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/A
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q_a.htm



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

FORM 10-Q/A
Amendment No. 1

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2009
 
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 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 July 17, 2009
Common Stock, No par value
 
17,517,331 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   T

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 43

 

Explanatory Note

Capitol is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q to revise its unaudited condensed consolidated financial statements as of and for the three months and six months ended June 30, 2009 that were part of Form 10-Q that Capitol filed with the Securities and Exchange Commission (SEC) on July 31, 2009.

This Amendment No. 1 reflects revised interpretation of fair-value accounting guidance (FSP FAS 157-4) to properly base fair-value estimates of collateral-dependent loans and other real estate owned upon appraisal data rather than use of alternative valuation methods.  FAS 157-4 was initially implemented in error for the period ended March 31, 2009, as disclosed in Capitol's 2009 Annual Report on Form 10-K.

When Capitol initially implemented FSP FAS 157-4 for the three months ended March 31, 2009, management made significant adjustments to appraisal data and used some alternative valuation methods, reducing estimated losses relating to fair value by $8 million.  As 2009 progressed, additional regulatory guidance suggested that substantially all such fair value estimates should be based solely upon appraisal data rather than use of alternative valuation methods.  As of December 31, 2009, substantially all fair value estimates for collateral-dependent loans and other real estate owned were based solely on appraisal data.

The information in this Amendment No. 1 not only revises the unaudited condensed consolidated financial statements that were contained in the originally-filed Form 10-Q for the three months and six months ended June 30, 2009, but also amends other information in that Form 10-Q affected by the revision described above.  Therefore, this Amendment No. 1 should be read together with the originally-filed Form 10-Q.  Furthermore, this Amendment No. 1 does not reflect events occurring after the filing of the originally-filed Form 10-Q or update information or disclosures contained in the originally-filed Form 10-Q that were not affected by the revision described above.  Accordingly, this Amendment No. 1 also should be read in conjunction with subsequent filings of financial information by Capitol relating to its financial position and results of operations for the year ended December 31, 2009, as information in such subsequent filings may update or supersede certain information contained in this Amendment No. 1 to Form 10-Q.

The following items of the originally-filed Form 10-Q for the period ended June 30, 2009 have been revised:

Part I – Financial Information:
Item 1 – Financial Statements (unaudited)
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

In addition, as required by Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, updated certifications by our principal executive officer and principal financial officer are filed herewith as Exhibit 31.1, Exhibit 31.2, Exhibit 32.1 and Exhibit 32.2 to this Amendment No. 1 on Form 10-Q which are currently dated April 27, 2010.





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Page 2 of 43

 

 
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 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, (xii) changes in management, (xiii) Capitol's proposed spin-off of Michigan Commerce Bancorp Limited; (xiv) consummation of pending sales of certain bank subsidiaries, and (xv) 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 – June 30, 2009 and December 31, 2008.
4
 
Condensed consolidated statements of operations – Three months and six months
ended June 30, 2009 and 2008.
5
 
Condensed consolidated statements of changes in equity – Six months ended
June 30, 2009 and 2008.
6
 
Condensed consolidated statements of cash flows – Six months ended June 30,
2009 and 2008.
7
 
Notes to condensed consolidated financial statements.
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
39
Item 4.
Controls and Procedures.
39
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings.
40
Item 1A.
Risk Factors.
40
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
40
Item 3.
Defaults Upon Senior Securities.
40
Item 4.
Submission of Matters to a Vote of Security Holders.
40
Item 5.
Other Information.
41
Item 6.
Exhibits.
41
     
SIGNATURES
 
42
     
EXHIBIT INDEX
 
43


 
Page 3 of 43

 

PART I, ITEM 1
               
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of June 30, 2009 and December 31, 2008
(in thousands, except share data)
               
     
(Unaudited)
       
     
June 30, 2009
   
December 31, 2008
 
     
(As Revised--Note J)
   
 
 
ASSETS
             
Cash and due from banks
    $ 119,801     $ 136,499  
Money market and interest-bearing deposits
      652,383       391,836  
Federal funds sold
      32,397       96,031  
Cash and cash equivalents
    804,581       624,366  
Loans held for sale
      30,843       10,474  
Investment securities -- Note C:
                 
   Available for sale, carried at market value
      13,809       15,584  
   Held for long-term investment, carried at
                 
     amortized cost which approximates fair value
    33,661       32,856  
Total investment securities
    47,470       48,440  
Portfolio loans:
                 
   Loans secured by real estate:
                 
    Commercial
      2,125,443       2,115,515  
    Residential (including multi-family)
      891,710       879,754  
    Construction, land development and other land
    676,309       797,486  
Total loans secured by real estate
    3,693,462       3,792,755  
   Commercial and other business-purpose loans
    786,164       845,593  
   Consumer
      55,830       61,340  
   Other
      41,383       35,541  
Total portfolio loans
    4,576,839       4,735,229  
   Less allowance for loan losses
      (114,215 )     (93,040 )
Net portfolio loans
    4,462,624       4,642,189  
Premises and equipment
      53,669       59,249  
Accrued interest income
      17,899       18,871  
Goodwill
      71,592       72,342  
Other real estate owned
      103,315       67,171  
Other assets
      131,547       111,734  
                   
            TOTAL ASSETS
    $ 5,723,540     $ 5,654,836  
                   
LIABILITIES AND EQUITY
                 
LIABILITIES:
                 
Deposits:
                 
   Noninterest-bearing
    $ 721,497     $ 700,786  
   Interest-bearing
      3,973,522       3,796,826  
Total deposits
    4,695,019       4,497,612  
Debt obligations:
                 
   Notes payable and short-term borrowings
    362,575       446,925  
   Subordinated debentures -- Note G
      167,366       167,293  
Total debt obligations
    529,941       614,218  
Accrued interest on deposits and other liabilities
    36,680       29,938  
Total liabilities
    5,261,640       5,141,768  
                   
EQUITY:
                 
Capitol Bancorp Limited stockholders' equity:
                 
  Preferred stock, 20,000,000 shares authorized;
                 
    none issued and outstanding
      --       --  
  Common stock, no par value,  50,000,000 shares authorized;
               
     issued and outstanding:   2009 - 17,517,331 shares                
   2008 - 17,293,908 shares
    277,000       274,018  
  Retained earnings
      42,440       80,255  
  Undistributed common stock held by employee-benefit trust
    (569 )     (569 )
  Fair value adjustment (net of tax effect) for investment
               
     securities available for sale (accumulated other
               
     comprehensive income)
      106       144  
Total Capitol Bancorp Limited stockholders' equity
    318,977       353,848  
Noncontrolling interests in consolidated subsidiaries
    142,923       159,220  
Total equity
    461,900       513,068  
                   
            TOTAL LIABILITIES AND EQUITY
  $ 5,723,540     $ 5,654,836  
                   
See notes to condensed consolidated financial statements.
               

 
Page 4 of 43

 

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months and Six Months Ended June 30, 2009 and 2008
(in thousands, except per share data)
       
    Three-Month Period    
Six-Month Period
 
   
2009
   
2008
   
2009
   
2008
 
Interest income:
 
(As Revised--
Note J) 
         
(As Revised--
Note J) 
       
  Portfolio loans (including fees)
  $ 68,359     $ 74,238     $ 136,435     $ 151,569  
  Loans held for sale
    344       236       561       536  
  Taxable investment securities
    152       102       304       235  
  Federal funds sold
    23       1,008       58       2,221  
  Other
    594       553       830       1,079  
                                Total interest income
    69,472       76,137       138,188       155,640  
Interest expense:
                               
  Deposits
    22,911       26,989       47,783       57,677  
  Debt obligations and other
    5,979       6,956       12,366       13,836  
                                Total interest expense
    28,890       33,945       60,149       71,513  
                                Net interest income
    40,582       42,192       78,039       84,127  
Provision for loan losses
    33,658       9,019       67,574       17,977  
Net interest income after provision
                       
                                  for loan losses
    6,924       33,173       10,465       66,150  
Noninterest income:
                               
  Service charges on deposit accounts
    1,505       1,457       3,007       2,790  
  Trust and wealth-management revenue
    1,135       1,563       2,523       3,208  
  Fees from origination of non-portfolio residential mortgage
                         
     loans
    1,496       1,063       2,398       1,984  
  Gain on sales of government-guaranteed loans
    405       643       645       1,223  
  Realized gains on sale of investment securities available
                         
     for sale
            2       1       45  
  Other
    2,453       1,749       3,377       3,792  
                               Total noninterest income
    6,994       6,477       11,951       13,042  
Noninterest expense:
                               
  Salaries and employee benefits
    24,442       27,730       53,495       53,278  
  Occupancy
    4,843       4,500       9,734       8,904  
  Equipment rent, depreciation and maintenance
    3,201       3,008       6,634       5,874  
  Costs associated with foreclosed properties and other
                               
     real estate owned
    4,202       1,181       8,561       2,092  
  FDIC insurance premiums and other regulatory fees
    5,348       933       7,462       1,870  
  Other
    8,124       10,436       16,221       20,575  
                              Total noninterest expense
    50,160       47,788       102,107       92,593  
                              Loss before income tax benefit
    (36,242 )     (8,138 )     (79,691 )     (13,401 )
Income tax benefit
    (13,282 )     (2,701 )     (28,824 )     (4,696 )
                              NET LOSS
    (22,960 )     (5,437 )     (50,867 )     (8,705 )
Less net losses attributable to noncontrolling interests
    6,656       6,060       13,889       11,519  
                                 
NET INCOME (LOSS) ATTRIBUTABLE TO
                               
CAPITOL BANCORP LIMITED
  $ (16,304 )   $ 623     $ (36,978 )   $ 2,814  
                                 
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE
                         
TO CAPITOL BANCORP LIMITED -- Note F:
                               
                               Basic
  $ (0.95 )   $ 0.04     $ (2.15 )   $ 0.16  
                                 
                               Diluted
  $ (0.95 )   $ 0.04     $ (2.15 )   $ 0.16  
                                 
See notes to condensed consolidated financial statements.
                         


 
Page 5 of 43

 

CAPITOL BANCORP LIMITED
 
Condensed Consolidated Statements of Changes in Equity (Unaudited)
 
For the Six Months Ended June 30, 2009 and 2008
 
(in thousands, except share and per share data)
 
                               
                               
   
Capitol Bancorp Limited Stockholders' Equity
         
           
 
 
 
 
Total Capitol
 
 
     
           
Undistributed
 
Accumulated
  Bancorp   
Noncontrolling
     
           
Common Stock
 
Other
 
Limited
 
Interests in
     
   
Common
 
Retained
 
Held by Employee-
 
Comprehensive
 
Stockholders'
 
Consolidated
 
Total
 
   
Stock
 
Earnings
 
Benefit Trust
 
Income
 
Equity
 
Subsidiaries
 
Equity
 
                               
Six Months Ended June 30, 2008
                             
                               
Balances at January 1, 2008
  $ 272,208   $ 117,520   $ (586 ) $ 3   $ 389,145   $ 156,198   $ 545,343  
                                             
Investment in consolidated subsidiaries by noncontrolling
                                   
   interests
                                  22,411     22,411  
                                             
Issuance of 3,174 shares of common stock upon exercise
                               
   of stock options
    54                       54           54  
                                             
Surrender of 14,138 shares of common stock to facilitate
                                   
   vesting of restricted stock
    (285 )                     (285 )         (285 )
                                             
Issuance of 18,312 unvested shares of restricted common
                                   
   stock, net of related unearned employee compensation
                               
   and 6,822 forfeited shares
    --                       --           --  
                                             
Recognition of compensation expense relating to restricted
                               
   common stock and stock options
    1,172                       1,172           1,172  
                                             
Tax effect of share-based payments
    2                       2           2  
                                             
Transfer of 205 shares of common stock to employee stock
                                   
   ownership plan
    (2 )         6           4           4  
                                             
Cash dividends paid ($0.40 per share)
          (6,927 )               (6,927 )         (6,927 )
                                             
Components of comprehensive loss:
                                           
   Net income (loss)
          2,814                 2,814     (11,519 )   (8,705 )
   Fair value adjustment for investment securities
                                     
     available for sale (net of income tax effect)
                (14 )   (14 )         (14 )
         Comprehensive loss
                                        (8,719 )
                                             
    BALANCES AT JUNE 30, 2008
  $ 273,149   $ 113,407   $ (580 ) $ (11 ) $ 385,965   $ 167,090   $ 553,055  
                                             
Six Months Ended June 30, 2009 (As Revised--Note J)
                                           
                                             
Balances at January 1, 2009
  $ 274,018   $ 80,255   $ (569 ) $ 144   $ 353,848   $ 159,220   $ 513,068  
                                             
Investment in consolidated subsidiary by noncontrolling
                                   
   interests
          27                 27     134     161  
                                             
Issuance of 227,357 shares of common stock to acquire
                                   
   noncontrolling interest in consolidated subsidiary
    2,542                       2,542     (2,542 )   --  
                                             
Surrender of 3,934 shares of common stock to facilitate
                                   
   vesting of restricted stock
    (23 )                     (23 )         (23 )
                                             
Recognition of compensation expense relating to restricted
                               
   common stock and stock options
    580                       580           580  
                                             
Tax effect of share-based payments
    (117 )                     (117 )         (117 )
                                             
Cash dividends paid ($0.05 per share)
          (864 )               (864 )         (864 )
                                             
Components of comprehensive loss:
                                           
   Net loss
          (36,978 )               (36,978 )   (13,889 )   (50,867 )
   Fair value adjustment for investment securities
                                     
     available for sale (net of income tax effect)
                (38 )   (38 )         (38 )
         Comprehensive loss
                            (37,016          (50,905 )
                                             
    BALANCES AT JUNE 30, 2009
  $ 277,000   $ 42,440   $ (569 ) $ 106   $ 318,977   $ 142,923   $ 461,900  
                                             
                                             
See notes to condensed consolidated financial statements.
                                   


 
Page 6 of 43

 

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2009 and 2008
(in thousands)
             
   
2009
   
2008
 
    (As Revised--Note J)        
OPERATING ACTIVITIES
           
  Net loss
  $ (50,867 )   $ (8,705 )
  Adjustments to reconcile net loss to net cash provided
               
    (used) by operating activities:
               
      Provision for loan losses
    67,574       17,977  
      Depreciation of premises and equipment
    5,419       5,005  
      Amortization of intangibles
    238       241  
      Net amortization (accretion) of investment security
               
         premiums (discounts)
    (43 )     6  
      Loss on sale of premises and equipment
    18       44  
      Gain on sales of government-guaranteed loans
    (645 )     (1,223 )
      Realized gains on sales of investment securities available
               
         for sale
    (1 )     (45 )
      Loss on sales of other real estate owned
    722       308  
      Reduction in other real estate owned
    6,785       2,085  
      Amortization of issuance costs of subordinated debentures
    73       47  
      Share-based compensation expense
    580       1,172  
      Deferred income tax credit
    (28,036 )        
  Originations and purchases of loans held for sale
    (204,779 )     (120,855 )
  Proceeds from sales of loans held for sale
    184,410       125,960  
  Decrease (increase) in accrued interest income and other assets
    9,742       (18,112 )
  Increase (decrease) in accrued interest expense on deposits and
       
     other liabilities
    6,742       (112 )
                 
NET CASH PROVIDED (USED) BY OPERATING
         
                   ACTIVITIES
    (2,068 )     3,793  
                 
INVESTING ACTIVITIES
               
  Proceeds from sales of investment securities available for sale
            885  
  Proceeds from calls, prepayments and maturities of investment
         
     securities
    10,474       10,761  
  Purchases of investment securities
    (9,529 )     (16,004 )
  Net decrease (increase) in portfolio loans
    61,046       (295,176 )
  Proceeds from sales of premises and equipment
    1,935       126  
  Purchases of premises and equipment
    (1,792 )     (6,537 )
  Proceeds from sale of other real estate owned
    7,939       3,529  
                 
NET CASH PROVIDED (USED) BY INVESTING
         
                   ACTIVITIES
    70,073       (302,416 )
                 
FINANCING ACTIVITIES
               
  Net increase in demand deposits, NOW accounts and savings
       
     accounts
    117,679       50,514  
  Net increase in certificates of deposit
    79,728       262,375  
  Net borrowings from debt obligations
    6,652       5,538  
  Proceeds from Federal Home Loan Bank advances
    1,842,341       995,755  
  Payments on Federal Home Loan Bank advances
    (1,933,343 )     (883,192 )
  Resources provided by noncontrolling interests
    134       22,411  
  Net proceeds from issuance of common stock
            54  
  Tax effect of share-based payments
    (117 )     2  
  Cash dividends paid
    (864 )     (6,927 )
                 
                NET CASH PROVIDED BY FINANCING ACTIVITIES
    112,210       446,530  
                 
                INCREASE IN CASH AND CASH EQUIVALENTS
    180,215       147,907  
                 
Cash and cash equivalents at beginning of period
    624,366       352,372  
                 
                 
                CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 804,581     $ 500,279  
                 
Supplemental disclosure of cash flow information:
               
  Cash paid during the period for interest
  $ 61,056     $ 72,609  
  Transfers of loans to other real estate owned
    51,590       34,381  
  Surrender of common stock to facilitate exercise of stock
               
     options and vesting of restricted stock
    23       285  
                 
See notes to condensed consolidated financial statements.
               

 

 
Page 7 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 periods ended June 30, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009.

The consolidated balance sheet as of December 31, 2008 was derived from audited consolidated financial statements as of that date.  Certain 2008 amounts have been reclassified to conform to the 2009 presentation.

Note B – Implementation of New Accounting Standards

In September 2006, the Financial Accounting Standards Board (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 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2 which deferred the effective date of Statement 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 on a more frequently recurring basis.  The implementation of previously deferred aspects of Statement No. 157 in 2009 (as permitted by FSP FAS 157-2) did not have a material effect on the Corporation's results of operations or financial position.  Fair value disclosures are set forth in Note D to the condensed consolidated financial statements.

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 became effective for Capitol on January 1, 2009 and the accompanying condensed consolidated financial statements reflect implementation of the new accounting standard.

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) had no impact upon implementation and its subsequent impact will depend upon the extent and magnitude of acquisitions in the future.

 
Page 8 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note B – Implementation of New Accounting Standards – Continued

On April 9, 2009, the FASB issued the following FSPs, each of which become effective for second quarter reporting, with earlier implementation permitted for the first calendar quarter of 2009.  Capitol elected to implement the new guidance effective January 1, 2009.

FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require interim disclosures about fair value of financial instruments in addition to annual reporting.  The required disclosures are included in Note D to the condensed consolidated financial statements.

FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance for debt securities to make it more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in financial statements.  Implementation of this new guidance did not have a material effect on Capitol's consolidated financial statements.  The expanded interim disclosures about investment securities are set forth in Note C to the condensed consolidated financial statements.

FSP FAS 157-4 amends prior fair value guidance to aid in determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  This new guidance is intended to clarify that significant adjustments to quoted prices may be necessary to estimate fair value when there has been a significant decrease in the volume and activity for the asset/liability in relation to normal market activity.  Fair value is the price that would be received to sell an asset (or paid to transfer a liability) in an orderly transaction (that is, not a forced liquidation or distressed sale) between willing market participants under current market conditions.  Fair-value information is presented in Note D (as revised) and discussed further in Note J.

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, became effective for Capitol on January 1, 2009 and did not have a material impact on Capitol's condensed consolidated financial statements upon implementation.

In February 2008, the FASB issued FSB FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.  The new guidance clarifies transfers and certain transactions' accounting subject to the provisions of FAS 140 and became effective January 1, 2009.  This new guidance did not have a material impact on Capitol's financial position or results of operations upon implementation.

In May 2009, the FASB issued Statement No. 165, Subsequent Events.  This new guidance requires the disclosure of the date through which an entity has evaluated subsequent events and became effective June 30, 2009.  This new guidance did not have a material impact on the Corporation's consolidated financial statements and related disclosures are set forth in Note I to the condensed consolidated financial statements.

In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140.  This new guidance revises the presentation and disclosure of transfers of financial assets and the effects of a transfer on an entity's financial position, operating results and cash flows.  Statement No. 166 applies to annual financial statements and interim periods beginning on or after November 15, 2009.  Management has not completed its review of this new guidance.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification™ and The Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.  On the effective date of this statement, the FASB Accounting Standards Codification™ (Codification) will supersede all then-existing non-Securities and Exchange Commission (SEC) accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009, and will not have a material impact on the Corporation's consolidated financial statements.

 
Page 9 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities

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

   
June 30, 2009
   
December 31, 2008
 
   
Amortized
Cost
   
Estimated
Fair
Value
   
Amortized
Cost
   
Estimated
Fair
Value
 
Available for sale:
                       
United States government agency
securities
  $ 6,840     $ 6,850     $ 9,785     $ 9,913  
Mortgage backed securities
    6,041       6,177       4,813       4,890  
Municipals
    767       782       768       781  
      13,648       13,809       15,366       15,584  
Held for long-term investment:
                               
Federal Reserve Bank stock
    192       192       146       146  
Federal Home Loan Bank stock
    26,676       26,676       26,053       26,053  
Corporate
    6,642       6,642       6,591       6,591  
Other
    151       151       66       66  
      33,661       33,661       32,856       32,856  
                                 
    $ 47,309     $ 47,470     $ 48,222     $ 48,440  

Investments in Federal Reserve Bank and Federal Home Loan Bank stock are restricted and may only be resold to, or redeemed by, the issuer.

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

   
June 30, 2009
   
December 31, 2008
 
   
Gains
   
Losses
   
Gains
   
Losses
 
United States government agency
securities
  $ 13     $ 3     $ 128     $ --  
Mortgage backed securities
    138       2       85       8  
Municipals
    15       --       13       --  
                                 
    $ 166     $ 5     $ 226     $ 8  

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

   
June 30, 2009
   
December 31, 2008
 
   
Unrealized
Loss
   
Carrying
Value
   
Unrealized
Loss
   
Carrying
Value
 
                         
One year or less:
                       
United States government agency
securities
  $ 3     $ 597     $ --     $ --  
Mortgage backed securities
    1       29       4       281  
      4       626       4       281  
In excess of one year:
                               
Mortgage backed securities
    1       51       4       501  
                                 
    $ 5     $ 677     $ 8     $ 782  


 
Page 10 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities—Continued

Management does not believe any individual unrealized loss as of June 30, 2009 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 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 June 30, 2009 were as follows:

   
Amortized
Cost
   
Estimated
Fair Value
 
             
Due in one year or less
  $ 4,937     $ 4,942  
After one year, through five years
    2,504       2,522  
After five years, through ten years
    593       602  
After ten years
    5,614       5,743  
Securities held for long-term investment
               
without stated maturities
    33,661       33,661  
                 
    $ 47,309     $ 47,470  

Note D – Fair Value

FAS 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.

 
Level 2:  Significant 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 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 June 30, 2009.  Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics.


 
Page 11 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Fair Value – Continued

 
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 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 fair value on other real estate owned on a nonrecurring basis to reflect partial write-downs based on the observable market price, current appraised value of the asset or other estimates of fair value.

The balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 were as follows (in $1,000s):

   
Total
   
Significant Other
Observable Inputs
(Level 2)
 
             
Investment securities available for sale:
           
United State government agency
securities
  $ 6,850     $ 6,850  
Mortgage backed securities
    6,177       6,177  
Municipals
     782        782  
    $ 13,809     $ 13,809  

The balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 were as follows (in $1,000s):

   
Total
   
Significant Other
Observable Inputs
(Level 2)
 
             
Investment securities available for sale:
           
United State government agency
securities
  $ 9,913     $ 9,913  
Mortgage backed securities
    4,890       4,890  
Municipals
     781        781  
    $ 15,584     $ 15,584  

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2009 were as follows (in $1,000s):

    As Revised   
   
Total
   
Significant
Unobservable
Inputs (1)
(Level 3)
 
             
Impaired loans
  $ 68,938     $ 68,938  
                 
Other real estate owned
  $ 103,315     $ 103,315  

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

 
Page 12 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Fair Value – Continued

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2008 were as follows (in $1,000s):

   
Total
   
Significant Other
Observable Inputs
(Level 2)
 
             
Impaired loans (1)
  $ 103,580     $ 103,580  

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

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

Capitol began applying the fair value measurement and disclosure provisions of FAS No. 157 effective January 1, 2009 to nonfinancial assets and liabilities measured on a nonrecurring basis, which did not have a material effect on Capitol's consolidated financial position upon implementation.  The Corporation measures the fair value of the following on a nonrecurring basis:  (1) long-lived assets, (2) foreclosed assets (other real estate owned), (3) the reporting unit under step one of its goodwill impairment test and (4) indefinite lived intangible assets.









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Page 13 of 43

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Fair Value – Continued

Carrying values and estimated fair values of financial instruments for FAS No. 107 disclosure purposes were as follows (in $1,000s):

   
June 30, 2009 (As Revised) 
   
December 31, 2008 
 
   
Carrying
Value
   
Estimated
Fair Value
   
Carrying
Value
   
Estimated
Fair Value
 
Financial assets:
                       
Cash and cash equivalents
  $ 804,581     $ 804,581     $ 624,366     $ 624,366  
Loans held for sale
    30,843       30,843       10,474       10,474  
Investment securities:
                               
Available for sale
    13,809       13,809       15,584       15,584  
Held for long-term investment
    33,661       33,661       32,856       32,856  
      47,470       47,470       48,440       48,440  
Portfolio loans:
                               
Loans secured by real estate:
                               
Commercial
    2,125,443       2,106,646       2,115,515       2,105,204