Capitol Bancorp Reports Modest First Quarter Profit

LANSING, Mich. and PHOENIX, May 11, 2011 /PRNewswire/ -- Net income of $289 thousand, or $0.01 per share, was reported for the first quarter of 2011, compared to a net loss of nearly $47.9 million, or ($2.75) per share, for the corresponding period in 2010.  Several key factors contributed to these significantly improved operating results:

• The provision for loan losses decreased more than 70 percent from the corresponding period of 2010 and nearly 40 percent from the fourth quarter of 2010.
• Costs associated with foreclosed properties and other real estate owned decreased 35 percent from the first quarter of 2010.
• Employee compensation and benefits expense decreased nearly 15 percent from the first quarter of 2010.
• Also contributing to the improved performance was a one-time gain resulting from the exchange of publicly-traded trust-preferred securities for Capitol's common stock in January 2011, as well as a collection of more modest gains associated with multiple affiliate divestiture transactions completed during the first quarter of 2011.

Consolidated assets declined nearly 37 percent to approximately $3.2 billion at March 31, 2011 from the approximate $5.1 billion reported at March 31, 2010, and nearly 10 percent on a linked-quarter basis from year-end's $3.5 billion, as a result of bank divestitures and balance-sheet deleveraging strategies.  Total portfolio loans approximated $2.5 billion at March 31, 2011, a 17 percent decline from the corresponding period in 2010, but a more modest 3 percent decline on a linked-quarter basis tied to early signs of economic stability in some markets and efforts to prudently enhance the earning-asset profile during the deleveraging process.  Deposits reflected a 19 percent decline to $2.8 billion from approximately $3.5 billion reported at March 31, 2010; however, the Corporation's continued focus on core funding sources resulted in an ongoing favorable improvement in deposit mix as noninterest-bearing deposits were in excess of 18 percent of total deposits at March 31, 2011, compared to 17 percent at March 31, 2010.

Capitol's Chairman and CEO Joseph D. Reid said, "Ardent focus on risk management and enhancing balance-sheet strength, while improving liquidity, continues to be at the forefront of our efforts in dealing with the Corporation's challenges in multiple markets.  These improvements have resulted from several regional consolidations and more than a dozen bank divestitures over the past few years.  The current challenges remain significant and the burdens represented by elevated levels of nonperforming assets, although modestly declining in recent quarters, continue to consume capital and managerial resources; however, we are encouraged that these efforts and others will support the Corporation as it continues to weather the storm and return to fundamental performance over time."

"We are cautiously encouraged by both redeployment of capital resources from divestiture efforts and continued preliminary signs of recent positive trends in asset quality and operating performance.  Nonperforming assets, although still elevated, reflect a third consecutive quarter of decline after six consecutive quarters of adverse growth.  The decline in the first quarter of 2011 (when compared to the preceding quarter) approximated 4.5 percent, while nonperforming loans declined more than 7 percent linked-quarter.  We remain hopeful these trendlines may be a harbinger of continued improving fundamentals."  

"Net loan charge-offs, which also continue to be elevated, reflected another quarter of active management and resolution-oriented focus, declining to approximately $24.2 million from $27.9 million linked-quarter and more than $41.6 million in the year-ago period.  Tied to our continuing efforts to build balance sheet strength, the allowance for loan losses approximated 5.58 percent of portfolio loans at March 31, 2011, consistent with year-end levels, despite a modest decline in nonperforming assets and a significant increase from the 3.90 percent level for the corresponding period in 2010," added Mr. Reid.

"Divestiture activities have resulted in the sale of 16 institutions, eliminating nearly $1.4 billion of assets.  Six additional transactions are pending, with assets approximating $290 million (a seventh divestiture, pending as of March 31, 2011, was completed in mid-April and is included in the aforementioned 16 consummated transactions).  Beyond the combined approximate $1.7 billion of assets involved in such divestitures, ongoing discussions continue in both the divestiture and capital-reallocation arenas to address the deterioration that has occurred in equity capital.  We expect to communicate additional developments as they arise, as all strategic alternatives and prospective sources of support are being actively and aggressively explored," said Mr. Reid.

Quarterly Performance

In the first quarter of 2011, consolidated net operating revenues from continuing operations increased to approximately $45.6 million from approximately $31.1 million for the corresponding period of 2010, partially attributable to a $16.9 million gain recorded on a debt-for-equity exchange that occurred in the first quarter of 2011.  However, on a core operating basis, despite the associated contraction in traditional fees and revenues tied to a shrinking balance sheet, notable expansion in the net interest margin both year-over-year and linked-quarter partially offset expected declines in noninterest income.  The net interest margin increased marginally to 3.15 percent for the three months ended March 31, 2011 from 3.03 percent for 2010's comparable period, and 2.94 percent on a linked-quarter basis.  Cash and cash equivalents were nearly $537 million, or nearly 17 percent of consolidated total assets at March 31, 2011 (and up slightly from the 15 percent level recorded at year-end), reflecting continued focus on liquidity despite the deleterious short-term effect on core operating revenues.  Other noninterest income totaled nearly $21.4 million, fueled by the $16.9 million gain, compared to $6.2 million in the comparable 2010 period.  However, as discussed, core noninterest revenue components continue to decline, partly attributable to Capitol's deleveraging efforts.

The Corporation continues to emphasize the reduction of operating expenses.  Noninterest expenses decreased in the recent quarter to $39.9 million from approximately $47.1 million for the three months ended March 31, 2010.  This improvement was largely driven by a significant decrease in costs associated with foreclosed properties and other real estate owned, which approximated $7.5 million in the first quarter of 2011, compared to nearly $11.6 million in the corresponding 2010 period.  FDIC insurance premiums and other regulatory fees also decreased from $4.1 million in 2010's first quarter to approximately $3.3 million in the most recent three-month period.  Combined, these two expense areas measured nearly $10.8 million in the most recent quarter, a substantial decrease from the combined $15.7 million level during the corresponding period of 2010.  More importantly, on a core, controllable-expense basis, year-over-year salary costs declined from $18.2 million in the 2010 period to $15.5 million in 2011's first quarter while remaining relatively static on a linked-quarter basis.  

The first quarter 2011 provision for loan losses decreased dramatically to approximately $13.5 million from nearly $47.4 million for the corresponding period of 2010.  During the first quarter of 2011, net loan charge-offs totaled approximately $24.2 million, a significant decrease from 2010's corresponding level of $41.6 million and continued improvement when compared with each of the four quarters ($27.9 million, $40.9 million, $33.4 million and $41.6 million, respectively) of 2010, as the Corporation continues to aggressively manage its nonperforming loans.

Adverse bank performance primarily in the Arizona, Michigan and Nevada markets, and the continued higher than historical level of provisioning for loan losses system-wide were major reasons for the core operating net loss in the three month period.  However, while capital-restoration efforts and the continued focus on reserve adequacy at our three largest regions has served to deliver sizable losses at these affiliates over the past few years, Capitol is encouraged that aggregate levels of nonperforming loans reflected notable declines in the first quarter when compared to year-end: Michigan (down 9.2 percent), Nevada (down 5.6 percent) and Arizona (down 4.4 percent).  

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."  A modest first quarter profit, fueled by the significant gain on the debt-for-equity exchange, coupled with continued shrinkage in consolidated assets, helped to stabilize any further material deterioration in core capital ratios.  However, the challenges, and multiple efforts to address this capital-restoration priority, remain ongoing.  As of March 31, 2011, Capitol has a $197.5 million valuation allowance related to deferred tax assets, which may be utilized upon a return to significant core profitability.

Net loan charge-offs of 3.78 percent of average loans (annualized) for the first quarter of 2011 represented a decrease from the 4.25 percent in the corresponding period of 2010 and the 4.05 percent on a linked-quarter basis.  The ratio of nonperforming loans to total portfolio loans improved slightly to 11.86 percent at March 31, 2011 compared to 11.90 percent reported at December 31, 2010, while still significantly elevated from the 8.80 percent at March 31, 2010.  The ratio of total nonperforming assets to total assets increased to 12.58 percent at March 31, 2011 from 12.03 percent reported at December 31, 2010 and 8.97 percent at March 31, 2010.  As discussed earlier, on a linked-quarter basis, notable declines in both  the percentage and aggregate levels of nonperforming loans and nonperforming assets (decreases of 7.4 percent and 4.5 percent, respectively, from year-end, or approximately $23 million and $19 million, respectively, in terms of aggregate dollars), are effectively muted when looking at these ratios because of the significant deleveraging of the consolidated balance sheet that has occurred simultaneously over the past six-to-eight quarters.

The continuing increase in the nonperforming assets ratio is attributable to borrower stress and delinquency, coupled with limited markets for the sale of real estate, especially in the states of Arizona, Michigan and Nevada, hindering the disposition of such assets.  While recent activity reflected some encouragement in the trend of a declining level of nonperforming loans in the Arizona Region (a $2.3 million decline, linked-quarter), the Great Lakes Region (an $11.5 million decline, linked-quarter) and the Nevada Region (a $5.0 million decline, linked-quarter), all three regions continue to reflect materially elevated levels of nonperforming assets.  The coverage ratio of the allowance for loan losses in relation to nonperforming loans was 47 percent at March 31, 2011, a modest improvement both year-over-year and linked-quarter, and consistent with levels reported in recent quarters.  The allowance for loan losses as a percentage of portfolio loans increased materially, from 3.90 percent at March 31, 2010 to 5.58 percent at March 31, 2011, and remained relatively flat with the 5.52 percent recorded at year-end.    

Comprehensive Capital Strategy

In December 2010, Capitol announced a comprehensive capital strategy focused on the enhancement of the Corporation's capital levels.  Those initiatives are designed to augment Capitol's existing strategic efforts focused on affiliate divestitures, operational cost savings, balance-sheet deleveraging and liquidity.  Capitol successfully completed the first of these capital initiatives, an offer to exchange outstanding trust-preferred securities for previously-unissued shares of Capitol's common stock.  On January 31, 2011, those exchanges resulted in an additional $19.5 million of equity for Capitol, the issuance of approximately 19.5 million previously-unissued shares of Capitol's common stock and the elimination of approximately $2 million of annual interest expense in future periods.  By increasing its capital through that exchange and other contemplated components of its capital strategy, Capitol expects flexibility to prospectively seek market opportunities and implement longer-term operating strategies that may be pursued at the appropriate time.  Additional prospective debt-for-equity exchanges are being assessed, as well as potential external capital sources that the Corporation continues to pursue.  Given Capitol's current precariously-low equity levels, the inability to successfully access these potential new capital resources would threaten the Corporation's ability to continue as a going concern.

Affiliate Bank Divestitures and Regional Bank Consolidations

Capitol previously announced plans to sell its controlling interests in several affiliate banks.  In the first quarter, Capitol completed the sale of its interest in its Arizona-based affiliate Bank of Tucson's main office and Texas-based Bank of Fort Bend.  In mid-April, after the close of the first quarter, North Carolina-based Community Bank of Rowan was also divested.  These transactions consisted of approximately $350 million of assets and reallocated nearly $30 million of capital for reinvestment in bank affiliates.  To date in 2011, Capitol also announced agreements to sell its interests in California-based Bank of Feather River, Oregon-based High Desert Bank and Texas-based Bank of Las Colinas.  Those transactions, in addition to three other pending transactions involving affiliates in the Midwest and Southwest areas of the country, reflect six divestitures awaiting regulatory approvals (and other contingencies) and represent nearly $290 million of assets and the opportunity to reallocate approximately $14 million of capital to other banks within the Capitol Bancorp network.  The six pending divestitures are anticipated to be completed in 2011.

During 2010, regional charter consolidations were completed in California, Georgia, Indiana, Michigan, Nevada and Washington, following 2009 charter consolidations in Arizona and Michigan.  To date, the regional consolidation effort has resulted in the consolidation of 27 charters into seven geographically-concentrated banks.

Mr. Reid stated, "We are pleased with our strategy of bank divestitures and regional consolidations which allow us to reallocate equity capital and resources to support those affiliates still challenged by current economic conditions."

About Capitol Bancorp Limited

Capitol Bancorp Limited is a community banking company, with a national network of separately chartered banks with operations in 14 states.  Founded in 1988, the Corporation has executive offices in Lansing, Michigan, and Phoenix, Arizona.

Capitol Bancorp's National Network of Community Banks

www.capitolbancorp.com

SOURCE Capitol Bancorp Limited

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