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Capitol Bancorp 10-K 2007 Documents found in this filing:
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
For
the
transition period from ____________ to ____________
Commission
File Number: 001-31708
CAPITOL
BANCORP LTD.
(Exact
name of registrant as specified in its charter)
(517)
487-6555
(Registrant's
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of
June 30, 2006, the aggregate market value of the registrant's common stock
held
by non-affiliates of the registrant was: $514,073,551. (Such amount was computed
based on shares held by non-affiliates as of January 31, 2006 and the common
stock closing price reported by the New York Stock Exchange on June 30, 2006.
For purposes of this computation, all executive officers, directors and 5%
shareholders have been assumed to be affiliates. Certain of such persons may
disclaim that they are affiliates of registrant.)
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
DOCUMENTS
INCORPORATED BY REFERENCE
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CAPITOL
BANCORP LTD.
Form
10-K
Fiscal
Year Ended: December 31, 2006
Cross
Reference Sheet
Key:
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CAPITOL
BANCORP LTD.
2006
FORM
10-K ANNUAL REPORT
TABLE
OF
CONTENTS
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FORWARD-LOOKING
STATEMENTS
Some
of
the statements contained or incorporated by reference in this annual report
on
Form 10-K that are not historical facts may constitute forward-looking
statements. Those forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, are subject to known and unknown
risks, uncertainties and other factors which may cause the actual future
results, performance or achievements of Capitol and/or its subsidiaries and
other operating units to differ materially from those contemplated in such
forward-looking statements. The words "intend," "expect," "project," "estimate,"
"predict," "anticipate," "should," "will," "may," "believe" and similar
expressions also identify forward-looking statements. Important factors which
may cause actual results to differ from those contemplated in such
forward-looking statements include, but are not limited to: (i) the results
of
Capitol's efforts to implement its business strategy, (ii) changes in interest
rates, (iii) legislation or regulatory requirements adversely impacting
Capitol's banking business and/or expansion strategy, (iv) adverse changes
in
business conditions or inflation, (v) general economic conditions, either
nationally or regionally, which are less favorable than expected and that result
in, among other things, a deterioration in credit quality and/or loan
performance and collectability, (vi) competitive pressures among financial
institutions, (vii) changes in securities markets, (viii) actions of competitors
of Capitol's banks and Capitol's ability to respond to such actions, (ix) the
cost of capital, which may depend in part on Capitol's asset quality, prospects
and outlook, (x) changes in governmental regulation, tax rates and similar
matters, (xi) changes in management and (xii) other risks detailed in Capitol's
other filings with the Securities and Exchange Commission. If one or more of
these risks or uncertainties materialize, or if underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated. The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make certain estimates and assumptions, many of which are based
on
assumptions relating to the above-stated forward-looking statements, that affect
the reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results will differ from those estimates because
of
the inherent subjectivity and inaccuracy of any estimation. 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.
[The
remainder of this page intentionally left blank]
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PART
I
Item
1. Business.
a. General
development of business:
Incorporated
by reference from Pages F-7 - F-11, Financial Information Section of Annual
Report, under the captions "Summary and Overview" and
"Capitol's Bank Development Strategy"
and
Pages F-41 - F-44, Financial Information Section of Annual Report, under the
caption "Note A—Nature of Operations, Basis of Presentation and Principles of
Consolidation."
b. Financial
information about segments:
Incorporated
by reference from Pages F-10 - F-13 , Financial Information Section of Annual
Report (excerpt from management's discussion and analysis of financial
conditions and results of operations) and Pages F-41 - F-44, Financial
Information Section of Annual Report, under the caption "Note A—Nature of
Operations, Basis of Presentation and Principles of Consolidation."
c. Narrative
description of business:
Incorporated
by reference from Pages F-7 - F-9, Financial Information Section of Annual
Report, under the caption "Summary and Overview," and "Capitol's Bank
Development Strategy," Pages F-41 - F-44, Financial Information Section of
Annual Report, under the caption "Note A—Nature of Operations, Basis of
Presentation and Principles of Consolidation," Pages F-21 - F-25, Financial
Information Section of Annual Report, under the caption "Liquidity, Capital
Resources and Capital Adequacy" and Pages F-25 - F-29, Financial Information
Section of Annual Report, under the caption "Trends Affecting
Operations."
At
December 31, 2006, Capitol and its subsidiaries employed approximately 1,354
full time equivalent employees.
In
1997,
Capitol formed Capitol Trust I, a Delaware statutory business trust. Capitol
Trust I's business and affairs are conducted by its property trustee, a Delaware
trustee, and three individual administrative trustees who are employees and
officers of Capitol. Capitol Trust I exists for the sole purpose of issuing
and
selling its preferred securities and common securities, using the proceeds
from
the sale of those securities to acquire subordinated debentures issued by
Capitol and certain related services. During 2001, Capitol formed Capitol Trust
II and Capitol Statutory Trust III, in conjunction with private placements
of
trust-preferred securities. Capitol Trust IV was similarly formed in 2002,
Capitol Trust VI, Capitol Trust VII and Capitol Statutory Trust VIII were formed
in 2003 and Capitol Trust IX was formed in 2004. Each of these securities has
similar terms. Additional information regarding trust-preferred securities
is
incorporated by reference from Pages F-57 - F-58, Financial Information Section
of Annual Report, under the caption "Note I—Subordinated Debt."
Supervision
and Regulation:
General:
The
banking industry is subject to extensive state and federal regulation and
continues to undergo significant change. Proposals to change the laws and
regulations governing the banking industry are frequently raised in Congress,
in
state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any changes and the impact such changes might have
on
Capitol are impossible to determine with any certainty. A change in applicable
laws or regulations, or a change in the way such laws or regulations are
interpreted by regulatory agencies or courts, may have a material impact on
the
business, operations and earnings of Capitol. Although Congress in recent years
has sought to reduce the regulatory burden on financial institutions with
respect to the approval of specific transactions, Capitol
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Item
1. Business - continued.
expects
that the financial services industry will remain heavily regulated and that
additional laws or regulations may be adopted. The following discussion
summarizes certain aspects of the banking laws and regulations that affect
Capitol. To the extent that the following information describes statutory or
regulatory provisions, it is qualified entirely by reference to the particular
statutory or regulatory provision.
Capitol
is a bank holding company registered with the Federal Reserve Board and is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "Bank Holding Company Act"). The Bank Holding Company Act requires the
Federal Reserve Board's prior approval of an acquisition of assets or of
ownership or control of voting shares of any bank or bank holding company if
the
acquisition would give the acquiring institution more than 5% of the voting
shares of such bank or bank holding company. It also imposes restrictions,
summarized below, on the assets or voting shares of non-banking companies that
Capitol may acquire.
Consistent
with the requirements of the Bank Holding Company Act, Capitol's lines of
business provide its customers with banking, trust and other financial services
and products. These services include commercial banking through 50 subsidiary
banks, as well as trust services, mortgage origination and servicing, equipment
leasing, brokerage and investment advisory services, property and casualty
insurance, brokerage services, life insurance and annuity products, and
portfolio management services through subsidiary banks and other subsidiaries.
Under
Federal Reserve Board policy, a bank holding company is expected to serve as
a
source of financial strength to each of its subsidiary banks and to stand
prepared to commit resources to support each of them. There are no specific
quantitative rules on a holding company's potential liability. If one of
Capitol's subsidiary banks were to encounter financial difficulty, the Federal
Reserve Board could invoke the doctrine and require a capital contribution
from
Capitol. In addition, and as a separate legal matter, a holding company is
required to guarantee the capital plan of an undercapitalized subsidiary bank.
See "Capital Adequacy and Prompt Corrective Action" below.
Capitol's
subsidiary banks are subject to the provisions of the banking laws of their
respective states of organization or the National Bank Act. They are under
the
supervision of, and are subject to periodic examination by, their respective
state banking departments (in the case of state-chartered banks) or the Office
of the Comptroller of the Currency ("OCC") (in the case of national banks),
and
are subject to the rules and regulations of the OCC, the Federal Reserve Board
and the Federal Deposit Insurance Corporation ("FDIC"). 49 of Capitol's banking
subsidiaries, as of December 31, 2006, are state-chartered banks and are
therefore subject to supervision, regulation and examination by state banking
regulators. Elkhart Community Bank and Goshen Community Bank are members of
the
Federal Reserve System so they are subject to supervision and examination by
the
Federal Reserve Board as well as the FDIC, because the FDIC insures their
deposits to the extent provided by law. Additionally, non-bank subsidiaries
are
supervised and examined by the Federal Reserve Board and various other federal
and state agencies.
Capitol's
insured depository institution subsidiaries are also subject to cross-guaranty
liability under federal law. This means that if one FDIC-insured depository
institution subsidiary of a multi-institution bank holding company fails or
requires FDIC assistance, the FDIC may assess "commonly controlled" depository
institutions for the estimated losses suffered by the FDIC. Such liability
could
have a material adverse effect on the financial condition of any assessed
subsidiary institution and on Capitol as the common parent. While the FDIC's
cross-guaranty claim is generally junior to the claims of depositors, holders
of
secured liabilities, general creditors and subordinated creditors, it is
generally superior to the claims of shareholders and affiliates.
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Item
1. Business - continued.
Payment
of Dividends:
There
are
various statutory restrictions on the ability of Capitol's banking subsidiaries
to pay dividends or make other payments to Capitol. Each of the state-chartered
banking subsidiaries is subject to dividend limits under the laws of the state
in which it is chartered. In addition, Elkhart Community Bank and Goshen
Community Bank are member banks of
the
Federal Reserve System, subject to the dividend limits of the Federal Reserve
Board. The Federal Reserve Board allows a member bank to make dividends or
other
capital distributions in an amount not exceeding the current calendar year's
net
income, plus retained net income of the preceding two years. Distributions
in
excess of this limit require prior approval of the Federal Reserve Board.
Federal Reserve Board policy provides that, as a matter of prudent banking,
a
bank holding company generally should not maintain a rate of cash dividends
unless its net income available to common shareholders has been sufficient
to
fully fund the dividends, and the prospective rate of earnings retention appears
to be consistent with the holding company's capital needs, asset quality and
overall financial condition.
Dividends
from a national banking association may be declared only from the bank's
undivided profits, and until the bank's surplus fund equals its common capital,
no dividends may be declared unless at least 10% of the bank's net income for
a
given time period has been carried to the surplus fund, depending on the
frequency of dividend payments in a given year. The OCC's approval is required
if the total of all dividends declared in any calendar year exceeds the sum
of
the bank's net income of that year combined with its retained net income of
the
preceding two years.
Capital
Adequacy and Prompt Corrective Action:
The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal regulators to take prompt corrective action against any
undercapitalized institution. FDICIA establishes five capital categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. "Well capitalized"
institutions significantly exceed the required minimum level for each capital
measure (currently, risk-based and leverage). "Adequately capitalized"
institutions include depository institutions that meet the required minimum
level for each capital measure. "Undercapitalized" institutions consist of
those
that fail to meet the required minimum level for one or more relevant capital
measures. "Significantly undercapitalized" characterizes depository institutions
with capital levels significantly below the minimum requirements. "Critically
undercapitalized" refers to depository institutions with minimal capital and
at
serious risk for government seizure.
Under
certain circumstances, a well-capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the
next lower capital category. A depository institution is generally prohibited
from making capital distributions, including paying dividends, or paying
management fees to a holding company if the institution would thereafter be
undercapitalized. Institutions that are adequately but not well capitalized
cannot accept, renew or rollover brokered deposits except with a waiver from
the
FDIC and are subject to restrictions on the interest rates that can be paid
on
such deposits. Undercapitalized institutions may not accept, renew or rollover
brokered deposits.
The
banking regulatory agencies are permitted or, in certain cases, required to
take
certain actions with respect to institutions falling within one of the three
undercapitalized categories. Depending on the level of an institution's capital,
the agencies' corrective powers include, among other things:
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Item
1. Business - continued.
A
banking
institution that is undercapitalized is required to submit a capital restoration
plan, and such a plan will not be accepted unless, among other things, the
banking institution's holding company guarantees the plan up to a certain
specified amount. Any such guarantee from a depository institution's holding
company is entitled to a priority of payment in bankruptcy.
FDICIA
also contains a variety of other provisions that may affect Capitol's
operations, including reporting requirements, regulatory standards for real
estate lending, "truth in savings" provisions, and the requirement that a
depository institution give 90 days prior notice to customers and
regulatory authorities before closing any branch.
At
December 31, 2006 and 2005, the most recent notification from the Federal
Reserve Board categorized Capitol and all of its depository institution
subsidiaries as "well capitalized" under the regulatory framework for prompt
corrective action. Information concerning capital adequacy guidelines for
Capitol and its banking subsidiaries including their regulatory capital position
at December 31, 2006 is incorporated herein by reference from Note P to the
consolidated financial statements appearing in the Annual Report.
FDIC
Insurance Assessments:
The
FDIC's deposit insurance assessments currently are calculated under a risk-based
system. The risk-based system places a bank in one of four risk categories,
principally on the basis of its capital level and an evaluation of the bank's
risk to the relevant deposit insurance fund, and bases premiums on the
probability of loss to the FDIC with respect to each individual bank. Under
the
Federal Deposit Insurance Act, depository institutions such as Capitol's
subsidiary banks may not pay interest on indebtedness, if such interest is
required to be paid out of net profits, or distribute any of its capital assets
while it remains in default on any assessment due to the FDIC. The adjusted
assessment rates for FDIC insured institutions currently range from 0.00% to
0.27% depending on the assessment category into which a bank is placed.
On
November 30, 2006, the FDIC adopted a new rule for calculating deposit
insurance based on a risk-weighting. The new rule took effect on January 1,
2007, and increases the assessment amount for all insured institutions for
payments due June 30, 2007 and forward. The new minimum annual assessment
rate will be 0.05% for a well capitalized bank, while the maximum annual rate
will be 0.43%. Also on November 30, 2006, the FDIC issued a one time credit
to institutions that were in existence on December 31, 1996 and paid a
deposit insurance assessment prior to that date, or are classified as a
"successor" to such an institution. This credit can be used to partially offset
the increased assessment rate. For assessment periods during 2007, a well
capitalized institution can offset up to 100% of the assessment with this
credit. For assessment periods after 2007, this credit can be used to offset
up
to 90% of the assessment. Capitol expects its bank subsidiaries will pay
increased insurance assessments in 2007 due to the changes in assessment
percentages and other factors. The FDIC retains the ability to increase
regular insurance assessments and to levy special additional assessments.
Effective
March 31, 2006, the FIDC merged the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") into a single fund called the
Deposit Insurance Fund. As a result of the merger, the BIF and the SAIF were
abolished. The merger of the BIF and the SAIF into the Deposit Insurance Fund
does not affect the authority of the Financing Corporation ("FICO") to impose
and collect, with the approval of the FDIC, assessments for anticipated
payments, issuance costs and custodial fees on bonds issued by the FICO in
the
1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The
bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter
ended September 30, 2006, the annualized FICO assessment was equal to 1.26
basis points for each $100 in domestic deposits maintained at an institution.
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Item
1. Business - continued.
Interstate
Banking:
Under
the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal Act"), as amended, a bank holding company may acquire banks in
states other than its home state, subject to any state requirement that the
bank
has been organized and operating for a minimum period of time (not to exceed
five years) and the requirement that the bank holding company not control,
prior
to or following the proposed acquisition, more than 10% of the total amount
of
deposits of insured depository institutions nationwide or, unless the
acquisition is the bank holding company's initial entry into the state, more
than 30% of such deposits in the state, or such lesser or greater amount set
by
the state. The Riegle-Neal Act also authorizes banks to merge across state
lines, thereby creating interstate branches. Banks are also permitted to acquire
and to establish de
novo
branches
in other states where authorized under the laws of those states.
Transactions
with Affiliates:
Transactions
between Capitol's subsidiary banks and their affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. The affiliates of the
banks include Capitol and any entity controlled by Capitol. Generally,
Sections 23A and 23B (i) limit the extent to which the subsidiary
banks may engage in "covered transactions" with any one affiliate to an amount
equal to 10% of such institution's capital stock and surplus, and maintain
an
aggregate limit on all such transactions with affiliates to an amount equal
to
20% of the bank's capital stock and surplus, (ii) require that a bank's
extensions of credit to such affiliates be fully collateralized (with 100%
to
130% collateral coverage, depending on the type of collateral),
(iii) prohibit the bank from purchasing or accepting as collateral from an
affiliate any "low quality assets" (including non-performing loans) and
(iv) require that all "covered transactions" be on terms substantially the
same, or at least as favorable, to the bank or its subsidiary as those provided
to a non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other types of similar
transactions.
Loans
to Insiders:
The
Federal Reserve Act and related regulations impose specific restrictions on
loans to directors, executive officers and principal stockholders of banks.
Under Section 22(h) of the Federal Reserve Act and its implementing regulations,
loans to a director, an executive officer and to a principal shareholder of
a
bank, and some affiliated entities of any of the foregoing, may not exceed,
together with all other outstanding loans to such person and affiliated
entities, the bank's loan-to-one-borrower limit. Loans in the aggregate to
insiders and their related interests as a class may not exceed the bank's
unimpaired capital and unimpaired surplus. Section 22(h) and its implementing
regulations also prohibit loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and principal
shareholders of a bank or bank holding company, and their respective affiliates,
unless such loan is approved in advance by a majority of the board of directors
of the bank with any "interested" director not participating in the voting.
Section 22(h) generally requires that loans to directors, executive officers
and
principal shareholders be made on terms and underwriting standards substantially
the same as offered in comparable transactions to other persons.
Community
Reinvestment Act:
Under
the
Community Reinvestment Act ("CRA") and related regulations, depository
institutions have an affirmative obligation to assist in meeting the credit
needs of their market areas, including low and moderate income areas, consistent
with safe and sound banking practice. The CRA requires the adoption by each
institution of a CRA statement for each of its market areas describing the
depository institution's efforts to assist in its community's credit needs.
Depository institutions are periodically examined for compliance with CRA and
are periodically assigned ratings in this regard. Banking regulators consider
a
depository institution's CRA rating when reviewing applications to establish
new
branches, undertake new lines of business, and/or acquire part or all of another
depository institution. An unsatisfactory rating can significantly delay or
even
prohibit regulatory approval of a proposed transaction by a bank holding company
or its depository institution subsidiary.
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Item
1. Business - continued.
Fair
Lending and Consumer Laws:
In
addition to the Community Reinvestment Act, other federal and state laws
regulate various lending and consumer aspects of the banking business.
Governmental agencies, including the Department of Housing and Urban
Development, the Federal Trade Commission and the Department of Justice, have
become concerned that in some cases, prospective borrowers experience unlawful
discrimination in their efforts to obtain loans from depository and other
lending institutions. These agencies have brought litigation against some
depository institutions alleging discrimination against borrowers. Many of
these
suits have been settled, in some cases for material sums, short of a full trial.
These
governmental agencies have clarified what they consider to be lending
discrimination and have specified various factors that they will use to
determine the existence of lending discrimination under the Equal Credit
Opportunity Act and the Fair Housing Act. These factors include evidence that
a
lender discriminated on a prohibited basis, evidence that a lender treated
applicants differently based on prohibited factors in the absence of evidence
that the treatment was the result of prejudice or a conscious intention to
discriminate, and evidence that a lender applied an otherwise neutral
non-discriminatory policy uniformly to all applicants, but the practice had
a
discriminatory effect, unless the practice could be justified as a business
necessity.
Banks
and
other depository institutions also are subject to numerous consumer-oriented
laws and regulations. These laws, which include the Truth in Lending Act, the
Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic
Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing
Act,
require compliance by depository institutions with various disclosure
requirements and requirements regulating the availability of funds after deposit
or the making of certain loans to customers.
Gramm-Leach
Bliley Act of 1999:
The
Gramm-Leach-Bliley Act of 1999 (the "GLBA") was signed into law on
November 12, 1999. The GLBA covers a broad range of issues, including a
repeal of most of the restrictions on affiliations among depository
institutions, securities firms and insurance companies. The following
description summarizes some of its significant provisions.
The
GLBA
repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting
unrestricted affiliations between banks and securities firms. It also permits
bank holding companies to elect to become financial holding companies. A
financial holding company may engage in or acquire companies that engage in
a
broad range of financial services, including securities activities such as
underwriting, dealing, investment, merchant banking, insurance underwriting,
sales and brokerage activities. In order to become a financial holding company,
the bank holding company and all of its affiliated depository institutions
must
be well-capitalized, well-managed and have at least a satisfactory Community
Reinvestment Act rating. Capitol has determined not to become certified as
a
financial holding company at this time. Capitol may reconsider this
determination in the future.
The
GLBA
provides that the states continue to have the authority to regulate insurance
activities, but prohibits the states in most instances from preventing or
significantly interfering with the ability of a bank, directly or through an
affiliate, to engage in insurance sales, solicitations or cross-marketing
activities. Although the states generally must regulate bank insurance
activities in a nondiscriminatory manner, the states may continue to adopt
and
enforce rules that specifically regulate bank insurance activities in specific
areas identified under the law. The federal bank regulatory agencies adopted
insurance consumer protection regulations that apply to sales practices,
solicitations, advertising and disclosures.
The
GLBA
repeals the broad exemption of banks from the definitions of "broker" and
"dealer" for purposes of the Securities Exchange Act of 1934, as amended. It
also identifies a set of specific activities, including traditional bank trust
and fiduciary activities, in which a bank may engage without being deemed a
"broker," and a set of activities in which a bank may engage without being
deemed a "dealer." Additionally, the law makes conforming changes in the
definitions
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Item
1. Business - continued.
of
"broker" and "dealer" for purposes of the Investment Company Act of 1940, as
amended, and the Investment Advisers Act of 1940, as amended.
The
GLBA
also contains extensive customer privacy protection provisions. Under these
provisions, a financial institution must provide to its customers, both at
the
inception of the customer relationship and on an annual basis, the institution's
policies and procedures regarding the handling of customers' nonpublic personal
financial information. The new law provides that, except for specific limited
exceptions, an institution may not provide such personal information to
unaffiliated third parties unless the institution discloses to the customer
that
such information may be so provided and the customer is given the opportunity
to
"opt out" of such disclosure. An institution may not disclose to a
non-affiliated third party, other than to a consumer reporting agency, customer
account numbers or other similar account identifiers for marketing purposes.
The
GLBA also provides that the states may adopt customer privacy protections that
are more strict than those contained in the GLBA.
Anti-Money
Laundering and the USA Patriot Act of 2001:
In
2001,
Congress enacted the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "Patriot
Act"). The Patriot Act is designed to deny terrorists and criminals the ability
to obtain access to the United States' financial system and has significant
implications for depository institutions, brokers, dealers, and other businesses
involved in the transfer of money. The Patriot Act mandates that financial
services companies implement policies and procedures with respect to additional
measures designed to address the following matters: money laundering, terrorist
financing, identifying and reporting suspicious activities and currency
transactions and currency crimes. The Patriot Act also substantially broadened
existing anti-money laundering legislation, imposed new compliance and due
diligence obligations, created new crimes and penalties and compelled the
production of documents located both inside and outside the United States.
The
U.S. Treasury Department has issued a number of regulations that apply some
of
these requirements to financial institutions such as Capitol's banking
subsidiaries. The regulations impose new obligations on financial institutions
to maintain appropriate policies, procedures and controls to detect, prevent
and
report money laundering and terrorist financing. Pursuant to the Patriot Act
and
the related regulations, Capitol and its banking subsidiaries have established
anti-money laundering compliance and due diligence programs that include, among
other things, the designation of a compliance officer, employee training
programs and an independent audit function to review and test the program.
Capitol
maintains an Internet web site at http://www.capitolbancorp.com
that
includes links to Capitol's Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to those reports
(the
"SEC Reports"). The SEC Reports are available without charge as soon as
reasonably practicable following the time that they are filed with or furnished
to the SEC. Information
on Capitol's website is not incorporated into this Form 10-K or Capitol's other
securities filings and is not a part of those filings. The public may read
and
copy any materials Capitol files with the SEC at the SEC's Public Reference
Room
at 100 F. Street, NE, Washington, DC 20549. The public may obtain information
on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains information regarding
issuers that file electronically with the SEC. That address is http://www.sec.gov.
In
addition, Capitol makes available on its website at http://www.capitolbancorp.com
under
the heading "Governance" its: (i) Code of Ethics; (ii) Governance
Guidelines; and (iii) the charters of Capitol's Board committees, and also
intends to disclose any amendments to its Code of Ethics, or waivers of the
Code
of Ethics on behalf of its Chief Executive Officer and other senior financial
officers, on its website. These corporate governance materials are also
available free of charge in print to shareholders who request them in writing
to: Capitol Bancorp Ltd., Attention: Corporate Secretary, Capitol Bancorp
Center, 200 Washington Square North, Lansing, Michigan 48933.
The
following tables (Tables A to G, inclusive), present certain statistical
information regarding Capitol's business.
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12
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DISTRIBUTION
OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A)
CAPITOL
BANCORP LIMITED
Net
interest income, the primary component of earnings, represents the difference
between interest income on interest-earning assets and interest expense on
interest-bearing liabilities. Net interest income depends upon the volume
of
interest-earning assets and interest-bearing liabilities and the rates earned
or
paid on them. This table shows the daily average balances for the major asset
and liability categories and the actual related interest income and expense
(in
$1,000s) and average yield/cost for the years ended December 31, 2006, 2005
and
2004.
(1)
Average yield/cost is determined by dividing the actual interest income/expense
by the daily average balance of the asset or liability category.
(2)
Average balance of loans includes nonaccrual loans.
(3)
Interest rate spread represents the average yield on interest-earning assets
less the average cost of interest-bearing liabilities.
(4)
Net
yield is based on net interest income as a percentage of average total
interest-earning assets.
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13
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CHANGES
IN NET INTEREST INCOME (TABLE B)
CAPITOL
BANCORP LIMITED
The
table
below summarizes the extent to which changes in interest rates and changes
in
the volume of interest-earning assets and interest-bearing liabilities have
affected Capitol's net interest income (in $1,000s). The change in interest
attributable to volume is calculated by multiplying the annual change in
volume
by the prior year's rate. The change in interest attributable to rate is
calculated by multiplying the annual change in rate by the prior year's average
balance. Any variance attributable jointly to volume and rate changes has
been
allocated to each category based on the percentage of each to the total change
in both categories.
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14
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INVESTMENT
PORTFOLIO (TABLE C)
CAPITOL BANCORP LIMITED
The
table
below shows amortized cost and estimated market value of investment securities
as of December 31, 2006, 2005 and 2004 (in $1,000s):
The
table
below shows the amortized cost, relative maturities and weighted average
yields
of investment securities at December 31, 2006 (in $1,000s):
Investment
securities which do not have stated maturities (corporate stock, Federal
Reserve
Bank and Federal Home Loan Bank stock) do not have stated yields or rates
of
return and such rates of return vary from time to time.
Following
is a summary of the weighted average maturities of investment securities
(exclusive of securities without stated maturities) at December 31, 2006:
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15
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LOAN
PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D)
CAPITOL
BANCORP LIMITED
Portfolio
loans outstanding as of December 31 are shown below (in $1,000s):
The
table
below summarizes (in $1,000s) the remaining maturity of portfolio loans
outstanding at December 31, 2006 according to scheduled repayments
of
principal:
The
following summarizes, in general, Capitol's various loan
classifications:
Commercial
- real estate
Comprised
of a broad mix of business use and multi-family housing properties, including
office, retail, warehouse and light industrial uses. A typical loan size
is
generally less than $1,000,000 and, at December 31, 2006, approximately
19% of
such properties were owner-occupied and approximately 16% of the commercial
real
estate total consisted of a combination of multi-family and residential
rental
income properties (including construction).
Commercial
- other
Includes
a range of business credit products, current asset lines of credit and
equipment
term loans. These products bear higher inherent economic risk than other
types
of lending activities. A typical loan size is generally less than $500,000,
and
multiple account relationships serve to reduce such risks.
Real
estate mortgage
Includes
single family residential loans held for permanent portfolio and home
equity
lines of credit. Risks are nominal, borne out by loss experience, housing
economic data and loan-to-value percentages.
Installment
Includes
a broad range of installment credit products, secured by automobiles,
boats,
etc., with typical consumer credit risks.
All
loans
are subject to underwriting procedures commensurate with the loan size,
nature
of collateral, industry trends, risks and experience factors. Appropriate
collateral is required for most loans, as is documented evidence of debt
repayment sources.
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16
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LOAN
PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D -
CONTINUED)
CAPITOL
BANCORP LIMITED
The
aggregate amount of nonperforming portfolio loans is summarized below as
of
December 31 (in $1,000s). Nonperforming loans are comprised of (a) loans
accounted for on a nonaccrual basis and (b) loans contractually past due
90 days
or more as to principal and interest payments (but not included in nonaccrual
loans in (a) above) and consist primarily of commercial real estate loans.
See
Note D of the Notes to Consolidated Financial Statements for additional
information regarding nonperforming loans.
In
addition to the identification of nonperforming loans involving borrowers
with
payment performance difficulties (i.e., nonaccrual loans and loans past
due 90
days or more), management utilizes an internal loan review process to identify
other potential problem loans which may warrant additional monitoring or
other
attention. This loan review process is a continuous activity which periodically
updates internal loan classifications. At inception, all loans are individually
assigned a classification which grade the credits on a risk basis, based
on the
type and discounted value of collateral, financial strength of the borrower
and
guarantors and other factors such as nature of the borrowers' business
climate,
local economic conditions and other subjective factors. The loan classification
process is fluid and subjective.
Potential
problem loans include loans which are generally performing as agreed; however,
because of loan review's and/or lending staff's risk assessment, increased
monitoring is deemed appropriate. In addition, some loans are identified
for
monitoring because of specific performance issues or other risk factors
requiring closer management and development of specific remedial action
plans.
At
December 31, 2006, potential problem loans (which includes nonperforming
loans)
approximated $146 million or about 4.2% of total consolidated portfolio
loans.
Such totals typically approximate 4% to 5% of loans outstanding and are
an
important part of management's ongoing and proactive loan review activities
which are designed to early-identify loans which warrant close monitoring
at the
bank and corporate credit-administration levels. It is important to note
that
these potential problem loans do not necessarily have significant loss
exposure
(nor are they necessarily deemed 'impaired'), but rather are identified by
management in this manner to aid in loan administration and risk management.
These loans are considered in management's evaluation of the adequacy of
the
allowance for loan losses.
The
table
below summarizes activity in other real estate owned (in $1,000s) for the
year
ended December 31:
Other
real estate owned is valued at the lower of cost or fair value (net
of estimated
selling cost) at the date of transfer/acquisition. Management performs
a
periodic analysis of estimated fair values to determine potential impairment
of
other real estate owned.
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17
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SUMMARY
OF LOAN LOSS EXPERIENCE (TABLE E)
CAPITOL
BANCORP LIMITED
The
table
below summarizes changes in the allowance for loan losses and related portfolio
data and ratios for the year ended December 31 (in $1,000s):
See
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations, for additional information regarding the allowance for loan
losses
and description of factors which influence management's judgment in determining
the amount of the allowance for loan losses at the balance sheet date.
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18
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SUMMARY
OF LOAN LOSS EXPERIENCE (TABLE E - CONTINUED)
CAPITOL
BANCORP LIMITED
The
amount of the allowance for loan losses allocated in the following table
(in
$1,000s) as of December 31, are based on management's estimate of losses
inherent in the portfolio at the balance sheet date, and should not be
interpreted as an indication of future charge-offs:
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