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 2010

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 March 31, 2010
 
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
   
Fourth Floor
   
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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at April 30, 2010
Common Stock, No par value
 
21,426,852 shares

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   £
No   £

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

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

 
Page 1 of 43

 

INDEX

PART I.                      FINANCIAL INFORMATION

Forward-Looking Statements
Some statements contained in this document, including consolidated financial statements of Capitol Bancorp Limited (Capitol or the Corporation), 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," "could," "believe," "may," "might," 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 and access to 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) availability of funds under the U.S. Treasury's Capital Assistance Program and Capital Purchase Program, (xii) changes in management, (xiii) Capitol's proposed spin-off of Michigan Commerce Bancorp Limited; (xiv) consummation of pending sales of certain bank subsidiaries, (xv) completion of Capitol's selective bank divestiture activities, (xvi) other risks detailed in Capitol's other filings with the Securities and Exchange Commission (SEC), and (xvii) the following, among others:

·  Management's ability to effectively manage interest rate risk and the impact of interest rates, in general, on the volatility of Capitol's net interest income;

·  The effect of the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, the implementation by the Department of the U.S. Treasury and federal banking regulators of a number of programs to address capital and liquidity issues within the banking system and additional programs that may apply to Capitol in the future, all of which may have significant effects on Capitol and the financial services industry;

·  The decline in commercial and residential real estate values and sales volume and the likely potential for continuing illiquidity in the real estate market;

·  The risks associated with the high concentration of commercial real estate loans within Capitol's portfolio;

·  The uncertainties in estimating the fair value of developed real estate and undeveloped land relating to collateral-dependent loans and other real estate owned in light of declining demand for such assets, falling prices and continuing illiquidity in the real estate market;

·  Negative developments and disruptions in the credit and lending markets, including the impact of the ongoing credit crisis on Capitol's business and on the businesses of its customers as well as other banks and lending institutions with which Capitol has commercial relationships;

·  A continuation of unprecedented volatility in the capital markets;

·  The risks associated with implementing Capitol's business strategy, including its ability to preserve and access sufficient capital to execute its strategy;

·  Rising unemployment and its impact on Capitol's customers' savings rates and their ability to service debt obligations;

·  Fluctuations in the value of Capitol's investment securities;

·  The ability to attract and retain senior management experienced in banking and financial services;

 
Page 2 of 43

 

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

·  The sufficiency of the allowance for loan losses to absorb the amount of actual losses inherent within the loan portfolio;

·  Capitol's ability to adapt successfully to technological changes to compete effectively in the marketplace;

·  Credit risks and risks from concentrations (by geographic area and by industry) within the Bank's loan portfolio and individual large loans;

·  The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in Capitol's market or elsewhere or providing similar services;

·  The failure of assumptions underlying the establishment of the allowance for loan losses and estimation of values of collateral or cash flow projections and various financial assets and liabilities;

·  Volatility of rate sensitive deposits;

·  Operational risks, including data processing system failures or fraud;

·  Liquidity risks;

·  The ability to successfully acquire deposits for funding and the pricing thereof;

·  The ability to successfully execute strategies to increase noninterest income;

·  Changes in the economic environment, competition or other factors that may influence loan demand and repayment, deposit inflows and outflows, and the quality of the loan portfolio and loan and deposit pricing;

·  The impact from liabilities arising from legal or administrative proceedings on the financial condition of Capitol;

·  The current prohibition of Capitol's subsidiary banks to pay dividends to Capitol without prior written authorization from regulatory agencies;

·  The current prohibition of Capitol's payment of cash dividends on its common stock without prior written regulatory authorization;

·  Administrative or enforcement actions of banking regulators in connection with any material failure of Capitol or its subsidiary banks to comply with banking laws, rules or regulations or formal agreements with regulatory agencies;

·  Capitol's compliance with the terms of its written agreement with the Federal Reserve Bank, amendments thereto or subsequent regulatory agreements;

·  The continued availability of credit facilities provided by Federal Home Loan Banks to Capitol's banking subsidiaries;

·  The uncertainties of future depositor activity regarding potentially uninsured deposits upon expiration of the Federal Deposit Insurance Corporation's (FDIC) Transaction Account Guarantee Program;

·  The possibility of the FDIC assessing Capitol's bank subsidiaries for any cross-guaranty liability;

·  Governmental monetary and fiscal policies, as well as legislative and regulatory changes, that may result in the imposition of costs and constraints on Capitol through higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital requirements, and operational limitations;

 
Page 3 of 43

 

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

·  Changes in general economic or industry conditions, nationally or in the communities in which Capitol conducts business;

·  Changes in legislation or regulatory and accounting principles, policies, or guidelines affecting the business conducted by Capitol;

·  The impact of possible future goodwill and other material impairment charges;

·  Acts of war or terrorism;

·  Capitol's ability to manage fluctuations in the value of its assets and liabilities and maintain sufficient capital and liquidity to support its operations;

·  The concentration of Capitol's nonperforming assets by loan type in certain geographic regions and with affiliated borrowing groups;

·  The risk of additional future losses if the proceeds Capitol receives upon the liquidation of assets are less than the carrying value of such assets;

·  Restrictions or limitations on access to funds from subsidiaries and potential obligations to contribute additional capital to Capitol's subsidiaries, which may restrict its ability to make payments on its obligations;

·  The availability and cost of capital and liquidity on favorable terms, if at all;

·  Changes in accounting standards or applications and determinations made thereunder;

·  The risk that the realization of deferred tax assets and recoverable income taxes may extend beyond 2010;

·  The risk that Capitol will not be able to complete its various proposed mergers and consolidations of certain of its subsidiary banks or, if completed, realize the anticipated benefits of the proposed mergers and/or consolidations;

·  The impact on Capitol's financial results, reputation and business if it is unable to comply with all applicable federal and state regulations and applicable formal agreements, consent orders, other regulatory actions and any related capital requirements;

·  The costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto;

·  The risk that, if economic conditions worsen or regulatory capital requirements are modified, Capitol may be required to seek additional liquidity and/or capital from external sources, if available;

·  The risk that Capitol could have an "ownership change" under Section 382 of the Internal Revenue Code, which could impair its ability to timely and fully utilize its net operating losses for tax purposes and so-called built-in losses that may exist if such an "ownership change" occurs;

·  Other factors and other information contained in this document and in other reports and filings of Capitol with the SEC under the Exchange Act, including, without limitation, under the caption "Risk Factors"; and

·  Other economic, competitive, governmental, regulatory, and technical factors affecting Capitol's operations, products, services, and prices.


 
Page 4 of 43

 

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

For a discussion of these and other risks that may cause actual results to differ from expectations, you should refer to the risk factors and other information in this Form 10-Q and Capitol's other periodic filings, including its 2009 Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, that Capitol files from time to time with the SEC.  All written or oral forward-looking statements that are made by or are attributable to Capitol are expressly qualified by this cautionary notice.

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 – March 31, 2010 and December 31, 2009.
6
 
Condensed consolidated statements of operations – Three months ended March 31,
2010 and 2009.
7
 
Condensed consolidated statements of changes in equity – Three months ended
March 31, 2010 and 2009.
8
 
Condensed consolidated statements of cash flows – Three months ended March 31,
2010 and 2009.
9
 
Notes to condensed consolidated financial statements.
10
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
40
Item 4.
Controls and Procedures.
40
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
Legal Proceedings.
 
41
Item 1A.
Risk Factors.
41
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
41
Item 3.
Defaults Upon Senior Securities.
41
Item 4.
[Removed and Reserved.]
41
Item 5.
Other Information.
41
Item 6.
Exhibits.
41
 
SIGNATURES
 
 
42
 
EXHIBIT INDEX
 
 
43




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Page 5 of 43

 

PART I, ITEM 1
 
             
CAPITOL BANCORP LIMITED
 
Condensed Consolidated Balance Sheets
 
As of March 31, 2010 and December 31, 2009
 
(in $1,000s, except share data)
 
             
 
(Unaudited)
       
 
March 31,
   
December 31,
 
 
2010
   
2009
 
ASSETS
           
Cash and due from banks
  $ 100,898     $ 88,188  
Money market and interest-bearing deposits
    828,663       698,882  
Federal funds sold
    10,094       21,851  
Cash and cash equivalents     939,655       808,921  
Loans held for sale
    6,878       16,132  
Investment securities -- Note C:
               
   Available for sale, carried at fair value
    14,734       40,778  
   Held for long-term investment, carried at
               
     amortized cost which approximates fair value
    3,404       5,891  
Total investment securities     18,138       46,669  
Federal Home Loan Bank and Federal Reserve
               
  Bank stock (at cost) -- Note C
    24,552       24,674  
Portfolio loans:
               
   Loans secured by real estate:
               
    Commercial
    1,958,635       1,990,332  
    Residential (including multi-family)
    758,205       785,362  
    Construction, land development and other land
    472,064       509,474  
Total loans secured by real estate     3,188,904       3,285,168  
   Commercial and other business-purpose loans
    643,845       684,253  
   Consumer
    42,399       44,168  
   Other
    32,613       33,512  
Total portfolio loans     3,907,761       4,047,101  
   Less allowance for loan losses
    (152,405 )     (144,664 )
Net portfolio loans     3,755,356       3,902,437  
Premises and equipment
    46,328       48,386  
Accrued interest income
    14,516       15,585  
Goodwill
    66,104       66,126  
Other real estate owned
    110,015       111,820  
Recoverable income taxes
    42,774       43,763  
Other assets
    40,620       47,427  
                 
            TOTAL ASSETS
  $ 5,064,936     $ 5,131,940  
                 
LIABILITIES AND EQUITY
               
LIABILITIES:
               
Deposits:
               
   Noninterest-bearing
  $ 702,726     $ 679,100  
   Interest-bearing
    3,751,635       3,731,533  
Total deposits     4,454,361       4,410,633  
Debt obligations:
               
   Notes payable and other borrowings
    225,880       276,159  
   Subordinated debentures -- Note G
    167,478       167,441  
Total debt obligations     393,358       443,600  
Accrued interest on deposits and other liabilities
    41,837       44,101  
Total liabilities     4,889,556       4,898,334  
                 
EQUITY:
               
Capitol Bancorp Limited stockholders' equity -- Note E:
               
  Preferred stock, 20,000,000 shares authorized;
               
    none issued and outstanding
    --       --  
  Common stock, no par value,  50,000,000 shares authorized;
               
     issued and outstanding:    2010 - 18,927,501 shares                
                                                    2009 - 17,545,631 shares     281,251       277,707  
  Retained-earnings deficit
    (163,633 )     (115,751 )
  Undistributed common stock held by employee-benefit trust
    (558 )     (558 )
  Fair value adjustment (net of tax effect) for investment
               
     securities available for sale (accumulated other
               
     comprehensive income)
    107       (63 )
Total Capitol Bancorp Limited stockholders' equity
    117,167       161,335  
Noncontrolling interests in consolidated subsidiaries
    58,213       72,271  
Total equity     175,380       233,606  
                 
            TOTAL LIABILITIES AND EQUITY
  $ 5,064,936     $ 5,131,940  
                 
See notes to condensed consolidated financial statements.
               


 
Page 6 of 43

 

CAPITOL BANCORP LIMITED
 
Condensed Consolidated Statements of Operations (Unaudited)
 
For the Three Months Ended March 31, 2010 and 2009
 
(in $1,000s, except per share data)
 
   
 
 
   
2010
   
2009
 
Interest income:
           
  Portfolio loans (including fees)
  $ 56,550     $ 68,076  
  Loans held for sale
    99       217  
  Taxable investment securities
    228       152  
  Federal funds sold
    9       35  
  Other
    609       236  
                                Total interest income
    57,495       68,716  
Interest expense:
               
  Deposits
    16,229       24,872  
  Debt obligations and other
    4,804       6,387  
                                Total interest expense
    21,033       31,259  
                                Net interest income
    36,462       37,457  
Provision for loan losses
    50,100       33,916  
Net interest income (deficiency) after
         
                                   provision for loan losses
    (13,638 )     3,541  
Noninterest income:
               
  Service charges on deposit accounts
    1,239       1,502  
  Trust and wealth-management revenue
    1,152       1,388  
  Fees from origination of non-portfolio residential
               
     mortgage loans
    473       902  
  Gain on sales of government-guaranteed loans
    462       240  
  Gain on debt extinguishment
    1,255          
  Realized gain on sales of investment securities available
               
     for sale
    14       1  
  Other
    2,792       924  
Total noninterest income
    7,387       4,957  
Noninterest expense:
               
  Salaries and employee benefits
    21,568       29,053  
  Occupancy
    4,586       4,891  
  Equipment rent, depreciation and maintenance
    3,009       3,433  
  Costs associated with foreclosed properties and other
               
     real estate owned
    12,085       4,359  
  FDIC insurance premiums and other regulatory fees
    4,570       2,114  
  Other
    9,759       8,097  
Total noninterest expense
    55,577       51,947  
Loss before income taxes (benefit)
    (61,828 )     (43,449 )
Income taxes (benefit)
    112       (15,542 )
NET LOSS
    (61,940 )     (27,907 )
Less net losses attributable to noncontrolling interests
    14,058       7,233  
                 
      NET LOSS ATTRIBUTABLE TO CAPITOL
               
         BANCORP LIMITED
  $ (47,882 )   $ (20,674 )
                 
      NET LOSS PER SHARE ATTRIBUTABLE
               
         TO CAPITOL BANCORP LIMITED -- Note F
  $ (2.75 )   $ (1.20 )
                 
See notes to condensed consolidated financial statements.
               
                 


 
Page 7 of 43

 

CAPITOL BANCORP LIMITED
 
Condensed Consolidated Statements of Changes in Equity (Unaudited)
 
For the Three Months Ended March 31, 2010 and 2009
 
(in $1,000s, except share and per share data)
 
                                           
                                           
 
Capitol Bancorp Limited Stockholders' Equity
             
                Undistributed          
Total Capitol
   
 
       
              Common Stock     Accumulated    
Bancorp
   
Noncontrolling
       
          Retained-     Held by     Other     Limited    
Interests in
       
 
Common
   
Earnings
    Employee-     Comprehensive     Stockholders'    
Consolidated
   
Total
 
 
Stock
   
(Deficit)
   
Benefit Trust
    Income (Loss)    
Equity
   
Subsidiaries
   
Equity
 
                                           
Three Months Ended March 31, 2009                                       
 
                                     
                                           
Balances at January 1, 2009
  $ 274,018     $ 80,255     $ (569 )   $ 144     $ 353,848     $ 159,220     $ 513,068  
                                                         
Sale of subsidiary shares to noncontrolling interests
      27                       27       134       161  
                                                         
Surrender of 3,285 shares of common stock to facilitate
                                               
   vesting of restricted stock
    (19 )                             (19 )             (19 )
                                                         
Recognition of compensation expense relating to restricted
                                         
   common stock and stock options
    283                               283               283  
                                                         
Tax effect of share-based payments
    (104 )                             (104 )             (104 )
                                                         
Cash dividends paid ($0.05 per share)
            (864 )                     (864 )             (864 )
                                                         
Components of comprehensive loss:
                                                       
   Net loss
            (20,674 )                     (20,674 )     (7,233 )     (27,907 )
   Fair value adjustment for investment securities
                                                 
      available for sale (net of income tax effect)
                      (8 )     (8 )             (8 )
         Comprehensive loss
                                    (20,682 )             (27,915 )
                                                         
    BALANCES AT MARCH 31, 2009
  $ 274,178     $ 58,744     $ (569 )   $ 136     $ 332,489     $ 152,121     $ 484,610  
                                                         
                                                         
Three Months Ended March 31, 2010                                                                                               
                                                         
Balances at January 1, 2010
  $ 277,707     $ (115,751 )   $ (558 )   $ (63 )   $ 161,335     $ 72,271     $ 233,606  
                                                         
Issuance of 10,000 shares of common stock upon
                                                 
   exercise of stock options
    20                               20               20  
                                                         
Issuance of 1,374,000 shares of common stock for
                                               
   redemption of promissory notes
    3,325                               3,325               3,325  
                                                         
Surrender of 755 shares of common stock to facilitate
                                               
   vesting of restricted stock
    (2 )                             (2 )             (2 )
                                                         
Forfeiture of 1,375 unvested shares of restricted common
                                               
   stock, net of related unearned employee compensation
    --                               --               --  
                                                         
Recognition of compensation expense relating to restricted
                                         
   common stock and stock options -- Note E
    223                               223               223  
                                                         
Tax effect of share-based payments
    (22 )                             (22 )             (22 )
                                                         
Components of comprehensive loss:
                                                       
   Net loss
            (47,882 )                     (47,882 )     (14,058 )     (61,940 )
   Fair value adjustment for investment securities
                                                 
      available for sale (net of income tax effect)
                      170       170               170  
         Comprehensive loss
                                    (47,712 )             (61,770 )
                                                         
    BALANCES AT MARCH 31, 2010
  $ 281,251     $ (163,633 )   $ (558 )   $ 107     $ 117,167     $ 58,213     $ 175,380  
                                                         
                                                         
See notes to condensed consolidated financial statements.
                                               

 
Page 8 of 43

 

CAPITOL BANCORP LTD.
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
For the Three Months Ended March 31, 2010 and 2009
 
(in $1,000s)
 
             
   
2010
   
2009
 
             
OPERATING ACTIVITIES
           
  Net loss
  $ (61,940 )   $ (27,907 )
  Adjustments to reconcile net loss to net cash provided (used)
               
    by operating activities:
               
      Provision for loan losses
    50,100       33,916  
      Depreciation of premises and equipment
    2,199       2,965  
      Amortization of intangibles
    61       122  
      Net amortization (accretion) of investment security
               
 premiums (discounts)       266        (20
      Loss on sale of premises and equipment
    1       16  
      Gain on sales of government-guaranteed loans
    (462 )     (240 )
      Gain on debt extinguishment
    (1,255 )        
      Realized gain on sales of investment securities available
               
         for sale
    (14 )     (1 )
      Loss on sales of other real estate owned
    1,774       500  
      Write-down of other real estate owned
    8,620       3,880  
      Amortization of issuance costs of subordinated debentures
    37       37  
      Share-based compensation expense
    223       283  
      Deferred income tax credit
    (29,561 )        
      Valuation allowance for deferred income tax assets
    29,577          
  Originations and purchases of loans held for sale
    (29,344 )     (79,757 )
  Proceeds from sales of loans held for sale
    38,598       65,252  
  Decrease (increase) in accrued interest income and other assets
    8,720       (7,329 )
  Decrease in accrued interest expense on deposits and
               
     other liabilities
    (2,264 )     (3,254 )
                 
                NET CASH PROVIDED (USED) BY OPERATING
               
                   ACTIVITIES
    15,336       (11,537 )
                 
INVESTING ACTIVITIES
               
  Proceeds from sales of investment securities available for sale
    23,664          
  Proceeds from calls, prepayments and maturities of investment
               
     securities
    7,389       5,085  
  Purchases of investment securities
    (2,394 )     (5,884 )
  Net decrease (increase) in portfolio loans
    66,679       (10,132 )
  Proceeds from sales of government-guaranteed loans
    10,570       2,869  
  Proceeds from sales of premises and equipment
    112       29  
  Purchases of premises and equipment
    (254 )     (736 )
  Proceeds from sales of other real estate owned
    11,605       3,738  
                 
                NET CASH PROVIDED (USED) BY INVESTING
               
                   ACTIVITIES
    117,371       (5,031 )
                 
FINANCING ACTIVITIES
               
  Net increase in demand deposits, NOW accounts and savings accounts
    37,607       30,486  
  Net increase in certificates of deposit
    6,121       178,464  
  Net proceeds from (payments on) debt obligations
    56       (1,905 )
  Proceeds from Federal Home Loan Bank advances
    271,380       892,571  
  Payments on Federal Home Loan Bank advances
    (317,135 )     (945,171 )
  Net proceeds from issuance of common stock
    20          
  Tax effect of share-based payments
    (22 )     (104 )
  Cash dividends paid
            (864 )
                 
                NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
    (1,973 )     153,477  
                 
                INCREASE IN CASH AND CASH EQUIVALENTS
    130,734       136,909  
                 
Cash and cash equivalents at beginning of period
    808,921       624,366  
                 
                 
                CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 939,655     $ 761,275  
                 
Supplemental disclosures:
               
  Cash paid during the period for interest on deposits and debt obligations
  $ 21,387     $ 32,798  
  Transfers of loans to other real estate owned
    20,194       25,832  
  Surrender of common stock to facilitate exercise of stock options
               
     and vesting of restricted stock
    2       19  
                 
See notes to condensed consolidated financial statements.
               



 
Page 9 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Limited (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 accounting principles generally accepted in the United States of America.

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 period ended March 31, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

The consolidated balance sheet as of December 31, 2009 was derived from audited consolidated financial statements as of that date.  Certain 2009 amounts have been reclassified to conform to the 2010 presentation.

Note B – Implementation of New Accounting Standards

In December 2007, a new accounting standard was issued to create accounting and reporting requirements for noncontrolling interests in a subsidiary (when it is not wholly-owned) and for the deconsolidation of a subsidiary and became effective January 1, 2009.  In January 2010, an accounting standards update was issued clarifying the types of transactions that should be accounted for as a decrease in ownership of a subsidiary, which became effective for the Corporation on January 1, 2010 (with retrospective application to January 1, 2009) and did not have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

A new standard became effective January 1, 2009 clarifying the accounting for transfers of financial assets and repurchase financing transactions.  Subsequently, further guidance revised requirements for the presentation and disclosure of transfers of financial assets and the effects of a transfer on an entity's financial position, financial performance and cash flows along with placing limitations on portions of financial assets that are eligible for accounting recognition as a sale.  The guidance applies to transfers of financial assets occurring on or after January 1, 2010 and did not materially affect the Corporation's financial position or results of operations upon implementation.

In December 2009, an accounting standards update was issued to improve financial reporting by entities involved with variable interest entities.  This standards update replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity and it requires additional disclosures about a reporting entity's involvement in variable interest entities.  The guidance became effective for the Corporation on January 1, 2010 and did not have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

In January 2010, an accounting standards update regarding fair value measurements and disclosures was issued to require more robust disclosures about (1) different classes of assets and liabilities measured at fair value, (2) valuation techniques and inputs used, (3) the activity in Level 3 fair-value measurements, and (4) the transfers between Levels 1, 2, and 3 of fair-value estimates.  The new disclosures became effective for the Corporation beginning January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair-value measurements which become effective beginning January 1, 2011.  The required interim disclosures for 2010 are set forth in Note D.  Management does not expect this new guidance to have a material effect on the Corporation's condensed consolidated financial statements upon implementation in 2011 of the deferred disclosure requirements.


 
Page 10 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note B – Implementation of New Accounting Standards – Continued

In April 2010, an accounting standards update was issued clarifying that modifications of loans accounted for within a pool that have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. Loans not accounted for within pools continue to be subject to the troubled debt restructuring accounting provisions.  This new guidance is effective for modifications of loans accounted for within pools occurring after July 1, 2010 and management does not expect it to have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

Note C – Investment Securities

Investments in Federal Home Loan Bank and Federal Reserve Bank stock are combined and classified separately from investment securities in the condensed consolidated balance sheet, are restricted and may only be resold to, or redeemed by, the issuer.

Investment securities consisted of the following (in $1,000s):

   
March 31, 2010
   
December 31, 2009
   
Amortized
Cost
   
Estimated
Fair
Value
   
Amortized
Cost
   
Estimated
Fair
Value
Available for sale:
                     
United States treasury
  $ 505     $ 504     $ 1,500     $ 1,500
United States government agency
    9,305       9,321       13,956       13,941
Mortgage-backed
    4,212       4,349       24,690       24,598
Municipalities
    551       560       727       739
      14,573       14,734       40,873       40,778
Held for long-term investment:
                             
Capitol Development Bancorp
Limited III
     637        637        672        672
Corporate
    2,665       2,665       5,119       5,119
Other
    102       102       100       100
      3,404       3,404       5,891       5,891
                               
    $ 17,977     $ 18,138     $ 46,764     $ 46,669

Securities held for long-term investment are not subject to the classification and accounting rules relating to most typical investments.  In addition, Capitol's corporate investments consist mostly of equity-method investments in non-public enterprises which, accordingly, are outside of the scope of accounting rules for most typical investments which often require use of estimated fair value.  Those entities, which are primarily involved in making equity investments in small businesses, use the fair value method of accounting in valuing their investment portfolios.  Notwithstanding that these investments are outside the scope of such accounting rules, they are included in Capitol's investment securities for financial reporting purposes to summarize all such investment securities together for reporting purposes.




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Page 11 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities—Continued

Gross unrealized gains and losses on investment securities available for sale were as follows (in $1,000s):

   
March 31, 2010
   
December 31, 2009
   
Gains
   
Losses
   
Gains
   
Losses
                       
United States treasury
  $ --     $ 1            
United States government agency
    15       --     $ 7     $ 22
Mortgage-backed
    138       --       122       214
Municipalities
    9       --       12       --
                               
    $ 162     $ 1     $ 141     $ 236

The age of gross unrealized losses and carrying value (at estimated fair value) of securities available for sale are summarized below (in $1,000s):

   
March 31, 2010
   
December 31, 2009
   
Unrealized
Loss
   
Carrying
Value
   
Unrealized
Loss
   
Carrying
Value
                       
One year or less:
                     
United States treasury
  $ 1     $ 504            
United States government agency
    --       --     $ 22     $ 8,979
Mortgage-backed
    --       --       214       19,879
                               
    $ 1     $ 504     $ 236     $ 28,858

Management does not believe any individual unrealized loss as of March 31, 2010 represents an other-than-temporary loss (primarily due to such amounts being attributable to changes in interest rates).  Further, it does not intend to sell such securities and believes it is unlikely a sale would become required before the amortized cost can be recovered.

Gross realized gains and losses from sales and maturities of investment securities were insignificant for the periods presented.

Scheduled maturities of investment securities held as of March 31, 2010 were as follows (in $1,000s):

   
Amortized
Cost
   
Estimated
Fair Value
           
Due in one year or less
  $ 5,046     $ 5,051
After one year, through five years
    5,082       5,094
After five years, through ten years
    1,186       1,215
After ten years
    3,259       3,374
Securities held for long-term
             
     investment without stated
             
     maturities
    3,404       3,404
               
    $ 17,977     $ 18,138



 
Page 12 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Fair Value

The following is a description of Capitol's valuation methodologies used to measure and disclose the fair values of its 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 (Level 1).  If quoted prices are not available, fair values are measured using independent pricing models (Level 2).

 
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.  There were no mortgage loans held for sale written down to fair value at March 31, 2010.  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, current appraised value of the collateral or other estimates of fair value.

 
Other real estate owned:  At the time of foreclosure, foreclosed properties are adjusted to estimated fair value less estimated costs to sell upon transfer from portfolio loans to other real estate owned, establishing a new accounting basis.  The Corporation subsequently adjusts estimated fair value of other real estate owned on a nonrecurring basis to reflect partial write-downs based on the observable market price or current appraisal data.

Long-lived and indefinite lived assets:  The Corporation does not record long-lived or indefinite lived assets at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments to a long-lived or indefinite asset are recorded to reflect partial write-downs based on the observable market price or other estimate of fair value.

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 were as follows (in $1,000s):

   
 
Total
   
Significant Other
Observable Inputs
(Level 2)
           
Investment securities available for sale:
         
United States treasury
  $ 504     $ 504
United States government agency
    9,321       9,321
Mortgage-backed
    4,349       4,349
Municipalities
     560        560
               
    $ 14,734     $ 14,734

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 were as follows (in $1,000s):

   
 
Total
   
Significant Other
Observable Inputs
(Level 2)
           
Investment securities available for sale:
         
United States treasury
  $ 1,500     $ 1,500
United States government agency
    13,941       13,941
Mortgage-backed
    24,598       24,598
Municipalities
     739        739
               
    $ 40,778     $ 40,778

 
Page 13 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Fair Value – Continued

Assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2010 were as follows (in $1,000s):

   
 
 
Total
   
Significant
Unobservable
Inputs
(Level 3)
           
Impaired loans (1)
  $ 151,164     $ 151,164
               
Other real estate owned (1)
  $ 110,015     $ 110,015

(1)  
Represents carrying value based on the appraised value of the applicable collateral or foreclosed property
or other estimates of fair value.

Assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2009 were as follows (in $1,000s):

   
 
 
Total
   
Significant
Unobservable
Inputs
(Level 3)
           
Impaired loans (1)
  $ 138,982     $ 138,982
               
Other real estate owned (1)
  $ 111,820     $ 111,820

(1)  
Represents carrying value based on the appraised value of the applicable collateral or other estimates of fair
value.

Many of Capitol's collateral-dependent impaired loans and other real estate owned are located in severely depressed real estate markets.  In those markets, valuations based upon appraisal data are imprecise in estimating fair value because comparable sale transactions may be infrequent, not orderly and/or distressed or forced.

Updated appraisals are generally obtained when it has been determined that a collateral-dependent loan has become impaired or when it is likely a real-estate loan is likely to be foreclosed.  Adjustments to a loan's carrying value (or requirements for the allowance for loan losses) are made, when appropriate, after review of the appraisal data or subsequently if market conditions significantly decline further.  The timing of the recognition of a collateral-dependent loan as nonperforming is dependent on several factors, including the performance of the loan, payment history and/or the receipt of updated borrower financial information.

When borrower performance has deteriorated (for example, sales or leasing has not occurred as expected, the borrower has become late on the required payments or financial information received indicates adverse financial trends), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered.  In the period between a loan being recognized as impaired and receipt of an updated appraisal, the loan will be included within loss contingency pools.  Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, the loan will be further evaluated for appropriate charge-down.  Generally, negative differences between appraised value, less the estimated cost to sell, and the carrying value of the loan are charged to the allowance for loan losses when the appraisal has been received and reviewed.  Occasionally, additional amounts may be included in the estimate of requirements for the allowance for loan losses if there are pending circumstances which may adversely impact the fair value estimate.  Internally-developed evaluations may be used when the amount of the loan is less than $250,000.  Internal evaluations may also be used when the most recent appraisal date is within a year and economic conditions have had corrections or deterioration.  Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

 
Page 14 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Fair Value – Continued

Comparative carrying values and estimated fair values of financial instruments based upon the accounting guidance set forth in ASC 825-10 (formerly FAS 107) were as follows (in $1,000s):

    March 31, 2010     December 31, 2009  
   
Carrying
Value
   
Estimated
Fair Value
   
Carrying
Value
   
Estimated
Fair Value
 
Financial assets:
                       
Cash and cash equivalents
  $ 939,655     $ 939,655     $ 808,921     $ 808,921  
Loans held for sale
    6,878       6,878       16,132       16,132  
Investment securities:
                               
Available for sale
    14,734       14,734       40,778       40,778  
Held for long-term investment
    3,404       3,404       5,891       5,891  
      18,138       18,138       46,669       46,669  
Federal Home Loan Bank and Federal Reserve
Bank stock
    24,552       24,552       24,674       24,674  
Portfolio loans:
                               
Loans secured by real estate:
                               
Commercial
    1,958,635