majority-owned by Capitol) approved separately a plan of share exchange for each
bank. The share exchange proposals are subject to approval by the banks'
respective shareholders (other than Capitol). If the share exchange proposals
are approved, Capitol estimates it would issue approximately 623,000 shares of
its common stock.
54