Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 14, 2013)
  • 10-Q (May 15, 2013)
  • 10-Q (Nov 14, 2012)
  • 10-Q (Aug 9, 2012)
  • 10-Q (May 3, 2012)
  • 10-Q (Nov 14, 2011)

 
8-K

 
Other

Capitol Bancorp 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2008
 
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
 
Commission file number:  001-31708

CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)

Michigan
 
38-2761672
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
   
Capitol Bancorp Center
   
200 N. Washington Square
   
Lansing, Michigan
 
48933
(Address of principal executive offices)
 
(Zip Code)

(517) 487-6555
(Registrant's telephone number, including area code)

Not applicable
(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.
Yes   T
No   £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   £
No   T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
 
Outstanding at October 15, 2008
Common Stock, No par value
 
17,337,308 shares

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer   £
   
Accelerated filer   T
Non-accelerated filer     £   (Do not check if a smaller reporting company)
 
Smaller reporting company   £


 
Page 1 of 30

 

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.
 
Item 1.
 
Financial Statements (unaudited):
Page
 
Condensed consolidated balance sheets – September 30, 2008 and December 31, 2007.
3
 
Condensed consolidated statements of operations – Three months and nine months
ended September 30, 2008 and 2007.
4
 
Condensed consolidated statements of changes in stockholders' equity – Nine months
ended September 30, 2008 and 2007.
5
 
Condensed consolidated statements of cash flows – Nine months ended September 30,
2008 and 2007.
6
 
Notes to condensed consolidated financial statements.
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
12
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
27
Item 4.
Controls and Procedures.
27
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
Legal Proceedings.
 
28
Item 1A.
Risk Factors.
28
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
28
Item 3.
Defaults Upon Senior Securities.
28
Item 4.
Submission of Matters to a Vote of Security Holders.
28
Item 5.
Other Information.
28
Item 6.
Exhibits.
28
 
SIGNATURES
 
 
29
 
EXHIBIT INDEX
 
 
30
 
 

 
Page 2 of 30

 

PART I, ITEM 1
               
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of September 30, 2008 and December 31, 2007
(in thousands, except share data)
               
     
(Unaudited)
       
     
September 30,
   
December 31,
 
     
2008
   
2007
 
ASSETS
             
Cash and due from banks
    $ 216,245     $ 196,083  
Money market and interest-bearing deposits
    41,338       26,924  
Federal funds sold
      233,760       129,365  
Cash and cash equivalents
    491,343       352,372  
Loans held for sale
      7,334       16,419  
Investment securities:
                 
   Available for sale, carried at market value
    18,085       14,119  
   Held for long-term investment, carried at
               
     amortized cost which approximates market value
    32,091       25,478  
Total investment securities
    50,176       39,597  
Portfolio loans:
                 
   Loans secured by real estate:
                 
    Commercial
      2,074,254       1,917,113  
    Residential (including multi-family)
      851,509       698,960  
    Construction, land development and other land
    813,420       852,595  
Total loans secured by real estate
    3,739,183       3,468,668  
   Commercial and other business-purpose loans
    832,669       768,473  
   Consumer
      58,122       48,041  
   Other
      32,298       29,519  
Total portfolio loans
    4,662,272       4,314,701  
   Less allowance for loan losses
      (97,585 )     (58,124 )
Net portfolio loans
    4,564,687       4,256,577  
Premises and equipment
      60,000       60,031  
Accrued interest income
      18,387       19,417  
Goodwill and other intangibles
      73,428       72,722  
Other assets
      161,992       84,628  
                   
            TOTAL ASSETS
    $ 5,427,347     $ 4,901,763  
                   
LIABILITIES AND STOCKHOLDERS' EQUITY
               
LIABILITIES:
                 
Deposits:
                 
   Noninterest-bearing
    $ 647,994     $ 671,688  
   Interest-bearing
      3,635,567       3,173,057  
Total deposits
    4,283,561       3,844,745  
Debt obligations:
                 
   Notes payable and short-term borrowings
    432,536       320,384  
   Subordinated debentures
      167,342       156,130  
Total debt obligations
    599,878       476,514  
Accrued interest on deposits and other liabilities
    30,096       35,161  
Total liabilities
    4,913,535       4,356,420  
                   
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
    160,704       156,198  
                   
STOCKHOLDERS' EQUITY:
                 
Common stock, no par value,  50,000,000 shares authorized;
               
   issued and outstanding:  2008 - 17,337,308 shares                
2007 - 17,316,568 shares
    273,644       272,208  
Retained earnings
      80,047       117,520  
Undistributed common stock held by employee-benefit trust
    (580 )     (586 )
Market value adjustment (net of tax effect) for
               
   investment securities available for sale (accumulated
               
   other comprehensive income)
      (3 )     3  
Total stockholders' equity
    353,108       389,145  
                   
            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 5,427,347     $ 4,901,763  
                   
See notes to condensed consolidated financial statements.
               

 
Page 3 of 30

 

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months and Nine Months Ended September 30, 2008 and 2007
(in thousands, except per share data)
     
 
Three Month Period
   
Nine Month Period
 
2008
   
2007
   
2008
   
2007
Interest income:
                     
   Portfolio loans (including fees)
  $ 73,328     $ 81,117     $ 224,897     $ 231,819
   Loans held for sale
    145       429       681       1,765
   Taxable investment securities
    154       188       389       589
   Federal funds sold
    1,259       2,916       3,480       8,569
   Other
    610       386       1,689       1,387
Total interest income
    75,496       85,036       231,136       244,129
Interest expense:
                             
   Deposits
    27,149       32,359       84,826       90,955
   Debt obligations and other
    7,308       6,009       21,144       16,283
Total interest expense
    34,457       38,368       105,970       107,238
Net interest income
    41,039       46,668       125,166       136,891
Provision for loan losses
    53,810       7,890       71,787       15,812
Net interest income (deficiency) after
                       
                                   provision for loan losses
    (12,771 )     38,778       53,379       121,079
Noninterest income:
                             
   Service charges on deposit accounts
    1,526       1,232       4,316       3,524
   Trust and wealth-management revenue
    1,791       1,371       4,999       3,525
   Fees from origination of non-portfolio residential
                             
     mortgage loans
    926       1,142       2,910       3,754
   Gain on sales of government-guaranteed loans
    608       946       1,831       2,296
   Gain on sales of other non-portfolio commercial loans
    207       371       867       1,000
   Realized gains on sale of investment securities
                             
     available for sale
    5       -       50       -
   Other
    1,888       2,049       5,020       4,440
Total noninterest income
    6,951       7,111       19,993       18,539
Noninterest expense:
                             
   Salaries and employee benefits
    29,319       27,816       82,597       80,325
   Occupancy
    4,968       3,831       13,872       10,880
   Equipment rent, depreciation and maintenance
    3,821       2,239       9,695       7,471
   Other
    15,684       10,588       40,221       29,835
Total noninterest expense
    53,792       44,474       146,385       128,511
Income (loss) before income taxes
                       
                                   (benefit) and minority interest
    (59,612 )     1,415       (73,013 )     11,107
Income taxes (benefit)
    (20,732 )     586       (25,428 )     4,696
Income (loss) before minority interest
    (38,880 )     829       (47,585 )     6,411
Minority interest in net losses of consolidated subsidiaries
    6,385       5,145       17,904       12,132
                               
      NET INCOME (LOSS)
  $ (32,495 )   $ 5,974     $ (29,681 )   $ 18,543
                               
      NET INCOME (LOSS) PER SHARE -- Note E:
                             
Basic
  $ (1.90 )   $ 0.35     $ (1.73 )   $ 1.10
                               
Diluted
  $ (1.90 )   $ 0.35     $ (1.73 )   $ 1.08
                               
See notes to condensed consolidated financial statements.
                       


 
Page 4 of 30

 

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2008 and 2007
(in thousands, except share data)
               
Undistributed
   
Accumulated
       
               
Common Stock
   
Other
       
 
Common
   
Retained
   
Held by Employee-
   
Comprehensive
       
 
Stock
   
Earnings
   
Benefit Trust
   
Income (Loss)
   
Total
 
                               
Nine Months Ended September 30, 2007                                 
                             
                               
Balances at January 1, 2007
  $ 249,244     $ 112,779           $ (144 )   $ 361,879  
                                       
Issuance of 371,314 shares of common stock to acquire
                               
   minority interest in subsidiaries
    15,927                             15,927  
                                       
Issuance of 276,842 shares of common stock upon
                                     
   exercise of stock options
    4,757                             4,757  
                                       
Surrender of 37,392 shares of common stock to facilitate
                               
   exercise of stock options
    (1,098 )                           (1,098 )
                                       
Surrender of 18,814 shares of common stock to facilitate
                               
   vesting of  restricted stock
    (845 )                           (845 )
                                       
Issuance of 37,472 unvested shares of restricted common
                               
   stock, net of related unearned employee compensation
    --                             --  
                                       
Recognition of compensation expense relating to restricted
                               
   common stock and stock options
    1,290                             1,290  
                                       
Tax benefits from share-based payments
    1,671                             1,671  
                                       
Issuance of 24,506 shares to employee stock ownership plan
    1,132                             1,132  
                                       
Cash dividends paid ($0.75 per share)
            (12,867 )                   (12,867 )
                                       
Components of comprehensive income:
                                     
   Net income
            18,543                     18,543  
   Market value adjustment for investment securities
                                     
      available for sale (net of income tax effect)
                          77       77  
         Comprehensive income
                                  18,620  
                                       
    BALANCES AT SEPTEMBER 30, 2007
  $ 272,078     $ 118,455           $ (67 )   $ 390,466  
                                       
Nine Months Ended September 30, 2008                                 
                                     
                                       
Balances at January 1, 2008
  $ 272,208     $ 117,520     $ (586 )   $ 3     $ 389,145  
                                         
Issuance of 109,435 shares of common stock upon
                                 
   exercise of stock options
    1,960                               1,960  
                                         
Surrender of 93,964 shares of common stock to facilitate
                                 
   exercise of stock options
    (2,090 )                             (2,090 )
                                         
Surrender of 14,199 shares of common stock to facilitate
                                 
   vesting of restricted stock
    (286 )                             (286 )
                                         
Issuance of 31,790 unvested shares of restricted common
                                 
   stock, net of related unearned employee compensation
                                 
   and 12,322 forfeited shares
    --                               --  
                                         
Recognition of compensation expense relating to restricted
                                 
   common stock and stock options
    1,693                               1,693  
                                         
Tax benefits from share-based payments
    161                               161  
                                         
Transfer of 250 shares to employee stock ownership plan
    (2 )             6               4  
                                         
Cash dividends paid ($0.45 per share)
            (7,792 )                     (7,792 )
                                         
Components of comprehensive loss:
                                       
   Net loss
            (29,681 )                     (29,681 )
   Market value adjustment for investment securities
                                 
      available for sale (net of income tax effect)
                            (6 )     (6 )
         Comprehensive loss
                                    (29,687 )
                                         
    BALANCES AT SEPTEMBER 30, 2008
  $ 273,644     $ 80,047     $ (580 )   $ (3 )   $ 353,108  
                                         
                                         
See notes to condensed consolidated financial statements.
                                 

 
Page 5 of 30

 

CAPITOL BANCORP LTD.
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
For the Nine Months Ended September 30, 2008 and 2007
 
(in thousands)
 
             
   
2008
   
2007
 
             
OPERATING ACTIVITIES
           
  Net income (loss)
  $ (29,681 )   $ 18,543  
  Adjustments to reconcile net income (loss) to net
               
    cash provided (used) by operating activities:
               
      Provision for loan losses
    71,787       15,812  
      Depreciation of premises and equipment
    8,433       6,641  
      Amortization of intangibles
    376       201  
      Net amortization (accretion) of investment security
               
 premiums (discounts)
    (1 )     4  
      Loss (gain) on sale of premises and equipment
    158       (118 )
      Minority interest in net losses of consolidated subsidiaries
    (17,904 )     (12,132 )
      Share-based compensation expense
    1,693       1,290  
  Originations and purchases of loans held for sale
    (170,646 )     (418,857 )
  Proceeds from sales of loans held for sale
    179,731       427,470  
  Increase in accrued interest income and other assets
    (76,153 )     (16,631 )
  Increase (decrease) in accrued interest expense on deposits
         
     and other liabilities
    (5,065 )     3,783  
                 
NET CASH PROVIDED (USED) BY OPERATING
         
                   ACTIVITIES
    (37,272 )     26,006  
                 
                 
INVESTING ACTIVITIES
               
  Proceeds from sales of investment securities available for sale
    974       287  
  Proceeds from calls, prepayments and maturities of investment
         
     securities
    14,435       7,731  
  Purchases of investment securities
    (27,171 )     (6,797 )
  Net increase in portfolio loans
    (379,897 )     (550,081 )
  Proceeds from sales of premises and equipment
    167       396  
  Purchases of premises and equipment
    (8,727 )     (10,426 )
                 
                NET CASH USED BY INVESTING ACTIVITIES
    (400,219 )     (558,890 )
                 
                 
FINANCING ACTIVITIES
               
  Net increase (decrease) in demand deposits, NOW accounts
               
     and savings accounts
    (79,524 )     184,655  
  Net increase in certificates of deposit
    518,340       230,810  
  Net borrowings from debt obligations
    112,152       68,731  
  Net proceeds from issuance of subordinated debentures
    11,131       55,000  
  Resources provided by minority interest
    22,410       36,115  
  Net proceeds from issuance of common stock
    1,960       4,757  
  Surrender of common stock to facilitate exercise of
               
     stock options
    (2,090 )     (1,098 )
  Surrender of common stock to facilitate vesting of
               
     restricted stock
    (286 )     (845 )
  Tax benefit from share-based payments
    161       1,671  
  Cash dividends paid
    (7,792 )     (12,867 )
                 
                NET CASH PROVIDED BY FINANCING ACTIVITIES
    576,462       566,929  
                 
                INCREASE IN CASH AND CASH EQUIVALENTS
    138,971       34,045  
                 
Cash and cash equivalents at beginning of period
    352,372       348,870  
                 
                 
                CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 491,343     $ 382,915  
                 
                 
See notes to condensed consolidated financial statements.
               

 
Page 6 of 30

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Ltd. (Capitol or the Corporation) 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, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008.

The consolidated balance sheet as of December 31, 2007 was derived from audited consolidated financial statements as of that date.  Certain 2007 amounts have been reclassified to conform to the 2008 presentation.

Note B – Implementation of New Accounting Standards

In June 2007, the Financial Accounting Standards Board (FASB) ratified an Emerging Issues Task Force (EITF) consensus regarding Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.  This new guidance became effective for Capitol on January 1, 2008 and did not have a material effect on Capitol's consolidated financial statements upon implementation.

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.  Statement No. 159 is applied prospectively and, while effective January 1, 2008, Capitol has not elected the fair value option through September 30, 2008.  Statement No. 157 does not require any new fair value measurements and was initially effective for the Corporation beginning January 1, 2008.  Capitol's disclosures relating to SFAS No. 157 are set forth in Note C.  In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2.  FSP FAS 157-2 defers the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis.  The effect of these new standards' adoption was not material to Capitol's consolidated financial statements in 2008.

On October 10, 2008, the FASB issued FSP FAS 157-3 to clarify the application of fair value measurements to the fair value of a financial asset when the market for that asset is not active.  This clarifying guidance became effective upon issuance, including prior periods for which financial statements had not been issued, such as the period ended September 30, 2008 for Capitol.  This new guidance did not have a material effect on Capitol's September 30, 2008 consolidated financial statements.

Note C – Fair Value

As discussed in Note B, SFAS No. 157 was implemented by Capitol effective January 1, 2008.  SFAS No. 157 establishes a hierarchy that prioritizes the use of fair value inputs used in valuation methodologies into the following three levels:

 
Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.


 
Page 7 of 30

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued
 
Note C – Fair Value – Continued
 
 
Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable
market data by correlation or other means.

 
Level 3:  Significant unobservable inputs that reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing
an asset or liability.

The following is a description of Capitol's valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:

 
Investment securities available for sale:  Securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based on quoted prices,
when available.  If quoted prices are not available, fair values are measured using independent pricing models.  Level 1 securities include those traded on an active
exchange as well as U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active over-the-counter
markets.  Level 2 securities include municipal government securities.

 
Mortgage loans held for sale:  Mortgage loans held for sale are carried at the lower of cost or fair value and are measured on a nonrecurring basis.  Mortgage loans
held for sale written down to fair value are included in the table below (none at September 30, 2008).  Fair value is based on independent quoted market prices, where
applicable, or the prices for other mortgage whole loans with similar characteristics.

 
Loans:  The Corporation does not record loans at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments to collateral
dependent loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of the collateral.

The balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 were as follows (in $1,000s):

   
 
 
Total
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
Other
Observable Inputs
(Level 2)
 
                   
Securities available for sale
  $ 18,085     $ 17,306     $ 779  

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2008 were as follows (in $1,000s):

   
 
 
Total
   
Significant
Other
Observable Inputs
(Level 2)
   
 
Total Gains
(Losses)
 
                   
Impaired loans (1)
  $ 98,916     $ 98,916     $ (7,574 )

(1)  
  Represents carrying value and related write-downs for which adjustments are based on the appraised value of the collateral.


 
Page 8 of 30

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note C – Fair Value – Continued
 
Capitol will apply the fair value measurement and disclosure provisions of SFAS No. 157 effective January 1, 2009 to nonfinancial assets and liabilities measured on a nonrecurring basis.  The Corporation measures the fair value of the following on a nonrecurring basis:  (1) long-lived assets, (2) foreclosed assets, (3) the reporting unit under step one of its goodwill impairment test and (4) indefinite lived assets.

Note D – Stock Options

Stock option activity for the interim 2008 period is summarized as follows:

   
Number of
Stock Options
Outstanding
   
Exercise
Price
Range
   
Weighted
Average
Exercise
Price
                 
Outstanding at January 1
    2,460,082     $
13.50  to $  46.20
    $ 27.85
Granted
    52,360      
20.12  to     20.12
      20.12
Exercised
    (108,935 )    
15.52  to     20.90
      17.94
Cancelled or expired
     (14,413 )              
                       
Outstanding at September 30
    2,389,094     $
13.50  to $  46.20
    $ 28.20

Stock options were granted in the first nine months of 2007 and 2008, with an aggregate fair value approximating $1,103,000 and $255,000, respectively.  Stock options granted in the interim 2008 period have a vesting date of December 31, 2008, and the stock options granted in the interim 2007 period (168,720) have varying vesting dates from December 31, 2007 through August 2010.  Each stock option expires seven years from date of grant.  Share-based compensation expense relating to stock options for the nine months ended September 30, 2008 and 2007 approximated $565,000 and $116,000, respectively.

As of September 30, 2008, stock options outstanding had a weighted average remaining contractual life of 2.82 years.  The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value as of September 30, 2008:

       
Weighted Average
   
Exercise Price
Range
 
Number
Outstanding
 
Exercise
Price
 
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
                 
$
10.00 to 14.99
    2,866   $
13.50
 
     0.25 years
  $ 17,167
$
15.00 to 19.99
    153,235    
16.66
 
     1.78 years
    433,655
$
20.00 to 24.99
    584,956    
21.67
 
     3.04 years
    0
$
25.00 to 29.99
    585,415    
27.09
 
     1.90 years
    0
$
30.00 to 34.99
    695,115    
32.10
 
     2.94 years
    0
35.00 or more
     367,507    
37.92
 
     4.17 years
    0
                         
Total outstanding
    2,389,094             $ 450,822




 
Page 9 of 30

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note E – Net Income (Loss) Per Share

The computations of basic and diluted earnings (loss) per share were based on the following (in 1,000s) for the periods ended September 30:

   
Three Month Period
   
Nine Month Period
   
2008
   
2007
   
2008
   
2007
                       
Numerator—net income (loss) for the period
  $ (32,495 )   $ 5,974     $ (29,681 )   $ 18,543
                               
Denominator:
                             
Weighted average number of shares
outstanding, excluding unvested
restricted shares (denominator for basic
earnings per share)
         17,145            17,096            17,144            16,919
                               
Effect of dilutive securities:
                             
Unvested restricted shares
    --       --       --       11
Stock options
    --       102       --       266
Total effect of dilutive securities
    --       102       --       277
                               
Denominator for diluted earnings per share—
                             
Weighted average number of shares and
potential dilution
     17,145        17,198        17,144        17,196
                               
Number of antidilutive stock options excluded
from diluted earnings per share computation
     2,389        1,650        2,389        368

Note F – New Banks and Other Development Activities

Capitol opened four de novo banks during the nine months ended September 30, 2008.  Adams Dairy Bank, located in Blue Springs, Missouri, opened in January, Mountain View Bank of Commerce, located in Westminster, Colorado, opened in February, Colonia Bank, located in Phoenix, Arizona, opened in April and Pisgah Community Bank, located in Asheville, North Carolina, opened in May.  Each is majority owned by bank-development subsidiaries controlled by Capitol.

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, regulatory approval and other factors, although the timing of such additional banking units, if any, is uncertain.  Future new banks and/or additions of other operating units could be either wholly-owned, majority-owned or otherwise controlled by Capitol.

Note G – Proposed Acquisition

In March 2008, Capitol announced the formation of a joint venture to acquire 24% of the common stock of Forethought Federal Savings Bank (Forethought), located in Batesville, Indiana, for cash consideration of approximately $2.3 million.  Forethought is engaged in providing trust-related, pre-need funeral planning products and services to customers in 28 states.  The proposed acquisition is subject to regulatory approval.


 
Page 10 of 30

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note H – Impact of New Accounting Standards

In December 2007, the FASB issued Statement No. 141(R), Business Combinations, to further enhance the accounting and financial reporting related to business combinations.  Statement No. 141(R) establishes principles and requirements for how the acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase, (3) requires that acquisition-related and restructuring costs be recognized separately from the acquisition, generally charged to expense when incurred and (4) determines information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  Statement No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009.  The effects of the Corporation's adoption of Statement No. 141(R) will depend upon the extent and magnitude of acquisitions after December 31, 2008.

Also in December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, to create accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  Statement No. 160 establishes accounting and reporting standards that require (1) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent's equity, (2) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income, (3) changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently, (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be initially measured at fair value and (5) entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  Statement No. 160 applies to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and early adoption is prohibited.  Management has not completed its review of this new guidance.

In March 2008 the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.  This new guidance revises the presentation and disclosure of derivatives and hedging activities and will be effective for Capitol on January 1, 2009.  Although management has not completed its review of the new standard, implementation is not expected to have a material impact on Capitol's consolidated financial statements.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, to clarify the sources of accounting principles used in the preparation of financial statements in the United States.  This new guidance is expected to become effective in 2008 and is not expected to have a material effect on Capitol's consolidated financial statements upon implementation.

The FASB has also recently issued several proposals to amend, supersede or interpret existing accounting standards which may impact Capitol's financial statements at a later date, such as a proposed amendment to Statement No. 128, Earnings per Share, among other things.  Capitol's management has not completed its analysis of such 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.

 
Page 11 of 30

 

PART I, ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Financial Condition

Total assets approximated $5.4 billion at September 30, 2008, an increase of $526 million from the December 31, 2007 level of $4.9 billion.  The balance sheet includes Capitol and its consolidated subsidiaries (in thousands):

   
Total Assets
   
September 30, 2008
   
December 31, 2007
Arizona Region:
         
Arrowhead Community Bank
  $ 84,613     $ 89,060
Asian Bank of Arizona
    37,040       25,017
Bank of Tucson
    176,684       187,468
Camelback Community Bank
    97,816       84,671
Colonia Bank(3)
    9,268        
Mesa Bank
    226,343       217,861
Southern Arizona Community Bank
    90,419       85,158
Sunrise Bank of Albuquerque
    78,857       71,726
Sunrise Bank of Arizona
    120,671       116,245
Valley First Community Bank
    72,371       77,306
Yuma Community Bank
    74,458       78,489
Arizona Region Total
    1,068,540       1,033,001
               
California Region:
             
Bank of Escondido
    99,031       89,557
Bank of Feather River
    24,509       17,283
Bank of San Francisco
    59,887       68,902
Bank of Santa Barbara
    66,253       58,738
Napa Community Bank
    144,472       131,457
Point Loma Community Bank
    62,231       56,428
Sunrise Bank of San Diego
    87,344       81,905
Sunrise Community Bank
    34,245       21,113
California Region Total
    577,972       525,383
               
Colorado Region:
             
Fort Collins Commerce Bank
    75,501       61,083
Larimer Bank of Commerce
    79,613       51,906
Loveland Bank of Commerce
    31,994       15,941
Mountain View Bank of Commerce(2)
    30,339        
Colorado Region Total
    217,447       128,930
               
Great Lakes Region:
             
Ann Arbor Commerce Bank
    366,383       362,429
Bank of Auburn Hills
    45,127       44,767