Capitol Bancorp 10-Q 2007
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Commission file number: 001-31708
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 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).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Page 1 of 27
PART I. FINANCIAL INFORMATION
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 2 of 27
Page 3 of 27
Page 4 of 27
Page 5 of 27
Page 6 of 27
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 condensed consolidated financial 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 periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.
The consolidated balance sheet as of December 31, 2006 was derived from audited consolidated financial statements as of that date. Certain 2006 amounts have been reclassified to conform to the 2007 presentation.
Note B – Implementation of New Accounting Standards
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156, Accounting for Servicing of Financial Assets, which is an amendment of Statement No. 140, intended to simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. Statement No. 156 is effective for years beginning after September 15, 2006, although earlier adoption is permitted. The standard's adoption effective January 1, 2007 did not have a material effect on Capitol's consolidated financial statements.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken in a tax return. Under FIN 48, tax positions are recognized in the financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities. Such tax positions will be measured initially and thereafter as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement, presuming the tax authority has full knowledge of the position and all relevant facts. FIN 48 also revises disclosure requirements to include disclosure of unrecognized tax benefits. FIN 48 did not have a material effect on Capitol's consolidated financial statements upon implementation effective January 1, 2007.
Note C – Stock Options
Stock option activity for the interim 2007 period is summarized as follows:
Page 7 of 27
Note C – Stock Options--Continued
168,720 stock options were granted in 2007 with an aggregate fair value approximating $1,103,000. These stock options have varying vesting dates from December 31, 2007 through August 2010. Each of the options expires seven years from date of grant. Share-based compensation expense relating to such stock options for the nine months ended September 30, 2007 approximated $116,000.
As of September 30, 2007, stock options outstanding had a weighted average remaining contractual life of 3.63 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value as of September 30, 2007:
Note D – Net Income Per Share
The computations of basic and diluted earnings per share were based on the following (in 1,000s) for the periods ended September 30:
Page 8 of 27
Note E – New Banks and Other Development Activities
Capitol opened six de novo banks during the nine months ended September 30, 2007. Bank of Tacoma, located in Tacoma, Washington, opened in January 2007; Sunrise Community Bank, located in Palm Desert, California, opened in February 2007; Larimer Bank of Commerce, located in Fort Collins, Colorado, opened in May 2007; Issaquah Community Bank, located in Issaquah, Washington and USNY Bank, located in Geneva, New York, each opened in July 2007 and High Desert Bank, located in Bend, Oregon, opened in September 2007. Each is majority owned by bank-development subsidiaries controlled by Capitol.
Bank development efforts were currently under consideration at September 30, 2007 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. As of September 30, 2007, Capitol had 12 applications pending for additional de novo community banks in Arizona, California, Colorado, Missouri, Nebraska, North Carolina, Oklahoma and Texas.
Capitol's operating strategy focuses 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. Most recently, Capitol has recruited several regional bank development executives to pursue de novo and other bank development opportunities in certain regions of the United States where it seeks to expand in future periods.
Note F – Acquisition of Minority Interests
Effective February 9, 2007, Capitol completed a share exchange transaction which involved the issuance of approximately 371,000 shares of previously unissued common stock in exchange for the nonvoting shares of Capitol Development Bancorp Limited II. Total consideration for this transaction approximated $15.9 million with related goodwill approximating $8.5 million. If this transaction had occurred at the beginning of 2006, net income for the nine months ended September 30, 2006 would have been $30 million ($1.79 per diluted share).
Note G – Impact of New Accounting Standards
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, which provides a definition of fair value for accounting purposes, establishes a framework for measuring fair value and expands related financial statement disclosures. In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. Statements No. 157 and 159 will be applied prospectively and implemented by Capitol effective January 1, 2008. Management has not completed its analysis of these new fair-value related standards.
In June 2007, the FASB ratified an Emerging Issues Task Force (EITF) consensus regarding Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, which becomes effective for Capitol January 1, 2008. Management has not completed its review of this new guidance, but expects the effect upon implementation will not be material to Capitol’s consolidated financial statements.
Also recently, the FASB has issued several proposals to amend, supersede or interpret existing accounting standards which may impact Capitol's financial statements at a later date:
Page 9 of 27
Note G – Impact of New Accounting Standards--Continued
Other proposals, interpretations of existing pronouncements or FASB staff positions have been recently issued which include the following:
Capitol's management has not completed its analysis of this new guidance (as proposed, where applicable) although it anticipates the potential impact (if finalized, where applicable) would not be material to Capitol's consolidated financial statements.
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.
[The remainder of this page intentionally left blank]
Page 10 of 27
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total assets approximated $4.7 billion at September 30, 2007, an increase of $588 million from the December 31, 2006 level of $4.1 billion. The balance sheet includes Capitol and its consolidated subsidiaries:
Total assets for Capitol's various western regions and consolidated totals relating to this table appear on the following page.
[The remainder of this page intentionally left blank]
Page 11 of 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – Continued
Financial Condition – Continued
Summary of total assets – continued: