UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
Commission file number 001-31708
CAPITOL BANCORP LTD.
| Michigan (State or other jurisdiction of incorporation or organization) |
38-2761672 (I.R.S. Employer Identification Number) |
Capitol Bancorp Center
200 Washington Square North, Lansing, Michigan
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Act). Yes þ No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common stock, No par value: 14,922,284 shares outstanding as of April 15, 2005.
Page 1 of 25
INDEX
PART I. FINANCIAL INFORMATION
Forward-Looking Statements
Certain of the statements contained in this document, including Capitol’s consolidated financial statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations and in documents incorporated into this document by reference that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of Capitol and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements. The words “intend”, “expect”, “project”, “estimate”, “predict”, “anticipate”, “should”, “believe”, and similar expressions also are intended to identify forward-looking statements. Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of Capitol’s efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol’s banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of Capitol’s banks and Capitol’s ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol’s asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, and (xi) other risks detailed in Capitol’s other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written or oral forward-looking statements attributable to Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors. Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements. Capitol undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.
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Item 1. Financial Statements (unaudited): |
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| Certification of Chief Executive Officer, Joseph D. Reid, Pursuant to Section 302 | ||||||||
| Certification of Chief Financial Officer, Lee W. Hendrickson, Pursuant to Section 302 | ||||||||
| Certification of Chief Financial Officer, Joseph D. Reid, Pursuant to Section 906 | ||||||||
| Certification of Chief Financial Officer, Lee W. Hendrickson, Pursuant to Section 906 | ||||||||
Page 2 of 25
PART I. ITEM I
CAPITOL BANCORP LIMITED
| (Unaudited) | ||||||||
| March 31 | December 31 | |||||||
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 161,052 | $ | 123,969 | ||||
Money market and interest-bearing deposits |
13,273 | 10,745 | ||||||
Federal funds sold |
115,114 | 96,390 | ||||||
Cash and cash equivalents |
289,439 | 231,104 | ||||||
Loans held for resale |
34,846 | 43,143 | ||||||
Investment securities: |
||||||||
Available for sale, carried at market value |
28,807 | 28,172 | ||||||
Held for long-term investment, carried at
amortized cost which approximates market value |
15,327 | 14,191 | ||||||
Total investment securities |
44,134 | 42,363 | ||||||
Portfolio loans: |
||||||||
Commercial |
2,516,999 | 2,444,492 | ||||||
Real estate mortgage |
171,728 | 177,204 | ||||||
Installment |
70,717 | 71,208 | ||||||
Total portfolio loans |
2,759,444 | 2,692,904 | ||||||
Less allowance for loan losses |
(37,725 | ) | (37,572 | ) | ||||
Net portfolio loans |
2,721,719 | 2,655,332 | ||||||
Premises and equipment |
32,600 | 32,661 | ||||||
Accrued interest income |
11,229 | 10,447 | ||||||
Goodwill and other intangibles |
41,804 | 41,943 | ||||||
Other assets |
39,422 | 34,425 | ||||||
TOTAL ASSETS |
$ | 3,215,193 | $ | 3,091,418 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
LIABILITIES: |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 529,673 | $ | 503,902 | ||||
Interest-bearing |
2,075,191 | 2,006,170 | ||||||
Total deposits |
2,604,864 | 2,510,072 | ||||||
Debt obligations: |
||||||||
Notes payable and short-term borrowings |
187,142 | 172,534 | ||||||
Subordinated debentures |
100,869 | 100,845 | ||||||
Total debt obligations |
288,011 | 273,379 | ||||||
Accrued interest on deposits and other liabilities |
20,381 | 16,288 | ||||||
Total liabilities |
2,913,256 | 2,799,739 | ||||||
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES |
43,299 | 39,520 | ||||||
STOCKHOLDERS’ EQUITY: |
||||||||
Common stock, no par value, 25,000,000 shares authorized;
issued and outstanding: 2005 - 14,921,183 shares 2004 - 14,828,750 shares |
197,113 | 196,271 | ||||||
Retained earnings |
65,960 | 60,476 | ||||||
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income) |
(188 | ) | (36 | ) | ||||
| 262,885 | 256,711 | |||||||
Less unearned compensation regarding restricted stock and other |
(4,247 | ) | (4,552 | ) | ||||
Total stockholders’ equity |
258,638 | 252,159 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 3,215,193 | $ | 3,091,418 | ||||
See notes to condensed consolidated financial statements.
Page 3 of 25
CAPITOL BANCORP LIMITED
| Three Months Ended March 31 | ||||||||
| 2005 | 2004 | |||||||
Interest income: |
||||||||
Portfolio loans (including fees) |
$ | 48,237 | $ | 40,030 | ||||
Loans held for resale |
637 | 423 | ||||||
Taxable investment securities |
235 | 530 | ||||||
Federal funds sold |
621 | 292 | ||||||
Other |
191 | 174 | ||||||
Total interest income |
49,921 | 41,449 | ||||||
Interest expense: |
||||||||
Deposits |
10,571 | 8,790 | ||||||
Debt obligations and other |
3,547 | 2,429 | ||||||
Total interest expense |
14,118 | 11,219 | ||||||
Net interest income |
35,803 | 30,230 | ||||||
Provision for loan losses |
2,023 | 3,508 | ||||||
Net interest income after provision
for loan losses |
33,780 | 26,722 | ||||||
Noninterest income: |
||||||||
Service charges on deposit accounts |
1,011 | 1,083 | ||||||
Trust fee income |
605 | 881 | ||||||
Fees from origination of non-portfolio
residential mortgage loans |
1,265 | 1,272 | ||||||
Gain (loss) on sale of investment securities
available for sale |
1 | (444 | ) | |||||
Other |
1,691 | 1,346 | ||||||
Total noninterest income |
4,573 | 4,138 | ||||||
Noninterest expense: |
||||||||
Salaries and employee benefits |
17,217 | 15,387 | ||||||
Occupancy |
2,300 | 2,133 | ||||||
Equipment rent, depreciation and maintenance |
1,439 | 1,367 | ||||||
Other |
5,518 | 4,677 | ||||||
Total noninterest expense |
26,474 | 23,564 | ||||||
Income before income taxes and minority interest |
11,879 | 7,296 | ||||||
Income taxes |
4,560 | 2,890 | ||||||
Income before minority interest |
7,319 | 4,406 | ||||||
Minority interest in net losses
of consolidated subsidiaries |
696 | 10 | ||||||
NET INCOME |
$ | 8,015 | $ | 4,416 | ||||
NET INCOME PER SHARE—Note D: |
||||||||
Basic |
$ | 0.55 | $ | 0.32 | ||||
Diluted |
$ | 0.52 | $ | 0.30 | ||||
See notes to condensed consolidated financial statements.
Page 4 of 25
CAPITOL BANCORP LTD.
| Unearned | ||||||||||||||||||||
| Accumulated | Compensation | |||||||||||||||||||
| Other | Regarding | |||||||||||||||||||
| Common | Retained | Comprehensive | Restricted Stock | |||||||||||||||||
| Stock | Earnings | Income | and Other | Total | ||||||||||||||||
Three Months Ended March 31, 2004 |
||||||||||||||||||||
Balances at January 1, 2004 |
$ | 180,957 | $ | 43,135 | $ | (200 | ) | $ | (4,995 | ) | $ | 218,897 | ||||||||
Issuance of 53,812 shares of common stock
upon exercise of stock options, net of
common stock surrendered to
facilitate exercise |
1,081 | 1,081 | ||||||||||||||||||
Issuance of 11,681 shares of restricted common stock |
337 | (337 | ) | 0 | ||||||||||||||||
Recognition of compensation expense relating to
restricted common stock |
319 | 319 | ||||||||||||||||||
Cash dividends paid ($.15 per share) |
(2,109 | ) | (2,109 | ) | ||||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||
Net income for the period |
4,416 | 4,416 | ||||||||||||||||||
Market value adjustment for investment
securities available for sale (net of
income tax effect) |
312 | 312 | ||||||||||||||||||
Comprehensive income for the period |
4,728 | |||||||||||||||||||
BALANCES AT MARCH 31, 2005 |
$ | 182,375 | $ | 45,442 | $ | 112 | $ | (5,013 | ) | $ | 222,916 | |||||||||
Three Months Ended March 31, 2005 |
||||||||||||||||||||
Balances at January 1, 2005 |
$ | 196,271 | $ | 60,476 | $ | (36 | ) | $ | (4,552 | ) | $ | 252,159 | ||||||||
Issuance of 92,433 shares of common stock
upon exercise of stock options, net of
common stock surrendered to
facilitate exercise |
842 | 842 | ||||||||||||||||||
Recognition of compensation expense relating to
restricted common stock |
305 | 305 | ||||||||||||||||||
Cash dividends paid ($.17 per share) |
(2,531 | ) | (2,531 | ) | ||||||||||||||||
Components of comprehensive income: |
||||||||||||||||||||
Net income for the period |
8,015 | 8,015 | ||||||||||||||||||
Market value adjustment for investment
securities available for sale (net of
income tax effect) |
(152 | ) | (152 | ) | ||||||||||||||||
Comprehensive income for the period |
7,863 | |||||||||||||||||||
BALANCES AT MARCH 31, 2005 |
$ | 197,113 | $ | 65,960 | $ | (188 | ) | $ | (4,247 | ) | $ | 258,638 | ||||||||
See notes to condensed consolidated financial statements.
Page 5 of 25
CAPITOL BANCORP LTD.
| Three Months Ended March 31 | ||||||||
| 2005 | 2004 | |||||||
| (in thousands) | ||||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 8,015 | $ | 4,416 | ||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||
Provision for loan losses |
2,023 | 3,508 | ||||||
Depreciation of premises and equipment |
1,363 | 1,096 | ||||||
Amortization of intangibles |
139 | 133 | ||||||
Net amortization (accretion) of investment security
premiums (discounts) |
11 | (20 | ) | |||||
Loss on sale of premises and equipment |
1 | 9 | ||||||
Minority interest in net losses of consolidated subsidiaries |
(696 | ) | (10 | ) | ||||
Compensation expense relating to restricted common stock |
305 | 319 | ||||||
Originations and purchases of loans held for resale |
(152,231 | ) | (178,877 | ) | ||||
Proceeds from sales of loans held for resale |
160,528 | 171,150 | ||||||
Increase in accrued interest income and other assets |
(5,677 | ) | (1,176 | ) | ||||
Increase (decrease) in accrued interest expense on
deposits and other liabilities |
4,093 | (6 | ) | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
17,874 | 542 | ||||||
INVESTING ACTIVITIES |
||||||||
Proceeds from sales of investment securities available
for sale |
— | 18,950 | ||||||
Proceeds from calls, prepayments and maturities of
investment securities |
961 | 1,662 | ||||||
Purchases of investment securities |
(2,972 | ) | (4,406 | ) | ||||
Net increase in portfolio loans |
(68,410 | ) | (101,331 | ) | ||||
Proceeds from sales of premises and equipment |
4 | 2 | ||||||
Purchases of premises and equipment |
(1,308 | ) | (601 | ) | ||||
NET CASH USED BY INVESTING ACTIVITIES |
(71,725 | ) | (85,724 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Net increase in demand deposits, NOW accounts and
savings accounts |
42,948 | 87,779 | ||||||
Net increase (decrease) in certificates of deposit |
51,844 | (592 | ) | |||||
Net borrowings from debt obligations |
14,608 | 18,900 | ||||||
Net proceeds from issuance of subordinated debentures |
— | 9,935 | ||||||
Resources provided by minority interest |
4,475 | 10,690 | ||||||
Net proceeds from issuance of common stock |
842 | 1,400 | ||||||
Cash dividends paid |
(2,531 | ) | (2,109 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
112,186 | 126,003 | ||||||
INCREASE IN CASH AND CASH EQUIVALENTS |
58,335 | 40,821 | ||||||
Cash and cash equivalents at beginning of period |
231,104 | 283,623 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 289,439 | $ | 324,444 | ||||
See notes to condensed consolidated financial statements.
Page 6 of 25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD.
Note A – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Ltd. (“Capitol”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles.
The statements do, however, include all adjustments of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Capitol considers necessary for a fair presentation of the interim periods.
The results of operations for the period ended March 31, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.
The consolidated balance sheet as of December 31, 2004 was derived from audited consolidated financial statements as of that date. Certain 2004 amounts have been reclassified to conform to the 2005 presentation.
Note B – Implementation of New Accounting Standard
AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and does not apply to loans originated by the entity. The SOP prohibits carrying over or creation of valuation allowances in the initial accounting for loans acquired in a transfer. It is effective for loans acquired in fiscal years beginning after December 15, 2004. This new guidance had no effect on Capitol’s consolidated financial statements upon implementation.
[The remainder of this page intentionally left blank]
Page 7 of 25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - Continued
Note C – Stock Options
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:
| Three Months Ended | ||||||||
| March 31 | ||||||||
| 2005 | 2004 | |||||||
Fair value assumptions: |
||||||||
Risk-free interest rate |
4.1 | % | 3.5 | % | ||||
Dividend yield |
2.1 | % | 2.1 | % | ||||
Stock price volatility |
.25 | .29 | ||||||
Expected option life |
7 years | 6 years | ||||||
Aggregate estimated fair value of
options granted (in thousands) |
$ | 362 | $ | 2,346 | ||||
Net income (in thousands): |
||||||||
As reported |
$ | 8,015 | $ | 4,416 | ||||
Less pro forma compensation
expense regarding fair value
of stock option awards, net
of related income tax effect |
(223 | ) | (1,525 | ) | ||||
Pro forma |
$ | 7,792 | $ | 2,891 | ||||
Net income per share: |
||||||||
Basic: |
||||||||
As reported |
$ | 0.55 | $ | 0.32 | ||||
Pro forma |
0.53 | 0.21 | ||||||
Diluted: |
||||||||
As reported |
0.52 | 0.30 | ||||||
Pro forma |
$ | 0.51 | $ | 0.20 | ||||
Stock option activity for the interim 2005 period is summarized as follows:
| Weighted | ||||||||||
| Number of | Exercise | Average | ||||||||
| Stock Options | Price | Exercise | ||||||||
| Outstanding | Range | Price | ||||||||
Outstanding at January 1 |
2,584,139 | $10.81 to $33.01 | $ | 21.06 | ||||||
Exercised |
(194,462 | ) | 11.00 to 27.05 | 16.09 | ||||||
Granted |
46,470 | 34.31 to 34.84 | 34.50 | |||||||
Cancelled or expired |
(2,362 | ) | 29.10 | |||||||
Outstanding at March 31 |
2,433,785 | $10.81 to $34.84 | $ | 21.73 | ||||||
Page 8 of 25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - Continued
Note C – Stock Options – Continued
As of March 31, 2005, stock options outstanding had a weighted average remaining contractual life of 4.3 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 | |||||||||||||
$10.00 to 14.99 |
327,813 | $ | 11.31 | 2.3 years | ||||||||||||
$15.00 to 19.99 |
598,840 | 16.64 | 3.5 years | |||||||||||||
$20.00 to 24.99 |
550,964 | 21.93 | 5.0 years | |||||||||||||
$25.00 to 29.99 |
750,126 | 27.01 | 5.0 years | |||||||||||||
$30.00 or more |
206,042 | $ | 33.32 | 5.8 years | ||||||||||||
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