Capitol Bancorp Reports Second Quarter 2010 Results

LANSING, Mich. and PHOENIX, Aug. 16 /PRNewswire-FirstCall/ --

• Bank Divestiture Activities Continue with Ten Transactions Pending
• Six Regional Consolidations Completed
• Total Assets of $4.7 Billion
• Four Affiliate Bank Sales Completed This Year; Six Divestitures Total

A net loss attributable to Capitol Bancorp was incurred for the second quarter of 2010 of $41 million or $1.98 per share, compared to a net loss of $47.9 million or $2.75 per share for the first quarter of 2010 and a net loss of $16.3 million or $0.95 per share reported for the second quarter of 2009.  

Consolidated assets declined 17 percent year-over-year to $4.7 billion at June 30, 2010 from the $5.7 billion reported for the second quarter of 2009, as a result of bank sales and related implementation of the capital preservation and balance-sheet deleveraging strategies.  Consistent with these efforts, total portfolio loans were $3.6 billion at June 30, 2010, a 21 percent decline over the past twelve months inclusive of the effect of recent bank sales.  Total deposits reflected an approximate 11 percent annualized decline to approximately $4.2 billion from the $4.4 billion reported at the beginning of 2010, while noninterest-bearing deposits approximated 16.3 percent of total deposits at June 30, 2010 versus 15.1 percent of total deposits at the beginning of 2010, as the Corporation continued to focus on core funding sources throughout the deleveraging process and as a result of recent bank sales.  

Capitol's Chairman and CEO Joseph D. Reid said, "We remain focused on a myriad of issues presented by both an uncertain and struggling economy in multiple markets of our franchise.  Building balance sheet strength and improving liquidity, while reallocating capital resources to those affiliates currently facing more difficult operating challenges, are being addressed via our strategy of regional consolidations and bank divestitures.  These initiatives also serve to enhance affiliate-level and system-wide operating efficiencies through the elimination of operating costs targeted by the regional consolidations.  Equity levels have diminished significantly in recent quarters as we work through the loan portfolio issues and related operating losses that arise in a severely weakened economy.  We continue to concentrate our efforts on these multiple deleveraging avenues while pursuing access to additional internal and external sources of capital."

"We are cautiously encouraged by both redeployment of capital resources via our divestiture efforts and recent positive trends and developments in asset quality.  Growth in nonperforming assets, although continuing to remain elevated, reflects another quarter demonstrating a substantially slowing trend.  Net loan charge-offs, elevated from historical levels, declined materially on a linked-quarter basis while the most recent quarterly provision for loan losses again exceeded charge-offs.  The June 30, 2010 allowance for loan losses approximating 4.44 percent of portfolio loans represents a material increase from the 3.57 percent level we reported at the beginning of 2010, and a significant increase during these difficult times from the approximate 2.5 percent level we posted a year ago," added Mr. Reid.

"Combining the aggregate quarter-end level of nonperforming assets with net charge-offs for each of the past six quarters, the rate of increase has continued its slowing trend:  from 34.1 percent in the first quarter of 2009, to 13.1 percent in 2009's second quarter, to 12.3 percent for the quarter ended September 30, 2009, to 11.2 percent for the final quarter of 2009, to 3.7 percent in 2010's first quarter, and most recently to 2.8 percent for the three months ended June 30, 2010.  In addition, pretax, pre-provision results, before costs associated with foreclosed properties and other real estate owned, were positive for the second consecutive quarter.  Costs associated with foreclosed properties and other real estate owned declined significantly on a linked-quarter basis, after decreasing dramatically from the fourth quarter of 2009 compared to 2010's first quarter.  We also remain cautiously optimistic as to the potential recovery of the $154.7 million valuation allowance for deferred tax assets once we are able to demonstrate a sustainable return to core profitability."

"Finally, our affiliate divestiture program has resulted in the sale of six institutions to date in 2010, eliminating $500 million of assets, and we currently have ten transactions pending encompassing an additional $700 million of assets as we aggressively seek to reallocate capital, deleveraging the balance sheet.  Above and beyond the approximate $1.2 billion of assets these efforts represent, there are ongoing discussions on additional fronts in both the divestiture and capital-reallocation arenas as we recognize and address the deterioration that has occurred in our once-robust capital support levels.  We expect to communicate additional developments as they arise and solidify."

Capital Initiatives

In addition to the completed divestitures and regional consolidations, capital-raising initiatives have included the commencement of an offer to exchange shares of Capitol's common stock for any and all of its outstanding 10.50 percent trust-preferred securities of Capitol Trust XII.  That offer ("proposed exchange"), which commenced in late May 2010, has been extended to August 31, 2010.  The proposed exchange is contingent upon receipt of consents from a majority in aggregate liquidation amount of all outstanding 8.50 percent cumulative trust-preferred securities of Capitol Trust I to approve proposed amendments to certain provisions of the Indenture and Guarantee Agreement pursuant to which the trust-preferred securities of Capitol Trust I were originally issued.  

Mr. Reid stated, "This pending exchange offer provides an opportunity to strengthen Tier 1 common and tangible common equity ratios, while also reducing interest expense associated with the debt securities.  We have been encouraged by the initial response to this initiative, with approximately 16 percent of publicly-traded shares of this instrument indicating a desire to participate in the pending exchange offer and we continue to explore other opportunities to create core tangible common equity."  

Affiliate Bank Divestitures and Regional Bank Consolidations

Capitol previously announced intentions to sell its controlling interests in several affiliate banks.  Sale of Capitol's interests in Bank of Belleville and Napa Community Bank, completed during April 2010, involved $228 million of assets while garnering more than $25 million of proceeds for reinvestment in bank affiliates.  In June 2010, Capitol completed the sale of Beachwood, Ohio based Ohio Commerce Bank and at the end of July, the sale of Community Bank of Lincoln in Lincoln, Nebraska was completed.  Those two sales involved approximately $130 million of assets.  In the second quarter of 2010, Capitol announced that it had entered into a collective stock redemption transaction with three Colorado affiliates: Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce.  Capitol also announced agreements to sell Bank of San Francisco in California, and Bank of Fort Bend in Sugar Land, Texas.  Those transactions, in addition to five other pending transactions involving affiliates in Colorado, Missouri, New York, North Carolina and Texas, reflect ten divestitures awaiting regulatory approvals (and other contingencies) and represent an additional $700 million of assets and estimated proceeds in excess of $50 million.  The ten pending divestitures, with book-value multiples at a premium to tangible equity, are anticipated to be completed in 2010.  

Subsequent to June 30, 2010, Capitol completed a regional consolidation of three Georgia-based banks into what operates today as Sunrise Bank.  That regional consolidation follows similar charter consolidations that have occurred earlier in 2010 and in the fourth quarter of 2009 in Arizona, California, Indiana, Michigan, Nevada and Washington, resulting in the cumulative elimination of 20 charters.  To date, the regional consolidation effort has resulted in the consolidation of 27 charters into six distinct, geographically-concentrated operating entities.  Preliminary results at the five largest regional consolidations are being actively monitored with the expectation of meeting targeted efficiency objectives, but implementation costs and restructuring expenses associated with consolidation activity can serve to delay full recognition of the projected cost savings and efficiencies expected with each consolidation.  

Mr. Reid further stated, "These bank sales and regional consolidations have provided the Corporation with capital redeployment flexibility to support our ongoing strategic initiatives to enhance balance sheet strength, while also serving our primary objective to assist those affiliates adversely affected by the current difficult economy.  We continue to assess additional initiatives to drive operational efficiencies and strengthen risk management oversight within our footprint, without compromising the community-based orientation and operating integrity of the affiliate system."

Quarterly Performance (as adjusted for discontinued operations)

In the second quarter of 2010, after adjusting for discontinued operations, consolidated net operating revenues decreased 10.4 percent to $38.3 million from the approximate $42.8 million reported for the corresponding period of 2009.  Net interest margin compression, fueled in large part by elevated levels of nonperforming assets, resulted in an 8.8 percent decline in net interest income.  A concerted effort to focus on core deposit funding sources, as referenced earlier, helped mitigate some of the margin pressure.  The net interest margin declined to 2.88 percent compared to 2009's second quarter margin of 3.02 percent and 3.03 percent in the first quarter of 2010.  Cash and cash equivalents totaled approximately $925 million, or 19 percent of the Corporation's consolidated total assets at June 30, 2010.  Other noninterest income totaled $5.4 million, a nearly 19 percent decrease compared to approximately $6.7 million in the comparable 2009 period.

The Corporation continues to emphasize the reduction of operating expenses through salary and staffing reductions, operational efficiencies and tight controls on other overhead. Salaries and employee benefit costs declined nearly 13 percent year-over-year and approximately 2.6 percent (10.4 percent annualized) on a linked-quarter basis.  Noninterest, or operating, expenses increased year-over-year to $48.7 million in the quarter ended June 30, 2010.  While costs associated with foreclosed properties and other real estate owned (which totaled $8.9 million in the second quarter of 2010 versus approximately $4.2 million in the corresponding 2009 period) increased significantly, but declined encouragingly on a 2010 linked-quarter basis ($3.2 million), FDIC insurance premiums and other regulatory fees decreased from $5.0 million in 2009's second quarter to approximately $4.2 million in the most recent three-month period.  Combined, these two expense areas increased to approximately $13.1 million in the current quarter, representing a substantial increase from the combined approximate $9.2 million level during the corresponding period of 2009, more than offsetting the aforementioned $2.9 million decline in compensation-related expenses.  On a linked-quarter basis, total operating expenses declined 8.4 percent from $53.2 million in 2010's first quarter to the $48.7 million in the subsequent quarter.  Again, adjusting for real estate owned-related and regulatory-related costs, linked quarter operating expenses still declined approximately 3.5 percent, or 14 percent annualized.

The second quarter 2010 provision for loan losses decreased to $44.6 million, a reduction from the $49.0 million recorded in the preceding quarter, and increased from the $32.5 million for the corresponding period of 2009.  During the second quarter of 2010, net loan charge-offs totaled $33.4 million, a significant increase from 2009's corresponding level of $18.3 million, but a reduction from the $41.8 million recorded in the first quarter of 2010, as the Corporation continues to aggressively manage its nonperforming loans.  

Adverse bank performance in the Arizona, Great Lakes and Nevada regions and the increased provision for loan losses were major reasons for the consolidated net loss.  

Six-Month Performance

Net operating revenues were $78.9 million for the six months ended June 30, 2010, a 2.3 percent decrease compared to the approximate $80.8 million for the year-ago period, buffeted by the aforementioned gains on sales of affiliates recorded in the recent quarter.  Core operating revenues, net of divestiture gains, declined 14.6 percent due to the impact of sizable deleveraging of the balance sheet resulting from bank sales, and further driven by margin compression and general softness across all major revenue components.  The provision for loan losses of $93.6 million for the first six months of 2010 was an increase from the $66.1 million for the comparable 2009 period.  The net loss per share for the first half of 2010 was $4.67, versus the $2.15 reported for the corresponding period in 2009.  

Balance Sheet

With total capital resources of approximately $304.1 million at June 30, 2010, the total capital-to-asset ratio was 6.40 percent.  Divestiture efforts and ongoing balance sheet deleveraging should serve to help strengthen consolidated capital ratios, but as of June 30, 2010 the consolidated leverage, Tier 1 and total risk-based regulatory capital ratios were 2.39 percent, 3.19 percent and 6.38 percent, respectively.  Consequently, the Corporation continues to be classified as "undercapitalized."

Net loan charge-offs of 3.64 percent of average loans (annualized) for the second quarter of 2010 decreased significantly from the 4.25 percent reported for the first quarter of 2010, but increased dramatically from the 1.64 percent reported for the corresponding period of 2009 as the Corporation continued to aggressively seek problem asset resolution.  The ratio of nonperforming loans to total portfolio loans was 9.93 percent at June 30, 2010 compared to 8.80 percent reported at March 31, 2010 and 5.70 percent for the same period in 2009.  The ratio of total nonperforming assets to total assets increased to 9.86 percent at June 30, 2010 from 8.97 percent reported at March 31, 2010 and 6.37 percent at June 30, 2009.  The continuing increase in nonperforming assets is attributable to borrower stress and delinquency, coupled with a minimal market for sale of real estate, especially in the states of Arizona, Michigan and Nevada, hindering the disposition of such assets.  The coverage ratio of the allowance for loan losses in relation to nonperforming loans approximated 45 percent at June 30, 2010, consistent with levels recorded in recent quarters, while the allowance for loan losses as a percentage of portfolio loans increased materially year-over-year, from 2.50 percent to 4.44 percent at June 30, 2010, as provisions for loan losses continued to exceed the significant level of net charge-off activity during 2010.  

About Capitol Bancorp Limited

Capitol Bancorp Limited (NYSE: CBC) is a national community banking company, with a network of separately chartered banks with operations in 15 states.  Founded in 1988, the Corporation has executive offices in Lansing, Michigan, and Phoenix, Arizona.  

SOURCE Capitol Bancorp Limited

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