UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 33-24728C
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2761672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common stock, No par value: 10,706,465 shares outstanding as of July 15,
2002.
Page 1 of 22
INDEX
PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document, including Capitol's
consolidated financial statements, Management's Discussion and Analysis of
Financial Condition and Results of Operations and in documents incorporated into
this document by reference that are not historical facts, including, without
limitation, statements of future expectations, projections of results of
operations and financial condition, statements of future economic performance
and other forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, are subject to known and unknown
risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of Capitol and/or its subsidiaries and
other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend", "expect", "project", "estimate",
"predict", "anticipate", "should", "believe", and similar expressions also are
intended to identify forward-looking statements. Important factors which may
cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of Capitol's efforts
to implement its business strategy, (ii) changes in interest rates, (iii)
legislation or regulatory requirements adversely impacting Capitol's banking
business and/or expansion strategy, (iv) adverse changes in business conditions
or inflation, (v) general economic conditions, either nationally or regionally,
which are less favorable than expected and that result in, among other things, a
deterioration in credit quality and/or loan performance and collectability, (vi)
competitive pressures among financial institutions, (vii) changes in securities
markets, (viii) actions of competitors of Capitol's banks and Capitol's ability
to respond to such actions, (ix) the cost of capital, which may depend in part
on Capitol's asset quality, prospects and outlook, (x) changes in governmental
regulation, tax rates and similar matters, and (xi) other risks detailed in
Capitol's other filings with the Securities and Exchange Commission. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated. All subsequent written or oral forward-looking statements
attributable to Capitol or persons acting on its behalf are expressly qualified
in their entirety by the foregoing factors. Investors and other interested
parties are cautioned not to place undue reliance on such statements, which
speak as of the date of such statements. Capitol undertakes no obligation to
release publicly any revisions to these forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of unanticipated events.
Page
----
Item 1. Financial Statements (unaudited):
Consolidated balance sheets - June 30, 2002 and
December 31, 2001. 3
Consolidated statements of income - Three months and
six months ended June 30, 2002 and 2001. 4
Consolidated statements of changes in stockholders' equity -
Six months ended June 30, 2002 and 2001. 5
Consolidated statements of cash flows - Six months ended
June 30, 2002 and 2001. 6
Notes to consolidated financial statements. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 21
Item 2. Changes in Securities and Use of Proceeds. 21
Item 3. Defaults Upon Senior Securities. 21
Item 4. Submission of Matters to a Vote of Security Holders. 21
Item 5. Other Information. 21
Item 6. Exhibits and Reports on Form 8-K. 21
SIGNATURES 22
Page 2 of 22
PART I, ITEM 1
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001
(Unaudited)
June 30 December 31
2002 2001
----------- -----------
(in thousands)
ASSETS
Cash and due from banks $ 111,758 $ 83,833
Money-market and mutual funds and interest-bearing deposits 26,053 10,999
Federal funds sold 81,849 68,859
----------- -----------
Cash and cash equivalents 219,660 163,691
Loans held for resale 25,873 62,487
Investment securities:
Available for sale, carried at market value 36,318 35,598
Held for long-term investment, carried at
amortized cost which approximates market value 7,923 8,089
----------- -----------
Total investment securities 44,241 43,687
Portfolio loans:
Commercial 1,694,134 1,535,451
Real estate mortgage 127,362 121,676
Installment 76,280 77,462
----------- -----------
Total portfolio loans 1,897,776 1,734,589
Less allowance for loan losses (26,310) (23,238)
----------- -----------
Net portfolio loans 1,871,466 1,711,351
Premises and equipment 17,159 16,441
Accrued interest income 10,085 9,471
Goodwill and other intangibles 15,390 8,527
Other assets 29,892 28,351
----------- -----------
TOTAL ASSETS $ 2,233,766 $ 2,044,006
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 314,167 $ 272,593
Interest-bearing 1,594,192 1,467,792
----------- -----------
Total deposits 1,908,359 1,740,385
Debt obligations 88,248 89,911
Accrued interest on deposits and other liabilities 15,008 14,244
----------- -----------
Total liabilities 2,011,615 1,844,540
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 51,551 48,621
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 40,377 70,673
STOCKHOLDERS' EQUITY
Common stock, no par value, 25,000,000 shares authorized;
issued and outstanding: 2002 - 10,705,378 shares
2001 - 7,829,178 shares 112,648 67,692
Retained earnings 19,273 14,173
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) 153 158
----------- -----------
132,074 82,023
Less note receivable from exercise of stock
options and unallocated ESOP shares (1,851) (1,851)
----------- -----------
Total stockholders' equity 130,223 80,172
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,233,766 $ 2,044,006
=========== ===========
Page 3 of 22
CAPITOL BANCORP LTD.
Consolidated Statements of Income (Unaudited)
For the Three Months and Six Months Ended June 30, 2002 and 2001
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Interest income:
Portfolio loans (including fees) $ 37,082 $ 36,504 $ 72,701 $ 71,508
Loans held for resale 500 637 1,234 1,234
Taxable investment securities 388 521 785 1,347
Federal funds sold 336 862 600 1,877
Other 255 370 496 742
-------- -------- -------- --------
Total interest income 38,561 38,894 75,816 76,708
Interest expense:
Deposits 11,815 17,380 24,008 35,080
Debt obligations and other 2,325 1,801 4,564 3,464
-------- -------- -------- --------
Total interest expense 14,140 19,181 28,572 38,544
-------- -------- -------- --------
Net interest income 24,421 19,713 47,244 38,164
Provision for loan losses 2,684 1,697 4,774 3,321
-------- -------- -------- --------
Net interest income after provision
for loan losses 21,737 18,016 42,470 34,843
Noninterest income:
Service charges on deposit accounts 981 810 1,939 1,520
Trust fee income 639 526 1,170 1,009
Fees from origination of non-portfolio residential
mortgage loans 1,478 789 2,371 1,391
Realized gains (losses) on sale of investment
securities available for sale 46 -- (18) 3
Other 280 364 760 689
-------- -------- -------- --------
Total noninterest income 3,424 2,489 6,222 4,612
Noninterest expense:
Salaries and employee benefits 11,776 9,730 22,803 18,743
Occupancy 1,622 1,328 3,142 2,703
Equipment rent, depreciation and maintenance 1,289 1,114 2,344 2,150
Other 4,353 3,919 9,544 7,893
-------- -------- -------- --------
Total noninterest expense 19,040 16,091 37,833 31,489
-------- -------- -------- --------
Income before federal income taxes and
minority interest 6,121 4,414 10,859 7,966
Federal income taxes 2,151 1,370 3,694 2,801
-------- -------- -------- --------
Income before minority interest 3,970 3,044 7,165 5,165
Minority interest in net income of
consolidated subsidiaries (57) (444) (208) (182)
-------- -------- -------- --------
NET INCOME $ 3,913 $ 2,600 $ 6,957 $ 4,983
======== ======== ======== ========
NET INCOME PER SHARE -- Note C
Basic $ 0.37 $ 0.33 $ 0.75 $ 0.64
======== ======== ======== ========
Diluted $ 0.35 $ 0.33 $ 0.73 $ 0.63
======== ======== ======== ========
Page 4 of 22
CAPITOL BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2002 and 2001
(in thousands except share data)
Note
Receivable
from Exercise
of Stock
Accumulated Options and
Other Unallocated
Common Retained Comprehensive ESOP
Stock Earnings Income Shares Total
--------- --------- ------------- ----------- ---------
SIX MONTHS ENDED JUNE 30, 2001
Balances at January 1, 2001 $ 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 1,873 shares of common stock
upon exercise of warrants 20 20
Issuance of 17,043 shares of common stock
upon exercise of stock options 161 161
Cash dividends paid ($0.20 per share) (1,548) (1,548)
Components of comprehensive income:
Net income for the period 4,983 4,983
Market value adjustment for investment
securities available for sale (net of
income tax effect) 250 250
---------
Comprehensive income for the period 5,233
--------- --------- --------- --------- ---------
BALANCES AT JUNE 30, 2001 $ 67,615 $ 10,004 $ 142 $ (1,996) $ 75,765
========= ========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2002
Balances at January 1, 2002 $ 67,692 $ 14,173 $ 158 $ (1,851) $ 80,172
Issuance of 2,721,749 shares of common stock to
acquire shares of Sun Community Bancorp held
by shareholders other than Capitol 43,160 43,160
Issuance of 86,136 shares of common stock
upon exercise of stock options 963 963
Issuance of 52,717 shares of common stock
upon exercise of warrants 583 583
Issuance of 15,598 shares of common stock
in exchange for investment security 250 250
Cash dividends paid ($0.20 per share) (1,857) (1,857)
Components of comprehensive income:
Net income for the period 6,957 6,957
Market value adjustment for investment
securities available for sale (net of
income tax effect) (5) (5)
---------
Comprehensive income for the period 6,952
--------- --------- --------- --------- ---------
BALANCES AT JUNE 30, 2002 $ 112,648 $ 19,273 $ 153 $ (1,851) $ 130,223
========= ========= ========= ========= =========
Page 5 of 22
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2002 and 2001
2002 2001
--------- ---------
(in thousands)
OPERATING ACTIVITIES
Net income $ 6,957 $ 4,983
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 4,774 3,321
Depreciation of premises and equipment 1,655 1,692
Amortization of goodwill and other intangibles 133 386
Net amortization (accretion) of investment security
premiums (discounts) 20 (31)
Loss (gain) on sale of premises and equipment (1) 105
Minority interest in net income of consolidated subsidiaries 208 182
Originations and purchases of loans held for resale (373,681) (298,386)
Proceeds from sales of loans held for resale 410,295 277,086
Decrease (increase) in accrued interest income and other assets (4,590) 1,298
Increase in accrued interest and other liabilities 764 1,033
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 46,534 (8,331)
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale 2,327 500
Proceeds from maturities of investment securities
available for sale 26,462 43,298
Purchases of investment securities available for sale (29,370) (18,454)
Net increase in portfolio loans (164,889) (209,218)
Proceeds from sales of premises and equipment 51 292
Purchases of premises and equipment (2,423) (4,650)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (167,842) (188,232)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 138,349 132,261
Net increase in certificates of deposit 29,625 96,417
Net borrowings from (payments on) debt obligations (1,663) 13,138
Net proceeds from issuance of trust-preferred securities 2,899 --
Resources provided by minority interests 8,383 3,663
Net proceeds from issuance of common stock 1,541 1,676
Cash dividends paid (1,857) (1,548)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 177,277 245,607
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 55,969 49,044
Cash and cash equivalents at beginning of period 163,691 142,784
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 219,660 $ 191,828
========= =========
Page 6 of 22
NOTES TO 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 six-month period ended June 30, 2002 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2002.
The consolidated balance sheet as of December 31, 2001 was derived from
audited consolidated financial statements as of that date. Certain 2001 amounts
have been reclassified to conform to the 2002 presentation.
NOTE B - NEW BANKS
Bank of Las Vegas, located in Las Vegas, Nevada, opened in February 2002.
It is majority-owned by Nevada Community Bancorp Limited, which is
majority-owned by Sun Community Bancorp Limited, a wholly-owned subsidiary of
Capitol.
Napa Community Bank, located in Napa, California, opened in March 2002. It
is majority-owned by First California Northern Bancorp, which is majority-owned
by Sun Community Bancorp Limited, a wholly-owned subsidiary of Capitol.
Page 7 of 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - CONTINUED
NOTE C - NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator--net income for the period $ 3,913,000 $ 2,600,000 $ 6,957,000 $ 4,983,000
=========== =========== =========== ===========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic earnings
per share) 10,685,203 7,807,442 9,300,756 7,742,229
Effect of dilutive securities--stock options
and warrants 501,910 155,574 240,472 120,280
----------- ----------- ----------- -----------
Denominator for dilutive net income per share--
Weighted average number of common shares
and potential dilution 11,187,113 7,963,016 9,541,228 7,862,509
=========== =========== =========== ===========
Number of antidilutive stock options excluded
from diluted earnings per share computation 107,752 121,416 126,577 264,479
=========== =========== =========== ===========
NOTE D - SHARE EXCHANGE TRANSACTIONS
In November 2001, the boards of directors of Capitol and Sun Community
Bancorp Limited entered into a plan of share exchange. The plan of share
exchange was approved by the shareholders of both Capitol and Sun at special
meetings held in late March 2002. The share exchange was based on a fixed
exchange ratio and resulted in Capitol issuing .734 shares of its previously
unissued common stock for each common share of Sun's common stock held by
shareholders other than Capitol, effective March 31, 2002. Capitol issued
approximately 2.7 million shares of its common stock and 850,000 stock options
resulting from the share exchange, for aggregate consideration approximating
$43.2 million. This transaction has been accounted for as a purchase. Had the
transaction occurred at the beginning of the periods presented, net income would
have approximated $7.2 million ($0.66 per diluted share) and $5.1 million ($0.48
per diluted share) for the six months ended June 30, 2002 and 2001,
respectively.
Sun was previously included in Capitol's consolidated financial statements.
The carrying value of assets and liabilities of Sun closely approximated their
fair values at the date of the share exchange with Capitol. Identified
intangible assets (principally core deposit intangibles) were estimated to
approximate $2.7 million, and are being amortized over a period of approximately
five years. Additionally, goodwill of approximately $4 million was recorded in
conjunction with the share exchange and will not be amortized, but will be
reviewed at least annually for impairment (see Note E).
Page 8 of 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - CONTINUED
NOTE D - SHARE EXCHANGE TRANSACTIONS - CONTINUED
As of June 30, 2002, potential share exchange transactions were pending
regarding the minority shareholders of Indiana Community Bancorp Limited and
Sunrise Capital Corporation which, if completed, would result in Capitol issuing
approximately 450,000 additional shares of common stock and those majority-owned
subsidiaries becoming wholly-owned.
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
Statement No. 141 requires that all business combinations be accounted for under
a prior standard of purchase accounting, eliminating the so-called
pooling-method which was used to account for some business combinations. This
standard did not have a material effect on Capitol's consolidated financial
statements.
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead be reviewed for impairment. Amortization of
goodwill ceased upon adoption of the Statement on January 1, 2002. This new
standard requires that goodwill be reviewed annually for impairment and,
accordingly, impairment adjustments of goodwill be charged against earnings, if
and when determined.
Capitol's previous business combinations (generally, acquisitions of
minority interests) have been accounted for using the purchase method. As of
June 30, 2002, the net carrying amount of reporting-unit goodwill approximated
$12.8 million and other intangible assets approximated $2.6 million. Upon
implementation, this new standard has not had a material effect on Capitol's
consolidated financial statements, other than the elimination of goodwill
amortization.
Statement No. 142 requires that intangible assets not subject to
amortization, such as Capitol's reporting-unit goodwill, be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Such potential impairment is measured
by comparing the fair value of a reporting unit with its carrying amount within
the consolidated group.
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, no impairment losses
were identified as of that date.
Page 9 of 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - CONTINUED
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS - CONTINUED
Paragraph 61 of 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):
Six Months Ended
June 30 Year Ended December 31
----------------------- ------------------------------------
2002 2001 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Net income, as reported $ 6,957 $ 4,983 $ 10,718 $ 8,035 $ 5,409
Add back -- goodwill
amortization -- 386 979 561 318
---------- ---------- ---------- ---------- ----------
Net income, as adjusted $ 6,957 $ 5,369 $ 11,697 $ 8,596 $ 5,727
========== ========== ========== ========== ==========
Net income per share,
as reported:
Basic $ 0.75 $ 0.64 $ 1.38 $ 1.14 $ 0.84
========== ========== ========== ========== ==========
Diluted $ 0.73 $ 0.63 $ 1.35 $ 1.13 $ 0.83
========== ========== ========== ========== ==========
Add back -- goodwill
amortization per share:
Basic -- $ 0.05 $ 0.12 $ 0.08 $ 0.05
========== ========== ========== ==========
Diluted -- $ 0.05 $ 0.12 $ 0.08 $ 0.05
========== ========== ========== ==========
Net income per share,
as adjusted:
Basic $ 0.75 $ 0.69 $ 1.50 $ 1.22 $ 0.89
========== ========== ========== ========== ==========
Diluted $ 0.73 $ 0.68 $ 1.47 $ 1.21 $ 0.88
========== ========== ========== ========== ==========
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.
Page 10 of 22
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets approximated $2.2 billion at June 30, 2002, an increase of
$190 million from the December 31, 2001 level of $2.0 billion. The balance sheet
includes Capitol and its consolidated subsidiaries:
Total Assets
(in $1,000's)
--------------------------
June 30 Dec 31
2002 2001
----------- -----------
Ann Arbor Commerce Bank $ 285,357 $ 271,116
Brighton Commerce Bank 75,114 70,530
Capitol National Bank 184,564 173,177
Detroit Commerce Bank 31,791 33,768
Grand Haven Bank 116,708 98,740
Kent Commerce Bank 75,169 66,873
Macomb Community Bank 86,802 97,113
Muskegon Commerce Bank 81,937 74,284
Oakland Commerce Bank 97,409 115,249
Paragon Bank & Trust 99,374 93,667
Portage Commerce Bank 131,479 127,884
Indiana Community Bancorp Limited:
Elkhart Community Bank 38,416 35,939
Goshen Community Bank 33,458 28,681
Sun Community Bancorp Limited:
Arrowhead Community Bank 44,010 33,658
Bank of Tucson 126,214 121,075
Camelback Community Bank 85,356 67,210
East Valley Community Bank 40,642 39,591
Mesa Bank 60,550 52,308
Southern Arizona Community Bank 72,406 55,423
Valley First Community Bank 48,858 58,625
Yuma Community Bank 37,089 23,202
Nevada Community Bancorp Limited:
Bank of Las Vegas(2) 21,882 n/a
Black Mountain Community Bank 51,657 50,909
Desert Community Bank 58,797 56,844
Red Rock Community Bank 92,802 84,971
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque 40,304 35,984
Sunrise Bank of Arizona 66,574 63,141
Sunrise Bank of San Diego(1) 46,683 37,912
First California Northern Bancorp:
Napa Community Bank(2) 23,809 n/a
Other, net (21,445) (23,868)
----------- -----------
Consolidated $ 2,233,766 $ 2,044,006
=========== ===========
n/a Not applicable
(1) Commenced operations as a DE NOVO bank in 2001.
(2) Commenced operations as DE NOVO banks in 2002.
Page 11 of 22
Portfolio loans increased during the six-month 2002 period by approximately
$163 million. Loan growth was funded primarily by higher levels of time
deposits. The majority of portfolio loan growth occurred in commercial loans,
consistent with the banks' emphasis on commercial lending activities. Portfolio
loan growth in 2002 is net of about $28 million of commercial loans sold to
other financial institutions.
The allowance for loan losses at June 30, 2002 approximated $26.3 million
or 1.39% of total portfolio loans, an increase from the year-end 2001 ratio of
1.34%.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the loan portfolio at the
balance sheet date. Management's determination of the adequacy of the allowance
is based on evaluation of the portfolio (including 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.
The table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the interim periods (in thousands):
2002 2001
---------- ----------
Allowance for loan losses at January 1 $ 23,238 $ 17,449
Loans charged-off:
Commercial 1,714 477
Real estate mortgage 146 10
Installment 154 139
---------- ----------
Total charge-offs 2,014 626
Recoveries:
Commercial 192 258
Real estate mortgage 61 3
Installment 59 15
---------- ----------
Total recoveries 312 276
---------- ----------
Net charge-offs 1,702 350
Additions to allowance charged to expense 4,774 3,321
---------- ----------
Allowance for loan losses at June 30 $ 26,310 $ 20,420
========== ==========
Average total portfolio loans for period ended June 30 $1,804,451 $1,463,142
========== ==========
Ratio of net charge-offs (annualized) to average
portfolio loans outstanding 0.19% 0.05%
========== ==========
Page 12 of 22
The amounts of the allowance for loan losses allocated in the following
table (in thousands) include all loans for which, based on Capitol's loan rating
system, management has concerns, and should not be interpreted as an indication
of future charge-offs.
June 30, 2002 December 31, 2001
----------------------- -----------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
---------- ---------- ---------- ----------
Commercial $ 24,749 1.31% $ 20,570 1.19%
Real estate mortgage 171 0.01 1,630 0.09
Installment 1,390 0.07 1,038 0.06
---------- ---------- ---------- ----------
Total allowance for loan losses $ 26,310 1.39% $ 23,238 1.34%
========== ========== ========== ==========
Total portfolio loans outstanding $1,897,776 $1,734,589
========== ==========
In addition to the allowance for loan losses, certain commercial loans in
Michigan and Indiana are enrolled in state-sponsored loan programs and have
additional reserves established to provide for loss protection. At June 30,
2002, total loans under these programs approximated $32 million. Reserves
related to these loans, which are represented by earmarked funds on deposit at
some of the bank subsidiaries, approximated $1.4 million and are not included in
the allowance for loan losses.
The state agency administering the Michigan program has announced plans to
terminate the program in 2002. Upon termination of the program, loans previously
enrolled in the program and related reserves would continue until the underlying
loans are repaid, but no new loans would be enrolled in the program. While this
program has complimented the lending efforts of Capitol's Michigan banks,
termination of the program is not expected to have a material adverse affect on
those banks' lending activities in the future. The termination of the program
may adversely affect the future availability of credit for those borrowers who
otherwise would have been eligible for enrollment in the program.
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.
Page 13 of 22
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
June 30 Dec 31
2002 2001
-------- --------
Nonaccrual loans:
Commercial $ 14,082 $ 11,220
Real estate 674 356
Installment 584 466
-------- --------
Total nonaccrual loans 15,340 12,042
Past due (>=90 days) loans:
Commercial 6,833 4,290
Real estate 884 787
Installment 253 119
-------- --------
Total past due loans 7,970 5,196
-------- --------
Total nonperforming loans $ 23,310 $ 17,238
======== ========
Nonperforming loans increased approximately $6 million during the six-month
period ended June 30, 2002. These loans at June 30, 2002 are in various stages
of resolution for which management believes such loans are 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 ratings. At inception, all loans are
individually assigned a rating 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 rating
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 assigned a more adverse classification, with specific performance issues or
other risk factors requiring close management and development of specific
remedial action plans.
At June 30, 2002, potential problem loans (including nonperforming loans)
approximated $83 million, or about 4% of total consolidated portfolio loans. 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 classified by management in this manner to aid in loan administration
and risk management. Management believes such 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, as evidenced by
higher loan losses in the first half of 2002.
Page 14 of 22
Other real estate owned (generally real estate acquired through foreclosure
or a deed in lieu of foreclosure and classified as a component of other assets)
approximated $2.7 million at June 30, 2002 and $3.0 million at December 31,
2001.
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming loans and ratio of the allowance
as a percentage of portfolio loans (dollars in thousands):
Allowance as a
Percentage
Total Allowance for Nonperforming of Total
Portfolio Loans Loan Losses Loans Portfolio Loans
----------------------- ---------------------- --------------------- --------------------
June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31
2002 2001 2002 2001 2002 2001 2002 2001
---------- ---------- --------- --------- --------- --------- -------- --------
Ann Arbor Commerce Bank $ 261,525 $ 233,920 $ 3,674 $ 3,219 $ 1,697 $ 1,960 1.40% 1.38%
Brighton Commerce Bank 65,870 60,984 808 732 227 227 1.23 1.20
Capitol National Bank 153,647 144,485 2,202 1,983 2,486 465 1.43 1.37
Detroit Commerce Bank 28,438 29,243 328 351 282 539 1.15 1.20
Grand Haven Bank 104,845 89,989 1,424 1,212 1,578 1,234 1.36 1.35
Kent Commerce Bank 71,026 63,782 853 766 916 55 1.20 1.20
Macomb Community Bank 72,226 79,844 1,238 1,088 2,403 1,431 1.71 1.36
Muskegon Commerce Bank 74,669 70,151 934 842 259 123 1.25 1.20
Oakland Commerce Bank 82,438 81,711 926 1,063 1,754 406 1.12 1.30
Paragon Bank & Trust 84,180 81,430 1,070 1,018 3,273 586 1.27 1.25
Portage Commerce Bank 118,105 109,393 1,650 1,550 2,915 2,845 1.40 1.42
Indiana Community Bancorp Limited:
Elkhart Community Bank(1) 36,739 31,492 552 473 175 222 1.50 1.50
Goshen Community Bank(1) 30,082 22,966 452 345 -- -- 1.50 1.50
Sun Community Bancorp Limited:
Arrowhead Community Bank(1) 35,288 30,430 475 457 2 1.35 1.50
Bank of Tucson 87,744 88,218 1,404 1,224 572 407 1.60 1.39
Camelback Community Bank 67,823 56,555 728 743 2 334 1.07 1.31
East Valley Community Bank 26,864 27,402 377 423 372 432 1.40 1.54
Mesa Bank 53,188 45,672 766 594 678 542 1.44 1.30
Southern Arizona Community Bank 58,113 50,879 814 662 278 298 1.40 1.30
Valley First Community Bank 37,682 41,851 647 670 114 1,018 1.72 1.60
Yuma Community Bank(1) 23,887 18,539 359 285 -- -- 1.50 1.54
Nevada Community Bancorp Limited:
Bank of Las Vegas(1) 12,474 n/a 188 n/a 1.51 n/a
Black Mountain Community Bank(1) 44,930 40,111 665 602 135 240 1.48 1.50
Desert Community Bank(1) 45,137 50,361 678 806 527 989 1.50 1.60
Red Rock Community Bank(1) 75,257 67,117 1,130 1,008 926 942 1.50 1.50
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 34,155 28,061 462 379 692 614 1.35 1.35
Sunrise Bank of Arizona 56,501 55,730 763 753 997 1,329 1.35 1.35
Sunrise Bank of San Diego(1) 41,228 32,910 557 455 50 -- 1.35 1.38
First California Northern Bancorp:
Napa Community Bank(1) 12,350 n/a 186 n/a -- n/a 1.51 n/a
Other, net 1,365 1,363 (465)
---------- ---------- --------- --------- --------- --------- -------- --------
Consolidated $1,897,776 $1,734,589 $ 26,310 $ 23,238 $ 23,310 $ 17,238 1.39% 1.34%
========== ========== ========= ========= ========= ========= ======== ========
n/a Not applicable
(1) As a condition of charter approval, bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years of
operations.
Page 15 of 22
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 2002, was $3.9 million, an
increase of $1.3 million over the same period last year. Diluted earnings per
share were $.35 compared to $.33 for the prior year period. Net income for the
first half of 2002 was $7 million ($.73 per diluted share), a 40% increase from
$5 million ($.63 per diluted share) in the comparable period of 2001. The
percentage increase in net income per share was less than the percentage
increase in the amount of net income in 2002 because of the larger share base
resulting from Capitol's share exchange regarding Sun Community Bancorp which
was completed March 31, 2002.
Second quarter 2002 earnings were a new record level. This period was
benefited by strong bank performance coupled with earnings from Sun Community
Bancorp, the southwestern bank development affiliate, and its banks.
Net interest income for the second quarter of 2002 totaled $24.4 million, a
24% increase as compared to $19.7 million for the comparable period in 2001. Net
interest income for the six-month 2002 period was $47.2 million, as compared to
$38.2 million for the same period in 2001. Net interest income increased 24%
during the six-month period versus 23% in the corresponding period of 2001.
These increases are attributable to the expansion in number of banks, the banks'
growth and a stable interim 2002 interest rate environment.
Noninterest income for the quarter ended June 30, 2002 was $3.4 million, an
increase of $935,000, or 38%, over the same period last year. On a year-to-date
basis, noninterest income totaled $6.2 million for the 2002 period, as compared
to $4.6 million in the first six months of 2001. Service charges on deposit
accounts and trust fee income both increased due to volume in the second quarter
of 2002 by 21% compared to the same period in 2001. Service charges on deposits
and trust fee income totaled $1.9 million and $1.2 million, respectively, for
the six-month period in 2002, as compared to $1.5 million and $1 million,
respectively, for the 2001 period. Fees from origination of non-portfolio
residential mortgage loans totaled $1.5 million for the second quarter of 2002,
and were $2.4 million for the six-month period, as compared to $789,000 and $1.4
million for the comparable periods in 2001, due to higher loan volume resulting
from lower interest rates.
The provision for loan losses for the quarter ended June 30, 2002 was $2.7
million as compared to $1.7 million during the corresponding 2001 period. The
loan loss provision for the six-month period in 2002 was $4.8 million, as
compared to $3.3 million for the same period in 2001. Increases in the provision
for loan losses are principally related to loan growth. The provisions for loan
losses are based upon management's analysis of the adequacy of the allowance for
loan losses, as previously discussed.
Noninterest expense totaled $19 million for the second quarter, and $37.8
million for the six-month period in 2002, as compared to $16.1 million and $31.5
million, respectively, for the comparable periods in 2001. The increase in
noninterest expense is associated with newly formed banks, growth and increases
in general operating costs. Increases in both occupancy and salary and employee
benefits mostly relate to the growth in the number of banks within the
consolidated group.
Page 16 of 22
Operating results (dollars in thousands) were as follows:
Six months ended June 30
--------------------------------------------------------------------------------------------
Return on Return on
Total Revenues Net Income Average Equity Average Assets
-------------------- -------------------- -------------------- --------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- -------- -------- --------
Ann Arbor Commerce Bank $ 11,097 $ 11,738 $ 2,339 $ 2,002 21.64% 22.98% 1.67% 1.61%
Brighton Commerce Bank 2,774 2,804 428 257 13.84 9.50 1.17 .81
Capitol National Bank 6,335 6,720 1,482 1,194 21.74 21.47 1.67 1.57
Detroit Commerce Bank 1,188 1,307 (29) (86) n/a n/a n/a n/a
Grand Haven Bank 4,350 3,795 883 460 20.15 15.57 1.61 1.13
Kent Commerce Bank 2,946 2,170 466 (26) 13.57 n/a 1.25 n/a
Macomb Community Bank 2,982 4,505 437 526 8.94 11.82 .98 .98
Muskegon Commerce Bank 3,138 3,132 631 360 16.50 12.40 1.65 1.08
Oakland Commerce Bank 3,638 4,582 632 695 14.57 18.46 1.23 1.34
Paragon Bank & Trust 3,979 4,190 515 227 11.51 7.21 1.07 .54
Portage Commerce Bank 5,029 5,801 926 801 17.58 16.75 1.50 1.24
Indiana Community Bancorp Limited:
Elkhart Community Bank 1,306 1,184 93 (64) 4.01 n/a .49 n/a
Goshen Community Bank 1,046 437 34 (254) 1.53 n/a .21 n/a
Sun Community Bancorp Limited:
Arrowhead Community Bank 1,549 631 3 (275) .14 n/a .01 n/a
Bank of Tucson 4,869 5,156 1,153 1,037 22.54 24.24 1.92 2.02
Camelback Community Bank 2,906 2,411 292 208 8.55 10.50 .78 .83
East Valley Community Bank 1,348 1,641 (185) (73) n/a n/a n/a n/a
Mesa Bank 2,462 2,097 381 183 13.55 8.83 1.36 .90
Southern Arizona Community Bank 2,353 2,012 288 113 9.80 5.76 .86 .50
Valley First Community Bank 1,940 2,518 65 252 2.31 9.57 .24 .90
Yuma Community Bank 1,159 392 8 (310) .42 n/a .05 n/a
Nevada Community Bancorp Limited:
Bank of Las Vegas(2) 375 n/a (478) n/a n/a n/a n/a n/a
Black Mountain Community Bank 1,782 1,498 131 (49) 5.69 n/a .53 n/a
Desert Community Bank 2,200 2,087 131 43 5.25 1.93 .43 .21
Red Rock Community Bank 3,141 2,751 407 378 9.24 9.55 .93 1.33
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque 1,334 1,427 (16) 70 n/a 3.87 n/a .48
Sunrise Bank of Arizona 2,751 3,316 243 238 7.88 9.33 .77 .74
Sunrise Bank of San Diego(1) 1,990 1,093 165 (743) 4.51 n/a .76 n/a
First California Northern Bancorp:
Napa Community Bank(2) 341 n/a (549) n/a n/a n/a n/a n/a
Other, net (270) (75) (3,919) (2,181) n/a n/a n/a n/a
-------- -------- -------- -------- -------- -------- -------- --------
Consolidated $ 82,038 $ 81,320 $ 6,957 $ 4,983 13.23% 13.64% .65% .57%
======== ======== ======== ======== ======== ======== ======== ========
n/a Not applicable
(1) Commenced operations as a DE NOVO bank in 2001.
(2) Commenced operations as DE NOVO banks in 2002.
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $168 million for the six-month
2002 period, compared to $229 million in the corresponding period of 2001. Such
growth occurred in all deposit categories, with the majority coming from time
deposits. The banks generally do not rely on brokered deposits as a key funding
source; brokered deposits approximated $196 million as of June 30, 2002, or
about 10% of total deposits, an increase of $53 million during the interim 2002
period. Brokered deposits, as a funding source, have increased in recent periods
due to competitive environments and increased depositor usage of the Internet,
and may similarly increase in future periods.
Noninterest-bearing deposits approximated 16% of total deposits at June 30,
2002 and December 31, 2001. Levels of noninterest-bearing deposits fluctuate
based on customers' transaction activity.
Page 17 of 22
Interim 2002 deposit growth was deployed primarily into commercial loans,
consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $220 million or 10% of total assets
at June 30, 2002 as compared with $164 million or 8% of total assets at December
31, 2001. As liquidity levels vary continuously based on customer activities,
amounts of cash and cash equivalents can vary widely at any given point in time.
Management believes the banks' liquidity position at June 30, 2002 is adequate
to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity
is the banks' marketable investment securities. Liquidity needs have not
historically necessitated the sale of investments in order to meet funding
requirements. The banks have not engaged in active trading of their investments.
At June 30, 2002, the banks had approximately $36.3 million of investment
securities classified as available for sale which can be utilized to meet
various liquidity needs as they arise.
Some of the banks have secured lines of credit with a Federal Home Loan
Bank. Borrowings thereunder approximated $76 million and additional borrowing
capacity approximated $9.3 million at June 30, 2002. These borrowings increased
($13 million in the first half of 2002) as a lower-cost funding source versus
various rates and maturities of time deposits. At June 30, 2002, Capitol had
unused lines of credit from an unrelated financial institution aggregating $10
million.
In November 2001, the boards of directors of Capitol and Sun entered into a
plan of share exchange. The plan of share exchange was approved by the
shareholders of both Capitol and Sun at special meetings held in late March
2002. The share exchange was based on a fixed exchange ratio and resulted in
Capitol issuing .734 shares of its previously unissued common stock for each
common share of Sun's common stock held by shareholders other than Capitol,
effective March 31, 2002. Capitol issued approximately 2.7 million shares of its
common stock and 850,000 stock options resulting from the share exchange, for
aggregate consideration approximating $43.2 million. This transaction has been
accounted for as a purchase. Had the transaction occurred at the beginning of
the periods presented, net income would have approximated $7.2 million ($0.66
per diluted share) and $5.1 million ($0.48 per diluted share) for the six months
ended June 30, 2002 and 2001, respectively.
As of June 30, 2002, potential share exchange transactions were pending
regarding the minority shareholders of Indiana Community Bancorp Limited and
Sunrise Capital Corporation which, if completed, would result in Capitol issuing
approximately 450,000 additional shares of common stock and those majority-owned
subsidiaries becoming wholly-owned.
Capitol and its banks are subject to complex regulatory capital
requirements, which require maintaining certain minimum capital ratios. These
ratio measurements, in addition to certain other requirements, are used by
regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. Management believes Capitol and
each of its banks are in compliance with regulatory requirements and are
expected to maintain such compliance.
Page 18 of 22
Stockholders' equity, as a percentage of total assets, approximated 5.8% at
June 30, 2002, increased from the ratio of 3.9% at the beginning of the year,
primarily as a result of the previously-mentioned share exchange regarding Sun.
Total capital funds (Capitol's stockholders' equity, plus minority interests in
consolidated subsidiaries, plus guaranteed preferred beneficial interests in the
Corporation's subordinated debentures) aggregated $222.2 million or 10% of total
assets at June 30, 2002.
Capitol's operating strategy continues to be focused on the ongoing growth
and maturity of its existing banks, coupled with new bank expansion in selected
markets as opportunities arise. Accordingly, Capitol may invest in or otherwise
develop additional banks in future periods, subject to economic conditions and
other factors, although the timing of such additional banking units, if any, is
uncertain. Such future new banks and/or additions of other operating units could
be either wholly-owned, majority-owned or otherwise controlled by Capitol.
TRENDS AFFECTING OPERATIONS
One of the most significant trends which can impact the financial condition
and results of operations of financial institutions are changes in market rates
of interest.
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.
During 2001, the Open Market Committee of the Federal Reserve Board
decreased interbank interest rates on numerous separate dates, for an
unprecedented decrease of 475 basis points during the year. In the first half of
2002, interest rates have remained relatively stable.
Because variable rate loans reprice more rapidly than interest-bearing
deposits, such market interest rate decreases compressed net interest margins at
Capitol's banks in 2001. 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. As the Open Market Committee
continues to influence interest rates and other economic policy in 2002,
including the potential of rate increases, net interest margins may become more
compressed (having an adverse impact on earnings) as the year progresses.
Start-up banks generally incur operating losses during their early periods
of operations. Recently-formed start-up banks are expected to detract from
consolidated earnings performance and start-up banks formed in 2002 and beyond
will similarly negatively impact short-term profitability.
General economic conditions also have a significant impact on both the
results of operations and the financial condition of financial institutions.
Page 19 of 22
Media reports of raising questions about the health of the domestic economy
have continued in 2002. In 2002, nonperforming loans have increased and it is
anticipated that levels of nonperforming loans and related loan losses may
increase as economic conditions, locally and nationally, evolve.
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
Statement No. 141 requires that all business combinations be accounted for under
a prior standard of purchase accounting, eliminating the so-called
pooling-method which was used to account for some business combinations. This
standard did not have a material effect on Capitol's consolidated financial
statements.
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead be reviewed for impairment. Amortization of
goodwill ceased upon adoption of the Statement on January 1, 2002. This new
standard requires that goodwill be reviewed annually for impairment and,
accordingly, impairment adjustments of goodwill be charged against earnings, if
and when determined. Capitol's previous business combinations (generally,
acquisitions of minority interests) have been accounted for using the purchase
method. As of June 30, 2002, the net carrying amount of goodwill approximated
$12.8 million and other intangible assets approximated $2.6 million. Upon
implementation, this new standard has not had a material effect on Capitol's
consolidated financial statements, other than the elimination of goodwill
amortization (such amortization approximated $386,000 for the six months ended
June 30, 2001).
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.
CRITICAL ACCOUNTING POLICIES
In May 2002, the Securities and Exchange Commission proposed significant
changes in disclosure rules applicable to public companies. One of those
proposed significant changes involves the identification of "critical accounting
policies". Capitol's significant accounting policies are described in the
financial section of its 2001 Annual Report. In the circumstances of Capitol,
management believes its "critical accounting policies" are those which encompass
the allowance for loan losses (due to the inherent subjectivity in estimating
loan losses), accounting for income taxes (due to the significant U.S. corporate
income tax rate and realization of deferred tax assets) and accounting for
goodwill (due to new accounting standards effective at the beginning of 2002).
Page 20 of 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Capitol and its subsidiaries are parties to certain ordinary,
routine litigation incidental to their business. In the opinion of
management, liabilities arising from such litigation would not have a
material effect on Capitol's consolidated financial position or
results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three
months ended June 30, 2002.
Page 21 of 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL BANCORP LTD.
(Registrant)
/s/ Joseph D. Reid
----------------------------------------
Joseph D. Reid
Chairman, President and CEO
(duly authorized to sign on behalf
of the registrant)
/s/ Lee W. Hendrickson
----------------------------------------
Lee W. Hendrickson
Executive Vice President and
Chief Financial Officer
Date: July 30, 2002
Page 22 of 22