Capitol Bancorp 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the transition period from ________________ to ________________
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 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.
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.
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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.
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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:
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Note C – Fair Value – Continued
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:
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):
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):
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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:
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:
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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:
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.
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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.
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PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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):