Capitol Bancorp Reports Year-End 2012 Results

LANSING, Mich., March 28, 2013 /PRNewswire/ -- A net loss of approximately $1.6 million, or ($0.04) per share, was reported for the fourth quarter of 2012, compared to a net loss of $6.5 million, or ($0.16) per share, for the corresponding period in 2011. Approximately $210,000 ($0.01 per share) of this 2012 quarterly net loss, or roughly 14 percent, is attributable to "reorganization items" expense directly associated with Capitol's financial restructuring plan. The following contributed to the operating results for the fourth quarter, and were the key factors that favorably impacted performance.

  • After removing the impact of bank divestitures:
    • Continuing declines in both nonperforming loans and other nonperforming assets: down nearly 7 percent and 8 percent, respectively, linked-quarter and 40 percent and nearly 32 percent, respectively, from year-end 2011.
    • Margin improvement of one hundred nine basis points year-over-year.
    • Total operating expenses declined 21 percent year-over-year.
    • The provision for loan losses decreased 99 percent from the same quarter of 2011.
    • Employee compensation and benefits expense decreased 11 percent from the same period in 2011.

Consolidated assets declined nearly 27 percent to $1.6 billion at December 31, 2012 from the nearly $2.2 billion reported at December 31, 2011, and nearly 8 percent on a linked-quarter basis from $1.7 billion reported at September 30, 2012, as a result of bank divestitures and ongoing balance sheet deleveraging strategies. Eliminating the effect of bank divestitures, total portfolio loans decreased 20 percent to $1.2 billion at December 31, 2012, from $1.5 billion reported at December 31, 2011. Deposits reflected a nearly 16 percent decline to $1.5 billion at December 31, 2012 from $1.8 billion reported at December 31, 2011; however, the Corporation's consistent focus on core funding sources resulted in an ongoing favorable improvement in deposit mix as noninterest-bearing deposits were nearly 21 percent of total deposits at December 31, 2012, compared to approximately 18 percent at December 31, 2011.

Capitol's Chairman and CEO Joseph D. Reid said, "Another quarter of active management and resolution-oriented focus resulted in net loan charge-offs of $1.8 million for the fourth quarter of 2012, a significant decrease from $13.4 million for the corresponding period of 2011. In addition, for the fourth quarter of 2012, (excluding the effect of affiliate divestitures), total nonperforming loans have declined 7 percent and total nonperforming assets have fallen 8 percent on a linked-quarter basis (declining almost 40 percent and 32 percent, respectively, from year-end 2011 totals). This continued decline is encouraging and we perceive these trendlines as an indication of continued improving fundamentals and a validation of the assumptions underlying Capitol's restructuring plan."

Quarterly Performance
In the fourth quarter of 2012, consolidated net operating revenues from continuing operations decreased to $19.9 million from nearly $23.7 million for the corresponding period of 2011. Other noninterest income from continuing operations totaled $3.0 million, compared to nearly $8.4 million in the comparable 2011 period. The net interest margin for the three months ended December 31, 2012 was 3.99 percent, a 109 basis point increase from the 2.90 percent reported for the same period in 2011 and a 35 basis point increase from the 3.64 percent reported for the previous quarter, due mainly to the suspension of interest accrual on trust preferred securities. Cash and cash equivalents were approximately $327 million, or 20 percent of consolidated total assets, at December 31, 2012. Capitol continues to focus on liquidity to manage its balance sheet in the face of ongoing economic challenges and regulatory constraints, which has resulted in a lower net interest margin than would have resulted had Capitol been progressively expanding and growing its loan portfolio.

The Corporation continues to reduce operating expenses. Total noninterest expenses decreased in the recent quarter to approximately $21.6 million compared to $27.4 million for the three months ended December 31, 2011, after eliminating the impact of bank divestitures. Costs associated with foreclosed properties and other real estate owned decreased to $3.0 million in the fourth quarter of 2012, reflecting Capitol's continued efforts to work through problem asset resolution, compared to nearly $5.5 million in the year-ago period. FDIC insurance premiums and other regulatory fees decreased from nearly $1.8 million in 2011's fourth quarter to $1.5 million in the most recent three-month period, attributed largely to the decline in liabilities on which the assessment is based. Combined, these two expense areas totaled $4.5 million in the most recent quarter, a decrease from the combined $7.3 million level during the corresponding period of 2011. Further, on a core, controllable-expense basis, year-over-year compensation costs declined more than 11 percent, from $10.8 million in the 2011 period to $9.6 million in 2012's fourth quarter.

The fourth quarter 2012 provision for loan losses decreased dramatically to $13,000 from nearly $3.0 million for the corresponding period of 2011, after the impact of bank divestitures. During the fourth quarter of 2012, net loan charge-offs totaled $1.8 million, a significant decrease from 2011's corresponding level of $13.4 million and the linked-quarter level of approximately $7.5 million, as the Corporation continues to aggressively manage its exposure to nonperforming loans.

Ongoing loan foreclosure, real estate maintenance and other costs associated with problem asset resolution corporate-wide were a major reason for the core net operating loss in the most recent three-month period. However, Capitol is encouraged that aggregate levels of nonperforming loans reflected notable declines at December 31, 2012 when compared to year-end 2011 as follows: Arizona (down 26 percent), Michigan (down 37 percent) and Nevada (down 58 percent).

Results for 2012
Net operating revenues for 2012 decreased to nearly $74.8 million, compared to $100.5 million for the corresponding period of 2011, which included a $16.9 million gain on exchange of trust preferred securities. While continued divestiture activity and significant deleveraging of Capitol's operations, coupled with measures designed to enhance liquidity levels, have contributed to the reduction in core operating revenues, ongoing system-wide management of asset mix and funding sources has helped mitigate the adverse impact of these declines. The provision for loan losses of approximately $1.5 million for the twelve months of 2012 was a significant decrease from the $35.6 million reported for the comparable 2011 period. The Corporation reported a net loss of approximately $25.5 million for the year ended December 31, 2012, a notable improvement from the $45.4 million loss reported for 2011. On a per share basis, the net loss for the year was $0.62, compared to a net loss of $1.17 reported for the corresponding period in 2011.

Balance Sheet
Divestiture efforts and ongoing balance sheet deleveraging are focused on strengthening consolidated capital ratios, although the Corporation continues to be classified as "undercapitalized." The challenges, and multiple efforts to address this capital-restoration priority, remain ongoing. As of December 31, 2012, Capitol had a $190.5 million valuation allowance related to deferred tax assets, which may be released upon a sustained return to profitability. In July 2011, Capitol announced that it had adopted a Tax Benefits Preservation Plan designed to preserve these substantial tax assets. This plan is similar to tax benefit preservation plans adopted by other public companies with significant tax attributes. The purpose of the plan is to protect Capitol's ability to carry forward its net operating losses and certain other tax attributes for utilization in certain circumstances to offset future taxable income and reduce its federal income tax liability.

Net loan charge-offs of 0.60 percent of average loans (annualized) for the fourth quarter of 2012 represented a notable decrease from the 3.44 percent in the corresponding period of 2011 (excluding discontinued operations), and the 2.32 percent on a linked-quarter basis. Recent activity reflected encouragement in the trend of a declining level of nonperforming loans in the Arizona Region (an $8.5 million decline from the amount reported at December 31, 2011), the Great Lakes Region (a $39.7 million decline from the amount reported at December 31, 2011, exclusive of discontinued operations) and the Nevada Region (a $38.1 million decline from the amount reported at December 31, 2011). The consolidated coverage ratio of the allowance for loan losses in relation to nonperforming loans was 48.29 percent at December 31, 2012, continuing the trend of modest improvement quarter-to-quarter over the past year. The allowance for loan losses as a percentage of portfolio loans also remained relatively consistent with recent periods at 5.26 percent, compared to 5.15 percent linked-quarter, and 5.56 percent for the same period of 2011.

Financial Restructuring Plan
In June 2012, Capitol announced the commencement of a voluntary restructuring plan, designed to facilitate its objective of converting existing debt to equity, which will facilitate new equity investments in the Corporation, as well as to help restore Capitol's capital ratios and ensure its affiliate banks are appropriately capitalized. The initiative includes the opportunity to preserve Capitol's substantial deferred tax assets, which can benefit all shareholders going forward. The joint plan of reorganization provides for the restructuring of Capitol's and its affiliate Financial Commerce Corporation's ("FCC", and collectively, the "Debtors") liabilities in a manner designed to maximize recoveries to all creditors and to enhance the financial stability of the reorganized Debtors while simultaneously raising new capital from outside investors, which can be immediately deployed into the reorganized Debtor's subsidiary banks, thus avoiding the significant adverse consequences that would result from the seizure of any subsidiary bank.

Existing debt holders were asked to exchange their debt securities for both preferred and common stock of the company (the "Exchange Offer"). Simultaneously, Capitol solicited votes from all debt and equity holders for a prepackaged Chapter 11 plan of reorganization (the "Standby Plan") for Capitol and FCC to be commenced in the event the Exchange Offer was not successful or that Capitol believed the transactions contemplated by the Standby Plan are in the best interests of all stakeholders. The Standby Plan contemplates the conversion of all current trust preferred security holders, unsecured senior note holders, current preferred equity shareholders and current common equity shareholders into new classes of common stock which will retain approximately 53 percent of the voting control and value of the restructured company.

Capitol has also been actively seeking to identify external capital sources sufficient to restore all affiliate institutions to "well-capitalized" status in exchange for approximately 47 percent of the restructured company. The Standby Plan contemplates an equity infusion of at least $70 million and up to $115 million pursuant to a separate equity commitment agreement to be entered into by Capitol and certain third-party investors prior to the date on which the Standby Plan becomes effective.

The first segment of the restructuring plan, the exchange of Capitol's outstanding trust preferred securities, unsecured capital notes and Series A preferred stock, expired on July 27, 2012. As the conditions for the Exchange Offers were not met, the Exchange Offer was terminated and the tendered securities were released into their original CUSIP numbers.

Holders of Capitol's senior notes, trust preferred securities, Series A preferred and common stock overwhelmingly voted to accept the Standby Plan and as a result of the successful vote, Capitol's board of directors approved proceeding with voluntary Chapter 11 filings for Capitol and FCC in the U.S. Bankruptcy Court for the Eastern District of Michigan (the "Court"), and Capitol is seeking confirmation of the approved Standby Plan by the Court. The Court granted Capitol certain "first-day motions" which allow it to continue its operations in the ordinary course during the plan confirmation process, and which include requests to continue the payment of wages, salaries and other employee benefits. Capitol has also been granted a motion by the Court restricting trading in Capitol's senior notes, trust preferred securities, preferred stock and common stock in order to preserve certain of Capitol's deferred tax assets.

Capitol officials emphasize that this initiative will not affect the operations or deposits of any of Capitol's affiliate banks, which are continuing normal operations during the pendency of the cases. Capitol's affiliated banks are regulated separately from the holding company and, like all other insured commercial banks, their deposits are insured by the Federal Deposit Insurance Corporation.

Capitol's Chairman and CEO, Joseph D. Reid stated, "We remain hopeful that the restructuring plan will serve to provide resolution for our trust preferred securities and Capitol's senior debt, while also facilitating additional equity investments in the Corporation. Additionally, successful completion of the plan will provide benefits to Capitol and all of its stakeholders, and will help to restore the Corporation's capital ratios, as well as the capital ratios of our affiliate banks, providing a more stable platform for future growth and support. We appreciate the continued support from our many stakeholders as we work through this reorganization process."

When the trust preferred securities were originally issued, and until recently, substantially all of those securities comprised a crucial element of Capitol's compliance with regulatory capital requirements because they were a material component of regulatory capital. Because of Capitol's weakened financial condition and changes to banking regulations affecting its ability (as well as that of other bank holding companies in the United States) to include any portion of these securities in regulatory capital computations, none of these securities are currently included in the Corporation's regulatory capital measurements. The restructuring initiatives will facilitate the conversion of Capitol's trust preferred securities to equity and represent an efficient opportunity to strengthen the composition of Capitol's capital base by increasing its Tier 1 common and tangible common equity ratios, while also reducing the dividend and interest expense associated with these securities. By increasing its common equity component, and successfully completing the capital raise component of the plan, Capitol expects to have increased capital flexibility to continue to support its community banking platform, strategically take advantage of select market opportunities and implement its long-term strategies.

Affiliate Bank Divestitures
Capitol previously announced plans to sell its controlling interests in several affiliate banks. The sale of one of these banks in the Northwest region of the country was completed in November 2012 and Capitol has also entered into definitive agreements to sell its interests in two affiliates located in the Great Lakes region. These three transactions represent nearly $210 million of assets. The pending divestiture is anticipated to be completed in 2013, pending regulatory approval and other contingencies.

About Capitol Bancorp Limited
Capitol Bancorp Limited (OTCQB: CBCRQ), which was founded in 1988, is a community banking company that has a network of separately chartered banks in nine states and executive offices in Lansing, Michigan.




(in thousands, except share and per-share data)

Three Months Ended

Year Ended

December 31

December 31





Condensed consolidated results of operations:

Interest income

$ 18,252

$ 21,417

$ 77,626

$ 94,720

Interest expense





Net interest income





Provision for loan losses





Noninterest income





Noninterest expense





Loss from continuing operations before income






Income (loss) from discontinued operations





Net loss attributable to Capitol Bancorp Limited

$ (1,550)

$ (6,516)

$ (25,474)

$ (45,427)

Net loss attributable to Capitol Bancorp Limited

per common share

$ (0.04)

$ (0.16)

$ (0.62)

$ (1.17)

Book value (deficit) per common share at end of period





Common stock closing price at end of period

$ 0.05

$ 0.09

$ 0.05

$ 0.09

Common shares outstanding at end of period





Number of common shares used to compute net

loss per share:











4th Quarter

3rd Quarter

2nd Quarter

1st Quarter

4th Quarter






Condensed summary of consolidated financial position:

Total assets

$ 1,618,252

$ 1,749,457

$ 1,985,907

$ 2,058,739

$ 2,205,265

Portfolio loans(1)












Capitol Bancorp Limited stockholders' equity (deficit)






Total capital

$ 7,180

$ 9,512

$ 17,294

$ 27,931

$ 40,509

Key performance ratios: