“The American banking industry is undergoing a challenge, which is unprecedented
in the past half century.”
Many annual reports to shareholders this year will start out with a comment similar
to this in their shareholder letter. The letter will remind the shareholders of
conditions which have become all too obvious, even to the most passive investor.
Other shareholder letters may choose to attempt to explain the condition which afflicts
financial institutions in this country, rightfully pointing blame to the greed of
Wall Street and the numerous transactions which led up to the current financial
crisis.
A better way to start may be to explain what the company is doing to meet the challenge,
rather than a lengthy narrative on how the industry got here. This is where we begin.
The name of the game for financial institutions today is, in a word, “survival.”
Earnings reports and asset growth metrics have been superseded by the all important
capital ratio—the amount of capital which the financial institution retains in order
to support its stability. Capital is the lifeblood of a financial institution.
I am pleased to report to you that, as of December 31, 2008, our capital ratios
were calculated as follows:
- Tier 1 Leverage Ratio – 10.72%
- Tier 1 Capital Ratio – 12.07%
- Total Risk-based Capital Ratio – 13.75%
Our objective has been, and continues to be, the preservation of capital. There
are a number of strategies which we have implemented to achieve this objective.
First and foremost was the termination of a series of new bank development programs
which were under way. We did complete the organization of four banking affiliates
in the first half of 2008, including Adams Dairy Bank in Blue Springs, Missouri;
Mountain View Bank of Commerce in Westminster, Colorado; Colonia Bank in Phoenix,
Arizona; and Pisgah Community Bank in Asheville, North Carolina. All other efforts
were terminated, eliminating the need for additional start-up capital.
Second was the reduction of operating expenses:
- During the 4th quarter of 2008, our employee count on a national basis was reduced
by 7%.
- The Corporation suspended contributions to its employee stock ownership plan.
- The Corporation suspended contributions to its 401(k) plan.
- An analysis of the entire Corporation was completed in the 4th quarter, eliminating
discretionary expenses.
- A freeze was imposed on all salary adjustments.
- Year-end bonuses were eliminated.
- A voluntary 10% salary reduction for the top executive officers of the Corporation
was implemented beginning in 2009.
Third, a plan was devised seeking the consolidation of a number of our banking affiliates
and further centralization of operational functions in order to reduce expenses
within certain geographical areas:
- A nine-bank merger application was filed in December 2008 affecting our Michigan
banks.
- A four-bank merger application was filed in February 2009 affecting our banking
affiliates in the Greater Phoenix market.
- Initiatives to re-engineer operational functions have been deployed which reflect
the Corporation’s more modest growth objectives.
- Other consolidation alternatives are currently being explored.
Fourth, other methods of capital preservation and conservation included the addition
of $57 million of capital to our balance sheet in 2008. This involved the sale of
trust preferred securities and common stock, coupled with a reduction in the corporate
dividend.
Fifth, we have applied for funding under the U.S. Treasury’s Capital Purchase Plan
as part of what is commonly referred to as “TARP.” As of this writing, we have received
no definitive response to the application, although the matter is pending.
Sixth, we have embarked upon a program to more efficiently allocate capital within
our system by methodically right-sizing the balance sheets of certain bank affiliates
currently facing operating challenges.
And, lastly, we continue to diligently explore the availability and cost of capital
through any and all outside sources, including private equity.
There is no silver-bullet solution to the dilemma facing the banking sector today.
Weathering this economic storm requires vigilance and commitment on the part of
the board of directors and management. This is a commitment that absolutely demands
daily action—not simply words. We have done, and will continue to do, anything and
everything necessary to preserve the viability of our enterprise and restore it
to the former valuation levels that it once enjoyed.
Before closing, I would like to acknowledge the long-standing, stalwart board service
provided to this company by former director, Leonard Maas. His oversight and guidance
has been a source of strength to our board of directors. We wish him well in his
retirement.
Thank you for your continued support of Capitol Bancorp Limited.
Joseph D. Reid
Chairman & CEO
Capitol Bancorp Limited