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 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
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 Ltd.
 
 
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   T
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 October 31, 2013
Common Stock, No par value
 
41,171,479 shares


Page 1 of 63

INDEX


 
 
Page
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited):
 
 
Condensed consolidated balance sheets – September 30, 2013 and December 31, 2012.
6
 
Condensed consolidated statements of operations – Three months and nine months
ended September 30, 2013 and 2012.
 
7
 
Condensed consolidated statements of comprehensive income (loss) – Three months
and nine months ended September 30, 2013 and 2012.
 
8
 
Condensed consolidated statements of changes in equity – Nine months ended
September 30, 2013 and 2012.
 
9
 
Condensed consolidated statements of cash flows – Nine months ended September 30,
2013 and 2012.
 
10
 
Notes to condensed consolidated financial statements.
11
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
59
Item 4.
Controls and Procedures.
59
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings.
60
Item 1A.
Risk Factors.
60
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
60
Item 3.
Defaults Upon Senior Securities.
61
Item 4.
Mine Safety Disclosures.
61
Item 5.
Other Information.
61
Item 6.
Exhibits.
61
 
 
 
SIGNATURES
 
62
 
 
 
EXHIBIT INDEX
 
63





[The remainder of this page intentionally left blank]
Page 2 of 63


 
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:

·            Capitol's ability to implement its proposed liquidation plan or successfully emerge from Chapter 11 bankruptcy and  restructure its existing unsecured debt obligations;

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

·            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 enforcement actions with regulatory agencies;

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

·            The recent seizure of five of Capitol's subsidiary banks by applicable state banking regulators and the Federal Deposit Insurance Corporation ("FDIC");

·            The possibility of the FDIC or an applicable state banking regulator seizing more of Capitol's subsidiary banks;

·            The possibility of the FDIC assessing Capitol's banking subsidiaries for any cross-guaranty liability for recently seized banks or losses arising from any additional bank closures;

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

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

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

·            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;

·            The risks associated with the high concentration of commercial real estate loans within Capitol's consolidated loan portfolio, along with other credit risks associated with individual large loans;

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

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

·            The failure of assumptions underlying estimates for the allowance for loan losses and estimation of values of collateral or cash flow projections related to impaired loans;
Page 3 of 63


FORWARD-LOOKING STATEMENTS – Continued

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

·            Volatility of interest rate sensitive deposits and the uncertainties of future depositor activity regarding potentially uninsured deposits;

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

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

·            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 impact of possible future material impairment charges;

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

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

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

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

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

·            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 enforcement actions, consent orders, other regulatory actions and any related capital requirements;

·            The effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Emergency Economic Stabilization Act of 2008, 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;

·            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;

·            Acts of war or terrorism; and

·            Other factors and other information contained in this document and in other reports and filings that Capitol makes with the SEC under the Securities Exchange Act of 1934, as amended, including, without limitation, under the caption "Risk Factors."

For a discussion of these and other risks that may cause actual results to differ from expectations, the reader should refer to the risk factors and other information in this Form 10-Q and Capitol's other periodic filings, including its 2012 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.

Page 4 of 63


FORWARD-LOOKING STATEMENTS – Continued

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.






[The remainder of this page intentionally left blank]


Page 5 of 63

PART I, ITEM 1
 
CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Balance Sheets (Unaudited)
As of September 30, 2013 and December 31, 2012
(in $1,000s, except share and per-share data)

 
 
September 30, 2013
   
December 31, 2012
 
 
 
   
As Adjusted
(Note C)
 
ASSETS
 
   
 
Cash and due from banks
 
$
22,282
   
$
43,727
 
Money market and interest-bearing deposits
   
192,849
     
214,340
 
Cash and cash equivalents
   
215,131
     
258,067
 
Loans held for sale
   
73
     
-
 
Investment securities available for sale, carried at fair value -- Note E
   
14,552
     
15,662
 
Federal Home Loan Bank and Federal Reserve Bank stock (carried on the basis of cost) -- Note E
   
6,262
     
7,456
 
Portfolio loans, less allowance for loan losses of $32,265 in 2013 and $51,508 in 2012 -- Note F
   
672,463
     
879,817
 
Premises and equipment
   
15,563
     
17,715
 
Accrued interest income
   
2,256
     
3,038
 
Other real estate owned
   
47,783
     
63,242
 
Other assets
   
10,122
     
14,438
 
Assets of discontinued operations -- Note G
   
-
     
361,867
 
 
               
TOTAL ASSETS
 
$
984,205
   
$
1,621,302
 
 
               
LIABILITIES AND EQUITY
               
LIABILITIES
               
Deposits:
               
Noninterest-bearing
 
$
190,745
   
$
246,538
 
Interest-bearing
   
723,744
     
947,603
 
Total deposits
   
914,489
     
1,194,141
 
Notes payable and other borrowings
   
8,908
     
5,426
 
Accrued interest on deposits and other liabilities
   
7,748
     
4,970
 
Liabilities of discontinued operations -- Note G
   
-
     
354,020
 
Liabilities subject to compromise -- Note B
   
195,723
     
200,293
 
Total liabilities
   
1,126,868
     
1,758,850
 
 
               
EQUITY:
               
Capitol Bancorp Limited stockholders' equity -- Note N:
               
Preferred stock (Series A), 700 shares authorized ($100 per-share liquidation preference); 51 shares issued and outstanding
   
5,098
     
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:  2013 - 41,171,479 shares; 2012 - 41,177,479 shares
   
292,090
     
292,092
 
Retained-earnings deficit
   
(422,892
)
   
(424,022
)
Undistributed common stock held by employee-benefit trust
   
(541
)
   
(541
)
Accumulated other comprehensive income (loss)
   
(173
)
   
72
 
Total Capitol Bancorp Limited stockholders' equity deficit
   
(126,418
)
   
(127,301
)
Noncontrolling interests in consolidated subsidiaries
   
(16,245
)
   
(10,247
)
Total equity deficit
   
(142,663
)
   
(137,548
)
 
               
TOTAL LIABILITIES AND EQUITY
 
$
984,205
   
$
1,621,302
 

          See notes to condensed consolidated financial statements.
Page 6 of 63


CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2013 and 2012
(in $1,000s, except per-share data)

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
As Adjusted
(Note C)
   
   
As Adjusted
(Note C)
 
Interest income:
 
   
   
   
 
Portfolio loans (including fees)
 
$
10,212
   
$
14,440
   
$
33,087
   
$
44,562
 
Loans held for sale
   
2
     
19
     
3
     
39
 
Taxable investment securities
   
33
     
40
     
108
     
127
 
Other
   
189
     
221
     
552
     
712
 
Total interest income
   
10,436
     
14,720
     
33,750
     
45,440
 
Interest expense:
                               
Deposits
   
1,419
     
2,305
     
4,826
     
7,832
 
Debt obligations and other
   
85
     
998
     
281
     
6,618
 
Total interest expense
   
1,504
     
3,303
     
5,107
     
14,450
 
Net interest income
   
8,932
     
11,417
     
28,643
     
30,990
 
Provision for loan losses -- Note F
   
3
     
277
     
(12,183
)
   
791
 
 
                               
Net interest income after provision for loan losses
   
8,929
     
11,140
     
40,826
     
30,199
 
Noninterest income:
                               
Service charges on deposit accounts
   
385
     
483
     
1,130
     
1,479
 
Trust and wealth-management revenue
   
667
     
735
     
2,117
     
2,159
 
Fees from origination of non-portfolio residential mortgage loans
   
49
     
199
     
175
     
503
 
Gain on sale of government-guaranteed loans
   
-
     
-
     
-
     
344
 
Other
   
1,488
     
3,646
     
5,197
     
6,819
 
Total noninterest income
   
2,589
     
5,063
     
8,619
     
11,304
 
Noninterest expense:
                               
Salaries and employee benefits
   
6,263
     
8,209
     
20,819
     
25,595
 
Occupancy
   
1,512
     
1,637
     
4,712
     
5,014
 
Equipment rent, depreciation and maintenance
   
803
     
1,102
     
2,794
     
3,540
 
Costs (income) associated with foreclosed properties and other real estate owned
   
1,048
     
1,170
     
2,454
     
6,748
 
FDIC insurance premiums and other regulatory fees
   
650
     
1,110
     
2,501
     
3,564
 
Other
   
2,124
     
4,133
     
9,395
     
11,710
 
Total noninterest expense
   
12,400
     
17,361
     
42,675
     
56,171
 
 
                               
Income (loss) before reorganization items and income taxes (benefit)
   
(882
)
   
(1,158
)
   
6,770
     
(14,668
)
Reorganization items -- Note B
   
360
     
2,746
     
2,195
     
2,746
 
Income (loss) before income taxes (benefit)
   
(1,242
)
   
(3,904
)
   
4,575
     
(17,414
)
Income taxes (benefit)
   
-
     
48
     
(1,547
)
   
4
 
Income (loss) from continuing operations
   
(1,242
)
   
(3,952
)
   
6,122
     
(17,418
)
Discontinued operations -- Note G:
                               
Income (loss) from operations of bank subsidiaries discontinued
   
92
     
(1,432
)
   
458
     
(6,189
)
Gain (loss) on bank subsidiaries discontinued
   
(4,653
)
   
29
     
(5,911
)
   
155
 
Less income tax expense
   
-
     
39
     
-
     
101
 
Loss from discontinued operations
   
(4,561
)
   
(1,442
)
   
(5,453
)
   
(6,135
)
NET INCOME (LOSS)
   
(5,803
)
   
(5,394
)
   
669
     
(23,553
)
 
                               
Net losses attributable to noncontrolling interests in consolidated subsidiaries
   
100
     
471
     
461
     
1,829
 
 
                               
NET INCOME (LOSS) ATTRIBUTABLE TO CAPITOL BANCORP LIMITED
 
$
(5,703
)
 
$
(4,923
)
 
$
1,130
   
$
(21,724
)
 
                               
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CAPITOL BANCORP LIMITED -- Note J
 
$
(0.14
)
 
$
(0.12
)
 
$
0.03
   
$
(0.53
)

            See notes to condensed consolidated financial statements.
Page 7 of 63


CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three and Nine Months Ended September 30, 2013 and 2012
(in $1,000s)


 
 
Three Months Ended
   
Nine Months Ended
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
As Adjusted
(Note C)
   
   
As Adjusted
(Note C)
 
 
 
   
   
   
 
NET INCOME (LOSS)
 
$
(5,803
)
 
$
(5,394
)
 
$
669
   
$
(23,553
)
 
                               
Other comprehensive income (loss), net of tax:
                               
Unrealized gains (losses) arising during the period
   
(180
)
   
27
     
(245
)
   
18
 
 
                               
COMPREHENSIVE INCOME (LOSS)
   
(5,983
)
   
(5,367
)
   
424
     
(23,535
)
 
                               
Comprehensive loss attributable to noncontrolling interests in consolidated subsidiaries
   
100
     
471
     
461
     
1,829
 
 
                               
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CAPITOL BANCORP LIMITED
 
$
(5,883
)
 
$
(4,896
)
 
$
885
   
$
(21,706
)

            See notes to condensed consolidated financial statements.
Page 8 of 63


CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Changes in Equity (Unaudited)
For the Nine Months Ended September 30, 2013 and 2012
(in $1,000s, except share and per-share data)

 
 
Capitol Bancorp Limited Stockholders' Equity
   
   
 
 
 
Preferred
Stock
   
Common
Stock
   
Retained-
Earnings
(Deficit)
   
Undistributed
Common
Stock
Held by
Employee-
Benefit Trust
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total Capitol
Bancorp
Limited
Stockholders'
Equity
(Deficit)
   
Noncontrolling
Interests in
Consolidated
Subsidiaries
   
Total
Equity
(Deficit)
 
 
 
   
   
   
   
   
   
   
 
Nine Months Ended September 30, 2012
 
   
   
   
   
   
   
   
 
 
 
   
   
   
   
   
   
   
 
Balances at December 31, 2011, as previously reported
 
$
5,098
   
$
292,135
   
$
(404,846
)
 
$
(541
)
 
$
70
   
$
(108,084
)
 
$
(563
)
 
$
(108,647
)
 
                                                               
Cumulative effect of change in accounting principle -- Note C
                   
4,128
                     
4,128
             
4,128
 
 
                                                               
Balances at January 1, 2012, as adjusted
   
5,098
     
292,135
     
(400,718
)
   
(541
)
   
70
     
(103,956
)
   
(563
)
   
(104,519
)
 
                                                               
Reduction in noncontrolling interest of sold subsidiaries
                                           
-
     
(7,360
)
   
(7,360
)
 
                                                               
Reduction in investment of subsidiaries due to change in ownership
                   
(144
)
                   
(144
)
   
144
     
-
 
 
                                                               
Issuance of 145,609 shares of common stock upon exercise of stock options
           
1
                             
1
             
1
 
 
                                                               
Surrender of 1,897 shares of common stock to facilitate vesting of restricted stock
           
-
                             
-
             
-
 
 
                                                               
Reversal of compensation expense relating to 5,500 forfeited restricted common stock shares and stock options
           
(86
)
                           
(86
)
           
(86
)
 
                                                               
Recognition of compensation expense relating to restricted common stock and stock options
           
72
                             
72
             
72
 
 
                                                               
Tax effect of share-based payments
           
(29
)
                           
(29
)
           
(29
)
 
                                                               
Net loss
                   
(21,724
)
                   
(21,724
)
   
(1,829
)
   
(23,553
)
 
                                                               
Other comprehensive loss
                                   
18
     
18
             
18
 
 
                                                               
BALANCES AT SEPTEMBER 30, 2012
 
$
5,098
   
$
292,093
   
$
(422,586
)
 
$
(541
)
 
$
88
   
$
(125,848
)
 
$
(9,608
)
 
$
(135,456
)
 
                                                               
Nine Months Ended September 30, 2013
                                                               
 
                                                               
Balances at December 31, 2012, as previously reported
 
$
5,098
   
$
292,092
   
$
(430,590
)
 
$
(541
)
 
$
72
   
$
(133,869
)
 
$
(10,247
)
 
$
(144,116
)
 
                                                               
Cumulative effect of change in accounting principle -- Note C
                   
6,568
                     
6,568
             
6,568
 
 
                                                               
Balances at January 1, 2013, as adjusted
   
5,098
     
292,092
     
(424,022
)
   
(541
)
   
72
     
(127,301
)
   
(10,247
)
   
(137,548
)
 
                                                               
Reduction in noncontrolling interest of subsidiaries discontinued
                                           
-
     
(47
)
   
(47
)
 
                                                               
Reduction in investment in subsidiaries due to change in ownership
                                           
-
     
(5,490
)
   
(5,490
)
 
                                                               
Reversal of compensation expense relating to 6,000 forfeited restricted common stock shares and stock options
           
(6
)
                           
(6
)
           
(6
)
 
                                                               
Recognition of compensation expense relating to restricted common stock and stock options
           
4
                             
4
             
4
 
 
                                                               
Net income (loss)
                   
1,130
                     
1,130
     
(461
)
   
669
 
 
                                                               
Other comprehensive loss
                                   
(245
)
   
(245
)
           
(245
)
 
                                                               
BALANCES AT SEPTEMBER 30, 2013
 
$
5,098
   
$
292,090
   
$
(422,892
)
 
$
(541
)
 
$
(173
)
 
$
(126,418
)
 
$
(16,245
)
 
$
(142,663
)

    See notes to condensed consolidated financial statements.
Page 9 of 63


CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2013 and 2012
(in $1,000s)

 
 
2013
   
2012
 
 
 
   
As Adjusted
(Note C)
 
 
 
   
 
OPERATING ACTIVITIES
 
   
 
Net income (loss)
 
$
669
   
$
(23,553
)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities (including discontinued operations):
               
Provision for loan losses
   
(12,764
)
   
2,247
 
Depreciation of premises and equipment
   
2,189
     
3,044
 
Reorganization items
   
2,195
     
2,746
 
Net amortization of investment security premiums
   
61
     
89
 
Loss on sale of premises and equipment
   
64
     
50
 
Gain on sale of government-guaranteed loans
   
-
     
(555
)
Loss (gain) on bank subsidiaries discontinued
   
6,434
     
(155
)
Loss (gain) on sale of other real estate owned
   
(2,219
)
   
(135
)
Write-down of other real estate owned
   
2,547
     
10,188
 
Amortization of issuance costs of subordinated debentures
   
-
     
59
 
Share-based compensation expense
   
(2
)
   
(14
)
Deferred income tax expense (credit)
   
2
     
(993
)
Originations and purchases of loans held for sale
   
(1,812
)
   
(22,077
)
Proceeds from sales of loans held for sale
   
1,739
     
23,604
 
Decrease in accrued interest income and other assets
   
9,052
     
2,110
 
Decrease in accrued interest expense on deposits and other liabilities
   
(4,114
)
   
(114
)
 
               
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
   
4,041
     
(3,459
)
 
               
INVESTING ACTIVITIES
               
Proceeds from calls, prepayments and maturities of investment securities
   
4,930
     
14,525
 
Purchases of investment securities
   
(5,247
)
   
(7,620
)
Redemption of Federal Home Loan Bank stock by issuer
   
1,415
     
1,848
 
Purchases of Federal Home Loan Bank stock
   
-
     
(31
)
Net decrease in portfolio loans
   
144,193
     
190,816
 
Proceeds from sales of government-guaranteed loans
   
-
     
4,984
 
Proceeds from sales of premises and equipment
   
49
     
28
 
Purchases of premises and equipment
   
(318
)
   
(1,499
)
Proceeds from sale of bank subsidiaries
   
1,000
     
8,940
 
Payments received on other real estate owned
   
97
     
54
 
Proceeds from sales of other real estate owned
   
30,056
     
35,987
 
 
               
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
176,175
     
248,032
 
 
               
FINANCING ACTIVITIES
               
Net increase in demand deposits, NOW accounts and savings accounts
   
77,291
     
124,114
 
Net decrease in certificates of deposit
   
(260,177
)
   
(329,190
)
Net payments on debt obligations
   
-
     
(2,317
)
Proceeds from Federal Home Loan Bank borrowings
   
4,500
     
59,511
 
Payments on Federal Home Loan Bank borrowings
   
(2,018
)
   
(81,528
)
Net proceeds from issuance of common stock
   
-
     
1
 
Tax effect of share-based payments
   
-
     
(29
)
 
               
NET CASH USED IN FINANCING ACTIVITIES
   
(180,404
)
   
(229,438
)
 
               
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(188
)
   
15,135
 
 
               
Change in cash and cash equivalents of discontinued operations
   
2,005
     
(1,327
)
 
               
Change in cash and cash equivalents of deconsolidated subsidiary
   
(44,753
)
   
-
 
 
               
Cash and cash equivalents at beginning of period
   
258,067
     
271,211
 
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
$ 215,131
   
$
$ 285,019
 
 
               
Supplemental disclosures:
               
Cash paid during the period for interest on deposits and debt obligations
   
6,369
     
18,529
 
Transfers of loans to other real estate owned
   
11,485
     
38,222
 

            See notes to condensed consolidated financial statements.
Page 10 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note A – Background and 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.

For comparative purposes, original balances as previously reported in periods prior to September 30, 2013 have been adjusted to exclude amounts related to discontinued operations (see Note G).

The results of operations for the period ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.

The consolidated balance sheet as of December 31, 2012 was derived from audited consolidated financial statements as of that date.  Certain 2012 amounts have been reclassified to conform to the 2013 presentation.  Refer to Note C for the effects of a change in accounting principle on amounts previously reported in the 2012 consolidated financial statements.

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which are discussed below and on page 51 of this document, as well as upon a variety of risk factors discussed elsewhere in this document and in 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 and for the year ended December 31, 2012.

Bankruptcy Filings

On August 9, 2012, Capitol and its affiliate Financial Commerce Corporation ("FCC"), (collectively the "Debtors"), filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Eastern District of Michigan (the "Bankruptcy Court").  The Debtors' Chapter 11 Cases (the "Chapter 11 Cases") are being jointly administered under Case Number 12-58409.  Capitol and FCC continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  Capitol's banking subsidiaries are not part of the filing and continue to conduct business on an uninterrupted basis.

On May 16, 2013, Capitol and FCC filed a proposed Joint Liquidating Plan of Capitol Bancorp Ltd. and Financial Commerce Corporation (the "Joint Liquidating Plan") and related Disclosure Statement with the Bankruptcy Court for the resolution of outstanding claims against and equity security interests in the Debtors.  The Joint Liquidating Plan superseded a prepackaged plan of reorganization filed by Capitol and FCC with the Bankruptcy Court in August 2012, which was withdrawn.  On May 22, 2013, Capitol and FCC filed an Amended Disclosure Statement (the "Amended Disclosure Statement"), which superseded a Disclosure Statement filed on May 16, 2013.

On July 17, 2013, Capitol and FCC filed an Amended Joint Liquidating Plan of Capitol Bancorp Ltd. and Financial Commerce Corporation (the "Amended Joint Liquidating Plan"), which superseded the prior Joint Liquidating Plan. Information contained in the Amended Joint Liquidating Plan and Amended Disclosure Statement is subject to change, whether as a result of amendments, third-party actions, or otherwise.

Page 11 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note A – Background and Basis of Presentation – Continued
 
The Amended Joint Liquidating Plan is subject to acceptance by the creditors of Capitol and FCC (as, and to the extent, required under the Bankruptcy Code) and confirmation by the Bankruptcy Court.  The deadline for creditors to vote on the Amended Joint Liquidating Plan was September 24, 2013.  The combined hearing to be conducted by the Bankruptcy Court on final approval of the Amended Disclosure Statement, and confirmation of the Amended Joint Liquidating Plan is presently scheduled for December 18, 2013.

Accounting Standards Codification ("ASC") Topic 852, Reorganizations, which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared.  However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Amounts that can be directly associated with the reorganization and restructuring of the business are reported separately as reorganization items in the condensed consolidated statements of operations beginning in the quarter ended September 30, 2012.  The condensed consolidated balance sheet distinguishes prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise (none as of September 30, 2013) and from post-petition liabilities.  Liabilities that may be affected by a Chapter 11 plan of reorganization are reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  Capitol applied ASC Topic 852 effective August 9, 2012 and has segregated those items as outlined above for all reporting periods subsequent to such date and will continue to do so until emergence from Chapter 11.

Refer to Note D for a description of a recently issued accounting standards update related to the liquidation basis of accounting.  As discussed there, management has determined that the Corporation has not met the criteria of the accounting standards update for reporting under the liquidation basis of accounting.
 
Note B – Debtor-in-Possession Financial Information

Liabilities Subject to Compromise

As required by ASC Topic 852, the amount of liabilities subject to compromise represents management's estimate of known or potential prepetition and post-petition claims to be addressed in connection with the bankruptcy filing.  Such claims are subject to future adjustments.  The liabilities subject to compromise consist of the following (in $1,000s):


 
 
September 30, 2013
   
December 31, 2012
 
 
 
   
 
Trust-preferred securities
 
$
151,296
   
$
151,296
 
Senior notes
   
6,820
     
6,820
 
Accrued interest payable
   
33,318
     
33,318
 
Accrued estimated taxes payable
   
3,196
     
7,108
 
Accounts payable and other accrued liabilities
   
1,093
     
1,751
 
 
               
Total liabilities subject to compromise
 
$
195,723
   
$
200,293
 

In accordance with ASC Topic 852, interest was no longer accrued on the trust-preferred securities and senior notes included in liabilities subject to compromise after Capitol filed for bankruptcy protection.  If Capitol had continued to accrue interest on these debt obligations, additional contractual interest expense of $2.5 million and $ 7.7 million for the three and nine months ended September 30, 2013, respectively, would have been reported.

Reorganization Items

Professional advisory fees and other costs directly associated with the reorganization are reported separately as reorganization items pursuant to ASC Topic 852.  The reorganization items for the three and nine months ended
 
Page 12 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note B – Debtor-in-Possession Financial Information – Continued
 
September 30, 2013 and 2012 consisted of the following (in $1,000s):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30
   
September 30
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
Professional fees
 
$
360
   
$
665
   
$
2,195
   
$
665
 
Deferred issuance costs
   
-
     
2,081
     
-
     
2,081
 
 
 
$
 
360
   
$
2,746
   
$
2,195
   
$
2,746
 


Note C – Change in Accounting Principle

Effective January 1, 2013, the Corporation elected to change its method of accounting related to the reserve for, and payment of, delinquent real and personal property taxes on properties serving as collateral for impaired loans.  The Corporation pays delinquent property taxes on these properties to avoid lien attachment by the taxing authorities.  Previously, the Corporation recorded an accrued liability for delinquent property taxes in accordance with ASC 450-20, "Loss Contingencies," with a corresponding charge to "Costs associated with foreclosed properties and other real estate owned."  Recent regulatory guidance suggests a more preferable method of accounting for these estimated delinquent property taxes is to consider the amount of such taxes when performing impairment analyses on collateral-dependent impaired loans.  Based on its analysis, the Corporation has determined this method of accounting is preferable.  Under the newly adopted method of accounting, when a loan is deemed to be collateral-dependent and a specific impairment analysis is performed, the delinquent property taxes will be reflected in the impairment calculation similar to estimated selling costs.  The decision on whether to reserve for, or charge-off, the amount of delinquent property taxes will depend upon whether the net value of the collateral (property appraised amount, less estimated costs to sell and the amount of the delinquent property taxes) is greater or less than the loan balance.  When the delinquent property taxes are paid, the amount will be added to the loan basis and considered in current and future impairment analyses.

In accordance with ASC 250-10-45, "Accounting Changes – Change in Accounting Principle," the Corporation is reporting the change in accounting principle through retrospective application as of the beginning of 2012, the first period presented in the accompanying condensed consolidated financial statements.  This is also the period through which the Corporation has determined it is practicable to determine the most appropriate amount of the beginning adjustment.  For periods prior to 2012, management believes determining the appropriate amount is impracticable due to the availability of records, subsequent changes in loan balances and relationships and the assumptions about management's intent at the time that is now difficult to independently substantiate.  Also, management believes retrospective application of the new accounting principle to periods prior to 2012 would not produce a materially different result.

Upon retrospective application of the new accounting method, it was determined that either (1) the adjusted impaired loan analyses resulted in no additional reserves or charge-offs, or (2) an adequate amount of unallocated allowance for loan losses existed to absorb the impact of any collateral shortfall on a by-loan basis.  As a result, the net effect of adopting the new accounting method was a decrease of the retained-earnings deficit and a reduction of accrued liabilities of $4.1 million as of January 1, 2012, with no effect on the total allowance for loan losses.  As indicated in the following table, the cumulative increase to portfolio loans, decrease to the accrued liability and decrease to the retained-earnings deficit were $3.1 million, $3.5 million and $6.6 million, respectively, as of December 31, 2012.
 
 
Page 13 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note C – Change in Accounting Principle – Continued
 
All 2012 periods have been retrospectively adjusted to reflect the change in accounting principle.  The following tables summarize the adjustments to the Corporation's unaudited condensed consolidated financial statements for each affected line item (in $1,000s, except per-share data):


 Condensed Consolidated Balance Sheet (Unaudited)

 
 
As of December 31, 2012
 
 
 
As Previously Reported
   
Reclassification of Discontinued
Operations(1)
   
Effect of Change
in Accounting
Principle
   
As Adjusted
 
 
 
   
   
   
 
Portfolio loans, less allowance for loan losses
 
$
1,143,212
   
$
(266,445
)
 
$
3,050
   
$
879,817
 
Total assets
   
1,618,252
             
3,050
     
1,621,302
 
Accrued interest on deposits and other liabilities
   
9,779
     
(1,291
)
   
(3,518
)
   
4,970
 
Total liabilities
   
1,762,368
             
(3,518
)
   
1,758,850
 
Retained-earnings deficit
   
(430,590
)
           
6,568
     
(424,022
)
Total Capitol Bancorp Limited stockholders' equity deficit
   
(133,869
)
           
6,568
     
(127,301
)
Total equity deficit
   
(144,116
)
           
6,568
     
(137,548
)

(1)           For comparative purposes, original balances as previously reported have also been adjusted to exclude amounts related to discontinued operations.

Condensed Consolidated Statement of Operations (Unaudited)

 
 
Three Months Ended September 30, 2012
 
 
 
As Previously Reported
   
Reclassification of Discontinued Operations(1)
   
Effect of Change in Accounting Principle
   
As Adjusted
 
 
 
   
   
   
 
Costs associated with foreclosed properties and other real estate owned
 
$
3,172
   
$
(1,252
)
 
$
(750
)
 
$
1,170
 
Total noninterest expense
   
23,735
     
(5,624
)
   
(750
)
   
17,361
 
Loss before income tax benefit
   
(6,155
)
   
1,501
     
750
     
(3,904
)
Loss from continuing operations
   
(6,203
)
   
1,501
     
750
     
(3,952
)
Net loss
   
(6,144
)
           
750
     
(5,394
)
Net loss attributable to Capitol Bancorp Limited
   
(5,673
)
           
750
     
(4,923
)
Net loss per common share attributable to Capitol Bancorp Limited
 
$
(0.14
)
                 
$
(0.12
)
 

 
Page 14 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note C – Change in Accounting Principle – Continued
 

 
 
Nine Months Ended September 30, 2012
 
 
 
As Previously Reported
   
Reclassification of Discontinued Operations(1)
   
Effect of Change in Accounting Principle
   
As Adjusted
 
 
 
   
   
   
 
Costs associated with foreclosed properties and other real estate owned
 
$
14,227
   
$
(5,279
)
 
$
(2,200
)
 
$
6,748
 
Total noninterest expense
   
77,509
     
(19,138
)
   
(2,200
)
   
56,171
 
Loss before income tax benefit
   
(25,905
)
   
6,291
     
2,200
     
(17,414
)
Loss from continuing operations
   
(25,909
)
   
6,291
     
2,200
     
(17,418
)
Net loss
   
(25,753
)
           
2,200
     
(23,553
)
Net loss attributable to Capitol Bancorp Limited
   
(23,924
)
           
2,200
     
(21,724
)
Net loss per common share attributable to Capitol Bancorp Limited
 
$
(0.58
)
                 
$
(0.53
)

(1) For comparative purposes, original balances as previously reported have also been adjusted to exclude amounts related to discontinued operations.
 
 
Note D – Accounting Standards Updates

In February 2013, an accounting standards update was issued to amend and improve the reporting of reclassifications out of accumulated other comprehensive income.  The amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements.  However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts.  This new guidance became effective prospectively for all annual and interim periods beginning January 1, 2013 and it did not have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

In April 2013, an accounting standards update was issued to improve the reporting as to when and how the liquidation basis of accounting should be applied.  The update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is 'imminent'.  Liquidation is deemed imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy).  The update requires financial statements prepared using the liquidation basis of accounting to present relevant information about an entity's expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation.  An entity is required to recognize and measure its liabilities in accordance with U.S. GAAP that otherwise applies to those liabilities.  The entity is also required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the anticipated duration of the liquidation process, including any costs associated with sale or settlement of its assets and liabilities.  This new guidance will become effective for entities that determine liquidation is imminent during annual and interim periods beginning January 1, 2014 and should be applied prospectively from the day that liquidation becomes imminent.  Early adoption is permitted.  Capitol's management has determined that liquidation is not currently imminent for the Corporation, as defined by this accounting standards update, and will continue to evaluate adoption of this accounting guidance if the Corporation meets the criteria for reporting under the liquidation basis of accounting in the future.

Page 15 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note E – 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 available for sale consisted of the following (in $1,000s):

 
 
September 30, 2013
   
December 31, 2012
 
 
 
Amortized
Cost
   
Estimated Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
 
 
   
   
   
 
United States treasury
 
$
3,249
   
$
3,250
   
$
3,499
   
$
3,500
 
United States government agency
   
5,000
     
4,682
     
4,000
     
3,987
 
Mortgage-backed
   
6,564
     
6,620
     
8,055
     
8,175
 
 
                               
 
 
$
14,813
   
$
14,552
   
$
15,554
   
$
15,662
 

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

 
 
September 30, 2013
   
December 31, 2012
 
 
 
Gains
   
Losses
   
Gains
   
Losses
 
 
 
   
   
   
 
United States treasury
 
$
1
   
   
$
1
   
 
United States government agency
   
1
   
$
319
           
$
13
 
Mortgage-backed
   
60
     
4
     
120
         
 
                               
 
 
$
62
   
$
323
   
$
121
   
$
13
 

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

 
 
September 30, 2013
   
December 31, 2012
 
 
 
Unrealized
Loss
   
Carrying
Value
   
Unrealized
Loss
   
Carrying
Value
 
One year or less:
 
   
   
   
 
United States government agencies
 
$
319
   
$
4,181
   
$
13
   
$
3,987
 
Mortgage-backed
   
4
     
1,741
     
-
     
-
 
 
 
$
323
   
$
5,922
   
$
13
   
$
3,987
 

 
Scheduled maturities of investment securities held as of September 30, 2013 were as follows (in $1,000s):

 
 
Amortized
Cost
   
Estimated
Fair Value
 
 
 
   
 
Due in one year or less
 
$
3,249
   
$
3,250
 
After one year, through five years
   
1,000
     
999
 
After five years, through ten years
   
4,349
     
4,295
 
After ten years
   
6,215
     
6,008
 
 
               
 
 
$
14,813
   
$
14,552
 

Page 16 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans

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

 
 
September 30, 2013
 
 
 
Secured by Real Estate
   
   
   
   
   
 
 
 
Commercial
   
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
Consumer
   
Other
   
Unallocated
   
Total
 
 
 
   
   
   
   
   
   
   
 
Allowance for loan losses:
 
   
   
   
   
   
   
   
 
Individually evaluated for impairment
 
$
4,570
   
$
1,917
   
$
873
   
$
1,328
   
$
3
   
   
   
$
8,691
 
Collectively evaluated for probable incurred losses
   
7,301
     
4,363
     
694
     
1,746
     
213
   
$
187
   
$
9,070
     
23,574
 
 
                                                               
Total allowance for loan losses
 
$
11,871
   
$
6,280
   
$
1,567
   
$
3,074
   
$
216
   
$
187
   
$
9,070
   
$
32,265
 
 
                                                               
Portfolio loans:
                                                               
Individually evaluated for impairment
 
$
71,684
   
$
17,436
   
$
8,253
   
$
6,849
   
$
28
                   
$
104,250
 
Collectively evaluated for probable incurred losses
   
380,318
     
129,199
     
22,249
     
61,176
     
5,586
   
$
1,950
             
600,478
 
 
                                                               
Total portfolio loans
 
$
452,002
   
$
146,635
   
$
30,502
   
$
68,025
   
$
5,614
   
$
1,950