| We have identified and are operating in 10 separate regions of the United States today. |
During the course of 2007, the American banking industry was bombarded with negative events leading to declines in earnings and, of course, market value reductions. The housing and mortgage industry fallout, margin compression and credit quality deterioration produced an economic tsunami affecting most every financial institution in the United States.
For Capitol Bancorp, earnings for the year were cut in half from $42.4 million ($2.57 per diluted share) to $21.9 million ($1.27 per diluted share). Capitol Bancorp’s stock price was reduced from $46.20 per share to $20.12 per share. Talk of recession shared the front page of our newspapers with the Iraq War and presidential politics.
Although the business of Capitol Bancorp banks is not based on subprime residential lending, we, like all financial institutions, are affected by it. It is during these times that it is important to stay focused on our objective as a community bank company — to develop a national affiliation of community banks which represents all major regions of the United States.
Regional Balance
One of the risks of a small community bank is geographical concentration. It is a risk which is difficult to offset. If the community suffers economically, then there is a high probability that the community bank will suffer with it. When a series of affiliated community banks are clustered within the same region, then all are affected by the economic fortunes of that region. We have witnessed regional economic downturns throughout our history.
If a community bank company can be established with a material presence in every major region of the United States, then a regional weakness will not serve to derail the performance of the whole company. It is this point which reveals the underlying objective of Capitol Bancorp. Ironically, it is the weakened performance of the Great Lakes Region which vividly makes this point.
We have identified and are operating in 10 separate regions of the United States today. The Great Lakes Region has undergone a most difficult economic adjustment largely as a result of its auto industry concentration. Because we began in the Great Lakes Region years ago, we remain overly concentrated in this region today. Specifically, 41.7% of our total assets rest in the Great Lakes. Although this is down from 46.7% in 2006, it remains disproportionate to the other regions of the United States.
| We will continue to pursue our objective of a regionally-balanced national affiliation of community-based banks. |
Bank Development
The cover of this report suggests the feverish pace with which we have operated over the past year, moving Capitol Bancorp a step closer to regional balance. In 2007 we added 11 new community banks, more than any other previous year in our history. This included two banks in Texas; two in California; two in Colorado; two in Washington; one in Oregon; one in New York; and one in Nebraska. New bank development promotes growth.Our asset growth rate for 2007 was 20.6%, moving from $4.1 billion to more than $4.9 billion over the course of the year. During that period portfolio loans increased from $3.5 billion to more than $4.3 billion representing an increase of 23.7%.
Unlike a new branch of an existing bank, the development of a new bank is a challenging undertaking. It requires a high level of direct, personal involvement by the officer group of Capitol Bancorp. Selection of the president and a board of directors is both crucial and time consuming. Location, staffing and the development of a marketing strategy each require large concentrations of time and energy. The regulatory process is cumbersome at best. Finally, raising the necessary local capital provides its own obstacles. This is why we are particularly pleased with the 11 successful development efforts of 2007.
In 2008
As the cover of this report also portrays, we continue to follow our strategic highway to develop a regionally-balanced national affiliation of community banks. Over the course of the current year, we will continue to pursue our objective with the addition of several new bank affiliates. We will continue our intensified effort to promote an exemplary risk management program. We will continue to strengthen our core information technology, providing enhancements to the product offerings at our bank affiliates. In this regard, we expect to have completed our remote deposit project which began in 2007.
Louis Allen and Robert Carr
The past year proved to be particularly difficult for all of us here at Capitol Bancorp with the passing of our dear friends and colleagues, Louis Allen and Robert Carr. Lou joined our Board of Directors in 1994 and served with distinction. He was particularly helpful to us over these years drawing on a lifetime of experience as a banker.
Bob was president of our first bank, Capitol National Bank, which opened in 1982. He served as a valuable mentor to many of the bank presidents who followed as we developed additional banks across the country. Bob ultimately served as vice chairman of Capitol Bancorp. He, along with a small handful of others, was truly a founder of Capitol Bancorp. We all learned a great deal about banking from Bob. He challenged every step taken by Capitol Bancorp as it grew; constantly reminding us that banking is a “people business.” We will continue to build on the legacy of Lou Allen and Bob Carr.
Conclusion
At year end Capitol Bancorp banks represented 60 bank presidents; 636 board of director seats; 60 different bank names; and operations in 17 states. There are today more than 1,700 employees. Our customers expect a high level of service from people without being forwarded to an 800 number.
As the “largest small bank company in America” we need to remain constantly vigilant to the importance of service and to the importance of the fact that “CBC banking” is, has been and will continue to be a “people business.”
Thank you for your support of our efforts.
Joseph D. Reid
Chairman & CEO
Capitol Bancorp Limited
