NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A – Basis of
Presentation
The
accompanying unaudited condensed consolidated financial statements of Capitol
Bancorp Limited (Capitol or the Corporation) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q. Accordingly, they do not
include all information and footnotes necessary for a fair presentation of
consolidated financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America.
The
condensed consolidated financial statements do, however, include all adjustments
of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation
S-X) which Capitol considers necessary for a fair presentation of the interim
periods.
The
results of operations for the periods ended September 30, 2009 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2009.
The
consolidated balance sheet as of December 31, 2008 was derived from audited
consolidated financial statements as of that date. Certain 2008
amounts have been reclassified to conform to the 2009 presentation.
Note B – Implementation of
New Accounting Standards
In
September 2006, an accounting standard regarding fair value was issued which
provides a definition of fair value for accounting purposes, establishes a
framework for measuring fair value and expanded related financial statement
disclosures. The standard was originally effective beginning January
1, 2008 but was subsequently deferred until January 1, 2009 for nonfinancial
assets and nonfinancial liabilities except those items recognized or disclosed
at fair value on an annual or more frequently recurring basis. Fair
value disclosures are set forth in Note D to the condensed consolidated
financial statements.
In
December 2007, a new accounting standard was issued to further enhance the
accounting and financial reporting related to business
combinations. This standard established principles and requirements
for how the acquirer in a business combination (1) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed and any noncontrolling interest in the acquiree, (2) recognizes and
measures goodwill acquired in the business combination or a gain from a bargain
purchase, (3) requires that acquisition-related and restructuring costs be
recognized separately from the acquisition, generally charged to expense when
incurred and (4) determines information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. This standard applies prospectively to business
combinations for which the acquisition date is on or after January 1,
2009. The effects of the Corporation
'
s adoption of this
standard had no impact upon implementation and its subsequent impact will depend
upon the extent and magnitude of acquisitions in the future.
Also in
December 2007, a new accounting standard was issued to create accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This standard establishes accounting
and reporting standards that require (1) the ownership interest in subsidiaries
held by parties other than the parent to be clearly identified and presented in
the consolidated balance sheet within equity, but separate from the parent's
equity, (2) the amount of consolidated net income (loss) attributable to the
parent and the noncontrolling interest to be clearly identified and presented on
the face of the consolidated statement of income, (3) changes in a parent
'
s ownership
interest while the parent retains its controlling financial interest in its
subsidiary to be accounted for consistently, (4) when a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary to be initially measured at fair value and (5) entities provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. This standard became effective for Capitol on January 1, 2009
and the accompanying condensed consolidated financial statements reflect the
implementation of this new accounting standard.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note B – Implementation of
New Accounting Standards – Continued
On April
9, 2009, several new accounting standards were issued which became effective for
interim 2009 reporting.
One of
the new standards requires interim disclosures about fair value of financial
instruments in addition to annual reporting. The required interim
disclosures are included in Note D to the condensed consolidated financial
statements.
Another
new standard amended the other-than-temporary-impairment guidance for debt
securities to make it more operational and to improve the presentation and
disclosure of other-than-temporary-impairments on debt and equity securities in
financial statements. Implementation of this new guidance did not
have a material effect on Capitol's consolidated financial
statements. The expanded interim disclosures about investment
securities are set forth in Note C to the condensed consolidated financial
statements.
The final
new standard issued in April 2009 amended prior fair value guidance to aid in
determining fair value when the volume and level of activity for an asset or
liability have significantly decreased and identifying transactions that are not
orderly. This new guidance intended to clarify that significant
adjustments to quoted prices may be necessary to estimate fair value when there
has been a significant decrease in the volume and activity for the
asset/liability in relation to normal market activity. Fair value is
the price that would be received to sell an asset (or paid to transfer a
liability) in an orderly transaction (that is, not a forced liquidation or
distressed sale) between willing market participants under current market
conditions. Capitol's implementation of this standard and its related
disclosures are set forth in Note D to the condensed consolidated financial
statements.
In March 2008, a new accounting
standard was issued which revises the presentation and disclosure of derivatives
and hedging activities. It became effective for Capitol on January 1,
2009 and did not have a material impact on Capitol's condensed consolidated
financial statements upon implementation.
In
February 2008, a new accounting standard was issued which clarifies transfers
and certain transactions
'
accounting
subject to the provisions of standards for accounting for transfers of financial
assets and repurchase financing transactions. It became effective
January 1, 2009 and did not have a material impact on Capitol's financial
position or results of operations upon implementation. In June 2009,
that accounting standard was amended to revise the presentation and disclosure
of transfers of financial assets and the effects of a transfer on an entity's
financial position, financial performance and cash flows. This
standard applies to fiscal years, and interim periods within those fiscal years,
beginning on or after November 15, 2009. Management has not completed
its review of this new guidance.
In May 2009, a new accounting standard
was issued which requires the disclosure of the date through which an entity has
evaluated subsequent events and became effective June 30, 2009. This
new guidance did not have a material impact on the Corporation's consolidated
financial statements and the related disclosures are set forth in Note N to the
condensed consolidated financial statements.
In June 2009, a new accounting standard
was issued related to the hierarchy of generally accepted accounting
principles. On the effective date of this standard, the Financial
Accounting Standards Board Accounting Standards Codification™ (Codification)
supersedes all then-existing non-Securities and Exchange Commission (SEC)
accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification becomes
non-authoritative. This standard is effective for financial
statements issued for interim and annual periods ending after September 15, 2009
and did not have a material impact to the Corporation's condensed consolidated
financial statements upon implementation.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note C – Investment
Securities
Investment
securities consisted of the following (in $1,000s):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
United
States government agency
securities
|
|
$
|
7,150
|
|
|
$
|
7,161
|
|
|
$
|
9,785
|
|
|
$
|
9,913
|
Mortgage-backed
securities
|
|
|
9,912
|
|
|
|
10,061
|
|
|
|
4,813
|
|
|
|
4,890
|
Municipals
|
|
|
767
|
|
|
|
783
|
|
|
|
768
|
|
|
|
781
|
|
|
|
17,829
|
|
|
|
18,005
|
|
|
|
15,366
|
|
|
|
15,584
|
Held
for long-term investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Reserve Bank stock
|
|
|
210
|
|
|
|
210
|
|
|
|
146
|
|
|
|
146
|
Federal
Home Loan Bank stock
|
|
|
24,534
|
|
|
|
24,534
|
|
|
|
26,053
|
|
|
|
26,053
|
Capitol
Development Bancorp
Limited
III
|
|
|
637
|
|
|
|
637
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
5,229
|
|
|
|
5,229
|
|
|
|
6,591
|
|
|
|
6,591
|
Other
|
|
|
100
|
|
|
|
100
|
|
|
|
66
|
|
|
|
66
|
|
|
|
30,710
|
|
|
|
30,710
|
|
|
|
32,856
|
|
|
|
32,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,539
|
|
|
$
|
48,715
|
|
|
$
|
48,222
|
|
|
$
|
48,440
|
Investments
in Federal Reserve Bank and Federal Home Loan Bank stock are restricted and may
only be resold to, or redeemed by, the issuer. Corporate investments
consist primarily of equity-method investments in limited partnerships and a
limited liability company. Those entities, which are involved in
making equity investments in banks and small businesses, use the fair value
method of accounting in valuing their investment portfolios.
Securities
held for long term investment are not subject to the classification and
accounting rules relating to most typical investments. Rather,
investments in Federal Home Loan Bank stock and Federal Reserve Bank stock are
required to be recorded at cost and generally classified within other
assets. In addition, Capitol's corporate investments consist mostly
of equity-method investments in small limited partnerships which, accordingly,
are outside of the scope of accounting rules for most typical investments which
often require use of estimated fair value. Notwithstanding that these
investments are outside the scope of such accounting rules, they are included in
Capitol's investment securities for financial reporting purposes to summarize
all such investment securities together for reporting purposes.
Gross
unrealized gains and losses on investment securities available for sale were as
follows (in $1,000s):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Gains
|
|
|
Losses
|
|
|
Gains
|
|
|
Losses
|
United
States government agency
securities
|
|
$
|
13
|
|
|
$
|
2
|
|
|
$
|
128
|
|
|
$
|
--
|
Mortgage-backed
securities
|
|
|
149
|
|
|
|
--
|
|
|
|
85
|
|
|
|
8
|
Municipals
|
|
|
16
|
|
|
|
--
|
|
|
|
13
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
178
|
|
|
$
|
2
|
|
|
$
|
226
|
|
|
$
|
8
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note C – Investment
Securities—Continued
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, 2009
|
|
|
December
31, 2008
|
|
|
Unrealized
Loss
|
|
|
Carrying
Value
|
|
|
Unrealized
Loss
|
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
4
|
|
|
$
|
281
|
United
States government agency
securities
|
|
|
2
|
|
|
|
700
|
|
|
|
--
|
|
|
|
--
|
|
|
$
|
2
|
|
|
$
|
700
|
|
|
$
|
4
|
|
|
$
|
281
|
In
excess of one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
4
|
|
|
$
|
501
|
Management
does not believe any individual unrealized loss as of September 30, 2009
represents an other-than-temporary loss (primarily due to such amounts being
attributable to changes in interest rates). Further, it does not
intend to sell such securities and believes it is unlikely a sale would become
required before the amortized cost can be recovered.
Gross
realized gains and losses from sales and maturities of investment securities
were insignificant for the periods presented.
Scheduled maturities of investment
securities held as of September 30, 2009 were as follows (in
$1,000s):
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
5,517
|
|
|
$
|
5,523
|
After
one year, through five years
|
|
|
2,311
|
|
|
|
2,326
|
After
five years, through ten years
|
|
|
580
|
|
|
|
591
|
After
ten years
|
|
|
9,421
|
|
|
|
9,565
|
Securities
held for long-term
|
|
|
|
|
|
|
|
investment
without stated
|
|
|
|
|
|
|
|
maturities
|
|
|
30,710
|
|
|
|
30,710
|
|
|
|
|
|
|
|
|
|
|
$
|
48,539
|
|
|
$
|
48,715
|
Note D – Fair
Value
Accounting
standards establish a hierarchy that prioritizes the use of fair value inputs
used in valuation methodologies into the following three levels:
|
Level
1: Quoted prices (unadjusted) for identical assets or
liabilities in active markets that the entity has the ability to access as
of the measurement date.
|
|
Level
2: Significant observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets
that are not active; or other inputs that are observable or can be derived
from or corroborated by observable market data by correlation or other
means.
|
|
Level
3: Significant unobservable inputs that reflect the reporting
entity's own assumptions about the assumptions that market participants
would use in pricing an asset or
liability.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note D – Fair Value –
Continued
The
following is a description of Capitol's valuation methodologies used to measure
and disclose the fair values of its assets and liabilities on a recurring or
nonrecurring basis:
|
Investment securities
available for sale:
Securities available for sale are
recorded at fair value on a recurring basis. Fair value
measurement is based on quoted prices, when available (Level
1). If quoted prices are not available, fair values are
measured using independent pricing models (Level
2).
|
|
Mortgage loans held for
sale:
Mortgage loans held for sale are carried at the
lower of cost or fair value and are measured on a nonrecurring
basis. There were no mortgage loans held for sale written down
to fair value at September 30, 2009. Fair value is based on
independent quoted market prices, where applicable, or the prices for
other mortgage whole loans with similar
characteristics.
|
|
Loans:
The
Corporation does not record loans at fair value on a recurring
basis. However, from time to time, nonrecurring fair value
adjustments to collateral-dependent loans are recorded to reflect partial
write-downs based on the observable market price, current appraised value
of the collateral or other estimates of fair
value.
|
|
Other real estate
owned:
At the time of foreclosure, foreclosed properties
are adjusted to estimated fair value less estimated costs to sell upon
transfer from portfolio loans to other real estate owned, establishing a
new accounting basis. The Corporation subsequently adjusts
estimated fair value on other real estate owned on a nonrecurring basis to
reflect partial write-downs based on the observable market price, current
appraised value of the asset or other estimates of fair
value.
|
The
balances of assets and liabilities measured at fair value on a recurring basis
as of September 30, 2009 were as follows (in $1,000s):
|
|
Total
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
|
|
|
|
Investment
securities available for sale:
|
|
|
|
|
|
United
States government agency
securities
|
|
$
|
7,161
|
|
|
$
|
7,161
|
Mortgage-backed
securities
|
|
|
10,061
|
|
|
|
10,061
|
Municipals
|
|
|
783
|
|
|
|
783
|
|
|
$
|
18,005
|
|
|
$
|
18,005
|
The
balances of assets and liabilities measured at fair value on a recurring basis
as of December 31, 2008 were as follows (in $1,000s):
|
|
Total
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
|
|
|
|
Investment
securities available for sale:
|
|
|
|
|
|
United
States government agency
securities
|
|
$
|
9,913
|
|
|
$
|
9,913
|
Mortgage-backed
securities
|
|
|
4,890
|
|
|
|
4,890
|
Municipals
|
|
|
781
|
|
|
|
781
|
|
|
$
|
15,584
|
|
|
$
|
15,584
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note D – Fair Value –
Continued
The
balances of assets and liabilities measured at fair value on a nonrecurring
basis as of September 30, 2009 were as follows (in $1,000s):
|
|
Total
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
|
|
|
|
Impaired
loans
(1)
|
|
$
|
123,914
|
|
|
$
|
123,914
|
|
|
|
|
|
|
|
|
Other
real estate owned
(1)
|
|
$
|
119,801
|
|
|
$
|
119,801
|
(1)
|
Represents
carrying value based on the appraised value of the applicable collateral
or foreclosed property or other estimates of fair
value.
|
The
balances of assets and liabilities measured at fair value on a nonrecurring
basis as of December 31, 2008 were as follows (in $1,000s):
|
|
Total
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
|
|
|
|
Impaired
loans
(1)
|
|
$
|
103,580
|
|
|
$
|
103,580
|
(1)
|
Represents
carrying value based on the appraised value of the applicable collateral
or other estimates of fair value.
|
Many of Capitol
'
s
collateral-dependent impaired loans and other real estate owned are located in
severely depressed real estate markets. In those markets, appraisal
data may be of limited usefulness in estimating fair value because comparable
sale transactions are infrequent, not orderly and are often distressed or
forced.
Appraisals
are generally obtained when it has been determined that a collateral-dependent
loan has become impaired or when it is likely a real-estate loan will be
foreclosed. Adjustments to the loan's carrying value or the allowance
for loan losses are made, when appropriate, after review of the appraisal or
subsequently if it is determined that the market significantly declines
further. The timing of the recognition of a collateral-dependent loan
as nonperforming is dependent on several factors, including the performance of
the loan, the payment history of the loan or the receipt of updated borrower
financial information. When borrower performance has deteriorated
(for example, sales or leasing has not occurred as expected), the borrower has
become late on the required payments or financial information received indicates
adverse financial trends, the loan will be regraded and, if appropriate, an
updated appraisal will be ordered. In the interim period between
loans being recognized as impaired and the appraisal being received, the loan
will be included within loss contingency pools. When the appraisal is
received and reviewed and any further fair value analysis is completed, the loan
will be evaluated for any appropriate charge-down. Generally,
negative differences between appraised value, less the estimated cost to sell,
and the carrying value of the loan are charged to the allowance for loan losses
when the appraisal has been received and reviewed. Occasionally,
additional amounts may be specifically reserved if there is a pending event
which may impact the fair value estimate. Internally-developed
evaluations may be used when the amount of the loan is less than
$250,000. Internal evaluations may also be used when the most recent
appraisal date is within a year and economic conditions have had corrections or
deterioration. Updated appraisals are obtained at least annually for
collateral-dependent loans and other real estate owned.
Effective
January 1, 2009, in accordance with recent accounting standards,
Capitol began applying the fair value measurement and disclosure provisions
regarding fair value to nonfinancial assets and liabilities measured on a
nonrecurring basis, which did not have a material effect on Capitol
'
s consolidated
financial position upon implementation. The Corporation measures the
fair value of the following nonfinancial assets on a nonrecurring basis:
(1) long-lived assets, (2) foreclosed assets (other real estate owned), (3) the
reporting unit under step one of its goodwill impairment test and (4) indefinite
lived intangible assets.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note D – Fair Value –
Continued
Comparative carrying values and
estimated fair values of financial instruments based upon the accounting
guidance set forth in ASC 825-10 were as follows (in $1,000s):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
Value
|
|
|
Estimated
Fair
Value
|
|
|
Carrying
Value
|
|
|
Estimated
Fair
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
889,694
|
|
|
$
|
889,694
|
|
|
$
|
624,366
|
|
|
$
|
624,366
|
|
Loans
held for sale
|
|
|
14,432
|
|
|
|
14,432
|
|
|
|
10,474
|
|
|
|
10,474
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
18,005
|
|
|
|
18,005
|
|
|
|
15,584
|
|
|
|
15,584
|
|
Held
for long-term investment
|
|
|
30,710
|
|
|
|
30,710
|
|
|
|
32,856
|
|
|
|
32,856
|
|
|
|
|
48,715
|
|
|
|
48,715
|
|
|
|
48,440
|
|
|
|
48,440
|
|
Portfolio
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,013,473
|
|
|
|
2,026,975
|
|
|
|
2,115,515
|
|
|
|
2,105,204
|
|
Residential
(including multi-family)
|
|
|
806,027
|
|
|
|
802,209
|
|
|
|
879,754
|
|
|
|
865,406
|
|
Construction,
land development and other
land
|
|
|
579,752
|
|
|
|
515,233
|
|
|
|
797,486
|
|
|
|
753,028
|
|
Total loans secured by real estate
|
|
|
3,399,252
|
|
|
|
3,344,417
|
|
|
|
3,792,755
|
|
|
|
3,723,638
|
|
Commercial
and other business-purpose loans
|
|
|
707,302
|
|
|
|
706,085
|
|
|
|
845,593
|
|
|
|
830,283
|
|
Consumer
|
|
|
45,866
|
|
|
|
46,394
|
|
|
|
61,340
|
|
|
|
62,313
|
|
Other
|
|
|
37,114
|
|
|
|
36,243
|
|
|
|
35,541
|
|
|
|
32,504
|
|
Total portfolio loans
|
|
|
4,189,534
|
|
|
|
4,133,139
|
|
|
|
4,735,229
|
|
|
|
4,648,738
|
|
Less
allowance for loan losses
|
|
|
(126,188
|
)
|
|
|
(126,188
|
)
|
|
|
(93,040
|
)
|
|
|
(93,040
|
)
|
Net portfolio loans
|
|
|
4,063,346
|
|
|
|
4,006,951
|
|
|
|
4,642,189
|
|
|
|
4,555,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
|
651,887
|
|
|
|
651,887
|
|
|
|
700,786
|
|
|
|
700,786
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
accounts
|
|
|
1,341,614
|
|
|
|
1,341,619
|
|
|
|
1,231,170
|
|
|
|
1,231,172
|
|
Time
certificates of less than $100,000
|
|
|
909,826
|
|
|
|
917,813
|
|
|
|
1,160,221
|
|
|
|
1,161,411
|
|
Time
certificates of $100,000 or more
|
|
|
1,605,016
|
|
|
|
1,610,752
|
|
|
|
1,405,435
|
|
|
|
1,408,431
|
|
Total interest-bearing
|
|
|
3,856,456
|
|
|
|
3,870,184
|
|
|
|
3,796,826
|
|
|
|
3,801,014
|
|
Total deposits
|
|
|
4,508,343
|
|
|
|
4,522,071
|
|
|
|
4,497,612
|
|
|
|
4,501,800
|
|
Notes
payable and short-term borrowings
|
|
|
300,326
|
|
|
|
302,051
|
|
|
|
446,925
|
|
|
|
447,490
|
|
Subordinated
debentures
|
|
|
167,402
|
|
|
|
170,841
|
|
|
|
167,293
|
|
|
|
170,841
|
|
Estimated
fair values of financial assets and liabilities in the preceding table are based
upon a comparison of current interest rates on financial instruments and the
timing of related scheduled cash flows to the estimated present value of such
cash flows using current estimated market rates of interest (unless quoted
market values or other fair value information is more readily
available). For example, the estimated fair value of portfolio loans
is based on discounted cash flow computations. Similarly, the
estimated fair value of time deposits, debt obligations and subordinated
debentures were determined through discounted cash flow
computations. Such estimates of fair value are not intended to
represent market value or portfolio liquidation value, and only represent an
estimate of fair value based on current financial reporting
requirements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note D – Fair Value –
Continued
Given
current market conditions, a portion of the loan portfolio is not readily
marketable and market prices do not exist. Capitol has not attempted
to market the loan portfolio to potential buyers, if any exist, to determine the
fair value of those instruments. Since negotiated prices in illiquid
markets depend upon the then present motivations of the buyer and seller, it is
reasonable to assume that actual sales prices could vary widely from any
estimate of fair value made without the benefit of
negotiations. Additionally, changes in market interest rates can
dramatically impact the value of financial instruments in a short period of
time. Accordingly, the fair value measurements for loans included in
the table on the preceding page are unlikely to represent the instruments'
liquidation values.
Note E – Stock
Options
Stock
option activity for the interim 2009 period is summarized as
follows:
|
|
Number
of
Stock
Options
Outstanding
|
|
|
Exercise
Price
Range
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1
|
|
|
2,374,159
|
|
|
$
|
13.50 to $ 46.20
|
|
|
$
|
28.28
|
Granted
|
|
|
69,520
|
|
|
|
6.04
|
|
|
|
6.04
|
Exercised
|
|
|
--
|
|
|
|
|
|
|
|
|
Cancelled
or expired
|
|
|
(68,699
|
)
|
|
|
13.50 to 21.82
|
|
|
|
20.88
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30
|
|
|
2,374,980
|
|
|
$
|
6.04 to $ 46.20
|
|
|
$
|
27.84
|
Stock
options were granted in the first nine months of 2009 and 2008, with an
aggregate fair value approximating $240,000 and $255,000,
respectively. Stock options granted during the interim 2009 period
have a vesting date of December 31, 2009 and stock options granted during the
interim 2008 period (52,360) became vested at December 31, 2008. Each
stock option expires seven years from date of grant. Share-based
compensation expense relating to stock options for the nine months ended
September 30, 2009 and 2008 approximated $342,000 and $565,000,
respectively.
As of
September 30, 2009, stock options outstanding had a weighted average remaining
contractual life of 2.23 years and, due to the exercise price being greater than
the current fair value of Capitol's common stock, had no intrinsic value at that
date. The following table summarizes stock options outstanding
segregated by exercise price range as of September 30, 2009:
|
|
|
|
|
|
Weighted
Average
|
Exercise
Price
Range
|
|
|
Number
Outstanding
|
|
|
Exercise
Price
|
|
Remaining
Contractual
Life
|
|
|
|
|
|
|
|
|
|
$
|
5.00 to 14.99
|
|
|
|
69,520
|
|
|
$
|
6.04
|
|
6.61
years
|
$
|
15.00 to 19.99
|
|
|
|
135,288
|
|
|
|
16.67
|
|
1.23
years
|
$
|
20.00 to 24.99
|
|
|
|
522,130
|
|
|
|
21.70
|
|
2.30
years
|
$
|
25.00 to 29.99
|
|
|
|
585,415
|
|
|
|
27.09
|
|
1.15
years
|
$
|
30.00 to 34.99
|
|
|
|
695,119
|
|
|
|
32.10
|
|
2.19
years
|
$
|
35.00 or more
|
|
|
|
367,508
|
|
|
|
37.92
|
|
3.42
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
outstanding
|
|
|
|
2,374,980
|
|
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note F – Net Loss Per Share
Attributable to Capitol Bancorp Limited
The
computations of basic and diluted loss per share were based on the following (in
1,000s) for the periods ended September 30:
|
|
Three
Month Period
|
|
|
Nine
Month Period
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator—net
loss attributable to Capitol
Bancorp
Limited for the period
|
|
$
|
(83,748
|
)
|
|
$
|
(32,495
|
)
|
|
$
|
(118,118
|
)
|
|
$
|
(29,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding,
excluding
unvested restricted shares
(denominator
for basic loss per share)
|
|
|
17,398
|
|
|
|
17,145
|
|
|
|
17,269
|
|
|
|
17,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
restricted shares
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Warrants
|
|
|
--
|
|
|
|
|
|
|
|
--
|
|
|
|
|
|
Stock
options
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
effect of dilutive securities
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted net loss per share—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares and
potential
dilution
|
|
|
17,398
|
|
|
|
17,145
|
|
|
|
17,269
|
|
|
|
17,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of antidilutive stock options excluded
from
diluted net loss per share computation
(see
Note E)
|
|
|
2,375
|
|
|
|
2,389
|
|
|
|
2,375
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of antidilutive unvested restricted shares
excluded
from diluted net loss per share
computation
|
|
|
109
|
|
|
|
61
|
|
|
|
109
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of antidilutive warrants excluded from
diluted
net loss per share computation
|
|
|
76
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
Note G – Trust-Preferred
Securities
In April
2009, the Corporation determined that it would commence the deferral of interest
payments on its various trust-preferred securities, as is permitted under the
terms of the securities, to conserve cash and capital resources. The
payment of interest may be deferred for periods up to five
years. During such deferral periods, Capitol is prohibited from
paying dividends on its common stock (subject to certain exceptions) and will
continue to accrue interest payable on such securities. Holders of
the trust-preferred securities will recognize current taxable income relating to
the deferred interest payments.
Note H – Share-Exchange
Transaction
Effective
May 31, 2009, Capitol completed a share-exchange transaction with the
noncontrolling shareholders of Bank of Auburn Hills, previously a 51%-owned
subsidiary. In conjunction with the share exchange, Capitol issued
227,000 previously unissued shares of Capitol's common stock and warrants for
the purchase of 76,000 shares of Capitol's common stock. The exercise
price of the warrants is $20.37 per share of Capitol's common stock, which
expire May 31, 2012. As a result of the share exchange transaction,
Bank of Auburn Hills became wholly-owned. Capitol's results of
operations would not have been materially different if the share exchange
transaction had occurred at the beginning of the periods
presented.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note I – Deconsolidation of
Subsidiaries
Bank of Santa Barbara, Community Bank
of Rowan and Summit Bank of Kansas City are majority-owned subsidiaries of
Capitol Development Bancorp Limited III (CDBL III) of which Capitol ceased to
have majority voting control effective September 30, 2009 when the previously
nonvoting Class B shares of CDBL III became voting. Thus, effective
September 30, 2009, these banks and the CDBL III holding company ceased to be
consolidated subsidiaries of Capitol and assets totaling $257.7 million and
related equity amounts were removed from the consolidated balance sheet on that
date.
Note J – Sale of Subsidiary
Banks
Effective September 21, 2009, Capitol
completed the sale of Yuma Community Bank, previously a wholly-owned
subsidiary. Capitol received $9.5 million in sale proceeds and
recorded a pre-tax gain of approximately $1.2 million. Capitol's
consolidated results of operations would not have been materially different if
the sale had occurred at the beginning of the periods presented.
In July 2009, Capitol entered into
definitive agreements to sell the following four affiliate
institutions: 1
st
Commerce Bank, Bank of Belleville, Bank of Santa Barbara and Community Bank of
Rowan. Bank of Santa Barbara and Community Bank of Rowan are
subsidiaries of CDBL III which as disclosed in Note I were deconsolidated
effective September 30, 2009. The projected financial impact of the
divestiture of these institutions is set forth in the accompanying pro forma
condensed consolidated financial statements on pages 42 and 44 (along with the
proposed spin-off discussed in Note K).
On November 6, 2009, the sale of Bank
of Santa Barbara was completed. The remaining three pending bank
sales are in various stages of regulatory approval for which approval is not
assured.
Note K – Proposed
Spin-Off
On July 21, 2009, Capitol announced its
intention to formally and legally separate the operations of Michigan Commerce
Bancorp Limited (MCBL) as an independent publicly-traded company through a
spin-off transaction. If completed, Capitol would continue to be a
bank holding company with national banking operations and MCBL would become a
separate publicly-traded bank holding company consisting of the substantial
majority of Capitol's prior Michigan-based banks (see accompanying pro forma
condensed consolidated financial statements on pages 42-44).
In the
proposed spin-off, Capitol's shareholders would receive shares of MCBL common
stock according to a distribution ratio. The distribution ratio and
related record date for the proposed distribution would be determined at a later
date. The proposed spin-off is subject to a number of significant
contingencies. The proposed spin-off would enable the two separate
publicly-traded companies to focus on maximizing opportunities for the distinct
business markets of each, and will allow both Capitol and MCBL to each develop
and implement a strategic plan that fits their specific market and
operations. As of the date of this report, Capitol has not received
regulatory approval of the proposed spin-off.
MCBL's
consolidated total assets approximated $1.2 billion or about 23% of Capitol's
total assets as of September 30, 2009. If the proposed spin-off had
been completed on September 30, 2009, consolidated total assets of Capitol would
have approximated $4.1 billion, while reflecting a 33.1% decline in
nonperforming assets and a modest increase in the consolidated total capital
ratio. If the proposed spin-off would have occurred at January 1,
2009, the consolidated net loss attributable to Capitol would have been reduced
48.5% to $60.8 million ($3.52 per share) for the nine months ended September 30,
2009.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL
BANCORP LIMITED – Continued
Note L – Proposed Share
Exchange Transaction
In July
2009, Capitol proposed a share exchange offer regarding the shares of Capitol
Development Bancorp Limited (CDBL) III-VI not already owned by Capitol, whereby
Class B common stock of the CDBLs could be exchanged for a combination of
convertible preferred stock of Capitol and trust-preferred
securities. The proposed exchange offer was terminated in October
2009.
Note M – Regulatory
Agreements
On September 21, 2009, Capitol and its
second-tier bank holding companies entered into a written agreement with the
Federal Reserve Bank of Chicago (the Reserve Bank) under which Capitol has
agreed to refrain from the following actions without the prior written consent
of the Reserve Bank (i) declare or pay dividends; (ii) receive dividends or any
other form of payment representing a reduction in capital from Michigan Commerce
Bank or from any of its subsidiary institutions that is subject to any
restriction by the institution's federal or state regulator that limits the
payment of dividends or other intercorporate payments; (iii) make any
distributions of interest, principal, or other sums of subordinated debentures
or trust preferred securities; (v) incur, increase or guarantee any debt; or
(vi) purchase or redeem any shares of its own stock or any shares of the stock
of Capitol, the second-tier bank holding companies, the nonbank subsidiaries or
any of the subsidiary banks that are held by shareholders.
Capitol
has also agreed to (i) submit to the Reserve Bank, within 60 days of the
agreement, a written plan to maintain sufficient capital at Capitol on a
consolidated basis and at Michigan Commerce Bank as a separate legal entity on a
stand-alone basis; (ii) notify the Reserve Bank no more than 30 days after the
end of any quarter in which Capitol's consolidated or Michigan Commerce Bank's
capital ratios fall below the approved capital plan's minimum ratios as well as
if any subsidiary institution's ratios fall below the minimum ratios required by
the institution's federal or state regulator; (iii) review and revise within 60
days of this agreement its ALLL methodology for loans held by Capitol and submit
to the Reserve Bank a written program for maintenance of an adequate ALLL for
loans held by Capitol; (iv) take all necessary actions to ensure each of its
subsidiary institutions comply with Federal Reserve regulations; (v) refrain
from increasing any fees or charging new fees to any subsidiary institution
without the prior written consent of the Reserve Bank; (vi) submit to the
Reserve Bank, within 60 days of the agreement, a written plan to enhance the
consolidated organization's risk management practices, a strategic plan to
improve the consolidated organization's earnings and overall condition for the
remainder of 2009 and a cash flow projection; (vii) comply with laws and
regulations regarding senior executive officer positions and severance payments;
and (viii) provide quarterly reports to the Reserve Bank regarding these
undertakings.
Certain of Capitol's bank
subsidiaries have entered into formal agreements with their applicable
regulatory agencies. Those agreements provide for certain
restrictions and other guidelines and/or limitations to be followed by the
banks. The banks generally subject to such regulatory agreements are
noted as such in the regulatory capital detail appearing on page
37.
Note N – Subsequent
Events
Management has evaluated subsequent
events through the time of filing this quarterly report on Form 10-Q on November
9, 2009.
On November 6, 2009, the sale of Bank
of Santa Barbara was completed, resulting in aggregate proceeds approximating
$3.9 million. As discussed in Note I, the Bank of Santa Barbara was
not included in Capitol's consolidated assets at the time of
sale. The pre-tax gain on sale of the bank will approximate $1.1
million.
On November 6, 2009, new tax
legislation was signed into law which would increase the amount of tax benefits
realizable through carryback of operating losses. Management has not
completed its analysis of that new tax legislation, however, it is believed that
it will be beneficial to the Corporation during the fourth quarter of 2009
through the recognition of additional income tax benefits in the form of
potential refund of taxes previously paid which were charged to expense in prior
years.
PART
I, ITEM 2
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion and analysis is intended as a review of significant factors
affecting the financial condition and results of operations of Capitol for the
periods indicated. The discussion should be read in conjunction with
the unaudited condensed consolidated financial statements and the notes thereto
presented herein. In addition to historical information, the
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Capitol's actual results could differ significantly
from those anticipated in these forward-looking statements as a result of
certain factors discussed in this report. Please refer to commentary
regarding forward-looking statements appearing on page 2 of this
document.
Financial
Condition
Total
assets approximated $5.3 billion at September 30, 2009 and $5.7 billion at
December 31, 2008. The balance sheet includes Capitol and its
consolidated subsidiaries (in thousands):
|
|
Total
Assets
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
Arizona
Region:
|
|
|
|
|
|
Arrowhead
Community Bank
|
|
$
|
77,223
|
|
|
$
|
80,606
|
Asian
Bank of Arizona
|
|
|
40,202
|
|
|
|
38,127
|
Bank
of Tucson
|
|
|
206,996
|
|
|
|
189,869
|
Camelback
Community Bank
|
|
|
89,859
|
|
|
|
93,754
|
Central
Arizona Bank
|
|
|
88,347
|
|
|
|
79,775
|
Colonia
Bank
|
|
|
12,786
|
|
|
|
12,522
|
Mesa
Bank
|
|
|
206,423
|
|
|
|
248,262
|
Southern
Arizona Community Bank
|
|
|
89,568
|
|
|
|
88,146
|
Sunrise
Bank of Albuquerque
|
|
|
79,724
|
|
|
|
81,977
|
Sunrise
Bank of Arizona
|
|
|
112,318
|
|
|
|
119,395
|
Yuma
Community Bank
(3)
|
|
|
|
|
|
|
73,028
|
Arizona
Region Total
|
|
|
1,003,446
|
|
|
|
1,105,461
|
|
|
|
|
|
|
|
|
California
Region:
|
|
|
|
|
|
|
|
Bank
of Escondido
|
|
|
106,147
|
|
|
|
96,803
|
Bank
of Feather River
|
|
|
34,014
|
|
|
|
29,218
|
Bank
of San Francisco
|
|
|
81,270
|
|
|
|
74,670
|
Bank
of Santa Barbara
(2)
|
|
|
|
|
|
|
72,076
|
Napa
Community Bank
|
|
|
163,014
|
|
|
|
149,093
|
Point
Loma Community Bank
|
|
|
75,167
|
|
|
|
61,514
|
Sunrise
Bank of San Diego
|
|
|
84,048
|
|
|
|
86,322
|
Sunrise
Community Bank
|
|
|
42,323
|
|
|
|
36,139
|
California
Region Total
|
|
|
585,983
|
|
|
|
605,835
|
|
|
|
|
|
|
|
|
Colorado
Region:
|
|
|
|
|
|
|
|
Fort
Collins Commerce Bank
|
|
|
88,504
|
|
|
|
80,247
|
Larimer
Bank of Commerce
|
|
|
90,146
|
|
|
|
88,725
|
Loveland
Bank of Commerce
|
|
|
38,944
|
|
|
|
32,034
|
Mountain
View Bank of Commerce
|
|
|
46,226
|
|
|
|
37,740
|
Colorado
Region Total
|
|
|
263,820
|
|
|
|
238,746
|
|
|
|
|
|
|
|
|
Great
Lakes Region:
|
|
|
|
|
|
|
|
Bank
of Auburn Hills
|
|
|
36,124
|
|
|
|
43,856
|
Bank
of Maumee
|
|
|
50,048
|
|
|
|
56,812
|
Bank
of Michigan
|
|
|
107,384
|
|
|
|
78,716
|
Capitol
National Bank
|
|
|
227,743
|
|
|
|
245,354
|
Elkhart
Community Bank
|
|
|
96,550
|
|
|
|
99,917
|
Evansville
Commerce Bank
|
|
|
56,601
|
|
|
|
63,228
|
Goshen
Community Bank
|
|
|
80,393
|
|
|
|
87,419
|
Michigan
Commerce Bank
(1)
|
|
|
1,187,487
|
|
|
|
1,275,125
|
Ohio
Commerce Bank
|
|
|
63,716
|
|
|
|
60,678
|
Paragon
Bank & Trust
|
|
|
102,479
|
|
|
|
107,491
|
Great
Lakes Region Total
|
|
|
2,008,525
|
|
|
|
2,118,596
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
Summary
of total assets – continued:
|
|
Total
Assets
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
Midwest
Region:
|
|
|
|
|
|
Adams
Dairy Bank
|
|
$
|
42,248
|
|
|
$
|
33,867
|
Bank
of Belleville
|
|
|
73,017
|
|
|
|
73,901
|
Community
Bank of Lincoln
|
|
|
56,535
|
|
|
|
53,222
|
Summit
Bank of Kansas City
(2)
|
|
|
|
|
|
|
53,429
|
Midwest
Region Total
|
|
|
171,800
|
|
|
|
214,419
|
|
|
|
|
|
|
|
|
Nevada
Region:
|
|
|
|
|
|
|
|
1
st
Commerce Bank
|
|
|
41,184
|
|
|
|
52,622
|
Bank
of Las Vegas
|
|
|
74,365
|
|
|
|
73,692
|
Black
Mountain Community Bank
|
|
|
173,101
|
|
|
|
157,545
|
Desert
Community Bank
|
|
|
107,244
|
|
|
|
100,312
|
Red
Rock Community Bank
|
|
|
138,547
|
|
|
|
126,993
|
Nevada
Region Total
|
|
|
534,441
|
|
|
|
511,164
|
|
|
|
|
|
|
|
|
Northeast
Region:
|
|
|
|
|
|
|
|
USNY
Bank
|
|
|
61,163
|
|
|
|
49,620
|
|
|
|
|
|
|
|
|
Northwest
Region:
|
|
|
|
|
|
|
|
Bank
of Bellevue
|
|
|
57,091
|
|
|
|
55,841
|
Bank
of Everett
|
|
|
44,232
|
|
|
|
44,756
|
Bank
of Tacoma
|
|
|
43,932
|
|
|
|
44,241
|
High
Desert Bank
|
|
|
44,803
|
|
|
|
41,904
|
Issaquah
Community Bank
|
|
|
35,034
|
|
|
|
36,942
|
Northwest
Region Total
|
|
|
225,092
|
|
|
|
223,684
|
|
|
|
|
|
|
|
|
Southeast
Region:
|
|
|
|
|
|
|
|
Bank
of Valdosta
|
|
|
52,662
|
|
|
|
58,995
|
Community
Bank of Rowan
(2)
|
|
|
|
|
|
|
138,341
|
First
Carolina State Bank
|
|
|
114,011
|
|
|
|
119,774
|
Peoples
State Bank
|
|
|
26,837
|
|
|
|
29,233
|
Pisgah
Community Bank
|
|
|
58,705
|
|
|
|
36,897
|
Sunrise
Bank of Atlanta
|
|
|
57,521
|
|
|
|
62,198
|
Southeast
Region Total
|
|
|
309,736
|
|
|
|
445,438
|
|
|
|
|
|
|
|
|
Texas
Region:
|
|
|
|
|
|
|
|
Bank
of Fort Bend
|
|
|
34,831
|
|
|
|
26,424
|
Bank
of Las Colinas
|
|
|
43,810
|
|
|
|
31,354
|
Texas
Region Total
|
|
|
78,641
|
|
|
|
57,778
|
|
|
|
|
|
|
|
|
Parent
company and other, net
|
|
|
81,515
|
|
|
|
84,095
|
|
|
|
|
|
|
|
|
Consolidated
Totals
|
|
$
|
5,324,162
|
|
|
$
|
5,654,836
|
(1)
|
Michigan
Commerce Bank resulted from the merger of Ann Arbor Commerce Bank,
Brighton Commerce Bank, Detroit Commerce Bank, Grand Haven Bank, Kent
Commerce Bank, Macomb Community Bank, Muskegon Commerce Bank, Oakland
Commerce Bank and Portage Commerce Bank effective March 31,
2009. For comparative purposes, the merger of those banks is
presented as if such merger occurred December 31, 2008.
|
(2)
|
Bank
of Santa Barbara, Community Bank of Rowan and Summit Bank of Kansas City
are majority-owned subsidiaries of Capitol Development Bancorp Limited
(CDBL) III of which Capitol ceased to have majority voting control
effective September 30, 2009. Thus, effective September 30,
2009, those banks and CDBL III ceased to be consolidated subsidiaries of
Capitol.
|
(3)
|
Capitol
sold its ownership in Yuma Community Bank effective September 21,
2009.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
Portfolio
loans, the single largest asset category, decreased during the nine months ended
September 30, 2009 by approximately $546 million, compared to loan growth of
about $347.6 million during the corresponding period of 2008. Of the
interim 2009 decrease, $203 million related to the deconsolidation of Bank of
Santa Barbara, Community Bank of Rowan and Summit Bank of Kansas
City. Portfolio growth has slowed in response to the need to preserve
liquidity and capital in the current economic climate and the general economic
slowdown occurring nationally.
Geographic diversification of
Capitol's balance sheet is important. Prior to 1996, all of Capitol's
banking operations were located in Michigan. As of September 30,
2009, 39% of the consolidated loan portfolio relates to banks located within the
Great Lakes Region (39% at December 31, 2008) and 61% of the consolidated loan
portfolio relates to banks located in other regions of the country (61% at
December 31, 2008). The reason why this is important is that
Capitol's diversification efforts will add stability to results of operations by
further reducing a disproportionate geographic concentration within a specific
region. On July 21, 2009, Capitol announced the proposed spin-off of
the substantial majority of its Michigan banking operation which, if completed,
would minimize Capitol's future exposure to the Michigan economy. The
proposed spin-off transaction is subject to a number of contingencies and is
discussed elsewhere in this narrative.
The
consolidated allowance for loan losses at September 30, 2009 approximated $126
million or 3.01% of total portfolio loans, a very significant increase from the
1.96% ratio at the beginning of the year, resulting from continued deterioration
in economic conditions and asset quality.
[The
remainder of this page intentionally left blank]
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
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 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 charged to operations and reduced by net charge-offs. The
table below summarizes portfolio loan balances and activity in the allowance for
loan losses (in thousands):
|
|
Periods
Ended September 30
|
|
|
|
Three
Month Period
|
|
|
Nine
Month Period
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses at beginning of period
|
|
$
|
114,215
|
|
|
$
|
63,904
|
|
|
$
|
93,040
|
|
|
$
|
58,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(5,593
|
)
|
|
|
(2,186
|
)
|
|
|
(11,218
|
)
|
|
|
(5,630
|
)
|
Residential
(including multi-family)
|
|
|
(6,845
|
)
|
|
|
(2,428
|
)
|
|
|
(18,213
|
)
|
|
|
(5,590
|
)
|
Construction,
land development and other land
|
|
|
(11,862
|
)
|
|
|
(
12,128
|
)
|
|
|
(25,729
|
)
|
|
|
(
15,248
|
)
|
Total
loans secured by real
estate
|
|
|
(24,300
|
)
|
|
|
(16,742
|
)
|
|
|
(55,160
|
)
|
|
|
(26,468
|
)
|
Commercial
and other business-purpose loans
|
|
|
(8,582
|
)
|
|
|
(3,753
|
)
|
|
|
(21,340
|
)
|
|
|
(8,051
|
)
|
Consumer
|
|
|
(485
|
)
|
|
|
(73
|
)
|
|
|
(1,029
|
)
|
|
|
(262
|
)
|
Other
|
|
|
(34
|
)
|
|
|
--
|
|
|
|
(35
|
)
|
|
|
(34
|
)
|
Total
charge-offs
|
|
|
(33,401
|
)
|
|
|
(20,568
|
)
|
|
|
(77,564
|
)
|
|
|
(34,815
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
29
|
|
|
|
181
|
|
|
|
151
|
|
|
|
899
|
|
Residential
(including multi-family)
|
|
|
51
|
|
|
|
130
|
|
|
|
252
|
|
|
|
590
|
|
Construction,
land development and other land
|
|
|
385
|
|
|
|
17
|
|
|
|
506
|
|
|
|
240
|
|
Total
loans secured by real
estate
|
|
|
465
|
|
|
|
328
|
|
|
|
909
|
|
|
|
1,729
|
|
Commercial
and other business-purpose loans
|
|
|
163
|
|
|
|
102
|
|
|
|
1,042
|
|
|
|
686
|
|
Consumer
|
|
|
88
|
|
|
|
9
|
|
|
|
117
|
|
|
|
74
|
|
Other
|
|
|
1
|
|
|
|
--
|
|
|
|
2
|
|
|
|
--
|
|
Total
recoveries
|
|
|
717
|
|
|
|
439
|
|
|
|
2,070
|
|
|
|
2,489
|
|
Net
charge-offs
|
|
|
(32,684
|
)
|
|
|
(20,129
|
)
|
|
|
(75,494
|
)
|
|
|
(32,326
|
)
|
Additions
to allowance charged to expense
|
|
|
48,771
|
|
|
|
53,810
|
|
|
|
112,756
|
|
|
|
71,787
|
|
Less
allowance for loan losses of subsidiaries no
longer
consolidated
|
|
|
(
4,114
|
)
|
|
|
|
|
|
|
(
4,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses at September 30
|
|
$
|
126,188
|
|
|
$
|
97,585
|
|
|
$
|
126,188
|
|
|
$
|
97,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
total portfolio loans for the period
|
|
$
|
4,505,447
|
|
|
$
|
4,617,153
|
|
|
$
|
4,623,317
|
|
|
$
|
4,521,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs (annualized) to average
portfolio
loans outstanding
|
|
|
2.90
|
%
|
|
|
1.74
|
%
|
|
|
2.18
|
%
|
|
|
0.
95
|
%
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
Interim
loan charge-offs for the nine-month 2009 period, which increased significantly
compared to 2008, are not necessarily indicative of future charge-off levels
because of the variability in asset quality and resolution of nonperforming
loans. The significant increase in the provision for loan losses in
2009 was associated primarily with Michigan, Arizona and Nevada banks, due to
growth in nonperforming loans and a sustained difficult and uncertain economic
climate. The interim 2009 provision for loan losses is discussed in
further detail in the ‘Results of Operations’ section of this
narrative.
The
amounts of the allowance for loan losses allocated in the following table
(dollars in thousands) are based on management's estimate of losses inherent in
the portfolio at the balance sheet date and should not be interpreted as an
indication of future charge-offs:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Amount
|
|
|
Percentage
of
Total
Portfolio
Loans
|
|
|
Amount
|
|
|
Percentage
of
Total
Portfolio
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
39,794
|
|
|
|
0.95
|
%
|
|
$
|
30,007
|
|
|
|
0.63
|
%
|
Residential
(including multi-family)
|
|
|
28,445
|
|
|
|
0.68
|
%
|
|
|
21,645
|
|
|
|
0.46
|
%
|
Construction,
land development and
other
land
|
|
|
23,764
|
|
|
|
0.57
|
%
|
|
|
17,496
|
|
|
|
0.37
|
%
|
Total
loans secured by real estate
|
|
|
92,003
|
|
|
|
2.20
|
%
|
|
|
69,148
|
|
|
|
1.46
|
%
|
Commercial
and other business-purpose loans
|
|
|
32,717
|
|
|
|
0.78
|
%
|
|
|
22,547
|
|
|
|
0.47
|
%
|
Consumer
|
|
|
1,255
|
|
|
|
0.03
|
%
|
|
|
1,032
|
|
|
|
0.02
|
%
|
Other
|
|
|
213
|
|
|
|
|
|
|
|
313
|
|
|
|
0.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
allowance for loan losses
|
|
$
|
126,188
|
|
|
|
3.01
|
%
|
|
$
|
93,040
|
|
|
|
1.96
|
%
|
[The
remainder of this page intentionally left blank]
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
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):
|
|
September
30,
2009
|
|
|
June
30,
2009
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
101,704
|
|
|
$
|
84,879
|
|
|
$
|
68,537
|
|
|
$
|
39,892
|
|
Residential
(including multi-family)
|
|
|
54,226
|
|
|
|
57,764
|
|
|
|
62,961
|
|
|
|
35,675
|
|
Construction,
land development and other land
|
|
|
86,720
|
|
|
|
87,055
|
|
|
|
77,861
|
|
|
|
72,996
|
|
Total
loans secured by real estate
|
|
|
242,650
|
|
|
|
229,698
|
|
|
|
209,359
|
|
|
|
148,563
|
|
Commercial
and other business-purpose loans
|
|
|
25,002
|
|
|
|
24,767
|
|
|
|
17,233
|
|
|
|
16,283
|
|
Consumer
|
|
|
513
|
|
|
|
586
|
|
|
|
356
|
|
|
|
190
|
|
Total
nonaccrual loans
|
|
|
268,165
|
|
|
|
255,051
|
|
|
|
226,948
|
|
|
|
165,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
due (
>
90 days)
loans and accruing interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
4,520
|
|
|
|
2,706
|
|
|
|
2,345
|
|
|
|
1,623
|
|
Residential
(including multi-family)
|
|
|
1,787
|
|
|
|
1,318
|
|
|
|
2,371
|
|
|
|
365
|
|
Construction,
land development and other land
|
|
|
2,990
|
|
|
|
4,284
|
|
|
|
109
|
|
|
|
2,293
|
|
Total
loans secured by real estate
|
|
|
9,297
|
|
|
|
8,308
|
|
|
|
4,825
|
|
|
|
4,281
|
|
Commercial
and other business-purpose loans
|
|
|
4,223
|
|
|
|
1,152
|
|
|
|
636
|
|
|
|
747
|
|
Consumer
|
|
|
29
|
|
|
|
42
|
|
|
|
50
|
|
|
|
146
|
|
Total
past due loans
|
|
|
13,549
|
|
|
|
9,502
|
|
|
|
5,511
|
|
|
|
5,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans
|
|
$
|
281,714
|
|
|
$
|
264,553
|
|
|
$
|
232,459
|
|
|
$
|
170,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate owned and other
repossessed
assets
|
|
|
120,107
|
|
|
|
103,953
|
|
|
|
87,074
|
|
|
|
67,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
nonperforming assets
|
|
$
|
401,821
|
|
|
$
|
368,506
|
|
|
$
|
319,533
|
|
|
$
|
237,659
|
|
Loans are considered impaired when it
is probable that all amounts due according to the contractual terms of a loan
agreement will not be collected, including contractually scheduled interest and
principal payments. Impaired loans, which are included in
nonperforming loans, are summarized below (in $1,000s):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Impaired
loans:
|
|
|
|
|
|
|
Loans
which have an allowance requirement
|
|
$
|
126,053
|
|
|
$
|
82,387
|
|
Loans
which do not have an allowance requirement
|
|
|
142,112
|
|
|
|
82,649
|
|
Total
impaired loans
|
|
$
|
268,165
|
|
|
$
|
165,036
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses related to impaired loans
|
|
$
|
30,781
|
|
|
$
|
16,769
|
|
Impaired
loans which do not have an allowance requirement include collateral-dependent
loans for which direct write-downs have been made and, accordingly, no allowance
requirement or allocation is necessary.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
Nonperforming
loans at September 30, 2009 approximated 6.72% of total portfolio loans, a sharp
increase from the December 31, 2008 ratio of 3.59%. Nonperforming
loans increased $112 million during the nine-month 2009
period. Notably, the pace of growth in nonperforming loans decreased
for the second consecutive quarter. Of the nonperforming loans at
September 30, 2009, about 89% were real estate secured. Those loans,
when originated, had appropriate loan-to-value ratios based upon real estate
market conditions at that time and, accordingly, have loss exposure which would
be expected to be minimal; however, underlying real estate values depend upon
current economic conditions and liquidation strategies. Most other
nonperforming loans were generally secured by other business
assets. Nonperforming loans at September 30, 2009 were in various
stages of resolution for which management believes such loans are adequately
collateralized or otherwise appropriately considered in its determination of the
adequacy of the allowance for loan losses.
Due to
local and regional economic conditions, there is uncertainty in future real
estate values, appraisal results and the resulting potential impact on valuation
of collateral-dependent loans and other real estate owned. The fair
value measurement of collateral-dependent loans and other real estate owned is
dependent primarily upon appraisal of the underlying property
value. Management cautiously monitors real estate values and related
appraisal data when evaluating such valuations.
Appraisals
are generally obtained when it has been determined that a collateral-dependent
loan has become impaired or when it is likely a real-estate loan will be
foreclosed. Adjustments to the loan's carrying value or the allowance
for loan losses are made, when appropriate, after review of the appraisal or
subsequently if it is determined that the market significantly declines
further. The timing of the recognition of a collateral-dependent loan
as nonperforming is dependent on several factors, including the performance of
the loan, the payment history of the loan or the receipt of updated borrower
financial information. When borrower performance has deteriorated
(for example, sales or leasing has not occurred as expected), the borrower has
become late on the required payments or financial information received indicates
adverse financial trends, the loan will be regraded and, if appropriate, an
updated appraisal will be ordered. In the interim period between
loans being recognized as impaired and the appraisal being received, the loan
will be included within loss contingency pools. When the appraisal is
received and reviewed and any further fair value analysis is completed, the loan
will be evaluated for any appropriate charge-down. Generally,
negative differences between appraised value, less the estimated cost to sell,
and the carrying value of the loan are charged to the allowance for loan losses
when the appraisal has been received and reviewed. Occasionally,
additional amounts may be specifically reserved if there is a pending event
which may impact the fair value estimate. Internally-developed
evaluations may be used when the amount of the loan is less than
$250,000. Internal evaluations may also be used when the most recent
appraisal date is within a year and economic conditions have had corrections or
deterioration. Updated appraisals are obtained at least annually for
collateral-dependent loans and other real estate owned.
Many of
Capitol
'
s
collateral-dependent impaired loans are located in severely depressed real
estate markets. In those markets, appraisal data may be of limited
usefulness in estimating fair value because comparable sale transactions are
infrequent, not orderly and are often distressed or forced. In
accordance with recent accounting standards on fair value, management made
significant adjustments to appraisal data earlier in 2009, reducing estimated
losses which would otherwise be recognized based on appraisals which appear to
be biased by forced or distressed sales. Although recent accounting
guidance provides for the use of alternative valuation techniques to estimate
fair value, other than the exclusive use of appraisals, certain bank regulatory
agencies appear to be singularly-focused on appraisal data even when such
appraisal data may be tainted by forced or distressed sales. Because
of this circumstance, bank regulatory agencies may increase their loss
estimates.
Total
nonperforming loans approximated $281.7 million at September 30,
2009. Of that total, $153.4 million or 54.5% (including some loans
carried at the parent level) were originated by banks within the Great Lakes
Region, primarily located in Michigan. Within the Great Lakes Region,
nonperforming loans approximated 3.66% of total consolidated portfolio loans at
September 30, 2009. Responsive to the elevated level of nonperforming
loans within the Great Lakes Region, higher levels of allowances for loan losses
have been established, approximating 4.01% of portfolio loans for the region on
a combined basis as of September 30, 2009 and ranging as high as
5.21%
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
at
certain banks. Those ratios can be contrasted with other banks and
geographic regions within the Corporation with lower levels of nonperforming
loans. Nonperforming loans have increased during the nine months
ended September 30, 2009 in other regions, such as the Arizona Region ($7.6
million increase) and the Nevada Region ($27.4 million increase) to 1.19% and
1.04% of consolidated portfolio loans, respectively, as the effects of the
recession have had an evolving significant effect on those regions
recently.
In
addition to the identification of nonperforming loans involving borrowers with
payment performance difficulties (i.e., nonaccrual loans and loans past due 90
days or more), management utilizes an internal loan review process to identify
other potential problem loans which may warrant additional monitoring or other
attention. This loan review process is a continuous activity which
periodically updates internal loan ratings. At inception, all loans
are individually assigned a rating which grades the credits on a risk basis,
based on the financial strength of the borrower and guarantors and other factors
such as nature of the borrower's business climate, local economic conditions and
other subjective factors. The loan rating process is fluid and
subjective.
Potential
problem loans include loans which are generally performing as agreed; however,
because of loan reviews and/or lending staff's risk assessment, increased
monitoring is deemed appropriate. In addition, some loans are
assigned a more adverse classification, with specific performance issues or
other risk factors requiring close management and development of specific
remedial action plans.
At
September 30, 2009, potential problem loans (including the previously-mentioned
nonperforming loans) approximated $826 million or about 20% of total
consolidated portfolio loans, a significant increase compared to approximately
$551 million or about 12% at December 31, 2008. These potential
problem loans do not necessarily have significant loss exposure (nor are they
necessarily deemed 'impaired'), but rather are identified by management in this
manner to aid in loan administration and risk management. Management
has considered these loans in its evaluation of the adequacy of the allowance
for loan losses. Management believes, however, that current general
economic conditions in some markets may result in higher levels of future loan
losses in comparison to previous years, as experienced in the first nine months
of 2009.
Real
estate owned and other repossessed assets increased $53 million to $120 million
during the nine months ended September 30, 2009. Most of this
increase ($48 million) was related to banks located in Michigan and the Arizona
Region.
Foreclosure
laws in Michigan generally favor borrowers rather than lenders and, accordingly,
foreclosure and redemption periods (i.e., the number of months it takes for a
financial institution to obtain clear title to freely market the real estate)
take much longer than many other states. Further, once the property
is available to the bank for sale or liquidation, market conditions, as they are
currently (particularly in Michigan and some western communities), may not be
conducive to rapid marketing or near-term sale of the properties.
Asset
quality is summarized on the following two pages.
[The
remainder of this page intentionally left blank]
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
The
following comparative analysis summarizes each bank's total portfolio loans,
allowance for loan losses, nonperforming loans and ratio of the allowance as a
percentage of portfolio loans (dollars in thousands):
|
|
|
|
|
Allowance
for
|
|
|
|
|
|
Allowance
as a Percentage
|
|
|
|
Total
Portfolio Loans
|
|
|
Loan
Losses
|
|
|
Nonperforming
Loans
|
|
|
of
Total Portfolio Loans
|
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
Arizona
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead
Community Bank
|
|
$
|
53,759
|
|
|
$
|
69,487
|
|
|
$
|
4,561
|
|
|
$
|
2,375
|
|
|
$
|
5,964
|
|
|
$
|
7,430
|
|
|
|
8.48
|
%
|
|
|
3.42
|
%
|
Asian
Bank of Arizona
|
|
|
31,257
|
|
|
|
33,023
|
|
|
|
1,000
|
|
|
|
694
|
|
|
|
461
|
|
|
|
1,898
|
|
|
|
3.20
|
%
|
|
|
2.10
|
%
|
Bank
of Tucson
|
|
|
153,793
|
|
|
|
168,390
|
|
|
|
1,936
|
|
|
|
1,550
|
|
|
|
4,375
|
|
|
|
2,462
|
|
|
|
1.26
|
%
|
|
|
0.92
|
%
|
Camelback
Community Bank
|
|
|
79,206
|
|
|
|
84,957
|
|
|
|
1,320
|
|
|
|
789
|
|
|
|
3,835
|
|
|
|
2,030
|
|
|
|
1.67
|
%
|
|
|
0.93
|
%
|
Central
Arizona Bank
|
|
|
68,203
|
|
|
|
69,372
|
|
|
|
2,917
|
|
|
|
1,339
|
|
|
|
2,388
|
|
|
|
1,895
|
|
|
|
4.28
|
%
|
|
|
1.93
|
%
|
Colonia
Bank
|
|
|
10,429
|
|
|
|
7,483
|
|
|
|
216
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
2.07
|
%
|
|
|
1.60
|
%
|
Mesa
Bank
|
|
|
107,965
|
|
|
|
147,853
|
|
|
|
2,459
|
|
|
|
3,250
|
|
|
|
14,492
|
|
|
|
21,423
|
|
|
|
2.28
|
%
|
|
|
2.20
|
%
|
Southern
Arizona Community Bank
|
|
|
79,338
|
|
|
|
79,434
|
|
|
|
1,110
|
|
|
|
875
|
|
|
|
164
|
|
|
|
|
|
|
|
1.40
|
%
|
|
|
1.10
|
%
|
Sunrise
Bank of Albuquerque
|
|
|
65,561
|
|
|
|
74,115
|
|
|
|
1,269
|
|
|
|
933
|
|
|
|
6,296
|
|
|
|
43
|
|
|
|
1.94
|
%
|
|
|
1.26
|
%
|
Sunrise
Bank of Arizona
|
|
|
88,607
|
|
|
|
110,131
|
|
|
|
1,676
|
|
|
|
1,159
|
|
|
|
11,976
|
|
|
|
3,707
|
|
|
|
1.89
|
%
|
|
|
1.05
|
%
|
Yuma
Community Bank
(3)
|
|
|
|
|
|
|
63,804
|
|
|
|
|
|
|
|
730
|
|
|
|
|
|
|
|
1,506
|
|
|
|
|
|
|
|
1.14
|
%
|
Arizona
Region Total
|
|
|
738,118
|
|
|
|
908,049
|
|
|
|
18,464
|
|
|
|
13,814
|
|
|
|
49,951
|
|
|
|
42,394
|
|
|
|
2.50
|
%
|
|
|
1.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Escondido
|
|
|
69,420
|
|
|
|
62,608
|
|
|
|
1,784
|
|
|
|
810
|
|
|
|
2,838
|
|
|
|
817
|
|
|
|
2.57
|
%
|
|
|
1.29
|
%
|
Bank
of Feather River
|
|
|
27,178
|
|
|
|
22,962
|
|
|
|
347
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
1.28
|
%
|
|
|
1.39
|
%
|
Bank
of San Francisco
|
|
|
72,473
|
|
|
|
60,772
|
|
|
|
1,352
|
|
|
|
823
|
|
|
|
597
|
|
|
|
299
|
|
|
|
1.87
|
%
|
|
|
1.35
|
%
|
Bank
of Santa Barbara
(2)
|
|
|
|
|
|
|
60,535
|
|
|
|
|
|
|
|
1,138
|
|
|
|
|
|
|
|
1,841
|
|
|
|
|
|
|
|
1.88
|
%
|
Napa
Community Bank
|
|
|
141,984
|
|
|
|
130,150
|
|
|
|
2,550
|
|
|
|
1,890
|
|
|
|
2,849
|
|
|
|
1,848
|
|
|
|
1.80
|
%
|
|
|
1.45
|
%
|
Point
Loma Community Bank
|
|
|
51,498
|
|
|
|
52,497
|
|
|
|
1,100
|
|
|
|
797
|
|
|
|
2,172
|
|
|
|
795
|
|
|
|
2.14
|
%
|
|
|
1.52
|
%
|
Sunrise
Bank of San Diego
|
|
|
66,748
|
|
|
|
76,282
|
|
|
|
2,620
|
|
|
|
1,048
|
|
|
|
3,609
|
|
|
|
1,444
|
|
|
|
3.93
|
%
|
|
|
1.37
|
%
|
Sunrise
Community Bank
|
|
|
33,210
|
|
|
|
28,355
|
|
|
|
995
|
|
|
|
440
|
|
|
|
1,107
|
|
|
|
|
|
|
|
3.00
|
%
|
|
|
1.55
|
%
|
California
Region Total
|
|
|
462,511
|
|
|
|
494,161
|
|
|
|
10,748
|
|
|
|
7,266
|
|
|
|
13,172
|
|
|
|
7,044
|
|
|
|
2.32
|
%
|
|
|
1.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort
Collins Commerce Bank
|
|
|
80,945
|
|
|
|
74,280
|
|
|
|
1,630
|
|
|
|
1,101
|
|
|
|
1,829
|
|
|
|
48
|
|
|
|
2.01
|
%
|
|
|
1.48
|
%
|
Larimer
Bank of Commerce
|
|
|
79,377
|
|
|
|
78,638
|
|
|
|
1,620
|
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
|
|
2.04
|
%
|
|
|
1.48
|
%
|
Loveland
Bank of Commerce
|
|
|
33,174
|
|
|
|
27,251
|
|
|
|
590
|
|
|
|
652
|
|
|
|
1,386
|
|
|
|
1,090
|
|
|
|
1.78
|
%
|
|
|
2.39
|
%
|
Mountain
View Bank of Commerce
|
|
|
39,037
|
|
|
|
32,180
|
|
|
|
601
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
1.54
|
%
|
|
|
1.47
|
%
|
Colorado
Region Total
|
|
|
232,533
|
|
|
|
212,349
|
|
|
|
4,441
|
|
|
|
3,387
|
|
|
|
3,215
|
|
|
|
1,138
|
|
|
|
1.91
|
%
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great
Lakes Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Auburn Hills
|
|
|
31,346
|
|
|
|
39,914
|
|
|
|
1,625
|
|
|
|
988
|
|
|
|
1,536
|
|
|
|
2,895
|
|
|
|
5.18
|
%
|
|
|
2.48
|
%
|
Bank
of Maumee
|
|
|
40,521
|
|
|
|
50,094
|
|
|
|
1,100
|
|
|
|
752
|
|
|
|
542
|
|
|
|
37
|
|
|
|
2.71
|
%
|
|
|
1.50
|
%
|
Bank
of Michigan
|
|
|
66,123
|
|
|
|
67,700
|
|
|
|
1,191
|
|
|
|
996
|
|
|
|
1,498
|
|
|
|
306
|
|
|
|
1.80
|
%
|
|
|
1.47
|
%
|
Capitol
National Bank
|
|
|
182,751
|
|
|
|
213,392
|
|
|
|
7,456
|
|
|
|
8,341
|
|
|
|
19,021
|
|
|
|
12,828
|
|
|
|
4.08
|
%
|
|
|
3.91
|
%
|
Elkhart
Community Bank
|
|
|
77,470
|
|
|
|
87,971
|
|
|
|
2,748
|
|
|
|
1,702
|
|
|
|
7,188
|
|
|
|
3,941
|
|
|
|
3.55
|
%
|
|
|
1.93
|
%
|
Evansville
Commerce Bank
|
|
|
46,971
|
|
|
|
55,779
|
|
|
|
1,160
|
|
|
|
943
|
|
|
|
1,055
|
|
|
|
158
|
|
|
|
2.47
|
%
|
|
|
1.69
|
%
|
Goshen
Community Bank
|
|
|
63,799
|
|
|
|
74,144
|
|
|
|
1,706
|
|
|
|
1,501
|
|
|
|
1,839
|
|
|
|
876
|
|
|
|
2.67
|
%
|
|
|
2.02
|
%
|
Michigan
Commerce Bank
(1)
|
|
|
1,001,207
|
|
|
|
1,127,348
|
|
|
|
44,061
|
|
|
|
30,258
|
|
|
|
107,467
|
|
|
|
63,092
|
|
|
|
4.40
|
%
|
|
|
2.68
|
%
|
Ohio
Commerce Bank
|
|
|
52,956
|
|
|
|
48,207
|
|
|
|
814
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
1.54
|
%
|
|
|
1.50
|
%
|
Paragon
Bank & Trust
|
|
|
70,214
|
|
|
|
87,651
|
|
|
|
3,655
|
|
|
|
2,990
|
|
|
|
6,820
|
|
|
|
6,447
|
|
|
|
5.21
|
%
|
|
|
3.41
|
%
|
Great
Lakes Region Total
|
|
|
1,633,358
|
|
|
|
1,852,200
|
|
|
|
65,516
|
|
|
|
49,194
|
|
|
|
146,966
|
|
|
|
90,580
|
|
|
|
4.01
|
%
|
|
|
2.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adams
Dairy Bank
|
|
|
35,330
|
|
|
|
28,834
|
|
|
|
645
|
|
|
|
450
|
|
|
|
207
|
|
|
|
|
|
|
|
1.83
|
%
|
|
|
1.56
|
%
|
Bank
of Belleville
|
|
|
63,371
|
|
|
|
65,150
|
|
|
|
938
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
1.48
|
%
|
|
|
1.42
|
%
|
Community
Bank of Lincoln
|
|
|
45,232
|
|
|
|
43,657
|
|
|
|
960
|
|
|
|
674
|
|
|
|
263
|
|
|
|
|
|
|
|
2.12
|
%
|
|
|
1.54
|
%
|
Summit
Bank of Kansas City
(2)
|
|
|
|
|
|
|
44,068
|
|
|
|
|
|
|
|
709
|
|
|
|
|
|
|
|
779
|
|
|
|
|
|
|
|
1.61
|
%
|
Midwest
Region Total
|
|
|
143,933
|
|
|
|
181,709
|
|
|
|
2,543
|
|
|
|
2,756
|
|
|
|
470
|
|
|
|
779
|
|
|
|
1.77
|
%
|
|
|
1.52
|
%
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
Summary
of loan information – continued:
|
|
|
|
|
Allowance
for
|
|
|
|
|
|
Allowance
as a Percentage
|
|
|
|
Total
Portfolio Loans
|
|
|
Loan
Losses
|
|
|
Nonperforming
Loans
|
|
|
of
Total Portfolio Loans
|
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
Nevada
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Commerce Bank
|
|
$
|
34,264
|
|
|
$
|
30,663
|
|
|
$
|
1,207
|
|
|
$
|
740
|
|
|
$
|
6,332
|
|
|
$
|
1,000
|
|
|
|
3.52
|
%
|
|
|
2.41
|
%
|
Bank
of Las Vegas
|
|
|
63,021
|
|
|
|
64,648
|
|
|
|
2,092
|
|
|
|
901
|
|
|
|
7,982
|
|
|
|
4,399
|
|
|
|
3.32
|
%
|
|
|
1.39
|
%
|
Black
Mountain Community Bank
|
|
|
143,494
|
|
|
|
143,654
|
|
|
|
2,452
|
|
|
|
1,765
|
|
|
|
9,760
|
|
|
|
1,722
|
|
|
|
1.71
|
%
|
|
|
1.23
|
%
|
Desert
Community Bank
|
|
|
84,814
|
|
|
|
87,388
|
|
|
|
2,625
|
|
|
|
943
|
|
|
|
5,539
|
|
|
|
3,671
|
|
|
|
3.10
|
%
|
|
|
1.08
|
%
|
Red
Rock Community Bank
|
|
|
95,377
|
|
|
|
110,143
|
|
|
|
2,985
|
|
|
|
1,200
|
|
|
|
14,101
|
|
|
|
5,488
|
|
|
|
3.13
|
%
|
|
|
1.09
|
%
|
Nevada
Region Total
|
|
|
420,970
|
|
|
|
436,496
|
|
|
|
11,361
|
|
|
|
5,549
|
|
|
|
43,714
|
|
|
|
16,280
|
|
|
|
2.70
|
%
|
|
|
1.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USNY
Bank
|
|
|
54,889
|
|
|
|
43,471
|
|
|
|
833
|
|
|
|
680
|
|
|
|
|
|
|
|
|
|
|
|
1.52
|
%
|
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Bellevue
|
|
|
40,846
|
|
|
|
48,838
|
|
|
|
1,030
|
|
|
|
850
|
|
|
|
2,674
|
|
|
|
170
|
|
|
|
2.52
|
%
|
|
|
1.74
|
%
|
Bank
of Everett
|
|
|
36,665
|
|
|
|
32,735
|
|
|
|
1,190
|
|
|
|
686
|
|
|
|
3,344
|
|
|
|
92
|
|
|
|
3.25
|
%
|
|
|
2.10
|
%
|
Bank
of Tacoma
|
|
|
34,784
|
|
|
|
40,175
|
|
|
|
1,115
|
|
|
|
770
|
|
|
|
1,627
|
|
|
|
1,183
|
|
|
|
3.21
|
%
|
|
|
1.92
|
%
|
High
Desert Bank
|
|
|
36,419
|
|
|
|
35,407
|
|
|
|
900
|
|
|
|
624
|
|
|
|
841
|
|
|
|
|
|
|
|
2.47
|
%
|
|
|
1.76
|
%
|
Issaquah
Community Bank
|
|
|
28,641
|
|
|
|
24,238
|
|
|
|
700
|
|
|
|
385
|
|
|
|
734
|
|
|
|
|
|
|
|
2.44
|
%
|
|
|
1.59
|
%
|
Northwest
Region Total
|
|
|
177,355
|
|
|
|
181,393
|
|
|
|
4,935
|
|
|
|
3,315
|
|
|
|
9,220
|
|
|
|
1,445
|
|
|
|
2.78
|
%
|
|
|
1.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Valdosta
|
|
|
44,331
|
|
|
|
51,629
|
|
|
|
843
|
|
|
|
835
|
|
|
|
972
|
|
|
|
|
|
|
|
1.90
|
%
|
|
|
1.62
|
%
|
Community
Bank of Rowan
(2)
|
|
|
|
|
|
|
109,290
|
|
|
|
|
|
|
|
1,634
|
|
|
|
|
|
|
|
1,688
|
|
|
|
|
|
|
|
1.50
|
%
|
First
Carolina State Bank
|
|
|
93,979
|
|
|
|
97,670
|
|
|
|
1,710
|
|
|
|
1,312
|
|
|
|
2,877
|
|
|
|
2,421
|
|
|
|
1.82
|
%
|
|
|
1.34
|
%
|
Peoples
State Bank
|
|
|
19,438
|
|
|
|
21,314
|
|
|
|
399
|
|
|
|
366
|
|
|
|
1,158
|
|
|
|
937
|
|
|
|
2.05
|
%
|
|
|
1.72
|
%
|
Pisgah
Community Bank
|
|
|
45,729
|
|
|
|
27,746
|
|
|
|
918
|
|
|
|
475
|
|
|
|
419
|
|
|
|
100
|
|
|
|
2.01
|
%
|
|
|
1.71
|
%
|
Sunrise
Bank of Atlanta
|
|
|
45,657
|
|
|
|
52,763
|
|
|
|
1,465
|
|
|
|
1,063
|
|
|
|
3,150
|
|
|
|
269
|
|
|
|
3.21
|
%
|
|
|
2.01
|
%
|
Southeast
Region Total
|
|
|
249,134
|
|
|
|
360,412
|
|
|
|
5,335
|
|
|
|
5,685
|
|
|
|
8,576
|
|
|
|
5,415
|
|
|
|
2.14
|
%
|
|
|
1.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Fort Bend
|
|
|
29,403
|
|
|
|
19,859
|
|
|
|
465
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
1.58
|
%
|
|
|
1.54
|
%
|
Bank
of Las Colinas
|
|
|
34,772
|
|
|
|
29,657
|
|
|
|
705
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
2.03
|
%
|
|
|
1.47
|
%
|
Texas
Region Total
|
|
|
64,175
|
|
|
|
49,516
|
|
|
|
1,170
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
|
1.82
|
%
|
|
|
1.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
company and other, net
|
|
|
12,558
|
|
|
|
15,473
|
|
|
|
842
|
|
|
|
654
|
|
|
|
6,430
|
|
|
|
5,135
|
|
|
|
6.71
|
%
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
totals
|
|
$
|
4,189,534
|
|
|
$
|
4,735,229
|
|
|
$
|
126,188
|
|
|
$
|
93,040
|
|
|
$
|
281,714
|
|
|
$
|
170,210
|
|
|
|
3.01
|
%
|
|
|
1.96
|
%
|
(1)
|
Michigan
Commerce Bank resulted from the merger of Ann Arbor Commerce Bank,
Brighton Commerce Bank, Detroit Commerce Bank, Grand Haven Bank, Kent
Commerce Bank, Macomb Community Bank, Muskegon Commerce Bank, Oakland
Commerce Bank and Portage Commerce Bank effective March 31,
2009. For comparative purposes, the merger of those banks is
presented as if such merger occurred December 31, 2008.
|
(2)
|
Bank
of Santa Barbara, Community Bank of Rowan and Summit Bank of Kansas City
are majority-owned subsidiaries of Capitol Development Bancorp Limited
(CDBL) III of which Capitol ceased to have majority voting control
effective September 30, 2009. Thus, effective September 30,
2009, those banks and CDBL III ceased to be consolidated subsidiaries of
Capitol.
|
(3)
|
Capitol
sold its ownership in Yuma Community Bank effective September 21,
2009.
|
As
previously discussed, the adequacy of the allowance for loan losses is
determined by management at the balance-sheet date. Levels of
nonperforming loans may fluctuate at balance-sheet dates at amounts which are
not commensurate with the ratio of the allowance for loan losses or the
so-called allowance coverage ratio of nonperforming loans (i.e., nonperforming
loans as a percentage of the allowance for loan losses). Several
factors may contribute to this occurrence. For example, estimated
losses relating to impaired collateral-dependent loans are generally reflected
as direct write-downs to those loans (and, accordingly, there is no related
allowance for loan losses allocation necessary). Further, some
collateral-dependent loans may have no or minimal loss potential which would
negate a computational comparison between the allowance for loan losses and such
nonperforming loans.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
At
September 30, 2009, Capitol had $68 million of goodwill and other intangibles
($72.3 million at December 31, 2008). Goodwill arises in acquisition
accounting. In Capitol's history, most of this goodwill is the result
of share-exchange transactions when Capitol issued shares of its common stock at
a premium over the book value of the noncontrolling interest of a subsidiary
banks' shares. Resulting goodwill is recorded at the entity to which
the goodwill related. Current accounting rules require an annual
review of goodwill for potential impairment, which Capitol most recently
conducted as of November 30, 2008. An interim review for potential
goodwill impairment is deemed necessary when events or circumstances indicate
potential for impairment since the annual testing date. Impairment
testing is determined through a two-step process; step one involves using
published information regarding comparable bank-sale transactions and related
multiples of book values and multiples of earnings, as well as the primary
valuation methodology to determine fair value, which is the discounted cash flow
method. The second testing step is required in the event that any
reporting unit fails step one. Step two involves the determination of
the fair value of each component of the reporting unit's balance
sheet. The results of this approach to estimating fair value of the
reporting unit is compared to the implied fair value determined in step
one. The difference between the estimated fair value determined in
step two of the impairment test and the implied fair value represents implied
goodwill which, in turn, is compared to recorded goodwill. If implied
goodwill is less than recorded goodwill, impairment exists and the amount of
shortfall between implied goodwill and recorded goodwill is the impairment
amount which is to be written off in the period the determination is
made.
During
the third quarter of 2009, Capitol initiated an evaluation using August 31, 2009
information to determine if events or circumstances warranted an interim
impairment test of goodwill. Such events or circumstances considered
included recent increases in the level of nonperforming assets, changes in net
interest margin, level of operating expenses, profitability and recent changes
to elements of the discount rate. These are considered key inputs and
drivers in the step one valuation methodology which is discounted cash
flows. Capitol determined that during the third quarter of 2009, a
number of the key inputs, either individually or collectively, had changed
significantly for a number of the reporting units from prior quarter-ends as
well as since the last testing date of November 30, 2008 such that an updated
interim impairment test was warranted. The overall methodology for
evaluating potential impairment of goodwill did not change in 2009 from the
methodology used for annual testing performed in 2008, but assumptions used in
step one and step two analyses were updated to reflect the current
environment.
In performing step one of the interim
analyses, future cash flows were projected using updated assumptions for asset
growth, interest margin, noninterest income and noninterest
expense. Those cash flows were then discounted using an updated
discount rate that was adjusted for changes in the 20-year U.S. Treasury rate
and company-specific risk premiums. The discount rate used for all
entities was 16.14% which was 144 basis points higher than the discount rate
used for the majority of the entities during the annual impairment testing
conducted as of November 30, 2008. Additionally, cash flows were
discounted using a lower rate of 15.14% and higher rate of 17.14% in order to
stress-test the results of the analysis.
[The
remainder of this page intentionally left blank]
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Financial Condition –
Continued
The
following table provides information as to the amount of goodwill by the
reporting unit as of August 31, 2009, the estimated fair value determined in
step one under the discounted cash flow methodology as a percentage of carrying
value of equity and whether the reporting unit passed step one of the impairment
testing:
Entity
|
|
Recorded
Goodwill
as of
August
31,
2009
|
|
|
Estimated
Entity
Fair
Value
as
Percentage of
Book
Value
|
|
Did
Entity Pass
Step
One of
Impairment
Test?
|
|
|
(in
$1,000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paragon
Bank & Trust
|
|
$
|
1,321
|
|
|
|
105.13
|
%
|
Yes
|
Michigan
Commerce Bank
|
|
|
2,875
|
|
|
|
93.35
|
%
|
No
|
Elkhart
Community Bank
|
|
|
1,228
|
|
|
|
135.72
|
%
|
Yes
|
Goshen
Community Bank
|
|
|
1,407
|
|
|
|
115.92
|
%
|
Yes
|
Central
Arizona Bank
|
|
|
947
|
|
|
|
86.95
|
%
|
No
|
Camelback
Community Bank
|
|
|
894
|
|
|
|
130.91
|
%
|
Yes
|
Southern
Arizona Community Bank
|
|
|
916
|
|
|
|
154.09
|
%
|
Yes
|
Mesa
Bank
|
|
|
1,552
|
|
|
|
120.34
|
%
|
Yes
|
Arrowhead
Community Bank
|
|
|
644
|
|
|
|
83.94
|
%
|
No
|
Sunrise
Bank of Albuquerque
|
|
|
671
|
|
|
|
97.26
|
%
|
No
|
Sunrise
Bank of San Diego
|
|
|
1,965
|
|
|
|
96.11
|
%
|
No
|
Desert
Community Bank
|
|
|
1,213
|
|
|
|
156.93
|
%
|
Yes
|
Red
Rock Community Bank
|
|
|
2,582
|
|
|
|
148.15
|
%
|
Yes
|
Black
Mountain Community Bank
|
|
|
1,263
|
|
|
|
212.44
|
%
|
Yes
|
First
Carolina State Bank
|
|
|
3,926
|
|
|
|
62.26
|
%
|
No
|
Peoples
State Bank
|
|
|
2,125
|
|
|
|
28.83
|
%
|
No
|
Bank
of Las Vegas
|
|
|
1,800
|
|
|
|
85.85
|
%
|
No
|
Bank
of Escondido
|
|
|
2,806
|
|
|
|
86.21
|
%
|
No
|
|
|
|
|
|
|
|
|
|
|
Capitol
Bancorp Limited
|
|
$
|
70,596
|
|
|
|
133.83
|
%
|
Yes
|
As noted
in the table above, nine reporting units did not pass step one of the impairment
test and, accordingly, were subject to further evaluation under step two
testing. The resulting step two analysis determined one institution,
Peoples State Bank, in which the implied goodwill was less than the recorded
goodwill by approximately $1.5 million. Therefore, that amount was
written-off to noninterest expense effective September 2009. There
can be no assurance that future testing will not result in additional material
impairment charges at a future date.
Accounting
for income taxes (before valuation allowance; see following discussion)
requires significant estimates and management judgments. At September
30, 2009, Capitol had a deferred tax asset approximating $109 million ($61.3
million at December 31, 2008). If it is determined that realization
of the deferred tax asset is in doubt, a valuation reserve is required to reduce
the deferred tax asset to the amount which is more-likely-than-not
realizable.
Capitol
Bancorp's management has considered and reviewed the status of the corporation's
consolidated deferred tax asset as of September 30, 2009. As of that
date, the consolidated deferred tax asset consisted primarily of components
relating to provisions for loan losses and net operating losses of consolidated
subsidiaries. Current accounting rules require recording of a
valuation allowance for deferred taxes assets when realization of the asset is
less than more-likely-than-not.
Due to
continuing operating losses during 2009, management reassessed the potential
realization of the deferred tax asset as of September 30, 2009 and elected to
record a valuation allowance of $91 million, to reduce the deferred tax asset to
approximately $17.6 million, which represents the amount of the asset estimated
to be currently recoverable via carryback of current net operating
losses.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Results of
Operations
Summary
The third
quarter 2009 net loss attributable to Capitol was approximately $83.7 million
compared to $32.5 million reported for the third quarter of 2008. The
net loss per share attributable to Capitol for the three months ended September
30, 2009 was $4.81 compared to loss per share of $1.90 in the corresponding
period of 2008. The net loss attributable to Capitol for the nine
months ended September 30, 2009 approximated $118.1 million, compared to $29.7
million in the corresponding period of 2008. The net loss per share
attributable to Capitol was $6.84 for the nine months ended September 30, 2009,
compared to $1.73 in the corresponding 2008 period.
The
primary reason for the interim 2009 loss was a very large provision for loan
losses recorded during the nine months ended September 30, 2009 as the
Corporation continued to carefully assess the implications and impact of
declining property values and weak bank performance as well as a valuation
allowance of approximately $91 million recorded to reduce deferred tax
assets. The provision for loan losses increased $41 million to $112.8
million for the nine months ended September 30, 2009, compared to a provision of
$71.8 million for the corresponding period of 2008.
Analytical
Review
The
provision for loan losses for the three months ended September 30, 2009 was
$48.8 million compared to $53.8 million during the corresponding 2008
period. The provision for loan losses for the nine-month 2009 period
was $112.8 million compared to $71.8 million for the same period in
2008. The provision for loan losses increased significantly in the
2009 period due to higher levels of loan charge-offs and in response to growth
in nonperforming loans. Of the provision for loan losses for the nine
months ended September 30, 2009, about half was attributable to increasing the
allowance for loan losses as a percentage of portfolio loans from 1.96% to
3.01%. Provisions for loan losses are based upon management's
analysis of the adequacy of the allowance for loan losses, as previously
discussed. The significant increase in the provision for loan losses
compared to the preceding year had a material adverse effect on operating
results for the interim 2009 periods.
Net
interest income for the nine-month 2009 period totaled $118.1 million, a 5.65%
decrease compared to $125.2 million in 2008. Net interest income for
the three months ended September 30, 2009 totaled $40.1 million, a 2.41%
decrease compared to $41 million in 2008. The net interest margin
approximated 3.0% for the three months ended September 30, 2009, a 2 basis-point
increase compared to 2.98% for the three months ended December 31, 2008 and a 30
basis-point decrease compared to 3.3% for the three months ended September 30,
2008. Several causal factors impacted the 2009 margin, including
elevated levels of nonperforming loans, higher levels of liquidity, higher cost
of funds due to avoiding wholesale funding sources, migration of
noninterest-bearing deposits to interest-bearing accounts, changes in interest
rates and higher interest costs related to debt obligations. It is
difficult to speculate on future changes in net interest margin.
Noninterest
income for the three months ended September 30, 2009 was $7.2 million, a 3%
increase compared to the $7.0 million for the same period in 2008, primarily due
to a gain on the sale of a bank subsidiary. Noninterest income for
the nine months ended September 30, 2009 was $19.1 million, a decrease of
$880,000 or 4.4%, over the same period in 2008. Fees from origination
of non-portfolio residential mortgage loans totaled $3.2 million for the first
nine months of 2009, up slightly from $2.9 million for the comparable period in
2008, due to lower interest rates and increasing loan origination
volume.
The
largest element of noninterest expense is salaries and employee benefits, which
approximated $77 million for the nine months ended September 30, 2009, a
decrease from $82.6 million in the corresponding period of 2008. For
the three months ended September 30, 2009, salaries and employee benefits
expense decreased $5.8 million or about 20% from amounts recorded in the
comparable period of 2008, as a result of significant reductions in staffing and
other cost-cutting measures implemented in late 2008 and early
2009.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Results of Operations –
Continued
Noninterest
expense totaled $157.2 million for the nine-month 2009 period and $55.5 million
for the three months ended September 30, 2009, compared to $146.4 million and
$53.8 million, respectively, for the comparable periods of 2008. The
net increase in noninterest expense is associated with regulatory fees, growth
in the size of previously-existing banks, costs of problem loan administration
and other real estate write-downs. Costs associated with foreclosed
properties and other real estate increased to $18 million in the nine-month 2009
period ($4.1 million in the 2008 period) while the cost of FDIC insurance and
other regulatory fees also increased significantly to $11.3 million ($2.9
million in the 2008 period) largely attributable to a one-time special FDIC
industry-wide assessment effective June 30, 2009 which approximated $2.6
million. The FDIC has announced it is likely that an additional
special assessment will be imposed later in 2009, however, the amount has not
been determined.
The more
significant elements of other noninterest expense consisted of the following (in
thousands) for the periods ended September 30:
|
|
Three
Month Period
|
|
|
Nine
Month Period
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
services (ATMs, telephone
banking
and Internet banking)
|
|
$
|
649
|
|
|
$
|
687
|
|
|
$
|
2,102
|
|
|
$
|
1,868
|
|
Loan
and collection expense
|
|
|
834
|
|
|
|
410
|
|
|
|
2,097
|
|
|
|
1,443
|
|
Legal
fees
|
|
|
1,012
|
|
|
|
373
|
|
|
|
2,052
|
|
|
|
946
|
|
Directors'
fees
|
|
|
507
|
|
|
|
616
|
|
|
|
1,768
|
|
|
|
2,174
|
|
Advertising
|
|
|
513
|
|
|
|
838
|
|
|
|
1,533
|
|
|
|
2,471
|
|
Paper,
printing and supplies
|
|
|
517
|
|
|
|
648
|
|
|
|
1,526
|
|
|
|
2,200
|
|
Professional
fees
|
|
|
767
|
|
|
|
485
|
|
|
|
1,442
|
|
|
|
1,184
|
|
Travel,
lodging and meals
|
|
|
463
|
|
|
|
707
|
|
|
|
1,349
|
|
|
|
2,193
|
|
Communications
|
|
|
394
|
|
|
|
585
|
|
|
|
1,308
|
|
|
|
1,634
|
|
Postage
|
|
|
318
|
|
|
|
335
|
|
|
|
949
|
|
|
|
993
|
|
Taxes
other than income taxes
|
|
|
197
|
|
|
|
147
|
|
|
|
690
|
|
|
|
658
|
|
Dues
and memberships
|
|
|
207
|
|
|
|
245
|
|
|
|
634
|
|
|
|
704
|
|
Insurance
expense
|
|
|
204
|
|
|
|
158
|
|
|
|
549
|
|
|
|
451
|
|
Courier
service
|
|
|
185
|
|
|
|
220
|
|
|
|
542
|
|
|
|
692
|
|
Contracted
labor
|
|
|
114
|
|
|
|
101
|
|
|
|
189
|
|
|
|
345
|
|
Preopening
and start-up costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,038
|
|
Goodwill
impairment
|
|
|
1,500
|
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
Restructuring
charge
(1)
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
2,500
|
|
Other
|
|
|
2,074
|
|
|
|
3,560
|
|
|
|
6,446
|
|
|
|
8,696
|
|
Total
|
|
$
|
10,455
|
|
|
$
|
12,615
|
|
|
$
|
26,676
|
|
|
$
|
33,190
|
|
|
(1)
|
A
restructuring charge was accrued during the 2008 period related to plans
to reduce staffing in conjunction with consolidation of certain back
office functions and mergers of bank
charters.
|
[The
remainder of this page intentionally left blank]
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Results of
Operations
–
Continued
Operating results (dollars in
thousands) were as follows:
|
|
Nine
Months Ended September 30
|
|
|
|
Total
Revenues
|
|
|
Net
Income (Loss)
(1)
|
|
|
Return
on
Average
Equity
(2)
|
|
|
Return
on
Average
Assets
(2)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Arizona
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead
Community Bank
|
|
$
|
3,443
|
|
|
$
|
4,784
|
|
|
$
|
(8,415
|
)
|
|
$
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Asian
Bank of Arizona
|
|
|
1,662
|
|
|
|
1,467
|
|
|
|
(3,618
|
)
|
|
|
(685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Tucson
|
|
|
9,513
|
|
|
|
10,006
|
|
|
|
1,467
|
|
|
|
2,897
|
|
|
|
11.04
|
%
|
|
|
21.43
|
%
|
|
|
0.97
|
%
|
|
|
2.13
|
%
|
Camelback
Community Bank
|
|
|
4,003
|
|
|
|
4,536
|
|
|
|
(768
|
)
|
|
|
764
|
|
|
|
|
|
|
|
11.00
|
%
|
|
|
|
|
|
|
1.12
|
%
|
Central
Arizona Bank
|
|
|
3,050
|
|
|
|
3,628
|
|
|
|
(4,977
|
)
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colonia
Bank
|
|
|
435
|
|
|
|
80
|
|
|
|
(1,618
|
)
|
|
|
(551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa
Bank
|
|
|
6,261
|
|
|
|
11,058
|
|
|
|
(9,131
|
)
|
|
|
(8,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern
Arizona Community Bank
|
|
|
3,903
|
|
|
|
4,482
|
|
|
|
237
|
|
|
|
411
|
|
|
|
3.51
|
%
|
|
|
6.05
|
%
|
|
|
0.35
|
%
|
|
|
0.62
|
%
|
Sunrise
Bank of Albuquerque
|
|
|
3,155
|
|
|
|
3,955
|
|
|
|
(1,173
|
)
|
|
|
199
|
|
|
|
|
|
|
|
3.62
|
%
|
|
|
|
|
|
|
0.35
|
%
|
Sunrise
Bank of Arizona
|
|
|
5,088
|
|
|
|
6,201
|
|
|
|
(5,479
|
)
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yuma
Community Bank
(5)
|
|
|
3,225
|
|
|
|
4,043
|
|
|
|
372
|
|
|
|
468
|
|
|
|
7.69
|
%
|
|
|
7.96
|
%
|
|
|
0.78
|
%
|
|
|
0.82
|
%
|
Arizona
Region Total
|
|
|
43,738
|
|
|
|
54,240
|
|
|
|
(33,103
|
)
|
|
|
(6,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Escondido
|
|
|
3,559
|
|
|
|
3,789
|
|
|
|
(1,443
|
)
|
|
|
241
|
|
|
|
|
|
|
|
2.22
|
%
|
|
|
|
|
|
|
0.34
|
%
|
Bank
of Feather River
|
|
|
1,560
|
|
|
|
955
|
|
|
|
(716
|
)
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of San Francisco
|
|
|
3,415
|
|
|
|
2,807
|
|
|
|
(973
|
)
|
|
|
39
|
|
|
|
|
|
|
|
0.61
|
%
|
|
|
|
|
|
|
0.08
|
%
|
Bank
of Santa Barbara
(4)
|
|
|
2,571
|
|
|
|
3,083
|
|
|
|
(1,300
|
)
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Napa
Community Bank
|
|
|
6,801
|
|
|
|
6,551
|
|
|
|
1,224
|
|
|
|
914
|
|
|
|
10.26
|
%
|
|
|
8.47
|
%
|
|
|
1.11
|
%
|
|
|
0.94
|
%
|
Point
Loma Community Bank
|
|
|
2,521
|
|
|
|
2,828
|
|
|
|
(1,396
|
)
|
|
|
244
|
|
|
|
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
0.57
|
%
|
Sunrise
Bank of San Diego
|
|
|
3,565
|
|
|
|
4,174
|
|
|
|
(1,586
|
)
|
|
|
166
|
|
|
|
|
|
|
|
2.07
|
%
|
|
|
|
|
|
|
0.25
|
%
|
Sunrise
Community Bank
|
|
|
1,542
|
|
|
|
1,182
|
|
|
|
(2,530
|
)
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
Region Total
|
|
|
25,534
|
|
|
|
25,369
|
|
|
|
(8,720
|
)
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort
Collins Commerce Bank
|
|
|
3,860
|
|
|
|
3,424
|
|
|
|
262
|
|
|
|
536
|
|
|
|
3.63
|
%
|
|
|
7.81
|
%
|
|
|
0.42
|
%
|
|
|
1.06
|
%
|
Larimer
Bank of Commerce
|
|
|
4,030
|
|
|
|
3,279
|
|
|
|
326
|
|
|
|
299
|
|
|
|
5.40
|
%
|
|
|
5.27
|
%
|
|
|
0.49
|
%
|
|
|
0.60
|
%
|
Loveland
Bank of Commerce
|
|
|
1,531
|
|
|
|
1,035
|
|
|
|
(900
|
)
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mountain
View Bank of Commerce
|
|
|
1,711
|
|
|
|
746
|
|
|
|
(608
|
)
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
Region Total
|
|
|
11,132
|
|
|
|
8,484
|
|
|
|
(920
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great
Lakes Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Auburn Hills
|
|
|
1,683
|
|
|
|
2,123
|
|
|
|
(3,344
|
)
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Maumee
|
|
|
1,973
|
|
|
|
2,119
|
|
|
|
(2,336
|
)
|
|
|
(604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Michigan
|
|
|
3,556
|
|
|
|
3,707
|
|
|
|
(505
|
)
|
|
|
426
|
|
|
|
|
|
|
|
8.41
|
%
|
|
|
|
|
|
|
0.81
|
%
|
Capitol
National Bank
|
|
|
9,281
|
|
|
|
11,214
|
|
|
|
(4,005
|
)
|
|
|
233
|
|
|
|
|
|
|
|
1.61
|
%
|
|
|
|
|
|
|
0.14
|
%
|
Elkhart
Community Bank
|
|
|
3,550
|
|
|
|
4,354
|
|
|
|
(2,998
|
)
|
|
|
210
|
|
|
|
|
|
|
|
3.18
|
%
|
|
|
|
|
|
|
0.30
|
%
|
Evansville
Commerce Bank
|
|
|
2,640
|
|
|
|
3,020
|
|
|
|
(1,509
|
)
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goshen
Community Bank
|
|
|
3,304
|
|
|
|
3,946
|
|
|
|
(676
|
)
|
|
|
252
|
|
|
|
|
|
|
|
4.23
|
%
|
|
|
|
|
|
|
0.42
|
%
|
Michigan
Commerce Bank
(3)
|
|
|
49,397
|
|
|
|
62,027
|
|
|
|
(50,985
|
)
|
|
|
(6,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
Commerce Bank
|
|
|
2,292
|
|
|
|
1,991
|
|
|
|
(560
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paragon
Bank & Trust
|
|
|
4,181
|
|
|
|
5,370
|
|
|
|
(5,520
|
)
|
|
|
(725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great
Lakes Region Total
|
|
|
81,857
|
|
|
|
99,871
|
|
|
|
(72,438
|
)
|
|
|
(7,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adams
Dairy Bank
|
|
|
1,704
|
|
|
|
1,121
|
|
|
|
(587
|
)
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Belleville
|
|
|
2,839
|
|
|
|
2,706
|
|
|
|
(808
|
)
|
|
|
23
|
|
|
|
|
|
|
|
0.45
|
%
|
|
|
|
|
|
|
0.05
|
%
|
Community
Bank of Lincoln
|
|
|
2,694
|
|
|
|
1,402
|
|
|
|
(1,243
|
)
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
Bank of Kansas City
(4)
|
|
|
2,780
|
|
|
|
2,333
|
|
|
|
(978
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
Region Total
|
|
|
10,017
|
|
|
|
7,562
|
|
|
|
(3,616
|
)
|
|
|
(1,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nevada
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Commerce Bank
|
|
|
1,814
|
|
|
|
1,776
|
|
|
|
(2,046
|
)
|
|
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Las Vegas
|
|
|
3,557
|
|
|
|
3,710
|
|
|
|
(1,328
|
)
|
|
|
112
|
|
|
|
|
|
|
|
1.71
|
%
|
|
|
|
|
|
|
0.21
|
%
|
Black
Mountain Community Bank
|
|
|
7,404
|
|
|
|
8,093
|
|
|
|
(859
|
)
|
|
|
1,390
|
|
|
|
|
|
|
|
12.49
|
%
|
|
|
|
|
|
|
1.22
|
%
|
Desert
Community Bank
|
|
|
4,449
|
|
|
|
5,622
|
|
|
|
(1,510
|
)
|
|
|
485
|
|
|
|
|
|
|
|
6.37
|
%
|
|
|
|
|
|
|
0.63
|
%
|
Red
Rock Community Bank
|
|
|
4,600
|
|
|
|
5,891
|
|
|
|
(3,224
|
)
|
|
|
672
|
|
|
|
|
|
|
|
6.56
|
%
|
|
|
|
|
|
|
0.75
|
%
|
Nevada
Region Total
|
|
|
21,824
|
|
|
|
25,092
|
|
|
|
(8,967
|
)
|
|
|
1,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Results of Operations –
Continued
Operating
results – continued:
|
|
Nine
Months Ended September 30
|
|
|
|
Total
Revenues
|
|
|
Net
Income (Loss)
(1)
|
|
|
Return
on
Average
Equity
(2)
|
|
|
Return
on
Average
Assets
(2)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Northeast
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USNY
Bank
|
|
$
|
2,316
|
|
|
$
|
1,249
|
|
|
$
|
(1,340
|
)
|
|
$
|
(583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Bellevue
|
|
|
1,981
|
|
|
|
2,181
|
|
|
|
(1,537
|
)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Everett
|
|
|
1,789
|
|
|
|
1,541
|
|
|
|
(2,048
|
)
|
|
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Tacoma
|
|
|
1,805
|
|
|
|
1,485
|
|
|
|
(2,530
|
)
|
|
|
(629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
High
Desert Bank
|
|
|
1,820
|
|
|
|
955
|
|
|
|
(2,726
|
)
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issaquah
Community Bank
|
|
|
1,554
|
|
|
|
857
|
|
|
|
(1,284
|
)
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
Region Total
|
|
|
8,949
|
|
|
|
7,019
|
|
|
|
(10,125
|
)
|
|
|
(2,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Valdosta
|
|
|
2,165
|
|
|
|
2,413
|
|
|
|
(1,261
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
Bank of Rowan
(4)
|
|
|
4,962
|
|
|
|
5,553
|
|
|
|
459
|
|
|
|
698
|
|
|
|
5.73
|
%
|
|
|
9.38
|
%
|
|
|
0.47
|
%
|
|
|
0.76
|
%
|
First
Carolina State Bank
|
|
|
4,183
|
|
|
|
4,785
|
|
|
|
(976
|
)
|
|
|
31
|
|
|
|
|
|
|
|
0.37
|
%
|
|
|
|
|
|
|
0.04
|
%
|
Peoples
State Bank
|
|
|
1,017
|
|
|
|
1,326
|
|
|
|
(1,739
|
)
|
|
|
5
|
|
|
|
|
|
|
|
0.13
|
%
|
|
|
|
|
|
|
0.03
|
%
|
Pisgah
Community Bank
|
|
|
1,739
|
|
|
|
357
|
|
|
|
(1,187
|
)
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sunrise
Bank of Atlanta
|
|
|
2,867
|
|
|
|
3,462
|
|
|
|
(2,126
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
Region Total
|
|
|
16,933
|
|
|
|
17,896
|
|
|
|
(6,830
|
)
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Fort Bend
|
|
|
1,122
|
|
|
|
629
|
|
|
|
(1,278
|
)
|
|
|
(669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Las Colinas
|
|
|
1,435
|
|
|
|
887
|
|
|
|
(1,162
|
)
|
|
|
(470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
Region Total
|
|
|
2,557
|
|
|
|
1,516
|
|
|
|
(2,440
|
)
|
|
|
(1,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
company and other, net
|
|
|
(211
|
)
|
|
|
2,831
|
|
|
|
30,381
|
|
|
|
(12,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
totals
|
|
$
|
224,646
|
|
|
$
|
251,129
|
|
|
$
|
(118,118
|
)
|
|
$
|
(29,681
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
(1)
|
Excludes
net losses attributable to noncontrolling interests.
|
(2)
|
Annualized
for periods presented.
|
(3)
|
Michigan
Commerce Bank resulted from the merger of Ann Arbor Commerce Bank,
Brighton Commerce Bank, Detroit Commerce Bank, Grand Haven Bank, Kent
Commerce Bank, Macomb Community Bank, Muskegon Commerce Bank, Oakland
Commerce Bank and Portage Commerce Bank effective March 31,
2009. For comparative purposes, the merger of those banks is
presented as if such merger occurred December 31, 2008.
|
(4)
|
Bank
of Santa Barbara, Community Bank of Rowan and Summit Bank of Kansas City
are majority-owned subsidiaries of Capitol Development Bancorp Limited
(CDBL) III of which Capitol ceased to have majority voting control
effective September 30, 2009. Thus, effective September 30,
2009, those banks and CDBL III ceased to be consolidated subsidiaries of
Capitol.
|
(5)
|
Capitol
sold its ownership in Yuma Community Bank effective September 21,
2009. The Bank's operations are included in Capitol's
consolidated totals through that
date.
|
Liquidity and Capital
Resources
The
principal funding source for asset growth and loan origination activities is
deposits. Total deposits increased $10.7 million for the nine months
ended September 30, 2009, compared to a $438.8 million increase in the
corresponding period of 2008. Growth occurred in most
interest-bearing deposit categories, with the majority coming from time deposit
accounts. Brokered deposits approximated $1.0 billion as of September
30, 2009, or about 21.6% of total deposits, a decrease of $95.6 million during
the nine-month 2009 period, as the banks have sought to add these funds
selectively based on maturity and interest-rate opportunities to aid in matching
the repricing of funding sources and assets. Brokered deposits at
September 30, 2009 include about $288.6 million of relationship-based structured
time accounts. Banks that are classified as less than
well-capitalized are required to obtain approval from the FDIC to renew or issue
new brokered deposits.
Noninterest-bearing
deposits approximated 14.5% of total deposits at September 30, 2009, a decrease
from 15.6% at December 31, 2008, and a decrease of $48.9 million in the 2009
interim period compared to a decrease of $23.7 million during the 2008
period. Levels of noninterest-bearing deposits can, however,
fluctuate based on customers' transaction activity.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Liquidity and Capital
Resources – Continued
During
the 2009 period, interest-bearing accounts increased about $59.6 million which
served as the primary funding source for growth in liquid
assets. Because of the growth in interest-bearing deposits, coupled
with higher relative rates on those balances (particularly with time deposit
accounts) and deployment of funds into liquid assets, net interest margins have
generally decreased compared to 2008.
Interim
2009 deposit growth was deployed primarily into cash and cash equivalents to
enhance liquidity. Cash and cash equivalents amounted to $889.7
million or 16.7% of total assets at September 30, 2009, compared to $624.4
million or 11% of total assets at December 31, 2008. As liquidity
levels vary continuously based on customer activities, amounts of cash and cash
equivalents can vary widely at any given point in time. Management
believes the banks' liquidity position at September 30, 2009 is adequate to fund
loan demand and meet depositor needs. In the current low interest
rate environment, deployment of deposit growth into cash and cash equivalents
adversely impacts net interest margin.
In
addition to cash and cash equivalents, an additional source of long-term
liquidity is the banks' marketable investment securities. Liquidity
needs have not historically necessitated the sale of investments in order to
meet funding requirements and the banks have not engaged in active trading of
their investments. At September 30, 2009, Capitol's banks had
approximately $18 million of investment securities classified as available for
sale which may be utilized to meet various liquidity needs as they
arise.
Several
of Capitol's banks have secured lines of credit with regional Federal Home Loan
Banks. Borrowings thereunder approximated $285 million and additional
borrowing capacity approximated $234 million at September 30,
2009. These facilities are used from time to time as a lower-cost
funding source versus various rates and maturities of time deposits available
within banks' individual communities. Total notes payable and
short-term borrowings were $300.3 million at September 30, 2009, a reduction of
$146.6 million from the beginning of the year as deposit growth enabled
repayment of select borrowings in addition to enhanced liquidity discussed
previously.
Capitol
Bancorp Limited stockholders' equity, as a percentage of total assets,
approximated 4.47% at September 30, 2009 and 6.26% at December 31,
2008. As of September 30, 2009, Capitol
'
s total capital
funds (i.e., the sum of Capitol Bancorp Limited stockholders' equity,
noncontrolling interests in consolidated subsidiaries and subordinated
debentures) approximated $484 million or 9.09% of total assets.
In April
2009, the Corporation determined that it would commence the deferral of interest
payments on its various trust-preferred securities, as is permitted under the
terms of the securities, to conserve cash and capital resources. The
payment of interest may be deferred for periods up to five
years. During such deferral periods, Capitol is prohibited from
paying dividends on its common stock (subject to certain exceptions) and will
continue to accrue interest payable on such securities. Holders of
the trust-preferred securities will continue to recognize current taxable income
relating to the deferred interest payments.
Capitol
and its banks are subject to complex regulatory capital requirements, which
require maintaining certain minimum capital ratios. These ratio
measurements, in addition to certain other requirements, are used by regulatory
agencies to determine the level of regulatory intervention and enforcement
applied to financial institutions.
[The
remainder of this page intentionally left blank]
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Liquidity and Capital
Resources – Continued
The
following comparative analysis summarizes each bank's regulatory capital
position as of the dates indicated:
|
|
|
|
|
Tier
1 Risk-Based
|
|
|
Total
Risk-Based
|
|
|
|
|
Tier
1 Leverage Ratio
(1)(5)
|
|
|
Capital
Ratio
(1)(5)
|
|
|
Capital
Ratio
(2)(5)
|
|
Regulatory
Classification
(3)
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
Sept
30,
2009
|
Dec
31,
2008
|
Arizona
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrowhead
Community Bank
|
|
|
4.55
|
%
|
|
|
7.77
|
%
|
|
|
6.69
|
%
|
|
|
8.74
|
%
|
|
|
8.03
|
%
|
|
|
10.02
|
%
|
adequately-capitalized
|
well-capitalized
|
Asian
Bank of Arizona
(4)
|
|
|
6.38
|
%
|
|
|
13.27
|
%
|
|
|
8.03
|
%
|
|
|
15.06
|
%
|
|
|
9.30
|
%
|
|
|
16.32
|
%
|
adequately-capitalized
|
well-capitalized
|
Bank
of Tucson
|
|
|
8.90
|
%
|
|
|
9.53
|
%
|
|
|
11.41
|
%
|
|
|
9.41
|
%
|
|
|
12.59
|
%
|
|
|
10.26
|
%
|
well-capitalized
|
well-capitalized
|
Camelback
Community Bank
|
|
|
8.62
|
%
|
|
|
9.02
|
%
|
|
|
9.76
|
%
|
|
|
9.64
|
%
|
|
|
11.02
|
%
|
|
|
10.53
|
%
|
well-capitalized
|
well-capitalized
|
Central
Arizona Bank
|
|
|
5.49
|
%
|
|
|
13.38
|
%
|
|
|
6.86
|
%
|
|
|
13.02
|
%
|
|
|
8.15
|
%
|
|
|
14.27
|
%
|
adequately-capitalized
|
well-capitalized
|
Colonia
Bank
(4)
|
|
|
40.91
|
%
|
|
|
65.50
|
%
|
|
|
59.24
|
%
|
|
|
79.66
|
%
|
|
|
60.51
|
%
|
|
|
80.91
|
%
|
well-capitalized
|
well-capitalized
|
Mesa
Bank
|
|
|
4.93
|
%
|
|
|
6.74
|
%
|
|
|
6.99
|
%
|
|
|
8.85
|
%
|
|
|
8.24
|
%
|
|
|
10.10
|
%
|
adequately-capitalized
(8)
|
well-capitalized
|
Southern
Arizona Community
Bank
|
|
|
9.53
|
%
|
|
|
9.14
|
%
|
|
|
10.66
|
%
|
|
|
10.15
|
%
|
|
|
11.91
|
%
|
|
|
11.22
|
%
|
well-capitalized
|
well-capitalized
|
Sunrise
Bank of Albuquerque
|
|
|
7.11
|
%
|
|
|
8.50
|
%
|
|
|
8.87
|
%
|
|
|
9.08
|
%
|
|
|
10.14
|
%
|
|
|
10.33
|
%
|
adequately-capitalized
(8)
|
well-capitalized
|
Sunrise
Bank of Arizona
|
|
|
5.73
|
%
|
|
|
8.73
|
%
|
|
|
7.61
|
%
|
|
|
9.38
|
%
|
|
|
8.87
|
%
|
|
|
10.41
|
%
|
adequately-capitalized
|
well-capitalized
|
Yuma
Community Bank
(6)
|
|
|
|
|
|
|
8.94
|
%
|
|
|
|
|
|
|
10.26
|
%
|
|
|
|
|
|
|
11.40
|
%
|
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Escondido
|
|
|
9.24
|
%
|
|
|
11.29
|
%
|
|
|
13.42
|
%
|
|
|
15.50
|
%
|
|
|
14.70
|
%
|
|
|
16.66
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Feather River
(4)
|
|
|
18.35
|
%
|
|
|
25.72
|
%
|
|
|
27.07
|
%
|
|
|
27.12
|
%
|
|
|
28.32
|
%
|
|
|
28.37
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of San Francisco
|
|
|
8.37
|
%
|
|
|
11.04
|
%
|
|
|
9.76
|
%
|
|
|
11.53
|
%
|
|
|
11.02
|
%
|
|
|
12.78
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Santa Barbara
(9)
|
|
|
6.93
|
%
|
|
|
8.00
|
%
|
|
|
7.80
|
%
|
|
|
8.77
|
%
|
|
|
9.07
|
%
|
|
|
10.03
|
%
|
adequately-capitalized
|
well-capitalized
|
Napa
Community Bank
|
|
|
10.77
|
%
|
|
|
11.06
|
%
|
|
|
11.03
|
%
|
|
|
10.79
|
%
|
|
|
12.28
|
%
|
|
|
12.04
|
%
|
well-capitalized
|
well-capitalized
|
Point
Loma Community Bank
|
|
|
8.43
|
%
|
|
|
11.11
|
%
|
|
|
11.20
|
%
|
|
|
12.78
|
%
|
|
|
12.46
|
%
|
|
|
14.04
|
%
|
well-capitalized
|
well-capitalized
|
Sunrise
Bank of San Diego
|
|
|
8.36
|
%
|
|
|
10.27
|
%
|
|
|
10.95
|
%
|
|
|
11.12
|
%
|
|
|
12.24
|
%
|
|
|
12.38
|
%
|
well-capitalized
|
well-capitalized
|
Sunrise
Community Bank
(4)
|
|
|
8.96
|
%
|
|
|
14.39
|
%
|
|
|
12.08
|
%
|
|
|
18.07
|
%
|
|
|
13.35
|
%
|
|
|
19.32
|
%
|
well-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort
Collins Commerce Bank
|
|
|
11.23
|
%
|
|
|
12.48
|
%
|
|
|
12.70
|
%
|
|
|
12.98
|
%
|
|
|
13.96
|
%
|
|
|
14.23
|
%
|
well-capitalized
|
well-capitalized
|
Larimer
Bank of Commerce
(4)
|
|
|
9.11
|
%
|
|
|
8.95
|
%
|
|
|
11.46
|
%
|
|
|
9.83
|
%
|
|
|
12.73
|
%
|
|
|
11.08
|
%
|
well-capitalized
|
well-capitalized
|
Loveland
Bank of Commerce
(4)
|
|
|
15.93
|
%
|
|
|
21.48
|
%
|
|
|
18.81
|
%
|
|
|
24.66
|
%
|
|
|
20.07
|
%
|
|
|
25.92
|
%
|
well-capitalized
|
well-capitalized
|
Mountain
View Bank of
Commerce
(4)
|
|
|
14.69
|
%
|
|
|
20.81
|
%
|
|
|
17.30
|
%
|
|
|
20.53
|
%
|
|
|
18.55
|
%
|
|
|
21.78
|
%
|
well-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great
Lakes Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Auburn Hills
|
|
|
6.37
|
%
|
|
|
11.05
|
%
|
|
|
8.31
|
%
|
|
|
12.64
|
%
|
|
|
9.61
|
%
|
|
|
13.90
|
%
|
adequately-capitalized
|
well-capitalized
|
Bank
of Maumee
(4)
|
|
|
8.99
|
%
|
|
|
10.47
|
%
|
|
|
11.94
|
%
|
|
|
11.54
|
%
|
|
|
13.21
|
%
|
|
|
12.79
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Michigan
|
|
|
6.66
|
%
|
|
|
9.15
|
%
|
|
|
9.96
|
%
|
|
|
9.76
|
%
|
|
|
11.22
|
%
|
|
|
11.01
|
%
|
well-capitalized
|
well-capitalized
|
Capitol
National Bank
|
|
|
7.29
|
%
|
|
|
7.95
|
%
|
|
|
9.48
|
%
|
|
|
8.96
|
%
|
|
|
10.76
|
%
|
|
|
10.24
|
%
|
adequately-capitalized
(8)
|
well-capitalized
|
Elkhart
Community Bank
|
|
|
5.02
|
%
|
|
|
7.71
|
%
|
|
|
6.89
|
%
|
|
|
8.82
|
%
|
|
|
8.17
|
%
|
|
|
10.08
|
%
|
adequately-capitalized
(8)
|
well-capitalized
|
Evansville
Commerce Bank
(4)
|
|
|
8.01
|
%
|
|
|
8.13
|
%
|
|
|
10.68
|
%
|
|
|
9.81
|
%
|
|
|
11.94
|
%
|
|
|
11.07
|
%
|
well-capitalized
|
well-capitalized
|
Goshen
Community Bank
|
|
|
7.28
|
%
|
|
|
7.96
|
%
|
|
|
9.64
|
%
|
|
|
8.96
|
%
|
|
|
10.92
|
%
|
|
|
10.21
|
%
|
adequately-capitalized
(8)
|
well-capitalized
|
Michigan
Commerce Bank
|
|
|
4.64
|
%
|
|
|
10.75
|
%
|
|
|
5.86
|
%
|
|
|
10.70
|
%
|
|
|
7.15
|
%
|
|
|
12.19
|
%
|
under-capitalized
(7)(8)
|
well-capitalized
|
Ohio
Commerce Bank
(4)
|
|
|
14.23
|
%
|
|
|
15.29
|
%
|
|
|
16.82
|
%
|
|
|
17.14
|
%
|
|
|
18.07
|
%
|
|
|
18.39
|
%
|
well-capitalized
|
well-capitalized
|
Paragon
Bank & Trust
|
|
|
4.76
|
%
|
|
|
8.09
|
%
|
|
|
6.92
|
%
|
|
|
8.99
|
%
|
|
|
8.22
|
%
|
|
|
10.27
|
%
|
adequately-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adams
Dairy Bank
(4)
|
|
|
16.37
|
%
|
|
|
22.19
|
%
|
|
|
20.76
|
%
|
|
|
25.01
|
%
|
|
|
21.71
|
%
|
|
|
26.27
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Belleville
|
|
|
8.30
|
%
|
|
|
8.68
|
%
|
|
|
10.28
|
%
|
|
|
9.51
|
%
|
|
|
11.53
|
%
|
|
|
10.76
|
%
|
well-capitalized
|
well-capitalized
|
Community
Bank of Lincoln
(4)
|
|
|
10.12
|
%
|
|
|
13.68
|
%
|
|
|
12.60
|
%
|
|
|
15.14
|
%
|
|
|
13.86
|
%
|
|
|
16.39
|
%
|
well-capitalized
|
well-capitalized
|
Summit
Bank of Kansas City
(9)
|
|
|
9.25
|
%
|
|
|
11.64
|
%
|
|
|
12.51
|
%
|
|
|
13.57
|
%
|
|
|
13.76
|
%
|
|
|
14.82
|
%
|
well-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nevada
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
st
Commerce Bank
(4)
|
|
|
8.41
|
%
|
|
|
10.03
|
%
|
|
|
11.40
|
%
|
|
|
16.02
|
%
|
|
|
12.67
|
%
|
|
|
17.28
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Las Vegas
|
|
|
6.90
|
%
|
|
|
8.78
|
%
|
|
|
7.75
|
%
|
|
|
9.47
|
%
|
|
|
9.03
|
%
|
|
|
10.72
|
%
|
adequately-capitalized
|
well-capitalized
|
Black
Mountain Community
Bank
|
|
|
7.55
|
%
|
|
|
8.45
|
%
|
|
|
8.78
|
%
|
|
|
9.10
|
%
|
|
|
10.04
|
%
|
|
|
10.31
|
%
|
well-capitalized
|
well-capitalized
|
Desert
Community Bank
|
|
|
6.93
|
%
|
|
|
8.21
|
%
|
|
|
8.12
|
%
|
|
|
9.58
|
%
|
|
|
9.39
|
%
|
|
|
10.65
|
%
|
adequately-capitalized
|
well-capitalized
|
Red
Rock Community Bank
|
|
|
5.76
|
%
|
|
|
8.52
|
%
|
|
|
7.92
|
%
|
|
|
9.39
|
%
|
|
|
9.18
|
%
|
|
|
10.45
|
%
|
adequately-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USNY
Bank
(4)
|
|
|
8.12
|
%
|
|
|
11.72
|
%
|
|
|
9.76
|
%
|
|
|
12.45
|
%
|
|
|
11.01
|
%
|
|
|
13.70
|
%
|
well-capitalized
|
well-capitalized
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Liquidity and Capital
Resources – Continued
Regulatory
capital position – continued:
|
|
|
|
|
Tier
1 Risk-Based
|
|
|
Total
Risk-Based
|
|
|
|
|
|
Tier
1 Leverage Ratio
(1)(5)
|
|
|
Capital
Ratio
(1)(5)
|
|
|
Capital
Ratio
(2)(5)
|
|
Regulatory
Classification
(3)
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
|
Sept
30,
2009
|
|
|
Dec
31,
2008
|
|
Sept
30,
2009
|
Dec
31,
2008
|
Northwest
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Bellevue
|
|
|
8.79
|
%
|
|
|
10.93
|
%
|
|
|
13.15
|
%
|
|
|
11.99
|
%
|
|
|
14.42
|
%
|
|
|
13.25
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Everett
(4)
|
|
|
9.14
|
%
|
|
|
11.98
|
%
|
|
|
11.34
|
%
|
|
|
14.30
|
%
|
|
|
12.61
|
%
|
|
|
15.56
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Tacoma
(4)
|
|
|
8.06
|
%
|
|
|
13.54
|
%
|
|
|
11.10
|
%
|
|
|
12.86
|
%
|
|
|
12.37
|
%
|
|
|
14.12
|
%
|
adequately-capitalized
(8)
|
well-capitalized
|
High
Desert Bank
(4)
|
|
|
8.34
|
%
|
|
|
15.86
|
%
|
|
|
10.94
|
%
|
|
|
17.29
|
%
|
|
|
12.21
|
%
|
|
|
18.54
|
%
|
well-capitalized
|
well-capitalized
|
Issaquah
Community Bank
(4)
|
|
|
15.77
|
%
|
|
|
23.27
|
%
|
|
|
21.69
|
%
|
|
|
26.08
|
%
|
|
|
22.96
|
%
|
|
|
27.33
|
%
|
well-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southeast
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Valdosta
(4)
|
|
|
7.94
|
%
|
|
|
8.01
|
%
|
|
|
11.70
|
%
|
|
|
10.32
|
%
|
|
|
12.96
|
%
|
|
|
11.58
|
%
|
well-capitalized
|
well-capitalized
|
Community
Bank of Rowan
(4)(9)
|
|
|
8.42
|
%
|
|
|
8.04
|
%
|
|
|
10.41
|
%
|
|
|
9.59
|
%
|
|
|
11.67
|
%
|
|
|
10.84
|
%
|
well-capitalized
|
well-capitalized
|
First
Carolina State Bank
|
|
|
7.91
|
%
|
|
|
8.61
|
%
|
|
|
9.87
|
%
|
|
|
9.69
|
%
|
|
|
11.13
|
%
|
|
|
10.94
|
%
|
well-capitalized
|
well-capitalized
|
Peoples
State Bank
|
|
|
9.11
|
%
|
|
|
8.15
|
%
|
|
|
13.53
|
%
|
|
|
10.40
|
%
|
|
|
14.79
|
%
|
|
|
11.65
|
%
|
well-capitalized
|
well-capitalized
|
Pisgah
Community Bank
(4)
|
|
|
11.73
|
%
|
|
|
22.86
|
%
|
|
|
14.56
|
%
|
|
|
25.11
|
%
|
|
|
15.82
|
%
|
|
|
26.37
|
%
|
well-capitalized
|
well-capitalized
|
Sunrise
Bank of Atlanta
(4)
|
|
|
7.21
|
%
|
|
|
8.19
|
%
|
|
|
9.05
|
%
|
|
|
9.78
|
%
|
|
|
10.32
|
%
|
|
|
11.04
|
%
|
well-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Fort Bend
(4)
|
|
|
15.61
|
%
|
|
|
23.19
|
%
|
|
|
20.25
|
%
|
|
|
28.46
|
%
|
|
|
21.50
|
%
|
|
|
29.71
|
%
|
well-capitalized
|
well-capitalized
|
Bank
of Las Colinas
(4)
|
|
|
12.08
|
%
|
|
|
19.54
|
%
|
|
|
16.26
|
%
|
|
|
22.08
|
%
|
|
|
17.53
|
%
|
|
|
23.33
|
%
|
well-capitalized
|
well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
totals
|
|
|
6.26
|
%
|
|
|
10.72
|
%
|
|
|
8.43
|
%
|
|
|
12.07
|
%
|
|
|
11.17
|
%
|
|
|
13.75
|
%
|
well-capitalized
|
well-capitalized
|
(1)
|
The
minimum required Tier 1 leverage ratio and Tier 1 risk-based capital ratio
is 4% (8% for
de
novo
institutions).
|
(2)
|
The
minimum required total risk-based capital ratio is 8%.
|
(3)
|
In
order to be classified as a 'well-capitalized' institution, the total
risk-based capital ratio must be 10% or more. To be classified
as an 'adequately-capitalized' institution, the total risk-based capital
ratio must be between 8% and 10%.
|
(4)
|
De novo
institution
which is subject to higher minimum ratio requirements as noted in (1)
above for the first three years of operations.
|
(5)
|
Ratios
are per the regulatory call reports and Y9-C filed at original due date
which is generally within 30 days after quarter-end.
|
(6)
|
Capitol
sold its ownership in Yuma Community Bank effective September 21,
2009.
|
(7)
|
Effective
November 9, 2009, Capitol transferred $8.3 million as additional capital
to Michigan Commerce Bank, increasing its regulatory classification to
adequately-capitalized.
|
(8)
|
Institution
is subject to a regulatory agreement and, accordingly, cannot be
classified better than adequately-capitalized.
|
(9)
|
Bank
of Santa Barbara, Community Bank of Rowan and Summit Bank of Kansas City
are majority-owned subsidiaries of Capitol Development Bancorp Limited
(CDBL) III of which Capitol ceased to have majority voting control
effective September 30, 2009. Thus, effective September 30,
2009, those banks and CDBL III ceased to be consolidated subsidiaries of
Capitol.
|
Effective
May 31, 2009, Capitol completed a share-exchange transaction with the
noncontrolling shareholders of Bank of Auburn Hills, previously a 51%-owned
subsidiary. In conjunction with the share exchange, Capitol issued
227,000 previously unissued shares of Capitol's common stock and warrants for
the purchase of 76,000 shares of Capitol's common stock. The exercise
price of the warrants is $20.37 per share of Capitol's common stock, which
expire May 31, 2012. As a result of the share exchange transaction,
Bank of Auburn Hills became wholly-owned by Capitol. Capitol's
results of operations would not have been materially different if it had
occurred at the beginning of the periods presented.
In
October 2008, Capitol applied to its primary federal regulator and the FDIC for
up to $142 million of preferred stock to be purchased by the U.S. Treasury
pursuant to the Capital Purchase Program (CPP) under the Troubled Asset Relief
Program (TARP). Capitol withdrew its application to participate in
this program.
In February 2009, the U.S. Treasury
announced its new Capital Assistance Program (CAP) under which U.S. banking
organizations may apply for a U.S. Treasury investment in mandatorily
convertible preferred stock in an amount of up to 1% or 2% of risk-weighted
assets. The purpose of the CAP is to provide eligible banking
organizations with capital in the form of a preferred security which is
convertible into common equity. Participating banking organizations
would also issue warrants to the U.S. Treasury. Eligibility will be
consistent with the criteria and deliberative process established under the
TARP/CPP. Capitol has recently submitted a CAP application on behalf
of Michigan Commerce Bancorp Limited (MCBL, described more fully on page 40) in
the amount of $21.7 million. There can be no assurance the CAP
application will be approved or, if approved, whether Capitol or MCBL would
choose to participate.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Trends Affecting
Operations
One of
the most significant trends which can impact the financial condition and results
of operations of financial institutions is changes in market rates of
interest.
Changes
in interest rates, either up or down, have an impact on net interest income
(plus or minus), depending on the direction and timing of such
changes. At any point in time, there is a difference between interest
rate-sensitive assets and interest rate-sensitive liabilities. This
means that when interest rates change, the timing and magnitude of the effect of
such interest rate changes can alter the relationship between asset yields and
the cost of funds.
The Board
of Governors of the Federal Reserve, which influences interest rates, has
maintained interbank borrowing rates at unusually low levels since
2008. The Board of Governors of the Federal Reserve has also
expressed concerns about a variety of macro economic issues. Home
mortgage rates have recently fluctuated and residential real estate markets have
deteriorated in various regions, which adversely impacts fee income from the
origination of residential mortgages. There has been widespread media
coverage of subprime and other residential mortgage “meltdown” issues; Capitol
believes its exposure to the residential real estate crisis to be generally
minimal due to its practice of selling residential mortgage loan production to
the secondary market. Many of Capitol's banks' commercial loans are
variable-rate and, accordingly, rate decreases may result in lower interest
income to Capitol in the near term; however, depositors will continue to expect
reasonable rates of interest on their accounts, potentially compressing net
interest margins further. The future outlook on interest rates and
their impact on Capitol's interest income, interest expense and net interest
income is uncertain.
General
economic conditions also have a significant impact on both the results of
operations and the financial condition of financial institutions. As
mentioned previously, general economic conditions within the state of Michigan
and the national economic recession are uncertain and are likely to continue to
have an adverse effect on Capitol's banks and their customers. It is
likely that, absent significant catalysts, Michigan's economic recovery in
particular may take an extended period of time.
Media
reports raising questions about the health of the domestic economy and the
sustained national recession have continued in 2009. During the
interim 2009 period, nonperforming assets have increased significantly; it is
likely levels of nonperforming assets and related loan losses will increase
further as economic conditions, locally and nationally, evolve.
Effective
March 31, 2009, nine Michigan bank charters were merged into Michigan Commerce
Bank. The resulting bank, with nine locations, was combined to gain
efficiencies in loan portfolio and problem asset management and general
operating efficiencies in daily processing. Similar multi-bank
mergers have been proposed in Arizona, Nevada, Southern California and the
Pacific Northwest, subject to regulatory approval. Additional mergers
and combinations of bank charters in other markets are under consideration as
management evaluates potential synergies and cost savings. In April
2009, Capitol announced the engagement of a financial advisor to assist
management in pursuing divestiture opportunities.
[The
remainder of this page intentionally left blank]
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Proposed Spin-off of
Michigan Commerce Bancorp Limited
On July
21, 2009, Capitol announced its intention to formally and legally separate the
operations of Michigan Commerce Bancorp Limited (MCBL) as an independent
publicly-traded company through a spin-off transaction. If completed,
Capitol would continue to be a bank holding company with national banking
operations and MCBL would become a separate publicly-traded bank holding company
consisting of the substantial majority of Capitol's prior Michigan-based banks
(see accompanying pro forma condensed consolidated financial
statements).
In the
proposed spin-off, Capitol's shareholders would receive shares of MCBL common
stock according to a distribution ratio. The distribution ratio and
related record date for the proposed distribution would be determined at a later
date. The proposed spin-off is subject to a number of significant
contingencies. As of the date of this report, Capitol has not
received regulatory approval of the proposed spin-off. The proposed
spin-off would enable the two separate publicly-traded companies to focus on
maximizing opportunities for the distinct business markets of each, and will
allow both Capitol and MCBL to each develop and implement a strategic plan that
fits their specific market and operations. As of the date of this
report, Capitol has not received regulatory approval of the proposed
spin-off. The proposed spin-off is illustrated in the accompanying
pro forma condensed consolidated financial statements on pages
42-44.
MCBL's
consolidated total assets approximated $1.2 billion or about 23% of Capitol's
total assets as of September 30, 2009. If the proposed spin-off had
been completed on September 30, 2009, consolidated total assets of Capitol would
have approximated $4.1 billion, while reflecting a 33.1% decline in
nonperforming assets and a modest increase in the consolidated total capital
ratio. If the proposed spin-off would have occurred at January 1,
2009, the consolidated net loss attributable to Capitol would have been reduced
48.5% to $60.8 million ($3.52 per share) for the nine months ended September 30,
2009.
Pending Sale of Four
Banks
In July 2009, Capitol entered into
definitive agreements to sell the following four affiliate
institutions: 1
st
Commerce Bank, Bank of Belleville, Bank of Santa Barbara and Community Bank of
Rowan. The projected financial impact of the divestiture of these
institutions is set forth in the accompanying pro forma condensed consolidated
financial statements on pages 42 and 44 (along with the proposed spin-off
discussed in Note K). Total proceeds from the pending sales are
expected to approximate $23 million, resulting in a pre-tax gain of $2.2 million
($1.4 million, or $0.08 per share, after federal income tax) and are expected to
be consummated in the fourth quarter of 2009, subject to regulatory approval and
other contingencies. The sale of Bank of Santa Barbara was completed
November 6, 2009 with aggregate proceeds of $3.9 million and a pre-tax gain on
sale approximating $1.1 million.
Proposed Share Exchange
Offer
In July
2009, Capitol proposed a share exchange offer regarding the shares of Capitol
Development Bancorp Limited (CDBL) III-VI not already owned by Capitol, whereby
Class B common stock of the CDBLs could be exchanged for a combination of
convertible preferred stock of Capitol and trust-preferred
securities. The proposed exchange offer was terminated in October
2009.
Regulatory
Agreements
On
September 21, 2009, Capitol and its second-tier bank holding companies entered
into a written agreement with the Federal Reserve Bank of Chicago (the Reserve
Bank) under which Capitol has agreed to refrain from the following actions
without the prior written consent of the Reserve Bank (i) declare or pay
dividends; (ii) receive dividends or any other form of payment representing a
reduction in capital from Michigan Commerce Bank or from any of its subsidiary
institutions that is subject to any restriction by the institution's federal or
state regulator that limits the payment of dividends or other intercorporate
payments; (iii) make any distributions of interest, principal, or other sums of
subordinated debentures or trust preferred securities; (v) incur, increase or
guarantee any debt; or (vi) purchase or redeem any shares of its own stock or
any shares of the stock of Capitol, the second-tier bank holding companies, the
nonbank subsidiaries or any of the subsidiary banks that are held by
shareholders.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS – Continued
Regulatory Agreements –
Continued
Capitol
has also agreed to (i) submit to the Reserve Bank, within 60 days of the
agreement, a written plan to maintain sufficient capital at Capitol on a
consolidated basis and at Michigan Commerce Bank as a separate legal entity on a
stand-alone basis; (ii) notify the Reserve Bank no more than 30 days after the
end of any quarter in which Capitol's consolidated or Michigan Commerce Bank's
capital ratios fall below the approved capital plan's minimum ratios as well as
if any subsidiary institution's ratios fall below the minimum ratios required by
the institution's federal or state regulator; (iii) review and revise within 60
days of this agreement its ALLL methodology for loans held by Capitol and submit
to the Reserve Bank a written program for maintenance of an adequate ALLL for
loans held by Capitol; (iv) take all necessary actions to ensure each of its
subsidiary institutions comply with Federal Reserve regulations; (v) refrain
from increasing any fees or charging new fees to any subsidiary institution
without the prior written consent of the Reserve Bank; (vi) submit to the
Reserve Bank, within 60 days of the agreement, a written plan to enhance the
consolidated organization's risk management practices, a strategic plan to
improve the consolidated organization's earnings and overall condition for the
remainder of 2009 and a cash flow projection; (vii) comply with laws and
regulations regarding senior executive officer positions and severance payments;
and (viii) provide quarterly reports to the Reserve Bank regarding these
undertakings.
Certain
of Capitol's bank subsidiaries have entered into formal agreements with their
applicable regulatory agencies. Those agreements provide for certain
restrictions and other guidelines and/or limitations to be followed by the
banks. The banks generally subject to such regulatory agreements are
noted as such in the regulatory capital detail appearing on page
37.
[The
remainder of this page intentionally left blank]