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Capitol Bancorp 10-Q 2011
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, 2011
 
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 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     £   (Do not check if a smaller reporting company)
 
Smaller reporting company   T

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 April 30, 2011
Common Stock, No par value
 
41,122,057 shares

 
Page 1 of 57

 

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 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 operating 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) changes in management, (xii) consummation of pending sales of certain bank subsidiaries, (xiii) completion of Capitol's selective bank divestiture activities, (xiv) other risks detailed in Capitol's other filings with the Securities and Exchange Commission (SEC), and (xv) the following, among others:

·  Capitol's ability to continue as a going concern;

·  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;
 
·  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 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 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;
 

 
Page 2 of 57

 

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued
 
·  Continued 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;

·  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 each of Capitol's subsidiary banks' 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 estimates for the allowance for loan losses and estimation of values of collateral or cash flow projections related to collateral-dependent loans;

·  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 and periodic payments on its trust-preferred securities 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;

 
 
Page 3 of 57

 

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

·  The uncertainties of future depositor activity regarding potentially uninsured deposits;

·  The possibility of the Federal Deposit Insurance Corporation (FDIC) assessing Capitol's banking 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;

·  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 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;

·  The risk that the realization of deferred tax assets may not occur;

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

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

·  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 that Capitol makes 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 57

 

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 2010 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, 2011 and December 31, 2010.
6
 
Condensed consolidated statements of operations – Three months ended
March 31, 2011 and 2010.
7
 
Condensed consolidated statements of changes in equity – Three months ended
March 31, 2011 and 2010.
8
 
Condensed consolidated statements of cash flows – Three months ended March 31,
2011 and 2010.
9
 
Notes to condensed consolidated financial statements.
10
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
49
Item 4.
Controls and Procedures.
49
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
Legal Proceedings.
 
50
Item 1A.
Risk Factors.
50
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
50
Item 3.
Defaults Upon Senior Securities.
50
Item 4.
[Removed and Reserved.]
50
Item 5.
Other Information.
50
Item 6.
Exhibits.
55
 
SIGNATURES
 
 
56
 
EXHIBIT INDEX
 
 
57




[The remainder of this page intentionally left blank]
 

 
Page 5 of 57

 

PART I, ITEM 1
 
   
CAPITOL BANCORP LIMITED
 
Condensed Consolidated Balance Sheets
 
As of March 31, 2011 and December 31, 2010
 
(in $1,000s, except share and per-share data)
 
               
     
(Unaudited)
       
     
March 31,
   
December 31,
 
     
2011
   
2010
 
ASSETS
             
Cash and due from banks
    $ 77,008     $ 56,709  
Money market and interest-bearing deposits
      459,002       477,639  
Federal funds sold
      484       413  
 
Cash and cash equivalents
    536,494       534,761  
Loans held for sale
      1,710       6,900  
Investment securities -- Note C:
                 
   Available for sale, carried at fair value
      20,954       17,482  
   Held for long-term investment, carried at
                 
     amortized cost which approximates fair value
    2,330       2,893  
 
Total investment securities
    23,284       20,375  
Federal Home Loan Bank and Federal Reserve
               
  Bank stock (carried on the basis of cost) -- Note C
    17,811       17,001  
Portfolio loans -- Note D:
                 
   Loans secured by real estate:
                 
    Commercial
      1,346,584       1,374,791  
    Residential (including multi-family)
      497,315       518,943  
    Construction, land development and other land
    216,993       230,788  
 
Total loans secured by real estate
    2,060,892       2,124,522  
   Commercial and other business-purpose loans
    350,873       375,968  
   Consumer
      22,066       23,375  
   Other
      16,890       15,133  
 
Total portfolio loans
    2,450,721       2,538,998  
   Less allowance for loan losses
      (136,681 )     (144,985 )
 
Net portfolio loans
    2,314,040       2,394,013  
Premises and equipment
      34,212       35,203  
Accrued interest income
      8,526       8,628  
Other real estate owned
      110,829       106,835  
Other assets
      15,555       17,965  
Assets of discontinued operations -- Note E
      134,501       398,533  
                   
            TOTAL ASSETS
    $ 3,196,962     $ 3,540,214  
                   
LIABILITIES AND EQUITY
                 
LIABILITIES:
                 
Deposits:
                 
   Noninterest-bearing
    $ 531,455     $ 500,809  
   Interest-bearing
      2,276,515       2,373,492  
 
Total deposits
    2,807,970       2,874,301  
Debt obligations:
                 
   Notes payable and other borrowings
      106,052       117,377  
   Subordinated debentures -- Note I
      149,080       167,586  
 
Total debt obligations
    255,132       284,963  
Accrued interest on deposits and other liabilities
    48,049       50,271  
Liabilities of discontinued operations -- Note E
    124,799       369,360  
 
Total liabilities
    3,235,950       3,578,895  
                   
EQUITY:
                 
Capitol Bancorp Limited stockholders' equity -- Notes G and L:
               
  Preferred stock (Series A), 700,000 shares authorized
               
      ($100 per-share liquidation preference); 50,980 shares
               
      issued and outstanding
      5,098          
  Preferred stock (for potential future issuance),
               
    19,300,000 shares authorized (none issued and outstanding)
    --       --  
  Common stock, no par value, 1,500,000,000 shares authorized;
               
     issued and outstanding:   2011 - 41,122,757 shares                
                                                   2010 - 21,614,856 shares     292,354       287,190  
  Retained-earnings deficit
      (353,468 )     (353,757 )
  Undistributed common stock held by employee-benefit trust
    (541 )     (541 )
  Fair value adjustment (net of tax effect) for investment securities
               
     available for sale (accumulated other comprehensive income)
    132       156  
Total Capitol Bancorp Limited stockholders' equity deficit
    (56,425 )     (61,854 )
Noncontrolling interests in consolidated subsidiaries
    17,437       23,173  
 
Total equity deficit
    (38,988 )     (38,681 )
                   
            TOTAL LIABILITIES AND EQUITY
  $ 3,196,962     $ 3,540,214  
                   
See notes to condensed consolidated financial statements.
               

 
Page 6 of 57

 

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2011 and 2010
(in $1,000s, except per share data)
   
 
 
 
2011
   
2010
 
Interest income:
           
  Portfolio loans (including fees)
  $ 34,792     $ 41,796  
  Loans held for sale
    29       60  
  Taxable investment securities
    54       222  
  Federal funds sold
    2       5  
  Other
    454       485  
Total interest income
    35,331       42,568  
Interest expense:
               
  Deposits
    8,027       13,300  
  Debt obligations and other
    3,113       4,428  
Total interest expense
    11,140       17,728  
Net interest income
    24,191       24,840  
Provision for loan losses -- Note D
    13,467       47,364  
Net interest income (deficiency) after
         
                                  provision for loan losses
    10,724       (22,524 )
Noninterest income:
               
  Service charges on deposit accounts
    905       978  
  Trust and wealth-management revenue
    944       1,152  
  Fees from origination of non-portfolio residential
               
     mortgage loans
    268       382  
  Gain on sale of government-guaranteed loans
    527       113  
  Gain on exchange of trust-preferred securities for
               
     common stock -- Note I
    16,861       --  
  Gain on exchange of promissory notes for common
               
     stock
    --       1,255  
  Realized gain on sale of investment securities available
         
     for sale
    --       14  
  Other
    1,887       2,330  
Total noninterest income
    21,392       6,224  
Noninterest expense:
               
  Salaries and employee benefits
    15,529       18,223  
  Occupancy
    3,612       3,751  
  Equipment rent, depreciation and maintenance
    2,187       2,669  
  Costs associated with foreclosed properties and other
               
     real estate owned
    7,497       11,593  
  FDIC insurance premiums and other regulatory fees
    3,296       4,134  
  Other
    7,800       6,691  
Total noninterest expense
    39,921       47,061  
Loss before income tax benefit
    (7,805 )     (63,361 )
Income tax benefit
    (2,135 )     (482 )
Loss from continuing operations
    (5,670 )     (62,879 )
Discontinued operations -- Note E:
               
  Income from operations of bank subsidiaries sold
    16       1,533  
  Gain on sale of bank subsidiaries
    4,368       --  
  Less income tax expense
    1,488       594  
Income from discontinued operations
    2,896       939  
NET LOSS
    (2,774 )     (61,940 )
Net losses attributable to noncontrolling interests in
               
  consolidated subsidiaries
    3,063       14,058  
                 
NET INCOME (LOSS) ATTRIBUTABLE TO CAPITOL
               
      BANCORP LIMITED
  $ 289     $ (47,882 )
                 
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE
         
      TO CAPITOL BANCORP LIMITED -- Note H
  $ 0.01     $ (2.75 )
                 
See notes to condensed consolidated financial statements.
               
                 

 
Page 7 of 57

 
 
 
 
 


 
Page 8 of 57

 

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2011 and 2010
(in $1,000s)
             
   
2011
   
2010
 
             
OPERATING ACTIVITIES
           
  Net loss
  $ (2,774 )   $ (61,940 )
  Adjustments to reconcile net loss to net cash provided
               
    by operating activities (including discontinued operations):
               
      Provision for loan losses
    13,961       50,100  
      Depreciation of premises and equipment
    1,597       2,199  
      Amortization of intangibles
    --       61  
      Net amortization of investment security premiums
    3       266  
      Loss on sale of premises and equipment
    4       1  
      Gain on sale of government-guaranteed loans
    (786 )     (462 )
      Gain on sale of bank subsidiaries
    (4,368 )     --  
      Gain on debt extinguishment
    (16,861 )     (1,255 )
      Realized gain on sale of investment securities available for sale
    --       (14 )
      Loss on sale of other real estate owned
    134       1,774  
      Write-down of other real estate owned
    4,223       8,620  
      Amortization of issuance costs of subordinated debentures
    25       37  
      Share-based compensation expense
    99       223  
      Deferred income tax credit
    (230 )     (267 )
      Valuation allowance for deferred income tax assets
    --       283  
  Originations and purchases of loans held for sale
    (9,516 )     (29,344 )
  Proceeds from sales of loans held for sale
    14,847       38,598  
  Decrease in accrued interest income and other assets
    17,262       8,720  
  Increase (decrease) in accrued interest expense on deposits and
               
     other liabilities
    1,187       (2,264 )
                 
                NET CASH PROVIDED BY OPERATING ACTIVITIES
    18,807       15,336  
                 
INVESTING ACTIVITIES
               
  Proceeds from sales of investment securities available for sale
    488       23,664  
  Proceeds from calls, prepayments and maturities of investment
               
     securities
    6,766       7,164  
  Purchases of investment securities
    (10,265 )     (2,307 )
  Redemption of Federal Home Loan Bank stock by issuer
    42       225  
  Purchase of Federal Home Loan Bank stock
    (849 )     (87 )
  Net decrease in portfolio loans
    40,531       66,679  
  Proceeds from sales of government-guaranteed loans
    11,628       10,570  
  Proceeds from sales of premises and equipment
    50       112  
  Purchases of premises and equipment
    (592 )     (254 )
  Proceeds from sale of bank subsidiaries
    8,869       --  
  Payments received on other real estate owned
    14       --  
  Proceeds from sales of other real estate owned
    7,988       11,605  
                 
                NET CASH PROVIDED BY INVESTING ACTIVITIES
    64,670       117,371  
                 
FINANCING ACTIVITIES
               
  Net increase in demand deposits, NOW accounts and savings accounts
    42,353       37,607  
  Net increase (decrease) in certificates of deposit
    (112,350 )     6,121  
  Net borrowings from debt obligations
    425       56  
  Proceeds from Federal Home Loan Bank borrowings
    91,350       271,380  
  Payments on Federal Home Loan Bank borrowings
    (103,250 )     (317,135 )
  Net proceeds from issuance of common stock
    --       20  
  Tax effect of share-based payments
    (17 )     (22 )
                 
                NET CASH USED BY FINANCING ACTIVITIES
    (81,489 )     (1,973 )
                 
                INCREASE IN CASH AND CASH EQUIVALENTS
    1,988       130,734  
                 
Change in cash and cash equivalents of discontinued operations
    (255 )     (28,947 )
                 
Cash and cash equivalents at beginning of period
    534,761       667,881  
                 
                CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 536,494     $ 769,668  
                 
Supplemental disclosures:
               
  Cash paid during the period for interest on deposits and debt obligations
  $ 11,914     $ 21,387  
  Transfers of loans to other real estate owned
    17,671       20,194  
  Surrender of common stock to facilitate vesting of restricted stock
    --       2  
  Exchange of common stock for redemption of debt     5,082        3,325  
                 
See notes to condensed consolidated financial statements.
               

 
Page 9 of 57

 

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, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

The consolidated balance sheet as of December 31, 2010 was derived from audited consolidated financial statements as of that date.  Certain 2010 amounts have been reclassified to conform to the 2011 presentation.

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which are discussed on page 41 of this document, as well as a variety of risk factors discussed elsewhere in this document and Capitol's other filings with the SEC.  Capitol's auditors included a going concern qualification in the most recent report on the Corporation's audited consolidated financial statements as of December 31, 2010.

Note B – Accounting Standards Updates

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 became effective beginning January 1, 2011.  These new disclosures did not have a material effect on the Corporation's consolidated financial statements upon implementation.

In July 2010, an accounting standards update was issued which requires significant new disclosures on a disaggregated basis about the allowance for loan losses and the credit quality of loans.  Under this standards update, a rollforward of the allowance for loan losses with the ending balance further disaggregated on the basis of the impairment methods used to establish loss estimates, along with the related ending loan balances and significant purchases and sales of loans during the period are to be disclosed by portfolio segment or classification used for reporting purposes.  Additional disclosures are required by class of loan, including credit quality, aging of past-due loans, nonaccrual status and impairment information.  Disclosure of the nature and extent of troubled debt restructurings that occur during the period and their effect on the allowance for loan losses, as well as the effect on the allowance regarding troubled debt restructurings that occur within the prior 12 months that defaulted during the current reporting period, will also be required.  The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the loan portfolio's risk and performance.

The majority of the disclosures under this new guidance, which are required as of the end of a reporting period, were first implemented in 2010 and are set forth in Note D.  The disclosures about activity that occurs during a reporting period, except for the disclosures related to troubled debt restructurings which were further delayed as noted below, became effective January 1, 2011 and did not have an effect on the Corporation's consolidated financial statements upon implementation except for expanded disclosures therein as set forth in Note D.


 
Page 10 of 57

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note B – Accounting Standards Updates – Continued

In April 2011, an accounting standards update was issued clarifying what constitutes a troubled debt restructuring.  When performing the evaluation of whether a loan modification or restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the modification constitutes a concession and (2) the debtor is experiencing financial difficulties as defined by the guidance.  This guidance also clarifies that a creditor is precluded from using the borrower's effective interest rate test when performing this evaluation.  For identification and disclosure purposes, this new guidance is effective beginning in the third quarter of 2011 and is to be applied retrospectively to modifications occurring on or after January 1, 2011 that remain outstanding at September 30, 2011.  The guidance requires disclosure of the total recorded investment and allowance for loan losses for newly-identified troubled debt restructurings, based on the new guidance, as of September 30, 2011.  The previously-deferred troubled debt restructuring activity related disclosures will be concurrently required.  Management has not completed its analysis of this new guidance, however, does not expect the new guidance will have a material effect on the Corporation's consolidated financial statements upon implementation beginning in the third quarter of 2011.

In April 2011, an accounting standards update was issued to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets on substantially the agreed upon terms.  This standard eliminates consideration of the transferor's ability to fulfill its contractual rights and obligations from the criteria, as well as related implementation guidance (i.e., that it possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets), in determining effective control, even in the event of default by the transferee.  Other criteria applicable to the assessment of effective control are not changed by this new guidance.  This new guidance will become effective January 1, 2012 and management does not expect it to have a material effect on the Corporation's results of operations or financial position 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, 2011
   
December 31, 2010(1)
 
   
Amortized
Cost
   
Estimated
Fair
Value
   
Amortized
Cost
   
Estimated
Fair
Value
 
Available for sale:
                       
United States treasury
  $ 4,041     $ 4,045     $ 503     $ 506  
United States government agency
    12,847       12,856       12,664       12,680  
Mortgage-backed
    3,518       3,676       3,758       3,918  
Municipalities
    370       377       371       378  
      20,776       20,954       17,296       17,482  
Held for long-term investment:
                               
Capitol Development Bancorp
Limited III
     457        457        463        463  
Corporate
    1,873       1,873       2,430       2,430  
      2,330       2,330       2,893       2,893  
                                 
    $ 23,106     $ 23,284     $ 20,189     $ 20,375  

(1)      Excludes amounts related to discontinued operations.

 
Page 11 of 57

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities – Continued

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 or financing small businesses, use the fair value method of accounting in valuing their investment portfolios.  Notwithstanding that those 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.

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

   
March 31, 2011
   
December 31, 2010
 
   
Gains
   
Losses
   
Gains
   
Losses
 
                         
United States treasury
  $ 4           $ 3        
United States government agency
    15     $ 6       17     $ 1  
Mortgage-backed
    158               160          
Municipalities
    7               7          
                                 
    $ 184     $ 6     $ 187     $ 1  

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, 2011
   
December 31, 2010
 
   
Unrealized
Loss
   
Carrying
Value
   
Unrealized
Loss
   
Carrying
Value
 
                         
One year or less:
                       
United States government agency
  $ 6     $ 5,002     $ 1     $ 4,794  

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, 2011 were as follows (in $1,000s):

   
Amortized
Cost
   
Estimated
Fair Value
 
             
Due in one year or less
  $ 4,561     $ 4,567  
After one year, through five years
    8,286       8,307  
After five years, through ten years
    690       717  
After ten years
    7,239       7,363  
Securities held for long-term investment
               
without stated maturities
    2,330       2,330  
                 
    $ 23,106     $ 23,284  


 
Page 12 of 57

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Loans

The following tables present the allowance for loan losses and the carrying amount of loans based on management's overall impairment evaluation methodology (in $1,000s), and should not be interpreted as an indication of future charge-offs:

   
March 31, 2011
 
   
Secured by Real Estate
                         
   
 
 
 
Commercial
   
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
 
 
 
Consumer
   
 
 
 
Other
   
 
 
 
Total
 
                                           
Allowance for loan losses:
                                         
Individually evaluated
                                         
for impairment
  $ 10,946     $ 5,767     $ 5,792     $ 6,831                 $ 29,336  
Collectively evaluated
                                                   
for impairment
    44,751       23,441       14,890       23,056     $ 1,031     $ 176       107,345  
                                                         
Total allowance for
                                                       
loan losses
  $ 55,697     $ 29,208     $ 20,682     $ 29,887     $ 1,031     $ 176     $ 136,681  
                                                         
Portfolio loans:
                                                       
Individually evaluated
                                                       
for impairment
  $ 171,224     $ 59,005     $ 56,493     $ 24,780     $ 22             $ 311,524  
Collectively evaluated
                                                       
for impairment
    1,175,360       438,310       160,500       326,093       22,044     $ 16,890       2,139,197  
                                                         
Total portfolio loans
  $ 1,346,584     $ 497,315     $ 216,993     $ 350,873     $ 22,066     $ 16,890     $ 2,450,721  


   
December 31, 2010
 
   
Secured by Real Estate
                         
   
 
 
 
Commercial
   
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
 
 
 
Consumer
   
 
 
 
Other
   
 
 
 
Total
 
                                           
Allowance for loan losses:
                                         
Individually evaluated
                                         
for impairment
  $ 10,101     $ 5,828     $ 6,914     $ 6,108                 $ 28,951  
Collectively evaluated
                                                   
for impairment
    44,322       33,200       14,201       23,278     $ 858     $ 175       116,034  
                                                         
Total allowance for
                                                       
loan losses
  $ 54,423     $ 39,028     $ 21,115     $ 29,386     $ 858     $ 175     $ 144,985  
                                                         
Portfolio loans:
                                                       
Individually evaluated
                                                       
for impairment
  $ 178,576     $ 57,923     $ 64,345     $ 26,914     $ 22             $ 327,780  
Collectively evaluated
                                                       
for impairment
    1,196,215       461,020       166,443       349,054       23,353     $ 15,133       2,211,218  
                                                         
Total portfolio loans
  $ 1,374,791     $ 518,943     $ 230,788     $ 375,968     $ 23,375     $ 15,133     $ 2,538,998  


 
Page 13 of 57

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio at the balance-sheet date.  Management's determination of the adequacy of the allowance is an estimate based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio and other factors.  The allowance is increased by provisions for loan losses charged to operations and reduced by net charge-offs.  The table below summarizes activity in the allowance for loan losses for the three months ended March 31, 2011 (in $1,000s) by loan type:

   
Secured by Real Estate
                         
   
 
 
 
Commercial
   
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
 
 
 
Consumer
   
 
 
 
Other
   
 
 
 
Total
 
                                           
Beginning balance
  $ 54,423     $ 39,028     $ 21,115     $ 29,386     $ 858     $ 175     $ 144,985  
                                                         
Acquired loan loss reserve
    1,043       117       651       500       68       1       2,380  
                                                         
Charge-offs
    (8,753 )     (7,341 )     (8,434 )     (5,325 )     (223 )             (30,076 )
Recoveries
    995       982       3,023       886       38       1       5,925  
Net charge-offs
    (7,758 )     (6,359 )     (5,411 )     (4,439 )     (185 )     1       (24,151 )
                                                         
Provision for loan losses
    7,989       (3,578 )     4,327       4,440       290       (1 )     13,467  
                                                         
Ending balance
  $ 55,697     $ 29,208     $ 20,682     $ 29,887     $ 1,031     $ 176     $ 136,681  







[The remainder of this page intentionally left blank]

 
Page 14 of 57

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

The table below summarizes activity in the allowance for loan losses (in $1,000s) and the ratio of net charge-offs to average portfolio loans outstanding:

   
Three Months Ended
March 31
 
   
2011
   
2010(1)
 
             
Allowance for loan losses at beginning of period
  $ 144,985     $ 129,310  
                 
Allowance for loan losses of previously-discontinued
bank subsidiary
     2,380        --  
                 
Loans charged-off:
               
Loans secured by real estate:
               
Commercial
    (8,753 )     (10,588 )
Residential (including multi-family)
    (7,341 )     (12,126 )
Construction, land development and other land
    (8,434 )     (13,777 )
Total loans secured by real estate
    (24,528 )     (36,491 )
Commercial and other business-purpose loans
    (5,325 )     (7,457 )
Consumer
    (223 )     (157 )
Total charge-offs
    (30,076 )     (44,105 )
Recoveries:
               
Loans secured by real estate:
               
Commercial
    995       358  
Residential (including multi-family)
    982       108  
Construction, land development and other land
    3,023       1,301  
Total loans secured by real estate
    5,000       1,767  
Commercial and other business-purpose loans
    886       688  
Consumer
    38       19  
Other
    1       --  
Total recoveries
    5,925       2,474  
Net charge-offs
    (24,151 )     (41,631 )
Additions to allowance charged to expense (provision
               
for loan losses)
    13,467       47,364  
                 
Allowance for loan losses at end of period
  $ 136,681     $ 135,043  
                 
Average total portfolio loans for the period
  $ 2,558,053     $ 3,215,054  
                 
Ratio of net charge-offs (annualized) to average
portfolio loans outstanding
    3.78 %     5.18 %

(1)      Excludes amounts related to operations discontinued in 2010 and 2011.


 
Page 15 of 57

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

Nonperforming loans (i.e., loans which are 90 days or more past due and still accruing interest and loans on nonaccrual status) and other nonperforming assets are summarized below (in $1,000s):

   
March 31,
2011
   
December 31,
2010(1)
 
Nonaccrual loans:
           
Loans secured by real estate:
           
Commercial
  $ 146,095     $ 153,956  
Residential (including multi-family)
    53,502       60,422  
Construction, land development and other land
    51,877       59,718  
Total loans secured by real estate
    251,474       274,096  
Commercial and other business-purpose loans
    30,141       30,660  
Consumer
    538       162  
Total nonaccrual loans
    282,153       304,918  
                 
Past due (>90 days) loans and accruing interest:
               
Loans secured by real estate:
               
Commercial
    5,049       2,875  
Residential (including multi-family)
    688       1,484  
Construction, land development and other land
    2,374       2,380  
Total loans secured by real estate
    8,111       6,739  
Commercial and other business-purpose loans
    410       2,073  
Consumer
    19       279  
Total past due loans
    8,540       9,091  
                 
Total nonperforming loans
  $ 290,693     $ 314,009  
                 
Real estate owned and other
repossessed assets
     111,428        107,095  
                 
Total nonperforming assets
  $ 402,121     $