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 MARCH 31, 2003
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 (I.R.S. Employer
of incorporation or Identification
organization) 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 [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b of the Act). 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: 12,293,820 shares outstanding as of April 22, 2003.
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.
Page
----
Item 1. Financial Statements (unaudited):
Consolidated balance sheets - March 31, 2003 and
December 31, 2002. 3
Consolidated statements of income - Three months ended
March 31, 2003 and 2002. 4
Consolidated statements of changes in stockholders' equity -
Three months ended March 31, 2003 and 2002. 5
Consolidated statements of cash flows - Three months ended
March 31, 2003 and 2002. 6
Notes to consolidated financial statements. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 20
Item 4. Controls and Procedures. 20
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
CERTIFICATIONS 23
Page 2 of 25
PART I, ITEM I
CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of March 31, 2003 and December 31, 2002
(Unaudited)
March 31 December 31
2003 2002
----------- -----------
(in thousands)
ASSETS
Cash and due from banks $ 128,623 $ 125,146
Money market, mutual funds and interest-bearing deposits 54,958 42,301
Federal funds sold 140,364 83,737
----------- -----------
Cash and cash equivalents 323,945 251,184
Loans held for resale 65,465 75,420
Investment securities:
Available for sale, carried at market value 31,693 25,355
Held for long-term investment, carried at
amortized cost which approximates market value 8,824 8,784
----------- -----------
Total investment securities 40,517 34,139
Portfolio loans:
Commercial 1,846,601 1,789,036
Real estate mortgage 128,605 127,855
Installment 76,951 74,481
----------- -----------
Total portfolio loans 2,052,157 1,991,372
Less allowance for loan losses (30,034) (28,953)
----------- -----------
Net portfolio loans 2,022,123 1,962,419
Premises and equipment 20,565 21,737
Accrued interest income 9,342 9,286
Goodwill and other intangibles 24,606 24,739
Other assets 33,726 30,364
----------- -----------
TOTAL ASSETS $ 2,540,289 $ 2,409,288
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 359,916 $ 360,669
Interest-bearing 1,821,524 1,701,403
----------- -----------
Total deposits 2,181,440 2,062,072
Debt obligations 84,348 93,398
Accrued interest on deposits and other liabilities 16,923 14,182
----------- -----------
Total liabilities 2,282,711 2,169,652
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE CORPORATION'S SUBORDINATED DEBENTURES 61,299 51,583
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 31,808 28,016
STOCKHOLDERS' EQUITY
Common stock, no par value, 25,000,000 shares authorized;
issued and outstanding: 2003 - 11,737,860 shares
2002 - 11,663,412 shares 134,211 135,234
Retained earnings 30,228 26,318
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income) 177 191
----------- -----------
164,616 161,743
Less note receivable from exercise of stock options
and unallocated ESOP shares (145) (1,706)
----------- -----------
Total stockholders' equity 164,471 160,037
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,540,289 $ 2,409,288
=========== ===========
Page 3 of 25
CAPITOL BANCORP LTD.
Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
Three Months Ended
March 31
--------------------
2003 2002
-------- --------
Interest income:
Portfolio loans (including fees) $ 38,385 $ 35,619
Loans held for resale 762 734
Taxable investment securities 199 397
Federal funds sold 284 264
Other 356 241
-------- --------
Total interest income 39,986 37,255
Interest expense:
Deposits 11,002 12,193
Debt obligations and other 1,997 2,239
-------- --------
Total interest expense 12,999 14,432
-------- --------
Net interest income 26,987 22,823
Provision for loan losses 1,890 2,090
-------- --------
Net interest income after provision
for loan losses 25,097 20,733
Noninterest income:
Service charges on deposit accounts 1,071 958
Trust fee income 522 531
Fees from origination of non-portfolio
residential mortgage loans 2,237 893
Realized gain (loss) on sale of investment
securities available for sale 3 (64)
Other 696 480
-------- --------
Total noninterest income 4,529 2,798
Noninterest expense:
Salaries and employee benefits 13,427 11,027
Occupancy 1,873 1,520
Equipment rent, depreciation and maintenance 1,165 1,055
Other 4,691 5,191
-------- --------
Total noninterest expense 21,156 18,793
-------- --------
Income before federal income taxes and minority interest 8,470 4,738
Federal income taxes 2,944 1,543
-------- --------
Income before minority interest 5,526 3,195
Minority interest in net income of
consolidated subsidiaries (213) (151)
-------- --------
NET INCOME $ 5,313 $ 3,044
======== ========
NET INCOME PER SHARE--Note C
Basic $ 0.45 $ 0.39
======== ========
Diluted $ 0.44 $ 0.38
======== ========
Page 4 of 25
CAPITOL BANCORP LTD.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
(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
--------- --------- --------- --------- ---------
THREE MONTHS ENDED MARCH 31, 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 43,165 43,165
Issuance of 70,174 shares of common stock
upon exercise of stock options 753 753
Issuance of 19,100 shares of common stock
upon exercise of warrants 213 213
Cash dividends paid ($.10 per share) (789) (789)
Components of comprehensive income:
Net income for the period 3,044 3,044
Market value adjustment for investment
securities available for sale (net of
income tax effect) (194) (194)
---------
Comprehensive income for the period 2,850
--------- --------- --------- --------- ---------
BALANCES AT MARCH 31, 2002 $ 111,823 $ 16,428 $ (36) $ (1,851) $ 126,364
========= ========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, 2003
Balances at January 1, 2003 $ 135,234 $ 26,318 $ 191 $ (1,706) $ 160,037
Issuance of 123,850 shares of common
stock upon exercise of stock options, net
of common stock surrendered to
facilitate exercise 279 279
Issuance of 22,512 shares of common stock
upon exercise of warrants 259 259
Surrender and cancellation of 71,914 shares
of common stock in repayment
of note receivable from exercise
of stock options (1,561) 1,561 0
Cash dividends paid ($.12 per share) (1,403) (1,403)
Components of comprehensive income:
Net income for the period 5,313 5,313
Market value adjustment for investment
securities available for sale (net of
income tax effect) (14) (14)
---------
Comprehensive income for the period 5,299
--------- --------- --------- --------- ---------
BALANCES AT MARCH 31, 2003 $ 134,211 $ 30,228 $ 177 $ (145) $ 164,471
========= ========= ========= ========= =========
Page 5 of 25
CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
2003 2002
--------- ---------
(in thousands)
OPERATING ACTIVITIES
Net income $ 5,313 $ 3,044
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,890 2,090
Depreciation of premises and equipment 958 802
Amortization of intangibles 133 --
Net amortization of investment security premiums 29 1
Loss (gain) on sale of premises and equipment (90) 5
Minority interest in net income of consolidated subsidiaries 213 151
Originations and purchases of loans held for resale (257,718) (203,954)
Proceeds from sales of loans held for resale 267,673 216,552
Increase in accrued interest income and other assets (3,393) (2,649)
Increase in accrued interest on deposits and other liabilities 2,741 2,066
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,749 18,108
INVESTING ACTIVITIES
Proceeds from sale of investment securities available for sale 4,625 --
Proceeds from calls, prepayments & maturities of investment securities 6,626 11,560
Purchases of investment securities (17,681) (12,313)
Net increase in portfolio loans (61,594) (60,202)
Proceeds from sales of premises and equipment 1,509 --
Purchases of premises and equipment (1,205) (852)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (67,720) (61,807)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 34,661 83,333
Net increase in certificates of deposit 84,707 29,625
Net payments on debt obligations (9,050) (550)
Net proceeds from issuance of trust-preferred securities 9,700 --
Resources provided by minority interests 3,579 8,383
Net proceeds from issuance of common stock 538 966
Cash dividends paid (1,403) (789)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 122,732 120,968
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 72,761 77,269
Cash and cash equivalents at beginning of period 251,184 163,691
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 323,945 $ 240,960
========= =========
Page 6 of 25
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 three-month period ended March 31, 2003
are not necessarily indicative of the results to be expected for the year ending
December 31, 2003.
The consolidated balance sheet as of December 31, 2002 was derived from
audited consolidated financial statements as of that date. Certain 2002 amounts
have been reclassified to conform to the 2003 presentation.
NOTE B - BANK DEVELOPMENT ACTIVITIES
Bank development efforts are currently under consideration at March 31,
2003 in several states including pre-development exploratory discussions, lease
and employment negotiations and preparation of preliminary regulatory
applications for formation and/or acquisition of community banks.
NOTE C - NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows:
Three Months Ended
March 31
-------------------------
2003 2002
----------- -----------
Numerator--net income for the period $ 5,313,000 $ 3,044,000
=========== ===========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic earnings per share) 11,697,756 7,900,928
Effect of dilutive securities--stock options and warrants 438,359 178,937
----------- -----------
Denominator for dilutive net income per share--
Weighted average number of common shares and
potential dilution 12,136,115 8,079,865
=========== ===========
Number of antidilutive stock options excluded from
diluted earnings per share computation 202,372 119,336
=========== ===========
Page 7 of 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - CONTINUED
NOTE D - STOCK OPTIONS
Stock option activity for the interim 2003 period is summarized as follows:
Weighted
Number of Exercise Average
Stock Options Price Exercise
Outstanding Range Price
------------- ------------------ -------
Outstanding at January 1 2,548,536 $ 4.92 to $ 25.10 $ 15.23
Exercised (335,893) 8.54 to 16.40 15.13
Granted 198,580 20.36 to 23.37 21.32
Cancelled or expired (23,290) --
--------- ------------------ -------
Outstanding at March 31 2,387,933 $ 4.92 to $ 25.10 $ 15.75
As of March 31, 2003, 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 95,377 $ 9.14 2.8 years
$10.00 to 14.99 908,099 12.49 4.7 years
$15.00 to 19.99 977,480 16.62 5.2 years
$20.00 to 24.99 306,351 21.60 6.2 years
$25.00 or more 100,626 $25.10 1.7 years
---------
2,387,933
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:
2003 2002
------- -------
Fair value assumptions:
Risk-free interest rate 3.5% 4.5%
Dividend yield 2.2% 2.5%
Stock price volatility .50 .46
Expected option life 7 years 7 years
Aggregate estimated fair value of
options granted (in thousands) $ 1,890 $ 62
Net income (in thousands):
As reported 5,313 3,044
Less pro forma compensation
expense regarding fair
value of stock option
awards, net of related
income tax effect (1,229) (41)
------- -------
Pro forma 4,084 3,003
Net income per share:
Basic:
As reported 0.45 0.39
Pro forma 0.35 0.38
Diluted:
As reported 0.44 0.38
Pro forma $ 0.34 $ 0.37
Page 8 of 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. -CONTINUED
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) recently issued Statements
No. 146 (ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES) and
No. 149 (AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES). These new standards have varying effective dates in 2003 and had no
material effect on Capitol's 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, including interim disclosures (such interim disclosures appear in
Note D). 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. This new guidance had no material effect 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, had no material effect upon Capitol's consolidated financial
statements upon implementation.
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 9 of 25
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets approximated $2.5 billion at March 31, 2003, an increase of
$131 million from the December 31, 2002 level of $2.4 billion. The balance sheet
includes Capitol and its consolidated subsidiaries:
Total Assets
(in $1,000's)
---------------------------
March 31 Dec 31
2003 2002
----------- -----------
Great Lakes Region:
Ann Arbor Commerce Bank $ 325,946 $ 309,152
Brighton Commerce Bank 83,323 78,382
Capitol National Bank 211,867 206,130
Detroit Commerce Bank 37,908 30,589
Grand Haven Bank 128,483 123,505
Kent Commerce Bank 73,832 73,801
Macomb Community Bank 88,749 87,050
Muskegon Commerce Bank 86,239 86,465
Oakland Commerce Bank 125,280 115,916
Paragon Bank & Trust 106,754 103,044
Portage Commerce Bank 140,926 139,068
Elkhart Community Bank 48,297 53,210
Goshen Community Bank 39,608 38,115
----------- -----------
Great Lakes Region Total 1,497,212 1,444,427
Southwest Region:
Arrowhead Community Bank 48,427 47,427
Bank of Tucson 141,104 132,094
Camelback Community Bank 87,483 82,387
East Valley Community Bank 37,766 37,640
Mesa Bank 64,585 66,312
Southern Arizona Community Bank 84,444 75,253
Valley First Community Bank 43,379 42,127
Yuma Community Bank 41,589 38,214
Bank of Las Vegas 28,983 26,880
Black Mountain Community Bank 67,626 63,202
Desert Community Bank 59,812 55,170
Red Rock Community Bank 110,276 96,906
Sunrise Bank of Albuquerque 50,267 46,898
Sunrise Bank of Arizona 90,691 82,126
----------- -----------
Southwest Region Total 956,432 892,636
California Region:
Sunrise Bank of San Diego 58,801 50,450
First California Northern Bancorp:
Napa Community Bank 39,545 36,042
----------- -----------
California Region Total 98,346 86,492
Other, net (11,701) (14,267)
----------- -----------
Consolidated $ 2,540,289 $ 2,409,288
=========== ===========
Portfolio loans increased during the three-month 2003 period by
approximately $61 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 2003 is net of about $19 million of commercial loans
sold to other financial institutions.
Page 10 of 25
The allowance for loan losses at March 31, 2003 approximated $30 million or
1.46% of total portfolio loans, an increase from the year-end 2002 ratio of
1.45%.
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):
2003 2002
----------- -----------
Allowance for loan losses at January 1 $ 28,953 $ 23,238
Loans charged-off:
Commercial (887) (530)
Real estate mortgage (21) (25)
Installment (96) (90)
----------- -----------
Total charge-offs (1,004) (645)
Recoveries:
Commercial 154 38
Real estate mortgage -- 2
Installment 41 21
----------- -----------
Total recoveries 195 61
----------- -----------
Net charge-offs (809) (584)
Additions to allowance charged to expense 1,890 2,090
----------- -----------
Allowance for loan losses at March 31 $ 30,034 $ 24,744
=========== ===========
Average total portfolio loans for period ended March 31 $ 2,023,830 $ 1,761,605
=========== ===========
Ratio of net charge-offs (annualized) to average portfolio
loans outstanding 0.16% 0.13%
=========== ===========
Net charge-offs of loans increased $225,000 in 2003, compared to the
three-month period in 2002. The increase, during the quarter ended March 31,
2003, was mainly due to losses associated with loans secured by business
equipment and accounts receivable.
Page 11 of 25
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.
March 31, 2003 December 31, 2002
------------------------- --------------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
------ ----- ------ -----
Commercial $ 27,610 1.35% $ 27,226 1.37%
Real estate mortgage 1,358 0.06 1,009 0.05
Installment 1,066 0.05 718 0.03
---------- ----- ----------- -----
Total allowance for loan losses $ 30,034 1.46% $ 28,953 1.45%
========== ===== =========== =====
Total portfolio loans outstanding $2,052,157 $ 1,991,372
========== ===========
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
March 31 Dec 31
2003 2002
------- -------
Nonaccrual loans:
Commercial $18,414 $15,444
Real estate 657 560
Installment 995 613
------- -------
Total nonaccrual loans 20,066 16,617
Past due (>=90 days) loans:
Commercial 5,045 5,728
Real estate 736 323
Installment 134 222
------- -------
Total past due loans 5,915 6,273
------- -------
Total nonperforming loans $25,981 $22,890
======= =======
Page 12 of 25
Nonperforming loans increased approximately $3.1 million during the
three-month period ended March 31, 2003. Of the nonperforming loans at March 31,
2003, about 65% are real estate secured. Those loans, when originated, had
appropriate loan-to-value ratios and, accordingly, have loss exposure which is
expected to be minimal; however, underlying real estate values depend upon
current economic conditions and liquidation strategies. Most other nonperforming
loans are generally secured by other business assets. Nonperforming loans at
March 31, 2003 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 grades 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 borrower's
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 March 31, 2003, potential problem loans (including the previously
mentioned nonperforming loans) approximated $104 million, or about 5% of total
consolidated portfolio loans. 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 interim 2003 period.
Page 13 of 25
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
----------------------- ----------------------- --------------------- ------------------
March 31 Dec 31 March 31 Dec 31 March Dec 31 March 31 Dec 31
2003 2002 2003 2002 2003 2002 2003 2002
---------- ---------- ---------- ---------- ---------- ---------- ------- -------
Great Lakes Region:
Ann Arbor Commerce Bank $ 281,066 $ 272,604 $ 4,025 $ 3,840 $ 2,829 $ 2,624 1.43% 1.41%
Brighton Commerce Bank 69,664 68,239 721 851 170 170 1.03 1.25
Capitol National Bank 162,305 158,651 2,308 2,322 1,764 1,753 1.42 1.46
Detroit Commerce Bank 28,719 26,799 585 627 1,098 751 2.04 2.34
Grand Haven Bank 121,114 114,616 1,744 1,626 2,038 1,605 1.44 1.42
Kent Commerce Bank 69,575 68,848 835 830 86 293 1.20 1.21
Macomb Community Bank 78,890 73,915 1,142 1,136 3,040 3,012 1.45 1.54
Muskegon Commerce Bank 79,544 77,247 1,012 966 2,890 1,806 1.27 1.25
Oakland Commerce Bank 89,857 86,049 1,173 1,119 1,375 1,805 1.31 1.30
Paragon Bank & Trust 91,872 86,571 1,562 1,291 3,035 2,628 1.70 1.49
Portage Commerce Bank 132,111 129,710 1,905 1,815 3,305 3,135 1.44 1.40
Elkhart Community Bank 44,279 43,277 664 658 244 245 1.50 1.52
Goshen Community Bank 36,936 35,408 556 532 -- -- 1.51 1.50
---------- ---------- ---------- ---------- ---------- ----------
Great Lakes Region Total 1,285,932 1,241,934 18,232 17,613 21,874 19,827
Southwest Region:
Arrowhead Community Bank 36,008 36,185 530 543 -- -- 1.47 1.50
Bank of Tucson 90,519 90,176 1,164 1,461 187 187 1.29 1.62
Camelback Community Bank 60,559 63,516 816 960 -- 232 1.35 1.51
East Valley Community Bank 26,748 25,932 405 389 233 17 1.51 1.50
Mesa Bank 59,878 55,588 724 834 -- 242 1.21 1.50
Southern Arizona Community Bank 61,928 60,913 789 914 -- -- 1.27 1.50
Valley First Community Bank 28,490 29,075 641 620 260 261 2.25 2.13
Yuma Community Bank 24,871 25,485 383 383 -- -- 1.54 1.50
Bank of Las Vegas 20,515 19,404 321 292 -- -- 1.56 1.50
Black Mountain Community Bank 50,796 52,240 786 784 327 324 1.55 1.50
Desert Community Bank 43,037 43,351 661 675 1,166 734 1.54 1.56
Red Rock Community Bank 82,025 80,152 1,833 1,203 1,789 861 2.23 1.50
Sunrise Bank of Albuquerque 43,286 38,577 585 521 -- -- 1.35 1.35
Sunrise Bank of Arizona 72,117 65,195 931 881 145 205 1.29 1.35
---------- ---------- ---------- ---------- ---------- ----------
Southwest Region Total 700,777 685,789 10,569 10,460 4,107 3,063
California Region:
Sunrise Bank of San Diego 39,087 39,116 577 577 -- -- 1.48 1.48
First California Northern Bancorp
Napa Community Bank 24,697 20,177 392 303 -- -- 1.59 1.50
---------- ---------- ---------- ---------- ---------- ----------
California Region Total 63,784 59,293 969 880 -- -- -- --
Other, net 1,664 4,356 264 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----- -----
Consolidated $2,052,157 $1,991,372 $ 30,034 $ 28,953 $ 25,981 $ 22,890 1.46% 1.45%
========== ========== ========== ========== ========== ========== ===== =====
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2003, was $5.3 million, an
increase of $2.3 million or 75% over the same period last year. Diluted earnings
per share were $0.44 compared to $0.38 for the prior year period. The percentage
increase in net income per share was less than the percentage increase in the
amount of net income in 2003 because of the larger share base resulting from
Capitol's 2002 share exchanges regarding Sun Community Bancorp, Sunrise Capital
Corporation, Indiana Community Bancorp and Nevada Community Bancorp.
Net interest income for the first three months of 2003 totaled $27 million,
an 18% increase compared to $22.8 million in 2002. This increase is attributable
to the expansion in number of banks, the banks' growth and a stable interest
rate environment.
Page 14 of 25
Noninterest income for the three months ended March 31, 2003 was $4.5
million, an increase of $1.7 million, or 62%, over the same period in 2002. Fees
from origination of non-portfolio residential mortgage loans totaled $2.2
million in the interim 2003 period, as compared to $1 million in 2002, due to
continuing high volume of loan fees derived from residential mortgage loan
refinance activity resulting from sustained low interest rates. Service charges
on deposit accounts increased in the first quarter of 2003 by 12%, compared to
2002 due to growth in the number and size of banks.
The provision for loan losses for the first quarter of 2003 was $1.9
million as compared to $2.1 million during the corresponding 2002 period. The
provision for loan losses is based upon management's analysis of the adequacy of
the allowance for loan losses, as previously discussed.
Noninterest expense totaled $21.2 million for the interim 2003 period
compared to $18.8 million in 2002. The increase in noninterest expense is
associated with newly formed banks, growth and increases in general operating
costs. Increases in both occupancy and salaries and employee benefits relate
primarily to the growth in the number and size of banks within the consolidated
group. Other noninterest expense in the 2002 period was higher than in 2003 due
to the preopening costs of two start-up banks which commenced operations in the
first three months of 2002.
Operating results (dollars in thousands) were as follows:
Three months ended March 31
----------------------------------------------------------------------------------------
Return on Return on
Total Revenues Net Income Average Equity Average Assets
-------------------- -------------------- -------------------- ------------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- ------- ------- ------- -------
Great Lakes Region:
Ann Arbor Commerce Bank $ 5,828 $ 5,415 $ 1,319 $ 1,144 21.91% 21.39% 1.73% 1.69%
Brighton Commerce Bank 1,367 1,353 319 188 18.88 12.40 1.60 1.05
Capitol National Bank 3,409 3,120 849 740 22.58 21.94 1.64 1.70
Detroit Commerce Bank 518 601 (21) (26) n/a n/a n/a n/a
Grand Haven Bank 2,511 2,141 569 421 22.01 20.39 1.79 1.61
Kent Commerce Bank 1,288 1,408 129 176 13.95 10.64 1.34 .98
Macomb Community Bank 1,371 1,501 (29) 283 n/a 11.61 n/a 1.24
Muskegon Commerce Bank 1,614 1,564 366 331 17.29 17.50 1.74 1.75
Oakland Commerce Bank 1,909 1,870 382 307 16.54 14.24 1.32 1.17
Paragon Bank & Trust 2,164 1,971 166 230 6.41 10.72 .63 .96
Portage Commerce Bank 2,732 2,461 565 418 20.37 15.92 1.61 1.36
Elkhart Community Bank 810 626 118 29 9.64 2.53 .61 .32
Goshen Community Bank 749 493 118 6 10.30 .58 1.19 .09
-------- -------- -------- --------
Great Lakes Region Total 26,270 24,524 4,850 4,247
Southwest Region:
Arrowhead Community Bank 917 666 82 (31) 7.52 n/a .71 n/a
Bank of Tucson 2,281 2,432 780 573 29.35 22.73 2.33 1.94
Camelback Community Bank 1,447 1,403 306 153 14.98 9.33 1.43 .85
East Valley Community Bank 660 699 (86) (97) n/a n/a n/a n/a
Mesa Bank 1,345 1,186 388 167 24.07 12.06 2.31 1.24
Southern Arizona Community Bank 1,282 1,140 305 158 17.61 11.08 1.56 1.00
Valley First Community Bank 689 997 69 63 4.82 4.51 .66 .46
Yuma Community Bank 753 518 82 (14) 8.71 n/a .82 n/a
Bank of Las Vegas 382 130 (78) (337) n/a n/a n/a n/a
Black Mountain Community Bank 1,105 836 180 55 13.64 4.85 1.13 .45
Desert Community Bank 964 1,152 121 104 9.28 8.51 .86 .69
Red Rock Community Bank 1,760 1,523 (106) 210 n/a 9.65 n/a .99
Sunrise Bank of Albuquerque 963 608 105 (25) 10.85 n/a .88 n/a
Sunrise Bank of Arizona 2,312 1,372 91 261 5.85 17.15 .42 1.67
-------- -------- -------- --------
Southwest Region Total 16,860 14,662 2,239 1,240
California Region:
Sunrise Bank of San Diego 935 954 43 93 2.30 5.10 .31 .90
First California
Northern Bancorp:
Napa Community Bank 551 44 (11) (394) n/a n/a n/a n/a
-------- -------- -------- --------
California Region Total 1,486 998 32 (301)
Other, net (101) (131) (1,808) (2,142) n/a n/a n/a n/a
-------- -------- -------- -------- ------- ------- ------- -------
Consolidated $ 44,515 $ 40,053 $ 5,313 $ 3,044 13.09% 14.80% .87% .58%
======== ======== ======== ======== ======= ======= ======= =======
n/a Not applicable
Page 15 of 25
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $119 million for the three
months ended March 31, 2003, slightly more than the $113 million increase in the
corresponding period of 2002. Growth occurred in most interest-bearing 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 $233 million as of March 31, 2003, or about 11% of total deposits,
an increase of $32 million during the interim 2003 period. Brokered deposits, as
a funding source, have increased in recent periods due to competitive
environments and selective opportunities to grow deposits at a faster pace
and/or lower cost than traditional sources, and may similarly increase in future
periods.
Noninterest-bearing deposits approximated 16.5% of total deposits at March
31, 2003 and 17.5% at December 31, 2002. Levels of noninterest-bearing deposits
can, however, fluctuate based on customers' transaction activity.
Interim 2003 deposit growth was deployed primarily into commercial loans,
consistent with the banks' emphasis on commercial lending activities.
Cash and cash equivalents amounted to $324 million or 13% of total assets
at March 31, 2003, compared with $251 million or 10% of total assets at December
31, 2002. 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 March 31, 2003 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 March 31, 2003, the banks had approximately $32 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 $80 million and additional borrowing
capacity approximated $16 million at March 31, 2003. These borrowings increased
slightly ($1 million in the interim period of 2003) as a lower-cost funding
source versus various rates and maturities of time deposits. At March 31, 2003,
Capitol had unused lines of credit from an unrelated financial institution
aggregating $21 million.
In March 2003, Capitol participated in a pooled trust-preferred securities
offering, structured with a 30-year maturity and a variable interest rate, with
net proceeds of approximately $9.7 million. These securities augment Capitol's
existing capital base and the proceeds have been used to reduce borrowings from
an unaffiliated bank.
Page 16 of 25
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.
Stockholders' equity, as a percentage of total assets, approximated 6.5% at
March 31, 2003 a slight decrease from 6.6% at the beginning of the year. 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 $258 million or 10% of total
assets at March 31, 2003.
In April 2003, Capitol announced the completion of an $11 million private
placement of its common stock to select institutional investors and the issuance
of approximately 550,000 shares of previously unissued common stock. Proceeds
from the offering have been used to reduce borrowings from an unaffiliated bank
and investment in short-term investments.
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, acquire 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 a difference between interest
rate-sensitive assets and interest rate-sensitive liabilities. This means that
when interest rates change, the timing and magnitude of the effect of such
interest rate changes can alter the relationship between asset yields and the
cost of funds.
In the first three months of 2003, interest rates have remained relatively
stable. The future outlook on interest rates and their impact on Capitol's
interest income, interest expense and net interest income is uncertain.
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 2003 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 17 of 25
Media reports raising questions about the health of the domestic economy
have continued in 2003. During the first quarter of 2003, 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
There are several new accounting standards either becoming effective or
being issued in 2003. They are listed and discussed in Note E of the
accompanying condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Capitol's critical accounting policies are described on page 10 of the
financial section of its 2002 Annual Report. In the circumstances of Capitol,
management believes its "critical accounting policies" are those which encompass
the use of estimates (because of inherent subjectivity), 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 18 of 25
PART I, ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
PART I, ITEM 4
CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Disclosure controls and procedures were evaluated as of March 31, 2003
("Evaluation Date"). Such evaluation concluded that Capitol's disclosure
controls and procedures are effective to ensure that material information
relating to Capitol, including its consolidated subsidiaries, is made known
to Capitol's senior management, particularly during the period for which
this quarterly report has been prepared.
(b) CHANGES IN INTERNAL CONTROL.
As of the signature date of this report, there have been no significant
changes in Capitol's internal controls or in other factors that could
significantly affect internal controls subsequent to the Evaluation Date
referred to in (a) above.
(c) ASSET-BACKED ISSUERS.
Not applicable.
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Page 19 of 25
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:
Exhibit No. Description of Exhibit
----------- ----------------------
10a Amended and Restated Employment Agreement of Joseph D.
Reid dated March 17, 2003 and amendment dated April 17,
2003.
99.1 Certification of Chief Executive Officer, Joseph D.
Reid, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Chief Financial Officer, Lee W.
Hendrickson, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended March
31, 2003.
Page 20 of 25
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 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: May 14, 2003
Page 21 of 25
CERTIFICATIONS
I, Joseph D. Reid, Chairman and CEO, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capitol Bancorp Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
Page 22 of 25
CERTIFICATIONS--CONTINUED
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Joseph D. Reid
-----------------------------
Joseph D. Reid
Chairman and CEO
[The remainder of this page intentionally left blank]
Page 23 of 25
CERTIFICATIONS--CONTINUED
I, Lee W. Hendrickson, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capitol Bancorp Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
Page 24 of 25
CERTIFICATIONS--CONTINUED
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Lee W. Hendrickson
-----------------------------
Lee W. Hendrickson
Chief Financial Officer
[The remainder of this page intentionally left blank]
Page 25 of 25