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As filed with the Securities and Exchange Commission on September 15, 1999
Registration No. 333-86431
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No.1 to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Capitol Bancorp Ltd.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2761672
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Joseph D. Reid
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
John Sharp
Strobl Cunningham Caretti & Sharp, P.C.
300 E. Long Lake Road, Suite 200
Bloomfield Hills, MI 48304
(248) 540-2300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.[_]
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
CALCULATION OF REGISTRATION FEE
Title Of Each Amount To Be Proposed Maximum Proposed Maximum Amount Of
Class Of Securities Being Registered (1) Offering Price Aggregate Offering Registration Fee
Registered Per Share (2) Price (2)
- ---------------------------- -------------------- ------------------------- --------------------------- -----------------
Common stock (no par value) 227,782 $12.844 $2,925,657 $814.00
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(1) Based on 136,164 shares of common stock, $10.64 par value, of Macomb
Community Bank, which is the maximum number of shares of Macomb common
stock (excluding shares held by Capitol) that may be outstanding
immediately prior to the consummation of the exchange transaction, assuming
exercise of all outstanding options to purchase shares of Macomb common
stock. Based also on an assumed exchange ratio of 1.67285 shares of Capitol
common stock for each share of Macomb common stock.
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, as
amended, the registration fee has been calculated based on a price of
$12.844 per share of Capitol common stock (the average of the high and low
price per share of common stock of Capitol as reported on the Nasdaq
National Market on August 30, 1999), and the maximum number of shares of
Capitol common stock that may be issued in the consummation of the exchange
transaction contemplated.
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PROXY STATEMENT/PROSPECTUS
PROPOSED PLAN OF SHARE EXCHANGE
The Board of Directors of Macomb Community Bank has approved a Plan of
Share Exchange that contemplates the exchange of the shares of Macomb common
stock held by all shareholders other than Capitol Bancorp Ltd. Capitol currently
holds 51% of Macomb's common stock. As a result of the exchange, Macomb will
become a wholly-owned subsidiary of Capitol.
If the exchange is approved, each share of Macomb common stock will be
converted into the right to receive Capitol common stock according to an
exchange ratio. The exchange ratio is calculated by dividing one and one-half
times the adjusted pro forma net book value per share of Macomb common stock as
of September 17, 1999 by the average price at closing of Capitol common stock on
the business days within the twenty-two (22) trading day period ending on
September 17, 1999. If the exchange ratio was calculated based on the
information currently available, each shareholder of Macomb would receive in the
exchange 1.67825 shares of Capitol common stock. This is based on an assumed
average trading price of Capitol common stock of $13.125 per share. The actual
exchange ratio will be based on information as of September 17, 1999 and will
probably be different.
Capitol estimates that Capitol will issue approximately 225,000 shares of
Capitol common stock to Macomb shareholders in the exchange. Those shares will
represent less than five percent of the outstanding Capitol common stock after
the exchange. Capitol's common stock trades on the Nasdaq National Market System
under the symbol "CBCL."
Macomb's Board of Directors has scheduled a special meeting of Macomb
shareholders to vote on the Plan of Share Exchange. The attached proxy
statement/prospectus includes detailed information about the time, date and
place of the special shareholders meeting.
This document gives you detailed information about the meeting and the
proposed exchange. You are encouraged to read this document carefully. IN
PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION FOR A DESCRIPTION OF
VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING THE EXCHANGE OF YOUR MACOMB
COMMON STOCK FOR CAPITOL'S COMMON STOCK.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE SECURITIES TO BE ISSUED UNDER THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED
IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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This proxy statement/prospectus is dated September 15, 1999, and is first
being mailed to shareholders of Macomb on or about September 16, 1999.
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[MACOMB LOGO]
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On September 28, 1999
To the Shareholders of Macomb Community Bank:
A special meeting of the shareholders of Macomb Community Bank will be held
at Macomb Community Bank at 16000 Hall Road, Ste. 102, Clinton Twp., Michigan
48038 on September 28, 1999, at 9:00 a.m., local time, for the following
purposes:
1. To consider and vote on a proposal to adopt and approve a Plan of
Share Exchange, dated as of September 30, 1999, between Capitol Bancorp Ltd. and
Macomb Community Bank under which all shareholders of Macomb (other than
Capitol) will exchange their stock in Macomb for stock in Capitol, according to
an exchange ratio, as described in the attached proxy statement/prospectus. A
copy of the Plan of Share Exchange is attached to the proxy statement/prospectus
as Annex A.
2. To act on any other matters that may properly be brought before the
special shareholders meeting or any adjournment or postponement.
Only shareholders of record at the close of business on August 31, 1999 are
entitled to notice of, and to vote at, the meeting or any adjournment or
postponement.
You are cordially invited to attend the special meeting of Macomb's
shareholders. Whether or not you plan to attend, please act promptly to vote
your shares with respect to the proposals described above. You may vote your
shares by completing, signing, dating and returning the enclosed proxy card as
promptly as possible in the enclosed postage-paid envelope.
If you attend the special shareholders meeting, you may vote your shares in
person even if you have previously submitted a proxy.
By Order of the Board of Directors,
/s/ Stephen Tarczy
President and Chief Executive Officer
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TABLE OF CONTENTS
SUMMARY................................................................................................... 10
Reasons for the Exchange. ....................................................................... 10
The Special Shareholders Meeting................................................................. 10
Recommendation to Shareholders................................................................... 10
Votes Required................................................................................... 10
Record Date; Voting Power........................................................................ 11
What Shareholders will Receive in the Exchange................................................... 11
Accounting Treatment............................................................................. 12
Tax Consequences of the Exchange to Macomb Shareholders.......................................... 12
Dissenters' Rights............................................................................... 12
Opinion of Financial Advisor..................................................................... 12
The Plan of Share Exchange....................................................................... 12
Termination of the Exchange...................................................................... 12
Your Rights as a Shareholder Will Change......................................................... 13
SELECTED CONSOLIDATED FINANCIAL DATA...................................................................... 14
RISK FACTORS.............................................................................................. 16
RECENT DEVELOPMENTS....................................................................................... 21
CAPITALIZATION............................................................................................ 23
DIVIDENDS AND MARKET FOR COMMON STOCK..................................................................... 24
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS................................................ 25
INFORMATION ABOUT CAPITOL................................................................................. 26
INFORMATION ABOUT MACOMB.................................................................................. 26
THE EXCHANGE.............................................................................................. 28
General.......................................................................................... 28
Background of the Exchange....................................................................... 28
Macomb's Reasons for the Exchange................................................................ 29
Capitol's Reasons for the Exchange............................................................... 29
Terms of Exchange................................................................................ 29
Macomb Board Recommendation...................................................................... 30
Accounting Treatment............................................................................. 30
Pro Forma Data................................................................................... 30
Material Federal Income Tax Consequences......................................................... 30
Regulatory Matters............................................................................... 32
Dissenters' Rights............................................................................... 32
Federal Securities Laws Consequences; Stock Transfer Restrictions................................ 32
OPINION OF FINANCIAL ADVISOR.............................................................................. 33
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THE CLOSING............................................................................................... 34
Effective Time................................................................................... 34
Shares Held by Capitol........................................................................... 34
Procedures for Surrender of Certificates; Fractional Shares...................................... 34
Stock Option Plans and Employee Stock Purchase Program........................................... 35
Fees and Expenses................................................................................ 35
Nasdaq Stock Market Listing...................................................................... 35
Amendment and Termination........................................................................ 35
THE SPECIAL SHAREHOLDERS MEETING.......................................................................... 36
Date, Time and Place............................................................................. 36
Matters to be Considered at the Special Shareholders Meeting..................................... 36
Record Date; Stock Entitled to Vote; Quorum...................................................... 36
Votes Required................................................................................... 36
Share Ownership of Management.................................................................... 36
Voting of Proxies................................................................................ 37
General Information.............................................................................. 37
Solicitation of Proxies; Expenses................................................................ 37
COMPARISON OF SHAREHOLDER RIGHTS.......................................................................... 38
DESCRIPTION OF CAPITAL STOCK OF CAPITOL................................................................... 40
Rights of Common Stock........................................................................... 40
Shares Available for Issuance.................................................................... 41
Capitol's Preferred Securities................................................................... 41
Anti-Takeover Provisions......................................................................... 41
WHERE YOU CAN FIND MORE INFORMATION....................................................................... 43
LEGAL MATTERS............................................................................................. 44
EXPERTS................................................................................................... 44
LIST OF ANNEXES
ANNEX A Plan of Share Exchange.............................................................. A-1
ANNEX B Opinion of Financial Advisor........................................................ B-1
ANNEX C Tax Opinion of Strobl Cunningham Caretti & Sharp, P.C............................... C-1
ANNEX D Financial Information Regarding Macomb Community Bank............................... D-1
ANNEX E Financial and Other Information Regarding Capitol Bancorp Ltd....................... E-1
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ANSWERS TO
FREQUENTLY ASKED QUESTIONS
Q: Why am I receiving these materials?
A: Macomb's Board of Directors has approved the exchange of the 49% of
Macomb's common stock not owned by Capitol for shares of common stock of
Capitol. The exchange requires the approval of Macomb's shareholders.
Macomb is sending you these materials to help you decide whether to approve
the exchange.
Q: What will I receive in the exchange?
A: You will receive shares of Capitol common stock, which are publicly
traded on the National Market System of the Nasdaq Stock Market, Inc. under
the symbol "CBCL." If the exchange is approved, an exchange ratio will be
calculated based on actual results of operation of Macomb and actual market
prices of Capitol common stock as of September 17, 1999, as described in
the Plan of Share Exchange. If the exchange ratio were calculated based on
currently available information, you would receive 1.67285 shares of
Capitol common stock for each share of Macomb common stock you own, based
on an assumed averaging trading price of Capitol common stock of $13.125
per share. The actual exchange ratio will be different because it will be
based on information as of September 17, 1999.
Q: What do I need to do now?
A: After you have carefully read this document, indicate on the enclosed proxy
card how you want to vote. Sign and mail the proxy card in the enclosed
prepaid return envelope as soon as possible. You should indicate your vote
now even if you expect to attend the special shareholders meeting and vote
in person. Indicating your vote now will not prevent you from later
canceling or revoking your proxy right up to the day of the special
shareholders meeting and will ensure that your shares are voted if you
later find you cannot attend the special shareholders meeting.
Q: What do I do if I want to change my vote?
A: You may change your vote:
. by sending a written notice to the President of Macomb prior to the
special shareholders meeting stating that you would like to revoke
your proxy;
. by signing a later-dated proxy card and returning it by mail prior to
the special shareholders meeting, no later than September 21, 1999; or
. by attending the special shareholders meeting and voting in person.
Q: What vote is required to approve the exchange?
A: In order to complete the exchange, holders of a majority of the shares of
Macomb common stock (other than Capitol) must approve the Plan of Share
Exchange. If you do not vote your Macomb shares, the effect will be a vote
against the Plan of Share Exchange.
Q: Should I send in my stock certificates at this time?
A: No. After the exchange is approved, Capitol or Capitol's stock transfer
agent will send Macomb shareholders written instructions for exchanging
their stock certificates.
Q: When do you expect to complete the exchange?
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A: As quickly as possible after September 30, 1999. Approval by Macomb's
shareholders at the special shareholders meeting must be obtained first. It
is anticipated the exchange will be completed by October 31, 1999.
Q: Where can I find more information about Capitol?
A: This document incorporates important business and financial information
about Capitol from documents filed with the SEC that have not been included
in or delivered with this document. Capitol will provide you with copies of
that information relating to Capitol, without charge, upon written or oral
request to:
Capitol Bancorp Ltd.
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
Attention: General Counsel
Telephone Number: (517) 487-6555
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
SPECIAL STOCKHOLDERS MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN
SEPTEMBER 21, 1999.
For more information on the matters incorporated by reference in this
document, see "Where You Can Find More Information".
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WHO CAN ANSWER YOUR QUESTIONS?
If you have additional questions, you should contact:
Macomb Community Bank
16000 Hall Rd., Ste. 102
Clinton Twp., Michigan 48038
(810) 228-1600
Attention: Stephen Tarczy, President
or
Capitol Bancorp Ltd.
200 Washington Square North, Fourth Floor
Lansing, Michigan 48533
(517) 487-6555
Attention: Cristin Reid English, General Counsel
If you would like additional copies of this
proxy statement/prospectus you should
contact:
Capitol Bancorp Ltd. at the address and phone number
above stated
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SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. It does not contain all of the information that may be
important to you. To understand the proposed exchange fully and the consequences
to you, You should read carefully the entire proxy statement/prospectus and the
documents referred to in this document. See "Where You Can Find More
Information".
Capitol Bancorp Ltd. is a bank holding company with headquarters located at
200 Washington Square North, Fourth Floor, Lansing, Michigan 48533. Capitol's
telephone number is (517) 487-6555
Capitol is a uniquely structured affiliation of community banks. It
currently has 19 majority-owned bank subsidiaries, including Macomb Community
Bank. Each bank is viewed by management as being a separate business from the
perspective of monitoring performance and allocation of financial resources.
Capitol uses a unique strategy of bank ownership and development through a
tiered structure.
Capitol's operating strategy is to provide transactional, processing and
administrative support and mentoring to aid in the effective growth and
development of its banks. It provides access to support services and management
with significant experience in community banking. These administrative and
operational support services do not require a direct interface with the bank
customer and therefore can be consolidated more efficiently without affecting
the bank customer relationship. Subsidiary banks have full decision-making
authority in structuring and approving loans and in the delivery and pricing of
other banking services.
Macomb Community Bank is a commercial bank with its headquarters at 16000
Hall Rd., Ste. 102, Clinton Twp., Michigan 48038. Macomb's telephone number is
(810) 228-1600.
Macomb is now and has been, since it commenced business, a 51% owned
subsidiary of Capitol. Macomb commenced the business of banking on September 18,
1996. Macomb offers a full range of community banking services.
REASONS FOR THE EXCHANGE (PAGE 28)
It is believed that the exchange will provide you with greater liquidity
and flexibility because Capitol's common stock is publicly traded. The exchange
will also provide you with greater diversification, since Capitol is active in
more than one geographic area and across a broader customer base.
THE SPECIAL SHAREHOLDERS MEETING (PAGE 36)
The special meeting of Macomb shareholders will be held on September 28,
1999 at 9:00 a.m., local time, at Macomb Community Bank at 16000 Hall Road,
Suite 102, Clinton Twp., Michigan 48038. At the special shareholders meeting,
you will be asked to approve the Plan of Share Exchange.
RECOMMENDATION TO SHAREHOLDERS (PAGE 30)
The Macomb board believes that the exchange is fair to you and in the best
interests of both you and Macomb and recommends that you vote FOR approval of
the share exchange.
VOTES REQUIRED (PAGE 36)
Approval of the Plan of Share Exchange requires the favorable vote of a
majority of the outstanding shares of Macomb common stock excluding the shares
held by Capitol. This is more than the vote required by law, but Macomb's board
has set the vote requirement to be sure the exchange is what you, the
shareholders of
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Macomb, want. Capitol holds 51% of the outstanding shares of Macomb common
stock. The Board of Directors holds 22.5% of the outstanding shares of Macomb
common stock, or 46% of all shares not held by Capitol. A majority of the Board
of Directors have agreed to vote their shares FOR approval of the Plan of Share
Exchange.
RECORD DATE; VOTING POWER (PAGE 36)
Macomb shareholders may vote at the special shareholders meeting if they
owned shares of common stock at the close of business on August 31, 1999. At the
close of business on August 31, 1999, approximately 136,582 shares of Macomb
common stock were outstanding (excluding shares held by Capitol). For each share
of Macomb common stock that you owned as of the close of business on that date,
you will have one vote in the vote of common shareholders at the special
shareholders meeting on the proposal to approve the Plan of Share Exchange.
WHAT SHAREHOLDERS WILL RECEIVE IN THE EXCHANGE (PAGE 29)
In the exchange, each outstanding share of Macomb common stock will be
automatically converted into the right to receive Capitol common stock,
according to an "exchange ratio". If the exchange ratio was calculated based on
the information currently available, each shareholder of Macomb would receive in
the exchange 1.67285 shares of Capitol common stock for each share of Macomb
common stock. This assumes an averaging trading price for Capitol common stock
of $13.125 per share. The actual exchange ratio will be based on information as
of September 17, 1999 and will probably be different. The exchange ratio will
be determined by dividing the Macomb Share Value by the Capitol Share Value,
where:
Macomb Share Value. The share value of each share of Macomb common
stock shall be determined by multiplying 1.5 times the adjusted pro
forma net book value per share of Macomb common stock as of the close
of business on Friday, September 17, 1999. The adjusted pro forma net
book value per share of Macomb common stock as of the close of
business on Friday, September 17, 1999 shall be calculated by (1)
adding stockholders' equity as reflected in Macomb's internally
prepared financial statements as of August 31, 1999 and Macomb's
actual net income for the month of September, 1999, prorated for the
first 17 days of the month; (2) subtracting from that sum the
principal amounts of Capitol's capital contributions to Macomb during
the period from September 18, 1996 to September 17, 1999 (aggregating
$2,580,000 through August 30, 1999) for which Capitol did not receive
shares of Macomb's common stock and also subtracting an interest
factor to impute to Capitol an appropriate return on its capital
contributions equivalent to Capitol's interest cost through September
17, 1999; and (3) dividing the remainder reached by the number of
shares of Macomb's common stock outstanding as of the close of
business on September 17, 1999.
Capitol Share Value. The share value of each share of Capitol common
stock will be the average of the closing prices of Capitol common
stock for each business day in the twenty-two (22) trading day period
prior to and ending on September 17, 1999, as reported by the NASDAQ
Stock Market, Inc.
Each Macomb shareholder (except Capitol) will receive shares of
Capitol common stock in exchange for his, her or their Macomb common stock
calculated by multiplying the number of shares of Macomb common stock held by
the shareholder by the exchange ratio. Any fractional shares will be paid in
cash.
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ACCOUNTING TREATMENT (PAGE 30)
Capitol's acquisition of the minority interest of Macomb will be accounted
for under the purchase method of accounting. After the exchange, 100% of
Macomb's results from operations will be included in Capitol's income statement,
as opposed to 51% as is currently reported, less amortization of goodwill
resulting from the exchange.
TAX CONSEQUENCES OF THE EXCHANGE TO MACOMB SHAREHOLDERS (PAGE 30)
Capitol's tax counsel has rendered its opinion that the exchange should be
treated as a reorganization for United States federal income tax purposes.
Accordingly, Macomb shareholders generally will not recognize any gain or loss
for United States federal income tax purposes on the exchange of their Macomb
shares for shares of Capitol's common stock in the exchange, except for any gain
or loss recognized in connection with the receipt of cash instead of a
fractional share of Capitol's common stock. Tax counsel's opinion is attached as
Annex C to this proxy statement/prospectus.
Tax matters are very complicated, and the tax consequences of the exchange
to each Macomb shareholder will depend on the facts of that shareholder's
situation. You are urged to consult your tax advisor for a full understanding of
the tax consequences of the exchange to you.
DISSENTERS' RIGHTS (PAGE 32)
Michigan law provides that if the consideration in a share exchange is
shares listed on a national securities exchange or held of record by 2,000 or
more persons, the holders of the stock to be exchanged are not entitled to
dissenters' rights. Since Capitol's common stock is listed in a national
securities exchange, there are no dissenters' rights.
OPINION OF FINANCIAL ADVISOR (PAGE 33)
Macomb retained JMP Financial, Inc. as its financial advisor and agent in
connection with the exchange to render a financial fairness opinion to the
Macomb shareholders.
In deciding to approve the exchange, the Macomb board considered this
opinion, which stated that as of its date and subject to the considerations
described in it, the consideration to be received in the exchange by holders of
Macomb common stock is fair from a financial point of view. The opinion is
attached as Annex B to this proxy statement/prospectus.
THE PLAN OF SHARE EXCHANGE (PAGE 28)
The Plan of Share Exchange is attached as Annex A to this proxy
statement/prospectus. You are encouraged to read the Plan of Share Exchange
because it is the legal document that governs the exchange.
TERMINATION OF THE EXCHANGE
Macomb and Capitol can jointly agree to terminate the plan of exchange at
any time without completing the exchange.
Macomb can terminate the exchange if a majority of Macomb's shareholders
(other than Capitol) fail to approve the exchange at the special shareholders
meeting; or a governmental authority prohibits the exchange.
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YOUR RIGHTS AS A SHAREHOLDER WILL CHANGE
Your rights as a Macomb shareholder are determined by Michigan's banking
law and by Macomb's articles of incorporation and by-laws. When the exchange is
completed, your rights as a Capitol stockholder will be determined by Michigan
law relating to business corporations (not the banking law) and by Capitol's
articles of incorporation and by-laws. See "Comparison of Shareholders Rights".
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SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial data below summarizes historical consolidated
financial information for the periods indicated and should be read in
conjunction with the financial statements and other information included in
Capitol's Annual Report on Form 10-K for the year ended December 31, 1998, which
is attached as part of Annex E to this proxy statement/prospectus. The unaudited
consolidated financial data below for the interim periods indicated has been
derived from, and should be read in conjunction with, Capitol's Quarterly Report
on Form 10-Q for the period ended June 30, 1999, which is attached as part of
Annex E in this proxy statement/prospectus. See "Where You Can Find More
Information". Interim results for the six months ended June 30, 1999 are not
necessarily indicative of results which may be expected in future periods,
including the year ending December 31, 1999. BECAUSE OF THE NUMBER OF BANKS
ADDED IN 1997 AND 1998, AND BECAUSE OF THE DIFFERING OWNERSHIP PERCENTAGE OF
BANKS INCLUDED IN THE CONSOLIDATED AMOUNTS, HISTORICAL OPERATING RESULTS ARE OF
LIMITED RELEVANCE IN EVALUATING HISTORICAL PERFORMANCE AND PREDICTING CAPITOL'S
FUTURE OPERATING RESULTS.
Results of operations data and selected balance sheet data as of and for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994 were derived from
audited consolidated financial statements which are not presented in this proxy
statement/prospectus. Capitol's audited consolidated financial statements as of
and for the years ended December 31, 1998 and 1997 and related statements of
operations for the years ended December 31, 1998, 1997 and 1996 are attached as
part of Annex E in this proxy statement/prospectus. The selected data provided
below as of and for the six months ended June 30, 1999 and 1998 have been
derived from Capitol's unaudited consolidated financial statements which are
attached as part of Annex E in this proxy statement/prospectus.
Under current accounting rules, entities which are more than 50% owned by
another are consolidated or combined for financial reporting purposes. This
means that all of the banks' assets (including Macomb's) are included in
Capitol's consolidated balance sheet, regardless of whether Capitol owns 51% or
100%. Capitol's net income, however, will only include its subsidiaries'
(including Macomb) net income or net loss to the extent of its ownership
percentage. This means that when a newly formed bank incurs early start-up
losses, Capitol will only reflect that loss based on its ownership percentage.
Conversely, when banks generate income, Capitol will only reflect that income
based on its ownership percentage.
As of and for the
Six Months Ended
June 30 As of and for the
(unaudited) Years Ended December 31
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1999 1998 1998 1997 1996 1995 1994
(dollars in thousands, except per share data)
Selected Results of Operations Data:
Interest income $42,409 $31,772 $69,668 $49,549 $36,479 $29,914 $21,480
Interest expense 21,451 16,637 36,670 24,852 17,800 15,079 9,397
Net interest income 20,958 15,135 32,998 24,697 18,679 14,835 12,083
Provision for loan losses 1,710 1,658 3,523 2,049 1,196 839 473
Net interest income after provision
for loan losses 19,248 13,477 29,475 22,648 17,483 13,996 11,610
Noninterest income 2,163 1,590 3,558 2,157 1,705 1,272 2,189
Noninterest expense 16,874 11,857 25,821 16,360 12,307 10,460 10,563
Income before income tax expense 4,537 3,210 7,212 8,445 6,881 4,808 3,236
Income tax expense 1,695 1,193 2,584 2,888 2,245 1,735 1,160
Income before cumulative effect
of change in accounting principle 2,842 2,017 4,628 5,557 4,636 2,073 2,076
Cumulative effect of change in
accounting principle (1) 197
Net income 2,645 2,017 4,628 5,557 4,636 3,073 2,076
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AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30 AS OF AND FOR THE
(UNAUDITED) YEARS ENDED DECEMBER 31
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1999 1998 1998 1997 1996 1995 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PER SHARE DATA:
Earnings per common share(5):
Before cumulative effect of
accounting change:
Basic $ 0.45 $ 0.32 $ 0.74 $ 0.91 $ 0.85 $ 0.63 $ 0.52
Diluted 0.44 0.31 0.72 0.88 0.82 0.62 0.52
After cumulative effect of
accounting change:
Basic 0.42 0.32 0.74 0.91 0.85 0.63 0.52
Diluted 0.41 0.31 0.72 0.88 0.82 0.62 0.52
Cash dividends declared(5) 0.18 0.17 0.33 0.30 0.25 0.19 0.19
Book value(5) 7.90 7.45 7.77 7.22 7.43 7.58 6.79
Tangible book value per share(5) 7.58 7.09 7.35 6.87 6.99 6.95 5.60
Dividend payout ratio 43.18% 51.71% 43.63% 32.95% 29.05% 30.37% 37.15%
Weighted average number of
common shares outstanding(5) 6,345 6,254 6,284 6,130 5,477 4,841 4,000
SELECTED BALANCE SHEET DATA:
Total assets $ 1,114,165 $ 846,477 $ 1,024,444 $ 690,556 $ 492,263 $ 384,070 $ 316,312
Investment securities 71,712 66,734 86,464 64,470 48,725 36,329 33,802
Portfolio loans 863,579 606,623 724,280 502,755 357,623 283,471 241,583
Allowance for loan losses (10,417) (7,373) (8,817) (6,229) (4,578) (3,687) (3,220)
Deposits 969,809 748,526 890,890 604,407 436,166 340,287 279,650
Debt obligations 25,200 3,000 23,600 6,500 8,712 7,924
Trust preferred securities 24,273 24,237 24,255 24,126
Stockholders' equity 50,143 46,775 49,292 45,032 40,159 30,865 25,714
PERFORMANCE RATIOS: (2)
Return on average equity 10.69% 8.91% 10.19% 13.28% 12.01% 10.55% 9.45%
Return on average assets 0.50% 0.52% 0.55% 0.96% 1.08% 0.87% 0.75%
Net interest margin (fully taxable
equivalent) 4.22% 4.18% 4.15% 4.54% 4.62% 4.46% 4.71%
Efficiency ratio (3) 75.62% 70.89% 70.63% 60.92% 60.38% 64.94% 74.01%
ASSET QUALITY:
Non-performing loans (4) $ 7,839 $ 4,926 $ 7,242 $ 4,011 $ 2,699 $ 1,341 $ 1,930
Allowance for loan losses to
non-performing loans 132.89% 149.68% 121.75% 155.30% 169.62% 274.94% 166.84%
Allowance for loan losses to
portfolio loans 1.21% 1.22% 1.22% 1.24% 1.28% 1.30% 1.33%
Non-performing loans to total
portfolio loans 0.91% 0.81% 1.00% 0.80% 0.75% 0.47% 0.80%
Net loan losses to average
portfolio loans 0.01% 0.09% 0.15% 0.09% 0.10% 0.14% 0.13%
CAPITAL RATIOS:
Average equity to average assets 4.67% 5.87% 5.36% 7.22% 8.97% 8.24% 7.93%
Tier 1 risk-based capital ratio 10.99% 13.30% 13.42% 14.26% 11.91% 9.80% 9.27%
Total risk-based capital ratio 12.05% 15.00% 14.60% 16.61% 12.88% 10.91% 10.51%
Leverage ratio 4.50% 9.67% 4.88% 6.65% 8.16% 7.16% 6.95%
- --------------
(1) Accounting change relates to new accounting standard which requires
write-off of previously capitalized start-up costs as of January 1, 1999.
(2) These ratios are annualized for the periods indicated.
(3) Efficiency ratio is computed by dividing noninterest expense by the sum of
net interest income and noninterest income.
(4) Nonperforming loans consist of loans on nonaccrual status and loans more
than 90 days delinquent.
(5) As restated to reflect Capitol's 1998 6-for-5 stock split as if it occurred
at the beginning of the periods presented.
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RISK FACTORS
The shares of common stock that are being offered are not savings accounts
or deposits or other obligations of a bank and are not insured by the Federal
Deposit Insurance Corporation or any other governmental agency.
Investing in Capitol's common stock will provide you with an equity
ownership interest in Capitol. As a Capitol shareholder, your investment may be
impacted by risks inherent in its business. You should carefully consider the
following factors, as well as other information contained in this prospectus,
before deciding to vote to exchange your Macomb common stock for Capitol's
common stock.
This proxy statement/prospectus also contains certain forward-looking
statements that involve risks and uncertainties. These statements relate to
Capitol's future plans, objectives, expectations and intentions. These
statements may be identified by the use of words such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," and similar
expressions. Actual results could differ materially from those discussed in
these statements. Factors that could contribute to these differences include
those discussed below and elsewhere in this prospectus.
NEWLY FORMED BANKS ARE LIKELY TO INCUR SIGNIFICANT OPERATING LOSSES.
Six of Capitol's bank subsidiaries are less than one year old. Newly formed
banks are expected to incur operating losses in their early periods of operation
because of an inability to generate sufficient net interest income to cover
operating costs. Newly formed banks may never become profitable. An accounting
rule change effective January 1, 1999 requires immediate write-off, rather than
capitalization, of start-up costs and, as a result, future newly formed banks
are expected to report larger early period operating losses. Those operating
losses can be significant and can occur for longer periods than planned
depending upon the ability to control operating expenses and generate net
interest income, which could affect the availability of earnings retained to
support future growth.
CAPITOL MAY BE UNABLE TO EFFECTIVELY MANAGE ITS GROWTH.
Capitol has rapidly and significantly expanded its operations and
anticipates that further expansion will be required to realize its growth
strategy. Capitol's rapid growth has placed significant demands on its
management and other resources which, given its expected future growth rate, are
likely to continue. To manage future growth, Capitol will need to attract, hire
and retain highly skilled and motivated officers and employees and improve
existing systems and/or implement new systems for:
- transaction processing;
- operational and financial management; and
- training, integrating and managing Capitol's growing employee base.
FAVORABLE ENVIRONMENT FOR FORMATION OF NEW BANKS COULD CHANGE ADVERSELY.
Capitol's growth strategy includes the formation of additional new banks.
Thus far, Capitol has experienced favorable business conditions for the
formation of its small, community and customer-focused banks. Those favorable
conditions could change suddenly or over an extended period of time. A change in
the availability of financial capital, human resources or general economic
conditions could eliminate or severely limit expansion opportunities. To the
extent Capitol is unable to effectively attract personnel and deploy its capital
in new or existing banks, this could adversely affect future asset growth,
earnings and the value of Capitol's common stock.
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CAPITOL'S BANKS ARE SMALL, HAVE LIMITATIONS ON THE SIZE OF LOANS THEY CAN MAKE
AND HAVE MINIMAL MARKET SHARE.
Capitol endeavors to capitalize its newly formed banks with the lowest
dollar amount permitted by regulatory agencies. As a result, the legal lending
limits of Capitol's banks severely constrain the size of loans that those banks
can make. In addition, many of the banks' competitors have significantly larger
capitalization and, hence, an ability to make significantly larger loans.
Capitol's banks are intended to be small in size. They each generally
operate from single locations. They are very small relative to the dynamic
markets in which they operate. Each of those markets has a variety of large and
small competitors that have resources far beyond those of Capitol's banks. While
it is the intention of Capitol's banks to operate as niche players within their
geographic markets, their continued existence is dependent upon being able to
attract and retain loan customers in those large markets that are dominated by
substantially larger regulated and unregulated financial institutions.
CAPITOL IS DEPENDENT UPON THE CONTRIBUTIONS OF ITS KEY MANAGEMENT PERSONNEL.
Capitol's future success depends, in large part, upon the continuing
contributions of its key management personnel, including bank presidents and
other senior officers. In particular, Capitol is dependent upon the continuing
services of Joseph D. Reid, Capitol's Chairman, President and Chief Executive
Officer. The loss of services of one or more key employees at Capitol or its
subsidiaries could have a material adverse effect on Capitol. Capitol can
provide no assurance that it will be able to retain any of its key officers and
employees or attract and retain qualified personnel in the future.
Joseph D. Reid has an employment agreement which expires on December 31,
2001. The agreement automatically extends for one year unless Mr. Reid or
Capitol gives written notice 45 days prior to December 31 of each year. Certain
members of Capitol's senior management also have employment agreements with
Capitol.
IF CAPITOL CANNOT RECRUIT ADDITIONAL HIGHLY QUALIFIED PERSONNEL, CAPITOL'S
BUSINESS MAY BE ADVERSELY IMPACTED.
Capitol's strategy is also dependent upon its continuing ability to attract
and retain other highly qualified personnel. Competition for such employees
among financial institutions is intense. Availability of personnel with
appropriate community banking experience varies. If Capitol does not succeed in
attracting new employees or retaining and motivating current and future
employees, Capitol's business could suffer significantly.
CAPITOL AND ITS BANKS OPERATE IN AN ENVIRONMENT HIGHLY REGULATED BY STATE AND
FEDERAL GOVERNMENT; CHANGES IN FEDERAL AND STATE BANKING LAWS AND REGULATIONS
COULD HAVE A NEGATIVE IMPACT ON CAPITOL'S BUSINESS.
As a bank holding company, Capitol is regulated primarily by the Federal
Reserve Board. Capitol's current bank affiliates are regulated primarily by the
state banking regulators and the FDIC and, in the case of one national bank, the
Office of the Comptroller of the Currency (OCC).
Federal and the various state laws and regulations govern numerous aspects
of the banks' operations, including:
- adequate capital and financial condition,
- permissible types and amounts of extensions of credit and investments,
- permissible nonbanking activities, and
- restrictions on dividend payments.
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Federal and state regulatory agencies have extensive discretion and power
to prevent or remedy unsafe or unsound practices or violations of law by banks
and bank holding companies. Capitol and its banks also undergo periodic
examinations by one or more regulatory agencies. Following such examinations,
Capitol may be required, among other things, to change its asset valuations or
the amounts of required loan loss allowances or to restrict its operations.
Those actions would result from the regulators' judgments based on information
available to them at the time of their examination.
The banks' operations are required to follow a wide variety of state and
federal consumer protection and similar statutes and regulations. Federal and
state regulatory restrictions limit the manner in which Capitol and its banks
may conduct business and obtain financing. Those laws and regulations can and do
change significantly from time to time, and any such change could adversely
affect Capitol.
REGULATORY ACTION COULD SEVERELY LIMIT FUTURE EXPANSION PLANS.
To carry out some of its expansion plans, Capitol is required to obtain
permission from the Federal Reserve Board. Applications for the formation of new
banks are submitted to the state and federal bank regulatory agencies for their
approval.
While Capitol's recent experience with the regulatory application process
has been favorable, the future climate for regulatory approval is impossible to
predict. Regulatory agencies could prohibit or otherwise significantly restrict
the expansion plans of Capitol, its current bank subsidiaries and future new
start-up banks.
THE BANKS' ALLOWANCES FOR LOAN LOSSES MAY PROVE INADEQUATE TO ABSORB ACTUAL
FUTURE LOAN LOSSES.
Capitol believes that its consolidated allowance for loan losses is
maintained at a level adequate to absorb any inherent losses in the loan
portfolios of its banks. Management's estimates are used to determine the
allowance that is considered adequate to absorb losses in the loan portfolios of
Capitol's banks. Management's estimates are based on historical loan loss
experience, specific problem loans, value of underlying collateral and other
relevant factors. These estimates are subjective and their accuracy depends on
the outcome of future events. Actual future losses may differ from current
estimates. Depending on changes in economic, operating and other conditions,
including changes in interest rates, that are generally beyond Capitol's
control, actual loan losses could increase significantly. As a result, such
losses could exceed current allowance estimates. No assurance can be provided
that the allowance will be sufficient to cover actual future loan losses should
such losses be realized.
Because some of Capitol's banks were formed more recently, they do not have
seasoned loan portfolios, and it is likely that the ratio of the allowance for
loan losses to total loans will need to be increased in future periods as the
loan portfolios become more mature. If it becomes necessary to increase the
ratio of the allowance for loan losses to total loans, such increases would be
accomplished through higher provisions for loan losses, which will adversely
impact net income or will increase operating losses.
In addition, bank regulatory agencies, as an integral part of their
supervisory functions, periodically review the adequacy of the allowance for
loan losses. Regulatory agencies may require Capitol or its banks to increase
their provision for loan losses or to recognize further loan charge-offs based
upon judgments different from those of management. Any increase in the allowance
required by regulatory agencies could have a negative impact on Capitol's
operating results.
CAPITOL'S COMMERCIAL LOAN CONCENTRATION INCREASES THE RISK OF DEFAULTS BY
BORROWERS.
Capitol's banks make various types of loans, including commercial,
consumer, residential mortgage and construction loans. Capitol's strategy
emphasizes lending to small businesses and other commercial enterprises. Loans
to small and medium-sized businesses are generally riskier than single-family
mortgage loans. Typically, the success of a small or medium-sized business
depends on the management talents and efforts of one or two persons or a small
group of persons, and the death, disability or resignation of one or more of
these persons could have a
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material adverse impact on the business. In addition, small and medium-sized
businesses frequently have smaller market shares than their competition, may be
more vulnerable to economic downturns, often need substantial additional capital
to expand or compete and may experience substantial variations in operating
results, any of which may impair a borrower's ability to repay a loan.
Substantial credit losses could result, which could cause you to lose your
entire investment in the common stock.
CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT CAPITOL'S BUSINESS.
Changes in Net Interest Income. Capitol's profitability is significantly
dependent on net interest income. Net interest income is the difference between
interest income on interest-earning assets, such as loans, and interest expense
on interest-bearing liabilities, such as deposits. Therefore, any change in
general market interest rates, whether as a result of changes in monetary
policies of the Federal Reserve Board or otherwise, can have a significant
effect on net interest income. Capitol's assets and liabilities may react
differently to changes in overall market rates or conditions because there may
be mismatches between the repricing or maturity characteristic of assets and
liabilities. As a result, changes in interest rates can affect net interest
income in either a positive or negative way.
Changes in The Yield Curve. Changes in the difference between short and
long-term interest rates, commonly known as the yield curve, may also harm
Capitol's business. For example, short-term deposits may be used to fund
longer-term loans. When differences between short-term and long-term interest
rates shrink or disappear, the spread between rates paid on deposits and
received on loans could narrow significantly, decreasing net interest income.
CAPITOL'S INVESTMENT IN SUN IS ILLIQUID AND MAY REQUIRE ADDITIONAL INVESTMENT
BY CAPITOL.
Capitol currently owns 51% of the common stock of Sun Community Bancorp
Ltd. Sun completed its initial public offering (IPO) in July 1999 and its common
stock is listed on the Nasdaq National Market. Capitol's investment in Sun is
likely to remain illiquid because:
- - Capitol has entered into an agreement with the underwriters of Sun's IPO
which prohibits Capitol from selling any of its shares in Sun for a six
month period after Sun's IPO;
- - Capitol is currently encouraged by the Federal Reserve Board to maintain an
investment of not less than 51% of Sun's common stock; and
- - Market conditions may limit the ability for Capitol to sell any large
blocks of Sun's common stock.
In addition, Capitol might be required by regulatory agencies, such as the
Federal Reserve Board, to increase its investment in Sun by investing additional
capital to meet unexpected needs at Sun or at one or more of its subsidiaries.
EXISTING SUBSIDIARIES OF CAPITOL MAY NEED ADDITIONAL FUNDS TO AID IN THEIR
GROWTH OR TO MEET OTHER ANTICIPATED NEEDS WHICH COULD REDUCE CAPITOL'S FUNDS
AVAILABLE FOR NEW BANK DEVELOPMENT OR OTHER CORPORATE PURPOSES.
Capitol's affiliated banks are generally capitalized at the minimum amount
permitted by regulatory agencies. Future growth of existing banks may require
additional capital infusions or other investment by Capitol to maintain
compliance with regulatory capital requirements or to meet growth opportunities.
Such capital infusions could reduce funds available for development of new
banks, or other corporate purposes.
POSSIBLE VOLATILITY OF STOCK PRICE.
The market price of Capitol's common stock may fluctuate in response to
numerous factors, including variations in the annual or quarterly financial
results of Capitol, or its competitors, changes by financial research analysts
in their estimates of the earnings of Capitol or its competitors or the failure
of Capitol or its competitors to meet such estimates, conditions in the economy
in general or the banking industry in particular, or unfavorable
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publicity affecting Capitol, its banks, or the industry. In addition, equity
markets have, on occasion, experienced significant price and volume fluctuations
that have affected the market price for many companies' securities which have
been unrelated to the operating performance of those companies. Any fluctuation
may adversely affect the prevailing market price of Capitol's common stock.
CAPITOL RELIES ON COMPUTER HARDWARE, SOFTWARE, AND INTERNET-BASED TECHNOLOGY
THAT COULD HAVE YEAR 2000 PROBLEMS AND ADVERSELY AFFECT THE DELIVERY OF BANK
SERVICES TO CUSTOMERS.
Capitol relies extensively on computer hardware, software and related
technology, together with data, in the operation of its business. This
technology and data are used in creating and delivering bank products and
services, and in Capitol's internal operations, for example, its billing and
accounting. An enterprise-wide program has been initiated to evaluate the
technology and data used in the creation and delivery of bank products and
services in Capitol's and Sun's internal operations. If Capitol or Sun fail to
complete the implementation of its Year 2000 plan prior to the commencement of
the Year 2000, or bank customers and suppliers fail to successfully remediate
their own Year 2000 issues, it could materially adversely affect Capitol, Sun
and their banks. The planned enterprise-wide program includes resolving any Year
2000 issues that are related to Capitol and its banks' systems, customers and
suppliers. However, there can be no assurances that third parties will
successfully remedy their own Year 2000 issues over which Capitol has no
control.
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RECENT DEVELOPMENTS
SUN'S INITIAL PUBLIC OFFERING
On July 8, 1999, Sun completed an initial public offering of 1,650,000
shares of common stock, resulting in net proceeds of approximately $25 million.
Of that offering, Capitol purchased 850,000 shares at the same price as offered
to the public, $16.00 per share, for a total of $13.6 million.
Capitol's ownership of Sun was 51% both before and after Sun's public
offering transaction. Capitol and Sun are parties to an anti-dilution agreement
whereby Capitol has the right to purchase additional shares of Sun, in the event
of a stock offering by Sun, in order to maintain Capitol's ownership of at least
51% of Sun's common stock. Additionally, Capitol is currently encouraged by the
Federal Reserve Board to maintain a controlling interest in Sun.
Capitol's purchase of shares in Sun's initial public offering was funded by
borrowings from Capitol's unaffiliated bank lender. The amounts borrowed were
advanced under a short-term additional credit facility which Capitol negotiated
in June 1999.
RECENT EXPANSION ACTIVITY
On June 30, 1999, Sun opened its seventh bank subsidiary, East Valley
Community Bank located in Chandler, Arizona.
Nevada Community Bancorp Limited was formed as a majority-owned subsidiary
of Sun in April 1999. Indiana Community Bancorp Limited was formed as a
majority-owned subsidiary of Capitol in May 1999. On August 6, 1999, Desert
Community Bank commenced operations in Las Vegas, Nevada as a majority owned
start-up banking subsidiary of Nevada Community Bancorp Limited.
Nevada Community Bancorp Limited completed a $10 million private placement
stock offering in which Sun invested $5.1 million; Indiana Community Bancorp
Limited also completed a private placement stock offering of $5 million, of
which $2.6 million was invested by Capitol.
Applications are currently pending for the formation of two new banks, one
in Las Vegas, Nevada, as a subsidiary of Nevada Community Bancorp Limited, and
one in Elkhart, Indiana, as a subsidiary of Indiana Community Bancorp Limited.
Sunrise Bank of Arizona, a majority-owned subsidiary of Sun, opened a loan
production office in Albuquerque, New Mexico in July 1999. Sunrise Capital
Corporation, a to-be-formed bank holding company, and Sunrise Bank of Arizona
have entered into a share exchange agreement which is subject to approval by
Sunrise Bank of Arizona's shareholders. Once approved by the shareholders of
Sunrise Bank of Arizona, a one for one share exchange will make Sunrise Capital
Corporation a wholly-owned subsidiary of Sun, and Sunrise Bank of Arizona a
majority-owned subsidiary of Sunrise Capital Corporation. Shareholder approval
is expected in mid-September.
Sunrise Capital Corporation is simultaneously engaged in a private
placement of its shares and expects to raise between $3 million and $4 million.
The proceeds will be used for future bank expansion and general corporate
purposes. Sun Community Bancorp intends to maintain its 51% ownership in Sunrise
Capital Corporation by purchasing 51% of the proposed offering.
Additional expansion through the development of new banks in the states of
Indiana, Nevada, New Mexico, California and others, is currently under
consideration by Capitol or its subsidiary bank development entities.
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CAPITOL'S PENDING PUBLIC OFFERING
On July 29, 1999, Capitol filed a registration statement seeking to
register for sale 1,700,000 shares of Capitol common stock. Proceeds from that
proposed offering are anticipated to be used by Capitol to repay debt
obligations. That registration statement has not yet been declared effective by
the SEC.
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CAPITALIZATION
The table presented below shows Capitol's actual total capitalization as of
June 30, 1999, and as adjusted to reflect the issuance and sale of 1,700,000
shares of common stock which Capitol is offering in the pending offering and the
application of the estimated net proceeds of that offering, and as adjusted to
reflect the exchange of Capitol's common stock for Macomb's common stock as
described in this proxy statement/prospectus.
As of June 30, 1999
---------------------------------------------
As Adjusted for the As Adjusted
Pending Capitol for the Macomb
Actual Offering and Use of Exchange (4)
Net Proceeds
---------- ------------- ------------
(dollars in thousands, except per share data)
Debt obligations:
Notes payable to unaffiliated bank.................... $ 16,700(1) $ --(1) $ --(1)
Other................................................. 8,500 8,500 8,500
----- ----- -----
Total debt obligations............................. 25,200 8,500 8,500
Guaranteed preferred beneficial interests in the
Corporation's Subordinated Debentures................. 24,272 24,272 24,272
Minority interest in consolidated subsidiaries........... 35,875 35,875 33,857
Stockholders' equity(2):
Common stock, no par value; 25,000,000 shares
authorized; issued, and outstanding:
Actual - 6,344,886 shares
As adjusted for pending Capitol offering -
8,044,886 shares
As adjusted for pending Capitol offering
and Macomb exchange - 8,267,791 shares............. 51,868 72,592 75,518
Retained earnings..................................... (516) (516) (516)
Market value adjustment for available-for-sale
securities........................................... (484) (484) (484)
Less unallocated ESOP shares.......................... (725) (725) (725)
---- ---- ----
Total stockholders' equity......................... 50,143 70,867 73,793
------ ------ ------
Total capitalization..................................... $ 135,490 $ 139,514 $ 140,422
========= ========= =========
Book value per share of common stock.................. $ 7.90 $ 8.80 $ 8.92
========= ========= =========
Capital ratios:
Stockholders' equity to total assets.................. 4.50% 6.36% 6.55%
Total capital funds to total assets(3)................ 9.89% 11.76% 11.72%
- --------------------
(1) Since June 30, 1999, Capitol has incurred additional debt of approximately
$13.2 million.
(2) Does not include 617,714 shares of common stock issuable upon exercise of
stock options. Also does not include 300,000 additional stock options
issuable pursuant to Capitol's stock option program upon completion of the
pending offering. See "Management--Stock Option Program."
(3) Total capital funds includes guaranteed preferred beneficial interests in
Capitol's subordinated debentures, minority interest in consolidated
subsidiaries and stockholders' equity.
(4) Assumes issuance of 222,905 shares of Capitol common stock upon completion
of Macomb exchange.
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DIVIDENDS AND MARKET FOR COMMON STOCK
Capitol's common stock is listed on the Nasdaq National Market under the
symbol "CBCL." The following table shows the high and low sale prices per share
of common stock as reported on the Nasdaq National Market and cash dividends
paid for the periods indicated. The table reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions and have been restated, where appropriate, for Capitol's 6-for-5
stock split in December 1998. The last reported sale price of Capitol's common
stock was $13.125 on August 31, 1999.
Cash Dividends
1997 High Low Paid
- ------------------------------- --------------- -------------- -------------------
1st Quarter $13.542 $12.083 $0.075
2nd Quarter 15.000 11.458 0.075
3rd Quarter 22.083 14.375 0.075
4th Quarter 27.500 20.104 0.075
1998
- -------------------------------
1st Quarter 25.625 20.833 0.083
2nd Quarter 25.417 20.104 0.083
3rd Quarter 21.667 18.333 0.083
4th Quarter 22.500 16.250 0.083
1999
- -------------------------------
1st Quarter 21.750 18.250 0.090
2nd Quarter 20.000 16.875 0.090
3rd Quarter (through August 31, 1999) 18.250 12.500 --
As of August 31, 1999, there were a total of approximately 2,400 beneficial
holders of Capitol's common stock based on information supplied by its stock
transfer agent and other sources.
Holders of common stock are entitled to receive dividends when, as and if
declared by Capitol's Board of Directors out of funds legally available.
Although Capitol has paid dividends on its common stock for the preceding five
years, there is no assurance that dividends will be paid in the future. The
declaration and payment of dividends on Capitol's common stock depends upon the
earnings and financial condition of Capitol, liquidity and capital requirements,
the general economic and regulatory climate, Capitol's ability to service debt
obligations senior to the common stock and other factors deemed relevant by
Capitol's Board of Directors. Regulatory authorities impose limitations on the
ability of banks to pay dividends to Capitol and the ability of Capitol to pay
dividends to its shareholders.
There is no market for Macomb common stock. Any transfers have been made
privately and are not reported. Macomb has never paid a dividend on its common
stock.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes forward-looking statements.
Capitol has based these forward-looking statements on its current expectations
and projections about future events. These forward-looking statements may be
impacted by risks, uncertainties and assumptions. Examples of some of the risks,
uncertainties or assumptions that may impact the forward-looking statements are:
- the results of management's efforts to implement Capitol's business
strategy including planned expansion into new markets in Arizona,
Nevada, New Mexico, Indiana and elsewhere;
- adverse changes in the banks' loan portfolios and the resulting credit
risk-related losses and expenses;
- adverse changes in the economy of the banks' market areas that could
increase credit-related losses and expenses;
- adverse changes in real estate market conditions that could also
negatively affect credit risk;
- the possibility of increased competition for financial services in
Capitol's markets;
- fluctuations in interest rates and market prices, which could
negatively affect net interest margins, asset valuations and expense
expectations;
- year 2000 (Y2K) computer, embedded chip and related data processing
issues; and
- other factors described in "Risk Factors".
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INFORMATION ABOUT CAPITOL
This proxy statement/prospectus is accompanied by a copy of the following
documents as indicated in Annex E:
- Report on Form 10-Q for period ended June 30, 1999
- Report on Form 10-Q for period ended March 31, 1999
- Annual Report to Shareholders for year ended December 31, 1998
- Annual Report on Form 10-K for year ended December 31, 1998
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 4, 1999.
INFORMATION ABOUT MACOMB
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's discussion and analysis of financial condition and results of
operations for the periods ended June 30, 1999 and December 31, 1998 are
included in this proxy statement/prospectus as part of Annex D.
FINANCIAL STATEMENTS.
Unaudited interim condensed financial statements of Macomb as of June 30,
1999 and for the six months ended June 30, 1999 and 1998 are included in this
proxy statement/prospectus as part of Annex D. Audited financial statements of
Macomb as of December 31, 1998 and for the years ended December 31, 1998 and
1997 are included in this proxy statement/prospectus as part of Annex D.
VOTING SECURITIES AND PRINCIPAL HOLDERS.
The following table shows the shareholdings of each director and officer of
Macomb and all directors and officers as a group, and also shows each person who
holds more than 5% of the 49% of Macomb's common stock held by stockholders
other than Capitol:
Shares beneficially owned prior to the offering
-----------------------------------------------
Percentage of
Percentage all Macomb
of all shares excluding
Name and title of Macomb Macomb shares
Beneficial owner Number shares owned by Capitol
- ------------------------------------------------------------------ ------- -------- ----------------
Eugene J. Agnone, Jr., Director 1,944 0.70% 1.42%
Gerald J. Carnago, Director 500 0.18% 0.37%
Robert C. Carr, Director and Chairman of the Board -- -- --
*Christina D'Alessandro, Director 12,604 4.52% 9.23%
Ronald G. Forster, Director and Vice Chairman 5,944 2.13% 4.35%
Robert F. Garvey, Director 1,296 0.46% 0.95%
John H. Johnson, Director 3,484 1.25% 2.55%
James R. Kaye, Director -- -- --
David F. Keowin, Director -- -- --
Sam Locricchio, Director, Secretary and Executive Vice President 1,050 0.38% 0.77%
*Delia Rendon-Martin, Director 13,160 4.72% 9.64%
*Vito Munaco, Director 15,921 5.71% 11.66%
James Patrona, Director 4,065 1.46% 2.98%
Stephen C. Tarczy, Director, President and CEO 2,838 1.02% 2.08%
All directors and executive officers as a group (14 persons) 62,806 22.53% 45.98%
* Includes shares owned by adult members of the directors' immediate family.
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In addition to the above listed directors and officers of Macomb, the
following individual owns approximately 5% of the outstanding shares exclusive
of Macomb shares owned by Capitol:
Shares beneficially owned prior to the offering
-----------------------------------------------
Percentage of
Percentage all Macomb
of all shares excluding
Name and title of Macomb Macomb shares
Beneficial owner Number Shares owned by Capitol
- ---------------------------------------------------------------------- ---------- -------------- ------------------
Vito A. Catalfio, Jr. Shareholder 6,803 2.44% 4.98%
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Because Macomb is already a majority-owned subsidiary of Capitol, it is
already included in Capitol's consolidated financial statements. Consummation of
the exchange is not expected to have a material impact on the consolidated
financial position or consolidated results of operation of Capitol. Accordingly,
pro forma consolidated financial information illustrating the exchange and
Capitol's purchase of the minority interest of Macomb is not required to be
presented in this prospectus.
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THE EXCHANGE
GENERAL
The Macomb Board of Directors is using this proxy statement/prospectus to
solicit proxies from the holders of Macomb common stock for use at the special
shareholders meeting.
At the special shareholders meeting to be held on September 28, 1999,
Macomb common shareholders will be asked to approve the exchange. The Plan of
Share Exchange provides for Macomb's minority shareholders to exchange the 49%
of the common stock of Macomb not owned by Capitol for Capitol common stock.
Upon consummation of the exchange, Macomb will become a wholly-owned subsidiary
of Capitol. In the exchange, Macomb shareholders will receive shares of
Capitol's common stock.
BACKGROUND OF THE EXCHANGE
The concept of a potential share exchange transaction with Capitol has been
discussed informally from time to time from the beginning of Macomb's
operations. Capitol expressed a willingness to extend an offer of an exchange
when the Bank reached its 36th month of operations. These discussions occurred
at various Macomb board meetings during that period. The objectives of the
potential exchange would be to enable shareholders of Macomb to achieve
liquidity in their investment, a reasonable return on their investment in the
form of a `premium' and to accomplish such an exchange on a tax-free basis.
Without the exchange, shareholders of Macomb will continue to hold community
bank stock which has no market and is illiquid.
Macomb's board of directors has not solicited or received any other
proposals for the potential exchange or sale of Macomb's shares of common stock
which are not owned by Capitol. If other proposals were under consideration for
sale or exchange of Macomb's shares to an entity other than Capitol, Capitol
would be permitted to vote its shares of Macomb. By virtue of Capitol's majority
ownership of Macomb, it is likely that Capitol would not vote its shares of
Macomb in favor of any other proposals regarding a share exchange or sale of the
minority interest in Macomb with another party. In addition, Capitol currently
has no intentions of selling its majority interest in Macomb. Hence, the only
proposal under consideration is Capitol's proposal.
Capitol based its proposal on its prior transactions whereby it has
acquired the minority interest in banks it controls. In those prior
transactions, Capitol has offered the minority shareholders an opportunity to
exchange their bank shares for Capitol common stock at an exchange ratio based
on 150% of adjusted book value of the bank's shares on or about the 36th month
of the bank's operations. Although Capitol is under no contractual obligation
to make such an offer to acquire the minority interests in any of its present
bank subsidiaries, it has made this proposal to Macomb's board of directors
consistent with its informal discussions with Macomb's board during the past
three years.
In evaluating and negotiating Capitol's proposal, the only aspect of the
proposal which was negotiated by Capitol and Macomb's board related to the
computation of the fair value of Capitol's shares to be used in the proposed
exchange. Consensus between Capitol and Macomb's directors who are not
employees or officers of Capitol was reached in August 1999 to approve the
proposed exchange subject only to:
- obtaining an independent opinion that the proposed share exchange is
fair to Macomb's shareholders from a financial point of view; and
- obtaining approval for the proposed exchange by a majority of Macomb's
shares not already owned by Capitol.
In August 1999, the Macomb board approved the Plan of Share Exchange and
agreed to call a special shareholder meeting for a shareholder vote to approve
the Plan of Share Exchange.
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MACOMB'S REASONS FOR THE EXCHANGE.
Macomb's reasons for the exchange are that the shareholders of Macomb will
be best served by the exchange in order to maximize their shareholder value and
to provide them:
- better protection through diversification geographically and by
customer base through Capitol's subsidiary banks rather than
dependence upon the resources of a single bank.
- the Macomb shareholders will receive publicly traded shares, providing
them liquidity as opposed to the Macomb common stock for which there
is no public market. Macomb shareholders who choose to do so may
continue to hold the Capitol stock they receive in the exchange
without being forced to have their investment reduced by the immediate
recognition of a capital gains tax.
- Macomb's shareholders will receive stock upon which historically there
has been a dividend paid. See "Dividends and Market for Common Stock."
The fact that Capitol has paid dividends for the past five years is
not a guaranty that dividends will continue to be paid. Capitol's
Board of Directors will declare and pay dividends as and when it
appears to Capitol's board that dividends are appropriate.
CAPITOL'S REASONS FOR THE EXCHANGE
Capitol believes that Macomb's profitability will continue to increase. As
noted elsewhere in this proxy statement/prospectus, while Macomb's assets are
reported as part of Capitol's assets for purposes of its consolidated financial
statements, Macomb's income is attributed to Capitol only in the percentage
which Capitol owns of Macomb common stock. Capitol desires to acquire the
remainder of Macomb's common stock so that Capitol can include 100% of Macomb's
income in Capitol's consolidated income statement.
TERMS OF THE EXCHANGE
Terms of the exchange are set forth in the Plan of Share Exchange. The Plan
of Share Exchange is included an Annex A to this proxy statement/prospectus. You
should review the Plan of Share Exchange in its entirety.
The terms of the exchange can be summarized as follows:
Upon approval of the exchange by a majority of the 49% of the
shares of Macomb held by shareholders other than Capitol, each share of Macomb
common stock will be exchanged for shares of Capitol common stock according to
an exchange ratio. The exchange ratio will be determined by dividing the Macomb
share value by the Capitol share value. The Macomb share value is one and
one-half times the adjusted pro forma net value per share of Macomb common stock
as of September 17, 1999. The adjusted pro forma net book value per share of
Macomb common stock as of September 17, 1999 will be calculated by (1) adding
stockholders equity as reflected in Macomb's internally prepared financial
statements as of August 31, 1999 and actual results for the month of September
1999 prorated to September 17, 1999; (2) subtracting from that sum the principal
amounts of Capitol's capital contributions to Macomb during the period from
October 1, 1996 to September 17, 1999 (aggregating $2,580,000 through August 30,
1999) for which Capitol did not receive shares of Macomb's common stock, and
also subtracting an interest factor to compute the approximate interest cost to
Capitol of the capital contributions made to Macomb during that period; and (3)
dividing the remainder reached by the number of shares of Macomb's common stock
outstanding as of September 17, 1999.
Capitol's share value will be determined by averaging the closing
prices of Capitol common stock for each trading day during the 22 trading day
period ending September 17, 1999. Once the Macomb share value and Capitol share
value are determined, the exchange ratio will be determined by dividing the
Macomb share value by the Capitol share value. Each Macomb shareholder (except
Capitol) will receive shares of Capitol common stock in exchange for his, her or
their Macomb common stock calculated by multiplying the number of shares in
Macomb common stock held by the shareholder by the exchange ratio. Any
fractional shares will be paid in cash.
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MACOMB BOARD RECOMMENDATION
THE MACOMB BOARD HAS DETERMINED THAT THE EXCHANGE IS FAIR TO AND IN THE
BEST INTERESTS OF THE MACOMB SHAREHOLDERS, HAS APPROVED THE PLAN OF SHARE
EXCHANGE AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF
SHARE EXCHANGE.
ACCOUNTING TREATMENT
Capitol expects the exchange to be treated as a purchase by Capitol.
PRO FORMA DATA
In light of the respective total assets and net income of Capitol and
Macomb and since Macomb has since its inception always been a consolidated
subsidiary of Capitol, pro forma financial statements are not included in this
proxy statement/prospectus. The pro forma effect of the exchange is deemed to be
immaterial.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The income tax discussion below represents the opinion of Strobl Cunningham
Caretti & Sharp, P.C., tax counsel to Capitol, on the material federal income
tax consequences of the exchange. This discussion is not a comprehensive
description of all of the tax consequences that may be relevant to you. For
example, counsel did not address tax consequences that arise from rules that
apply generally to all taxpayers or to some classes of taxpayers or tax
consequences that are generally assumed to be known by investors. This
discussion is based upon the Internal Revenue Code, the regulations of the U.S.
Treasury Department and court and administrative rulings and decisions in effect
on the date of this proxy statement/prospectus. These laws may change, possibly
retroactively, and any change could affect the continuing validity of this
discussion.
This discussion also is based upon certain representations made by Macomb
and Capitol. You should read carefully the full text of the tax opinion of
Strobl Cunningham Caretti & Sharp, P.C. The opinion is included in this proxy
statement/prospectus as Annex C. This discussion also assumes that the exchange
will be effected pursuant to applicable state law and otherwise completed
according to the terms of the Plan of Share Exchange. You should not rely upon
this discussion if any of these factual assumptions or representations is, or
later becomes, inaccurate.
This discussion also assumes that shareholders hold their shares of Macomb
common stock as a capital asset and does not address the tax consequences that
may be relevant to a particular shareholder receiving special treatment under
some federal income tax laws. Shareholders receiving special treatment include:
- banks;
- tax-exempt organizations;
- insurance companies;
- dealers in securities or foreign currencies;
- Macomb shareholders who received their Macomb common stock through the
exercise of employee stock options or otherwise as compensation;
- Macomb shareholders who are not U.S. persons; and
- Macomb shareholders who hold Macomb common stock as part of a hedge,
straddle or conversion transaction.
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The discussion also does not address any consequences arising under the
laws of any state, locality or foreign jurisdiction. No rulings have been or
will be sought from the Internal Revenue Service regarding any matters relating
to the exchange.
Based on the assumptions and representations above, it is the opinion of
Strobl Cunningham Caretti & Sharp, P.C., tax counsel to Capitol, that:
- the exchange will qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code;
- no gain or loss will be recognized by the shareholders of Macomb who
exchange their Macomb common stock solely for Capitol common stock
(except with respect to cash received instead of a fractional share of
Capitol common stock);
- the aggregate tax basis of the Capitol common stock received by Macomb
shareholders who exchange all of their Macomb common stock for Capitol
common stock in the exchange will be the same as the aggregate tax
basis of the Macomb common stock surrendered in exchange (reduced by
any amount allocable to a fractional share of Capitol common stock for
which cash is received);
- the holding period of the Capitol common stock received will include
the holding period of shares of Macomb common stock surrendered in
exchange; and
- a holder of Macomb common stock that receives cash instead of a
fractional share of Capitol common stock will, in general, recognize
capital gain or loss equal to the difference between the cash amount
received and the portion of the holder's tax basis in shares of Macomb
common stock allocable to the fractional share; this gain or loss will
be long-term capital gain or loss for federal income tax purposes if
the holder's holding period in the Macomb common stock exchanged for
the fractional share of Capitol common stock is more than the
long-term holding period.
The tax opinion of Strobl Cunningham Caretti & Sharp, P.C. is not binding
upon the Internal Revenue Service or the courts.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE EXCHANGE
TO YOU WILL DEPEND ON YOUR PARTICULAR SITUATION. YOU ARE ENCOURAGED TO CONSULT
YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY OF FEDERAL,
STATE, LOCAL AND FOREIGN TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGE IN THE
TAX LAWS.
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REGULATORY MATTERS
Macomb is subject to regulation by the Michigan Financial Institutions
Bureau and the FDIC. The Financial Institutions Bureau has been advised by
Capitol of the proposed share exchange. The FDIC is not required to give
permission or otherwise review the exchange prior to consummation.
As a bank holding company, Capitol is subject to regulation by the Federal
Reserve Board. Federal Reserve Board rules require Capitol to obtain the Federal
Reserve Board's permission to acquire at least 51% of a subsidiary bank. The
rules of the Federal Reserve Board do not differentiate between ownership of 51%
and ownership of 100% of the stock of the subsidiary bank. Of course, Capitol
received permission to acquire 51% or more ownership of Macomb prior to Macomb
commencing the business of banking. Accordingly, Capitol will not be required to
seek any further approval from the Federal Reserve Board for the exchange.
It is a condition of the exchange that the shares of Capitol stock to be
issued pursuant to the Plan of Share Exchange be approved for listing on the
Nasdaq Stock Market, Inc., subject to official notice of issuance. An
application will be filed to list Capitol's shares. Accordingly, the shares of
Capitol common stock to be issued in exchange for the Macomb common stock will
be publicly tradable upon consummation of the exchange. There will be no
restriction on the ability of a former Macomb shareholder to sell in the open
market the Capitol common stock received (unless the Macomb shareholder is also
an officer, director or affiliate of either Macomb or Capitol, in which case
Rule 144 and Rule 145 issued by the SEC do impose certain restrictions on sale
of Capitol common stock).
DISSENTERS' RIGHTS
Michigan law provides that where the consideration to be received in a
share exchange is common stock which is publicly tradable on a national
securities exchange, or held of record by 2,000 or more persons, dissenters'
rights are not available. Capitol's common stock is tradable on the National
Market System of the Nasdaq Stock Market, Inc. and, accordingly, qualifies as
stock traded on a national securities exchange. Therefore, no dissenters' rights
will be available in the exchange.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
This proxy statement/prospectus does not cover any resales of the Capitol
common stock you will receive in the exchange, and no person is authorized to
make any use of this proxy statement/prospectus in connection with any such
resale.
All shares of Capitol common stock you will receive in the exchange will be
freely transferable, except that if you are deemed to be an "affiliate" of
Macomb under the Securities Act of 1933 at the time of the special shareholders
meeting, you may resell those shares only in transactions permitted by Rule 145
under the Securities Act or as otherwise permitted under the Securities Act.
Persons who may be affiliates of Macomb for those purposes generally include
individuals or entities that control, are controlled by, or are under common
control with, Macomb, and would not include shareholders who are not officers,
directors or principal shareholders of Macomb.
The affiliates of Macomb may not offer, sell or otherwise dispose of any of
the shares of Capitol common stock issued to that affiliate in the exchange or
otherwise owned or acquired by that affiliate:
(1) for a period beginning 30 days prior to the exchange and continuing
until financial results covering at least 30 days of post-exchange
combined operations of Capitol and Macomb have been publicly filed by
Capitol; or
(2) in violation of the Securities Act.
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OPINION OF FINANCIAL ADVISOR
Macomb has retained JMP Financial, Inc. to provide a financial fairness
opinion in connection with the exchange. The Macomb board selected JMP
Financial, Inc. to act as Macomb's financial advisor based on its
qualifications, expertise and reputation. JMP Financial, Inc. has rendered its
opinion, in writing, that, based upon and subject to the various considerations
set forth in the opinion, the consideration to be received pursuant to the
exchange by the holders of Macomb common stock is fair from a financial point
of view.
The full text of the written opinion of JMP Financial, Inc. is attached as
Annex B to this proxy statement/prospectus and sets forth, among other things,
the assumptions made, procedures followed, matters considered and limitations on
the scope of the review undertaken by JMP Financial, Inc. in rendering its
opinion. Macomb shareholders are urged to, and should, read the opinion
carefully and in its entirety. The opinion is directed to the Macomb board and
addresses only the fairness from a financial point of view of the consideration
received pursuant to the exchange as of the date of the opinion. It does not
address any other aspect of the exchange and does not constitute a
recommendation to any holder of Macomb common stock as to how to vote at the
special shareholders meeting. The summary of the opinion of JMP Financial, Inc.
set forth in this document is qualified in its entirety by reference to the full
text of the opinion.
In connection with rendering its opinion, JMP Financial, Inc. among other
things:
- reviewed certain internal financial statements and other financial and
operating data concerning Macomb prepared by the management of Macomb;
- analyzed certain financial projections prepared by the management of
Macomb;
- discussed the past and current operations and financial condition and
the prospects of Macomb with senior executives of Macomb;
- reviewed certain publicly available financial statements and other
information of Capitol;
- discussed the past and current operations and financial condition and
the prospects of Capitol with senior executives of Capitol;
- reviewed the reported prices and trading activity for Capitol common
stock;
- compared the financial performance of Macomb and Capitol and the
prices and trading activity of Capitol common stock with that of
certain other comparable publicly traded companies and their
securities;
- reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
- reviewed the Plan of Share Exchange; and
- performed such other analyses and considered such other factors as JMP
Financial, Inc. deemed appropriate.
With respect to the financial projections provided to JMP Financial, Inc.
by the management of Macomb, JMP Financial, Inc. understood that such
projections were reasonably prepared on bases reflecting management's best
currently available estimates and judgments of the future financial performance
of Macomb. In addition, JMP Financial, Inc. assumed that the exchange would be
consummated in accordance with the terms set forth in the Plan of Share
Exchange, including, among other things, that the exchange would be treated as a
reorganization pursuant to the Internal Revenue Code of 1986.
In rendering its opinion, JMP Financial, Inc. performed the following analyses:
(1) JMP Financial, Inc., reviewed the performance of all publicly traded stocks
of Michigan banks and bank holding companies. No bank or bank holding
company was identical to Macomb or Capitol. JMP Financial, Inc., did,
however, note that the Macomb and the Capitol share value were generally
within the range of the share values of comparable size banks and bank
holding companies.
(2) JMP Financial, Inc., also consulted a private database to construct a group
of banks and bank holding companies it deemed to be similar to either
Macomb or Capitol, considering, but not limiting its analysis to, such
factors as size, financial condition and performance, geography and market
performance. Once again, although no bank or bank holding company was
identical to Macomb or Capitol, JMP Financial, Inc., noted that the
estimated share value of Capitol was within the range of trading prices of
institutions of a similar size and in a similar market or markets.
(3) JMP Financial, Inc., reviewed the pricing ratios in those mergers and
acquisitions of banks and bank holding companies pending or completed
during the past twelve months for which public information was available.
JMP Financial, Inc., found that the premium to book value ratios offered to
selling shareholders generally ranged from 125 percent to 300 percent, with
both median and average premium to book values falling between 225 percent
and 250 percent. All of these transactions involved the transfer of control
to the acquiring institution. JMP also reviewed the trading prices and
histories of small publicly traded banks it deemed comparable to Macomb to
determine the approximate fair market value of small minority positions in
those institutions and found that price-to-book value ratios ranged from 79
percent to 281 percent with averages and medians ranging from 161 to 173
percent. The banks which JMP Financial, Inc., reviewed and which it defined
as "small publicly traded banks" are all listed on the Nasdaq National
Market System and average a weekly trading volume of about one-half of one
percent of their outstanding stock. Among the significant differences
between these small publicly traded banks and Macomb is that the Macomb
stock was illiquid. A number of historical studies and valuation practices
estimate liquidity discounts in a range from 10 to 30 percent. The
transaction at issue is somewhere between the sale of all of the stock of
an entire financial institution and the sale of a minority block of stock
in a community bank; however, JMP Financial, Inc. believes the exchange
bears more characteristics of the latter than the former. The most dramatic
difference in the view of JMP Financial, Inc., between the exchange and an
acquisition of all of the stock of an entire institution in a publicly
announced transaction is the "change of control" by which the acquiring
institution acquires all of the outstanding stock of the acquired
institution. In such transactions, control of the acquired institution
changes hands, for which the acquiring institution may pay a significant
premium. In the present transaction, JMP Financial, Inc., noted that
Capitol has had control of Macomb from the outset and would not be expected
to pay a "premium" for control, since it already owns control of Macomb.
JMP Financial, Inc., would expect that the premium over book value would be
closer to the price paid in the sale of a minority block of stock in a
small publicly traded bank, which in fact is the case. JMP Financial, Inc.
therefore concluded that the exchange was fair to the shareholders of
Macomb from a financial point of view.
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The opinion and presentation of JMP Financial, Inc. to the Macomb board was
one of many factors taken into consideration by Macomb's board in making its
decision to approve the exchange. The analyses as described above should not be
viewed as determinative of the opinion of the Macomb board with respect to the
exchange or of whether the Macomb board would have been willing to agree to a
transaction with a different form or amount of consideration.
The Macomb board retained JMP Financial, Inc. based upon its
qualifications, experience and expertise. JMP Financial, Inc. is a recognized
investment banking and advisory firm which has especial expertise in the
valuation of banks.
Under the engagement letter, JMP Financial, Inc. provided financial
advisory services and a financial fairness opinion in connection with the
exchange, and Macomb agreed to pay JMP Financial a fee of $8,500 plus
out-of-pocket expenses. In addition, Macomb has agreed to indemnify JMP
Financial, Inc. and its affiliates, against certain liabilities and expenses,
including certain liabilities under the federal securities laws.
THE CLOSING
EFFECTIVE TIME
The exchange will be effective at 9:00 a.m., Eastern Time, on September 30,
1999, and will be closed as soon as possible after the vote at the special
meeting of Macomb's shareholders. If the Plan of Share Exchange is approved, as
of the effective date, each outstanding share of Macomb common stock will be
automatically converted into the right to receive Capitol common stock according
to the exchange ratio.
SHARES HELD BY CAPITOL
Shares of Macomb common stock owned by Capitol since Macomb's organization
will be unaffected by the exchange. Those shares will not be exchanged for any
securities of Capitol or other consideration.
PROCEDURES FOR SURRENDER OF CERTIFICATES; FRACTIONAL SHARES
As soon as reasonably practicable after the effective date of the exchange,
Capitol or Capitol's transfer agent will send you a letter of transmittal. The
letter of transmittal will contain instructions with respect to the surrender of
your Macomb stock certificates. YOU SHOULD NOT RETURN STOCK CERTIFICATES WITH
THE ENCLOSED PROXY.
Commencing immediately after the effective date of the exchange, upon
surrender by you of your stock certificates representing Macomb shares in
accordance with the instructions in the letter of transmittal, you will be
entitled to receive stock certificates representing shares of Capitol common
stock into which those Macomb shares have been converted, together with a cash
payment in lieu of fractional shares, if any.
After the effective date, each certificate that previously represented
shares of Macomb stock will represent only the right to receive the shares of
Capitol common stock into which shares of Macomb stock were converted in the
exchange, and the right to receive cash in lieu of fractional shares of Capitol
common stock as described below.
Until your Macomb certificates are surrendered to Capitol or Capitol's
agent, you will not be paid any dividends or distributions on the Capitol common
stock into which your Macomb shares have been converted with a record date after
the exchange, and will not be paid cash in lieu of fractional shares,. When
those certificates are surrendered, any unpaid dividends and any cash in lieu of
fractional shares of Capitol common stock payable as described below will be
paid to you without interest.
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Macomb's transfer books will be closed at the effective date of the
exchange and no further transfers of shares will be recorded on the transfer
books. If a transfer of ownership of Macomb stock that is not registered in the
records of Macomb's has occurred, then, so long as the Macomb stock certificates
are accompanied by all documents required to evidence and effect the transfer,
as set forth in the transmittal letter and accompanying instructions, a
certificate representing the proper number of shares of Capitol common stock
will be issued to a person other than the person in whose name the certificate
so surrendered is registered, together with a cash payment in lieu of fractional
shares, if any, and payment of dividends or distributions, if any.
No fractional share of Capitol common stock will be issued upon surrender
of certificates previously representing Macomb shares. Instead, Capitol will pay
you an amount in cash determined by multiplying the fractional share interest to
which you would otherwise be entitled by the Capitol share value used in
determining the exchange ratio.
FEES AND EXPENSES
Whether or not the exchange is completed, Capitol and Macomb will each pay
its own costs and expenses incurred in connection with the exchange, including
the costs of (a) the filing fees in connection with Capitol's Form S-4
registration statement and this proxy statement/prospectus, (b) the filing fees
in connection with any filing, permits or approvals obtained under applicable
state securities and "blue sky" laws, (c) the expenses in connection with
printing and mailing of the Capitol Form S-4 registration statement and this
proxy statement/prospectus, and (d) all other expenses.
NASDAQ STOCK MARKET LISTING
Capitol will promptly prepare and submit to the Nasdaq Stock Market, Inc. a
listing application with respect to the maximum number of shares of Capitol
common stock issuable to Macomb shareholders in the exchange, and Capitol must
use reasonable best efforts to obtain approval for the listing of Capitol common
shares on the Nasdaq Stock Market, Inc.
AMENDMENT AND TERMINATION
Capitol and Macomb may amend or terminate the exchange at any time before
or after shareholder approval of the Plan of Share Exchange. After shareholder
approval of the exchange, it may not be further amended without the approval of
the shareholders.
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THE SPECIAL SHAREHOLDERS' MEETING
DATE, TIME AND PLACE
The special shareholders meeting will be held on September 28, 1999 at
Macomb Community Bank, 16000 Hall Rd., Ste 102, Clinton Twp., Michigan 48038 at
9:00 a.m., local time.
MATTERS TO BE CONSIDERED AT THE SPECIAL SHAREHOLDERS MEETING
At the special shareholders meeting, holders of Macomb common stock will
vote on whether to approve the exchange. See "The Exchange".
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Holders of record of Macomb common stock at the close of business on August
31, 1999, the record date for the special shareholders meeting, are entitled to
receive notice of and to vote at the special shareholders meeting. At the close
of business on the record date, approximately 278,746 shares of Macomb common
stock were issued and outstanding and held by approximately 126 holders of
record.
A majority of the shares of the Macomb common stock (excluding shares held
by Capitol) entitled to vote on the record date must be represented in person or
by proxy at the special shareholders meeting in order for a quorum to be present
for purposes of transacting business at the meeting. In the event that a quorum
of common stock is not represented at the special shareholders meeting, it is
expected that the meeting will be adjourned or postponed to solicit additional
proxies. Holders of record of Macomb common stock on the record date are each
entitled to one vote per share with respect to approval of the exchange at
Macomb's special shareholders meeting.
Macomb does not expect any other matters to come before the special
shareholders meeting. However, if any other matters are properly presented at
the special meeting for consideration, the persons named in the enclosed form of
proxy, and acting thereunder, will have discretion to vote or not vote on those
matters in accordance with their best judgment, unless authorization to use that
discretion is withheld. If a proposal to adjourn the special meeting is properly
presented, however, the persons named in the enclosed form of proxy will not
have discretion to vote in favor of the adjournment proposal any shares which
have been voted against the proposal(s) to be presented at the special meeting.
Macomb is not aware of any matters expected to be presented at the special
meeting other than as described in the notice of special meeting.
VOTES REQUIRED
Although approval of two-thirds of the shares entitled to vote is all that
is required by law, Macomb and Capitol have agreed that approval of the exchange
will require the affirmative vote of a majority of the shares of Macomb common
stock outstanding on the record date, excluding the 51% of Macomb's shares held
by Capitol. Thus, the exchange will require at least a 75% approval, since
Capitol will vote for the exchange. Abstentions and broker non-votes will have
the same effect as a vote against the proposal to approve the exchange.
SHARE OWNERSHIP OF MANAGEMENT
As of the close of business on August 31, 1999, the directors and executive
officers of Macomb and their affiliates were entitled to vote approximately
62,806 shares of Macomb common stock. These shares represent approximately 22.5%
of the outstanding shares of Macomb common stock and 46% of Macomb's shares held
by shareholders other than Capitol. The directors and executive officers have
agreed to vote their shares of Macomb common stock in favor of the exchange.
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VOTING OF PROXIES
Submitting Proxies
You may vote by attending the special shareholders meeting and voting your
shares in person at the meeting, or by completing the enclosed proxy card,
signing and dating it and mailing it in the enclosed postage pre-paid envelope.
If you sign a written proxy card and return it without instructions, your shares
will be voted FOR the exchange at the special shareholders meeting.
If your shares are held in the name of a trustee, bank, broker or other
record holder, you must either direct the record holder of your shares as to how
to vote your shares or obtain a proxy from the record holder to vote at the
special shareholders meeting.
Shareholders who submit proxy cards should not send in any stock
certificates with their proxy cards. A transmittal form with instructions for
the surrender of certificates representing shares of Macomb stock will be mailed
by Capitol to former Macomb shareholders shortly after the exchange is
effective.
Revoking Proxies
If you are a shareholder of record, you may revoke your proxy at any time
prior to the time it is voted at the special shareholders meeting. Proxies may
be revoked by written notice, including by telegram or telecopy, to the
president of Macomb, by a later-dated proxy signed and returned by mail or by
attending the special shareholders meeting and voting in person. Attendance at
Macomb's special shareholders meeting will not in and of itself constitute a
revocation of a proxy. Any written notice of a revocation of a proxy must be
sent so as to be delivered before the taking of the vote at the special
shareholders meeting to:
Macomb Community Bank
16000 Hall Rd., Ste. 102
Clinton Twp., MI 48038
Attention: Stephen Tarczy, President
If you require assistance in changing or revoking a proxy, you should
contact Stephen Tarczy at the address or phone number provided in this proxy
statement/prospectus under the caption "Who Can Answer Your Questions."
GENERAL INFORMATION
Brokers who hold shares in street name for customers who are the beneficial
owners of those shares are prohibited from giving a proxy to vote on non-routine
matters, such as the proposal to be voted on at the special shareholders
meeting, unless they receive specific instructions from the customer. These
so-called broker non-votes will have the same effect as a vote against the
exchange.
Abstentions may be specified on all proposals. If you submit a proxy with
an abstention, you will be treated as present at the special shareholders
meeting for purposes of determining the presence or absence of a quorum for the
transaction of all business. An abstention will have the same effect as a vote
against the exchange
SOLICITATION OF PROXIES; EXPENSES
Capitol or Macomb will pay the cost of solicitation of proxies. In addition
to solicitation by mail, the directors, officers and employees of Macomb may
also solicit proxies from shareholders by telephone, telecopy, telegram or in
person.
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COMPARISON OF SHAREHOLDER RIGHTS
As a result of the exchange, holders of shares of Macomb stock will become
holders of shares of Capitol common stock. The following chart summarizes the
material differences between the rights of Macomb shareholders (left column),
and the rights of shareholders of Capitol (right column). This summary is not
intended to be complete and is qualified by reference to the Michigan Banking
Code and the Michigan Business Corporation Act, as well as to Macomb's articles
of incorporation and by-laws (copies of which may be obtained from Macomb) and
Capitol's articles of incorporation and by-laws, (copies of which are on file
with the SEC).
MACOMB: CAPITOL:
- ------------------------------ ------------------------------------------------ ------------------------------------------------
GOVERNING LAW: Michigan Banking Code Michigan Business Corporation Act
Public Act 319 of 1969 Public Act 284 of 1972
ASSESSABILITY OF SHARES: Shareholders may be assessed to restore the Shares of common stock are non-assessable and
capital of Macomb up to its stated capital in shareholders have no liability in excess of
the event of losses. MCLA 487.501 their initial investment. MCLA 450.1317
AUTHORIZED BUT Under the Banking Code, banks cannot have Capitol has authorized but unissued shares,
UNISSUED SHARES: authorized but unissued shares. which may be issued by the Board of Directors
in the Board's discretion and without a
shareholder vote. MCLA 450.1202
DIVIDENDS: Macomb shareholders may share in dividends as Capitol common stockholders may share in
and when declared by the Macomb Board of dividends as and when declared by the Board of
Directors (although none have been to date). The Directors (see "Dividends and Market for
Board of Directors may only declare dividends Common Stock"); dividends may be paid out of
out of net profits from operations and must have any funds available unless the payment of the
a surplus equal to 20% of Macomb's stated dividend renders the business corporation
capital on hand after the declaration and insolvent. MCLA 450.1345
payment of any dividend. MCLA 487.385
AMENDMENT TO ARTICLES Needs approval of the Banking Commissioner and Approval of a majority of the shareholders.
OF INCORPORATION: approval of a majority of the shareholders to MCLA 450.1611
amend the articles. MCLA 487.405
ISSUANCE OF NEW SHARES: Approval of the Banking Commissioner and a Capitol's Board of Directors may issue new
two-thirds vote of the shareholders of Macomb. shares without a vote of the shareholders under
MCLA 487.379 Michigan law up to the authorized but unissued
shares; any additional shares in excess of the
authorized but unissued shares would require
approval of a majority of the shareholders. MCLA
450.1611
VOTE ON DIRECTORS: Macomb has 14 Directors who are elected Capitol has 18 directors who are elected
annually for one year terms. There is no annually to one year terms. There is no
cumulative voting. cumulative voting.
BUSINESS COMBINATIONS: A consolidation of Macomb with any other banking A business combination involving Capitol would
institution would require the approval of the require the approval of a majority of the
Banking Commissioner and the approval of a outstanding shareholders. MCLA 450.1703A; the
two-thirds vote of the Macomb Michigan Business anti-takeover provisions as described in
Corporation Act has certain shareholders. "Description of the Capital Stock of Capitol"
MCLA 487.425 which are not included in the Michigan Banking
Code.
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MACOMB: CAPITOL:
- ------------------------------ ------------------------------------------------ ------------------------------------------------
INDEMNIFICATION OF The Michigan Banking Code provides for the Indemnification of directors and officers is
DIRECTORS AND OFFICERS: indemnification of directors and officers. provided for under the Michigan Business
See MCLA 487.401-405. Corporation Act in substantially similar language
to that in the Michigan Banking code. See MCLA
450.1561-.1567.
LIMITATION OF LIABILITY: The Michigan Banking Code permits banking The Michigan Business Corporation Act allows
corporations to limit the liability of directors corporations to limit the liabilities of the
and officers. MCLA 487.400. Macomb has adopted a directors and officers in substantially similar
provision in its Articles of Incorporation which language to the Michigan Banking Code. MCLA
limits the liability of directors and officers 450.1209. Capitol has adopted a provision in its
to the greatest extent permitted by law. Articles of Incorporation which limits directors
and officers liability to the greatest extent
permitted by law.
DESCRIPTION OF THE CAPITAL STOCK OF CAPITOL
Capitol's Articles of Incorporation, as amended to date, authorize the
issuance of up to 25,000,000 shares of common stock, without par value.
Capitol's articles of incorporation do not authorize the issuance of any other
class of stock. As of June 30, 1999, 6,344,886 shares of common stock were
outstanding. UMB Bank, n.a., serves as transfer agent and registrar for
Capitol's common stock. Capitol also has pending an offering of up to 1,700,000
additional shares. See "Recent Developments".
Michigan law allows Capitol's board of directors to issue additional shares
of stock up to the total amount of common stock authorized without obtaining the
prior approval of the shareholders.
Capitol's board of directors has authorized the issuance of the shares of
common stock as described in this proxy statement/prospectus. All shares of
common stock offered will be, when issued, fully paid and nonassessable.
The following summary of the terms and provisions of the common stock does
not purport to be complete and is qualified in its entirety by reference to
Capitol's articles of incorporation, as amended, a copy of which is on file with
the SEC, and to the Michigan Business Corporation Act ("MBCA").
RIGHTS OF COMMON STOCK
All voting rights are vested in the holders of shares of common stock. Each
share of common stock is entitled to one vote. The shares of common stock do not
have cumulative voting rights, which means that a stockholder is entitled to
vote each of his or her shares once for each director to be elected at any
election of directors and may not cumulate shares in order to cast more than one
vote per share for any one director. The holders of the common stock do not have
any preemptive, conversion or redemption rights. Holders of common stock are
entitled to receive dividends if and when declared by Capitol's board of
directors out of funds legally available. Under Michigan law, dividends may be
legally declared or paid only if after the distribution the corporation can pay
its debts as they come due in the usual course of business and the corporation's
total assets equal or exceed the sum of its liabilities. In the event of
liquidation, the holders of common stock will be entitled, after payment of
amounts due to creditors and senior security holders, to share ratably in the
remaining assets.
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SHARES AVAILABLE FOR ISSUANCE
The availability for issuance of a substantial number of shares of common
stock at the discretion of the board of directors provides Capitol with the
flexibility to take advantage of opportunities to issue additional stock in
order to obtain capital, as consideration for possible acquisitions and for
other purposes (including, without limitation, the issuance of additional shares
through stock splits and stock dividends in appropriate circumstances). There
are, at present, no plans, understandings, agreements or arrangements concerning
the issuance of additional shares of common stock, except as described in this
proxy statement/prospectus and for the shares of common stock reserved for
issuance under Capitol's stock option program.
Uncommitted authorized but unissued shares of common stock may be issued
from time to time to persons and in amounts the board of directors of Capitol
may determine and holders of the then outstanding shares of common stock may or
may not be given the opportunity to vote thereon, depending upon the nature of
those transactions, applicable law and the judgment of the board of directors of
Capitol regarding the submission of an issuance to or vote by Capitol's
shareholders. As noted, Capitol's shareholders have no preemptive rights to
subscribe to newly issued shares.
Moreover, it will be possible that additional shares of common stock would
be issued for the purpose of making an acquisition by an unwanted suitor of a
controlling interest in Capitol more difficult, time consuming or costly or
would otherwise discourage an attempt to acquire control of Capitol. Under such
circumstances, the availability of authorized and unissued shares of common
stock may make it more difficult for shareholders to obtain a premium for their
shares. Such authorized and unissued shares could be used to create voting or
other impediments or to frustrate a person seeking to obtain control of Capitol
by means of a merger, tender offer, proxy contest or other means. Such shares
could be privately placed with purchasers who might cooperate with the board of
directors of Capitol in opposing such an attempt by a third party to gain
control of Capitol. The issuance of new shares of common stock could also be
used to dilute ownership of a person or entity seeking to obtain control of
Capitol. Although Capitol does not currently contemplate taking that action,
shares of Company common stock could be issued for the purposes and effects
described above, and the board of directors reserves its rights (if consistent
with its fiduciary responsibilities) to issue shares for such purposes.
CAPITOL'S PREFERRED SECURITIES
Capitol has issued debentures to Capitol Trust I, a Delaware business trust
subsidiary of Capitol. Capitol Trust I purchased the debentures with the
proceeds of preferred securities (which are traded on the NASDAQ National Stock
Market under the symbol "CBCLP"). Capitol has guaranteed the preferred
securities. The documents governing these securities, including the indenture
under which the debentures were issued, restrict Capitol's right to pay a
dividend on its common stock under certain circumstances and give the holders of
the preferred securities preference on liquidation over the holders of Capitol's
common stock. Specifically, Capitol may not declare or pay a cash dividend on
its common stock if (a) an event of default has occurred as defined in the
indenture, (b) Capitol is in default under its guarantee, or (c) Capitol has
exercised its right under the debentures and the preferred securities to extend
the interest payment period. In addition, if any of these conditions have
occurred and until they are cured, Capitol is restricted from redeeming or
purchasing any shares of its common stock except under very limited
circumstances. Capitol's obligation under the debentures, the preferred
securities and the guarantee is $25.3 million and the interest rate is 8.5% per
annum, payable quarterly.
ANTI-TAKEOVER PROVISIONS
In addition to the utilization of authorized but unissued shares as
described above, the MBCA contain other provisions which could be utilized by
Company to impede certain efforts to acquire control of Capitol. Those
provisions include the following:
CONTROL SHARE ACT. The MBCA contains provisions intended to protect
shareholders and prohibit or discourage certain types of hostile takeover
activities. These provisions regulate the acquisition of "control shares" of
large public Michigan corporations.
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The act establishes procedures governing "control share acquisitions." A
control share acquisition is defined as an acquisition of shares by an acquirer
which, when combined with other shares held by that person or entity, would give
the acquirer voting power at or above any of the following thresholds: 20%,
33-1/3% or 50%. Under that act, an acquirer may not vote "control shares" unless
the corporation's disinterested shareholders vote to confer voting rights on the
control shares. The acquiring person, officers of the target corporation, and
directors of the target corporation who are also employees of the corporation
are precluded from voting on the issue of whether the control shares shall be
accorded voting rights. The act does not affect the voting rights of shares
owned by an acquiring person prior to the control share acquisition.
The act entitles corporations to redeem control shares from the acquiring
person under certain circumstances. In other cases, the act confers dissenters'
rights upon all of a corporation's shareholders except the acquiring person.
The act applies only to an "issuing public corporation." Capitol falls
within the statutory definition of an "issuing public corporation." The act
automatically applies to any "issuing public corporation" unless the corporation
"opts out" of the statute by so providing in its articles of incorporation or
bylaws. Capitol has not "opted out" of the provisions of the act.
FAIR PRICE ACT. Certain provisions of the MBCA establish a statutory scheme
similar to the supermajority and fair price provisions found in many corporate
charters. The act provides that a super majority vote of 90% of the shareholders
and no less than two-thirds of the votes of non-interested shareholders must
approve a "business combination." The act defines a "business combination" to
encompass any merger, consolidation, share exchange, sale of assets, stock
issue, liquidation, or reclassification of securities involving an "interested
shareholder" or certain "affiliates." An "interested shareholder" is generally
any person who owns 10% or more of the outstanding voting shares of the company.
An "affiliate" is a person who directly or indirectly controls, is controlled
by, or is under common control with a specified person.
At this time, Capitol's management beneficially owns (including immediately
exercisable stock options) control of approximately 27.66% of the outstanding
common stock. It is now unknown what percentage will be owned by management upon
completion of the pending offering and the exchange. If management's shares are
voted as a block, management will be able to prevent the attainment of the
required supermajority approval.
The supermajority vote required by the act does not apply to business
combinations that satisfy certain conditions. These conditions include, among
others, that: (i) the purchase price to be paid for the shares of the company is
at least equal to the greater of (a) the market value of the shares or (b) the
highest per share price paid by the interested shareholder within the preceding
two-year period or in the transaction in which the shareholder became an
interested shareholder, whichever is higher; and (ii) once a person has become
an interested shareholder, the person must not become the beneficial owner of
any additional shares of the company except as part of the transaction which
resulted in the interested shareholder becoming an interested shareholder or by
virtue of proportionate stock splits or stock dividends.
The requirements of the act do not apply to business combinations with an
interested shareholder that the Board of Directors has approved or exempted from
the requirements of the act by resolution at any time prior to the time that the
interested shareholder first became an interested shareholder.
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WHERE YOU CAN FIND MORE INFORMATION
Capitol has filed a registration statement on Form S-4 to register with the
SEC the Capitol common stock to be issued to Macomb shareholders in the
exchange. This proxy statement/prospectus is a part of that registration
statement and constitutes a prospectus of Capitol in addition to being a proxy
statement of Macomb for the special meeting. As allowed by SEC rules, this proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement.
In addition, Capitol files reports, proxy statements and other information
with the SEC under the Exchange Act. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. You may read and copy this
information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office Citicorp Center
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. The SEC also maintains an Internet world wide
web site that contains reports, proxy statements and other information about
issuers, including Capitol, who file electronically with the SEC. The address of
that site is www.sec.gov. You can also inspect reports, proxy statements and
other information about Capitol at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
In addition, all subsequent documents filed with the SEC by Capitol
pursuant Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 after the date of this proxy statement/ prospectus shall be deemed to be
incorporated by reference into this proxy statement/prospectus and to be a part
hereof from the date of filing such documents. Any statement contained in this
proxy statement/prospectus or in a document incorporated or deemed to be
incorporated by reference in this prospectus or another such document shall be
deemed to be modified or superseded for purposes of this proxy
statement/prospectus to the extent that a statement contained in this proxy
statement/prospectus or another such document or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modified or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified superseded, to constitute a part of
this proxy statement/prospectus.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY SEPTEMBER 21, 1999
TO RECEIVE THEM BEFORE THE SPECIAL SHAREHOLDERS MEETING. If you request any
incorporated documents from us, Capitol will mail them to you by first class
mail, or another equally prompt means, within one business day after Capitol
receives your request.
No one has been authorized to give any information or make any
representation about Macomb, Capitol or the exchange, that differs from, or adds
to, the information in this document or in documents that are publicly filed
with the SEC. Therefore, if anyone does give you different or additional
information, you should not rely on it.
If you are in a jurisdiction where it is unlawful to offer to exchange, or
to ask for offers of exchange, the securities offered by this proxy
statement/prospectus or to ask for proxies, or if you are a person to whom it is
unlawful to direct these activities, then the offer presented by this proxy
statement/prospectus does not extend to you.
The information contained in this proxy statement/prospectus speaks only as
of its date unless the information specifically indicates that another date
applies. Information in this document about Capitol has been supplied by
Capitol, and information about Macomb has been supplied by Macomb.
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LEGAL MATTERS
Certain legal matters relating to the validity of the shares of Capitol
common stock offered by this proxy statement/prospectus and certain federal
income tax matters relating to the exchange will be passed upon for Capitol by
Strobl Cunningham Caretti & Sharp, P.C.
EXPERTS
The consolidated financial statements of Capitol attached to this proxy
statement/prospectus included in Capitol's annual report to shareholders and its
report on Form 10-K for the fiscal year ended December 31, 1998, have been
audited by BDO Seidman, LLP, independent auditors, as stated in their report,
which is attached as part of Annex E, given upon their authority as experts in
accounting and auditing.
The financial statements of Macomb attached to this proxy
statement/prospectus as Annex D for the fiscal years ended December 31, 1998 and
December 31, 1997 have been audited by BDO Seidman, LLP, and the financial
statements for the fiscal year ended December 31, 1996 have been reviewed by BDO
Seidman, LLP, independent accountants, as stated in their report, which is
attached as part of Annex D, given upon their authority as experts in accounting
and auditing.
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44
ANNEX A
PLAN OF SHARE EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into effective September
30, 1999 between and among CAPITOL BANCORP LTD., a Michigan corporation
("Capitol") and the SHAREHOLDERS of MACOMB COMMUNITY BANK ("Macomb").
R E C I T A L S
A. Macomb is a Michigan banking corporation which commenced the business of
banking September 18, 1996.
B. Capitol is now and has been since Macomb commenced the business of
banking the holder of fifty-one (51%) percent of the duly issued and outstanding
common stock of Macomb ("Macomb common stock").
C. Macomb common stock is privately held and not traded in any public
market.
D. Capitol's common stock ("Capitol common stock") is traded on the
National Market System of the NASDAQ Stock Market, Inc.
E. Macomb's Board of Directors has determined that it would be in the best
interest of Macomb's stockholders to exchange their shares of stock in Macomb
for shares of Capitol common stock as described in this Plan.
The parties adopt this Plan as of the effective date.
1. The Exchange. Each shareholder who holds Macomb common stock will
exchange his, her or their shares of Macomb common stock for shares of Capitol
common stock according to an exchange ratio determined as follows:
Macomb Share Value. The share value of each share of Macomb common
stock shall be determined by multiplying 1.5 times the adjusted pro
forma net book value per share of Macomb common stock as of the
close of business on Friday, September 17, 1999. The adjusted pro
forma net book value per share of Macomb common stock as of the
close of business on Friday, September 17, 1999 shall be calculated
by (1) adding stockholders' equity as reflected in Macomb's
internally prepared financial statements as of August 31, 1999 and
Macomb's actual net income for the month of September, 1999,
prorated for the first 17 days of the month; (2) subtracting from
that sum the principal amounts of Capitol's capital contributions
to Macomb during the period from September 18, 1996 to September
17, 1999 (aggregating $2,580,000 through August 30, 1999) for which
Capitol did not receive shares of Macomb's common stock and also
subtracting an interest factor to impute to Capitol an appropriate
return on its capital contributions equivalent to Capitol's
interest cost through September 17, 1999; and (3) dividing the
remainder reached by the number of shares of Macomb's common stock
outstanding as of the close of business on September 17, 1999.
Capitol Share Value. The share value of each share of Capitol
common stock will be the average of the closing prices of Capitol
common stock for the trading days in the twenty-two (22) trading
day period prior to and ending on September 17, 1999, as reported
by the NASDAQ Stock Market, Inc.
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Exchange Ratio. The exchange ratio will be determined by dividing
the Macomb Share Value by the Capitol Share Value.
Each Macomb shareholder (except Capitol) will receive shares of
Capitol common stock in exchange for his, her or their Macomb common stock
calculated by multiplying the number of shares of Macomb common stock held by
the shareholder by the exchange ratio. Any fractional shares will be paid in
cash.
2. Approvals Necessary. The following approvals will be necessary
prior to the Plan becoming effective:
a. The Board of Directors of Macomb shall have approved and adopted
the Plan.
b. The Board of Directors of Capitol (acting through its Executive
Committee or otherwise, Capitol's Board having already approved
the exchange in principle) shall have approved and adopted the
Plan.
c. A majority of the common stock of Macomb (exclusive of the
shares held by Capitol) shall have been voted to approve and
adopt the Plan at a special meeting of the shareholders called
for that purpose.
d. The Securities and Exchange Commission shall have declared
effective the Registration Statement registering the shares of
stock of Capitol's common stock to be issued in the exchange.
e. The Financial Institutions Bureau of the State of Michigan shall
not have issued any objection to the Plan (a letter indicating
the Financial Institutions Bureau does not object has already
been received).
3. Fairness Opinion. The Board of Directors of Macomb shall have
secured the opinion of a recognized firm of financial advisors that the share
exchange is fair from a financial point of view to the shareholders of Macomb.
4. Tax Opinion. Strobl Cunningham Caretti & Sharp, P.C. shall have
issued its legal opinion that the share exchange constitutes a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended, and that the exchange shall not be a taxable event to the shareholders
of Macomb.
5. Surrender of Certificates. Each shareholder of Macomb common stock
shall surrender to Capitol his, her or their certificate(s) for shares of Macomb
common stock within thirty (30) days after the effective date of this Plan.
Capitol shall direct its transfer agent, UMB Bank, n.a., to issue certificate(s)
of Capitol common stock to be issued in the exchange. Certificate(s) of Capitol
common stock shall be issued and registered in the same name as the shares of
Macomb common stock surrendered in exchange therefor, and shall thereafter be
transferable in the same manner as otherwise provided for Capitol common stock.
In the event any shareholder of Macomb common stock fails to surrender his, her
or their certificate(s) within thirty (30) days of the effective date of this
Plan, such certificate(s) shall nonetheless be cancelled and deemed surrendered,
and certificate(s) for Capitol common stock shall be issued and registered in
the name of the person who is the registered holder on the books of Macomb on
the effective date of this Plan, and the Macomb certificate(s) shall thereafter
be null and void and of no force or effect whatever.
6. New Macomb Certificate. Macomb shall issue its certificate
registering in the name of Capitol all shares of stock now registered to
shareholders other than Capitol.
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ANNEX B
JMP FINANCIAL, INC.
753 GRAND MARAIS
GROSSE POINTE PARK, MI 48230
TEL/FAX (313) 824-1711
September , 1999
Board of Directors
Macomb Community Bank
16000 Hall Road
Clinton Township, MI 48038
Gentlemen:
We have examined the Plan of Share Exchange (the "Agreement") dated
September 30, 1999, entered into between Capitol Bancorp, Ltd., a Michigan
Corporation ("CBCL") and the shareholders (the "Shareholders") of Macomb
Community Bank ("Macomb"), a Michigan Corporation by which CBCL shall acquire
from the Shareholders their outstanding shares of Macomb, not already owned by
CBCL, in exchange for shares of CBCL (the "Exchange").
The terms of the transaction contemplated by the Agreement provide that
each share of Macomb's common stock, not already owned by CBCL and issued and
outstanding as of September 17, 1999 (the "Effective Date") shall be exchanged,
pursuant to the Exchange Ratio specified in the Agreement, into shares of CBCL
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange.
JMP Financial, Inc. ("JMP"), as a regular part of its investment banking
business, is engaged in the valuation of the securities of commercial and
savings banks as well as the holding companies of commercial and savings banks
in connection with mergers, acquisition, and divestitures, and for other
purposes.
In connection with this engagement and rendering this opinion, we reviewed
materials deemed necessary and appropriate by us under the circumstances,
including;
- Audited consolidated financial statements of Macomb for the three
years ended December 31, 1998;
- Unaudited financial statements of Macomb for the period ended June 30,
1999 and internal financial reports as of August 26, 1999;
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Page Two
Macomb Board of Directors
September , 1999
- Certain unaudited internal financial information concerning the
capital ratios of Macomb;
- Publicly available information concerning CBCL;
- Publicly available information with respect to certain other bank
holding companies, which we deemed, appropriate, including competitors
of CBCL and Macomb.
- Publicly available information with respect to the nature and terms of
certain other transactions which we consider relevant;
- The Agreement;
- Reviewed and discussed with representative of management of Macomb,
certain information of a business and financial nature regarding
Macomb and CBCL, including financial forecast and related assumptions,
provided by Macomb or otherwise publicly available; and
- Reviewed certain historical market prices and trading volumes of
Macomb's and CBCL's common stock to the extent reasonably available.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of all of the financial statements and other
information reviewed by us for the purposes of the opinion expressed herein. We
have not made an independent evaluation or appraisal of the assets and
liabilities of Macomb or CBCL or any of its subsidiaries and we have not been
furnished with any such evaluation or appraisal. Additionally, we are not
experts in the evaluation of reserves for loan losses, and we have not reviewed
any individual credit files. For purposes of this opinion, we have assumed that
CBCL's and Macomb's loan loss reserves are adequate in all material respects and
that, in the aggregate, other conditions at CBCL and Macomb are satisfactory and
this opinion is conditioned upon such assumption. We have also assumed that
there has been no material change in Macomb's or CBCL's assets, financial
condition. Results of operations, business, or prospects since the date of the
last financial statements made available to us for Macomb and CBCL,
respectively. This opinion is necessarily based on economic, market and other
conditions in effect on, and the information made available to us as of, the
date hereof. It should be understood that subsequent developments may effect the
opinion and that JMP does not have any litigation to update, revise or reaffirm
it.
The opinion expressed herein is being rendered to the Board of Directors of
Macomb for its use in evaluation of the proposed transaction, assuming the
transaction is consummated upon the terms set forth in the Agreement.
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Page Three
Macomb Board of Directors
September , 1999
Based upon the terms and conditions of the Exchange and the current market
value of CBCL's common stock, and based further upon such other considerations
as we deem relevant, JMP is, subject to the foregoing, of the opinion on the
date hereof, that the consideration to be received by the Shareholders in the
Exchange would be fair from a financial point of view if the transaction
contemplated by the Agreement is in fact consummated pursuant to the terms
thereof.
Sincerely,
John Palffy
President
JMP Financial, Inc.
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ANNEX C
[Letterhead of Strobl Cunningham Caretti & Sharp, P.C.]
September 15, 1999
Capitol Bancorp Ltd.
200 Washington Sq. N., Fourth Floor
Lansing, MI 48933
Re: Plan of Share Exchange
Tax Considerations
Ladies and Gentlemen:
We have acted as special counsel in connection with the Plan of Share
Exchange between Capitol Bancorp Ltd. ("Capitol") and the shareholders of Macomb
Community Bank ("Macomb").
Capitol will file with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act"), a registration statement on
Form S-4 (the "Registration Statement"), with respect to the common shares of
Capitol to be issued to holders of shares of common stock of Macomb in
connection with the Plan of Share Exchange. In addition, Capitol has prepared,
and we have reviewed, a Proxy Statement/Prospectus which is contained in and
made a part of the Registration Statement (the "Proxy Statement"), and the
Appendices thereto, including the Plan of Share Exchange and this letter. In
rendering our opinion, we have relied upon the facts stated in the Proxy
Statement and upon such other documents as we have deemed appropriate, including
the information about Capitol and Macomb included or incorporated by reference
in the Proxy Statement.
We have assumed that (i) all parties to the Plan of Share Exchange, and to
any other documents reviewed by us, have acted, and will act, in accordance with
the terms of the Plan of Share Exchange and such other documents, (ii) all
facts, information, statements and representations qualified by the knowledge
and/or belief of Capitol and/or Macomb will be complete and accurate as of the
effective time as though not so qualified, (iii) the Plan of Share Exchange will
be consummated at the effective date pursuant to the terms and conditions set
forth in the Plan of Share Exchange without the waiver or modification of any
such terms and conditions, and (iv) the Plan of Share Exchange is authorized by
and will be effected pursuant to applicable state law.
Based upon and subject to the foregoing, and to the qualifications,
limitations, representations and assumptions contained in the portion of the
Proxy Statement captioned "Material Federal Income Tax Consequences," we are of
the opinion that:
- the exchange will qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code;
50
- no gain or loss will be recognized by the shareholders of Macomb who
exchange their Macomb common stock solely for Capitol common stock
(except with respect to cash received instead of a fractional share of
Capitol common stock);
- the aggregate tax basis of the Capitol common stock received by Macomb
shareholders who exchange all of their Macomb common stock for Capitol
common stock in the exchange will be the same as the aggregate tax
basis of the Macomb common stock surrendered in exchange (reduced by
any amount allocable to a fractional share of Capitol common stock for
which cash is received);
- the holding period of the Capitol common stock received will include
the holding period of shares of Macomb common stock surrendered in
exchange; and
- a holder of Macomb common stock that receives cash instead of a
fractional share of Capitol common stock will, in general, recognize
capital gain or loss equal to the difference between the cash amount
received and the portion of the holder's tax basis in shares of Macomb
common stock allocable to the fractional share; this gain or loss will
be long-term capital gain or loss for federal income tax purposes if
the holder's holding period in the Macomb common stock exchanged for
the fractional share of Capitol common stock is more than the
long-term holding period.
No opinion is expressed on any matters other than those specifically
stated. This opinion is furnished to you for use in connection with the
Registration Statement and may not be used for any other purpose without our
prior express written consent. We hereby consent to the inclusion of this
opinion as an appendix to the Proxy Statement and to the use of our name in that
portion of the Proxy Statement captioned "Material Federal Income Tax
Consequences." In giving such consent, we do not thereby admit that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Sincerely,
/s/STROBL CUNNINGHAM CARETTI & SHARP, P.C.
51
ANNEX D
FINANCIAL INFORMATION REGARDING MACOMB COMMUNITY BANK
Management's discussion and analysis of financial condition and results of operations.....................D-2
Condensed interim financial statements as of and for the periods ended June 30, 1999
and 1998 (unaudited)....................................................................................D-8
Audited financial statements as of and for the years ended December 31, 1998 and 1997.....................D-14
Budget Income Statement for the year 1999 in Summary Form.................................................D-29
D-1
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MACOMB COMMUNITY BANK
PERIODS ENDED JUNE 30, 1999 AND DECEMBER 31, 1998
Financial Condition
Macomb Community Bank is engaged in commercial banking activities from its sole
location in Clinton Township, Michigan. From its inception in September 1996,
the Bank provides a full array of banking services, principally loans and
deposits, to entrepreneurs, professionals and other high net worth individuals
in its community.
Total assets approximated $82.9 million at June 30, 1999, compared with $76.0
million at December 31, 1998. The Bank's total assets approximated $41.0 million
at year-end 1997.
Total portfolio loans approximated $50.6 million at June 30, 1999, an increase
of approximately $10 million from the $40.0 million level at December 31, 1998.
At December 31, 1997, total portfolio loans approximated $19.5 million.
Portfolio loan growth during these periods has been significant and is
consistent with the Bank's overall balance sheet growth during these periods.
Commercial loans approximated 80.8% of total portfolio loans at June 30, 1999
consistent with the Bank's emphasis on commercial lending activities. Real
estate mortgage loans approximated 16.7% of total portfolio loans at June 30,
1999.
The allowance for loan losses at June 30, 1999 approximated $507,000 or 1.00% of
total portfolio loans.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the loan portfolio at the
balance sheet date. Management's determination of the adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors. The allowance for loan losses is based upon
management's estimate of potential loan losses incurred at the respective
balance sheet dates.
Since the Bank's inception, net charge offs (loans written-off, less recoveries)
have been less than $5,000.
Most of the Bank's growth has been funded by deposits, most of which are
interest-bearing. Total deposits approximated $75.9 million at June 30, 1999, an
increase of approximately $6 million from the $69.4 million level at December
31, 1998. Deposits also increased significantly in 1998 from the $37.2 million
level at the beginning of 1998.
The Bank generally does not rely upon brokered deposits as a key funding source;
deposits are generally obtained within the Bank's community.
D-2
53
The Bank emphasizes obtaining noninterest-bearing deposits as a means to reduce
its cost of funds. Noninterest-bearing deposits approximated $8 million at June
30, 1999, a decrease of approximately $1.4 million from December 31, 1998.
Noninterest-bearing deposits fluctuate significantly from day to day, depending
upon customer account activity.
Stockholders' equity approximated $6.6 million at June 30, 1999 or approximately
8% of total assets. Capital adequacy is discussed elsewhere in this narrative.
Results of Operations
Net income for the six months ended June 30, 1999 approximated $292,000,
compared with $80,000 in the six month 1998 period.
1998 represented the Bank's first calendar year of profitability, with net
income of $323,000, compared to net losses of $83,000 in 1997 and $120,000 for
the short 1996 period.
During these recent periods, the Bank's profitability has been the result of its
loan and deposit portfolios reaching a sufficient size to generate an adequate
margin to cover operating expenses and produce profits.
The principal source of operating revenues is interest income. Total interest
income for the six months ended June 30, 1999 approximated $2.8 million,
compared with $1.8 million in the first six months of 1998. For the year ended
December 31, 1998, total interest income approximated $4.2 million, compared
with $2.0 million in 1997.
Interest expense on deposits has also increased significantly during these
periods, consistent with the growth in the interest-bearing deposits. Total
interest expense approximated $1.6 million for the six months ended June 30,
1999, compared with $1.0 million for the first six months of 1998. For the year
ended December 31, 1998, total interest expense approximated $2.4 million,
compared with $1.1 million in 1997.
Net interest income approximated $1.2 million for the six months ended June 30,
1999, compared with $749,000 for the 1998 corresponding period. Net interest
income for the year ended December 31, 1998 approximated $1.8 million, nearly
double the $955,000 in 1997.
Provisions for loan losses ($102,000 for the six months ended June 30, 1999,
$209,000 for the year ended December 31, 1998 and $140,000 for the year ended
December 31, 1997) have been based primarily upon amounts necessary to increase
the allowance for loan losses to the regulatorily-imposed ratio requirement of
not less than 1% of total portfolio loans outstanding.
Noninterest income has also increased significantly during the Bank's period of
existence. Total noninterest income approximated $100,000 for the six months
ended June 30, 1999 ($53,000 in the corresponding period in 1998) and
approximated $124,000 for the year ended December 31, 1998 and $40,000 for the
year ended December 31, 1997.
D-3
54
Noninterest expenses have increased significantly during the period of the
Bank's existence. Total noninterest expense approximated $760,000 for the six
months ended June 30, 1999, compared with $586,000 for the corresponding 1998
period. For the year ended December 31, 1998, total noninterest expense
approximated $1.2 million, compared with $980,000 for the year ended December
31, 1997.
The principal component of noninterest expense is salaries and employee benefits
which has increased during these periods based upon the increased staffing
required to serve customers and to facilitate growth.
Liquidity and Capital Resources
The principal funding source for asset growth and loan origination activities is
deposits. Growth in deposits and loans was previously discussed in this
narrative. As stated previously, most of the deposit growth has been deployed
into commercial loans, consistent with the Bank's emphasis on commercial lending
activities.
Cash and cash equivalents approximated $23.5 million at June 30, 1999, compared
with $30.0 million at December 31, 1998 and $15.9 million at December 31, 1997.
As liquidity levels vary continuously based upon customer activities, amounts of
cash and cash equivalents can vary widely at any given point in time. Management
believes the Bank's liquidity position at June 30, 1999 is adequate to fund loan
demand and to meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity is the
Bank's portfolio of marketable investment securities. Liquidity requirements
have not historically necessitated the sale of investments in order to meet
liquidity needs. It also has not engaged in active trading of its investments
and has no intention of doing so in the foreseeable future. At June 30, 1999 and
December 31, 1998, the Bank had approximately $8.3 million and $5.1 million,
respectively, of investment securities classified as available for sale which
can be utilized to meet various liquidity needs as they arise.
The Bank has secured lines of credit with the Federal Home Loan Bank of
Indianapolis. As of the balance sheet dates of June 30, 1999, December 31, 1998
and December 31, 1997, no amounts had been drawn on those credit facilities.
Availability on this credit facility approximated $2.5 million at June 30, 1999.
All banks are subject to a complex series of capital ratio requirements which
are imposed by state and federal banking agencies. In the case of Macomb
Community Bank, as a young bank, it is subject to a more restrictive requirement
than is applicable to most banks inasmuch as the Bank must maintain a
capital-to-asset ratio of not less than 8% for its early years of operation.
Since inception, the Bank's asset growth has been significant. In order to
maintain compliance with the above-mentioned ratio requirement, Capitol Bancorp
Ltd., the Bank's 51% majority owner, has made capital infusions amounting to
$2,515,000 through June 30, 1999. Those
D-4
55
capital infusions have been accounted for as an increase in the Bank's surplus
account, specifically earmarked as supplemental capital infusions and have not
been treated as a change in the parent's ownership percentage of the Bank.
Year 2000
The year 2000 issue confronting the Bank and its suppliers, customers and
competitors, centers on the inability of computer systems and embedded
technology to properly recognize dates near the end of and beyond the year 1999.
Macomb Community Bank utilizes the information technology systems of Capitol
Bancorp Ltd., its 51% majority owner. Capitol has been actively implementing a
comprehensive plan throughout 1998 and 1999, as required by bank regulatory
guidelines, to address potential impacts of the year 2000 issue on its
information technology (IT) and non-IT systems. Capitol's and the Bank's year
2000 plans are subject to modification and are revised periodically as
additional information is developed.
READINESS. Capitol has completed the inventory, assessment, remediation and
planning phases for its mission-critical IT and non-IT systems. Minimum-control
systems are those systems that pose risks to Capitol's ability to process data
for its loans, deposits, general ledger, revenues and operating results. Of the
17 mission-critical systems, all have tested as being year 2000 compliant.
Capitol recognizes that its ability to be year 2000 compliant is somewhat
dependent upon the year 2000 efforts of its vendors. Capitol and its banks
(including Macomb) sent questionnaires to its significant vendors in 1998.
Follow-up letters requesting additional information of the vendors' year 2000
readiness were sent when necessary. All mission-critical vendors have responded
to the questionnaires or have otherwise represented that they are year 2000
compliant. Capitol also routinely monitors its nonmission-critical vendors to
determine their level of year 2000 readiness.
Capitol and its banks (including Macomb) have been required by bank regulatory
agencies to update their customers on the banks' year 2000 compliance efforts.
Letters and informational brochures have been, and will continue to be, sent to
customers heightening their awareness of the year 2000 issue and notifying them
of the banks' efforts in addressing year 2000 issues. Compliance efforts are
also communicated to customers on their account statements and through brochures
available in bank lobbies.
Capitol and its banks (including Macomb) are also following regulatory
requirements that require an assessment of loan customers' year 2000 readiness.
Letters and questionnaires have been utilized to assess material loan customers'
readiness based on the size of their loan type. The number of existing customers
that have not responded to the letters and questionnaires is minimal. Follow-up
letters or phone calls are being made when necessary to obtain additional
information from these customers. Of those who have responded, all material
customers represented that they are year 2000 compliant or are working toward
compliance. The number of customers still working towards year 2000 compliance
is minimal and, in Capitol's opinion, their
D-5
56
inability to become compliant will not have a material adverse effect on
Capitol's business or operating results. Capitol and its banks (including
Macomb) also monitor customers applying for new loans that exceed a certain
dollar amount by requiring a written representation that the customer is year
2000 compliant.
WORST CASE SCENARIO AND CONTINGENCY PLANS. Capitol and its banks (including
Macomb) have determined the most reasonably likely worst case scenario is the
possibility of the lack of power or communication services for a period of time
in excess of one day. If this scenario were to occur, Capitol and its banks'
operations could be interrupted. Capitol and its banks have developed plans and
procedures to address this scenario, ranging from producing complete printed
reports from the core banking systems prior to January 1, 2000, to ensure that a
hard copy of the data is available in the event of a failure, to preparations
for failures of voice and data communications through the use of manual posting
and courier services, use of generators, alternative customer service locations
and/or reduced lobby hours.
Contingency planning, including the type discussed above, is an integral
part of Capitol's year 2000 readiness plan. Capitol's contingency plans address
alternative courses of action in the event that mission-critical systems do not
function properly with the date change. Development of the contingency plans was
recently completed. The year 2000 contingency plans will be tested during the
third and fourth quarters of 1999 to validate the effectiveness of contingent
procedures and will be refined as additional information becomes available.
COSTS. The costs associated with Capitol's year 2000 compliance in 1999 are
estimated at approximately $250,000, of which approximately $175,000 has been
incurred through June 30, 1999. A similar amount was incurred in 1998. These
costs principally relate to the added personnel costs, the employment of
external consultants, and the purchase of software upgrades.
These estimated costs are part of Capitol's information technology budget.
Capitol's information technology staff and senior management have devoted
significant time and resources to year 2000 activities. While this has resulted
in allocating resources that would have otherwise been devoted to other
information technology projects, no projects have been delayed or postponed that
would have a material adverse impact on Capitol or its banks' operations.
REGULATORY OVERSIGHT. Bank regulators have issued numerous statements and
guidance on year 2000 compliance issues and the responsibilities of senior
management and directors of banks and bank holding companies. In addition, the
bank regulators have issued safety and soundness guidelines to be followed by
insured depository institutions, including Capitol and its banks, to ensure
resolution of any year 2000 problems. Periodic year 2000 reviews are performed
by various bank regulatory agencies. Most of the recent examinations have been
performed by the FDIC and it is expected that the FDIC will continue its
frequent examinations throughout 1999. The banking regulatory agencies have
asserted that year 2000 testing and certification is a key safety and soundness
issue in conjunction with regulatory examinations. Consequently, Capitol's or
its banks' failure to address appropriately the year 2000 issue could result in
supervisory action, including the reduction of the banks' supervisory ratings,
the denial of applications for expansion, or the imposition of civil money
penalties.
D-6
57
The Federal Financial Institutions Examination Council maintains an Internet
site that lists financial institutions which have been subject to enforcement
actions relating to year 2000 readiness. As of July 31, 1999, none of Capitol's
banks (including Macomb) are subject to enforcement actions for year 2000
readiness.
Impact of New Accounting Standards
A new accounting standard requiring the write-off of previously capitalized
start-up and preopening costs was implemented effective January 1, 1999.
Implementation of that accounting standard had no impact on the Bank's financial
statements in 1999.
FASB Statement No. 133, "Accounting For Derivative Instruments and Hedging
Activities", requires all derivatives to be recognized in financial statements
and to be measured at fair value. Gains and losses resulting from changes in
fair value would be included in income, or in comprehensive income, depending on
whether the instrument qualifies for hedge accounting and the type of hedging
instrument involved. This new standard will become effective in 2001 and,
because the Bank has typically not entered into derivative contracts either to
hedge existing risks or for speculative purposes, is not expected to have a
material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Bank's financial statements.
D-7
58
MACOMB COMMUNITY BANK
------
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
D-8
59
BALANCE SHEETS
MACOMB COMMUNITY BANK
June 30 December 31
1999 1998
---------------- ----------------
ASSETS (unaudited)
Cash and due from banks $ 2,408,644 $ 4,503,806
Interest-bearing deposits with banks 10,461,307 18,601,397
Federal funds sold 10,650,000 6,850,000
------------ -----------
Cash and cash equivalents 23,519,951 29,955,203
Investment securities
Available for sale, carried at market value 8,037,345 4,969,371
Held for long-term investment, carried at amortized
cost which approximates market value 228,200 175,400
----------- -----------
Total investment securities 8,265,545 5,144,771
Portfolio loans:
Commercial 40,893,140 32,612,991
Real estate mortgage 8,449,541 6,602,310
Installment 1,250,242 1,210,576
----------- -----------
Total portfolio loans 50,592,923 40,425,877
Less allowance for loan losses (507,000) (405,000)
----------- -----------
Net portfolio loans 50,085,923 40,020,877
Premises and equipment 481,523 509,014
Accrued interest income 391,246 295,453
Other assets 174,426 119,127
----------- -----------
TOTAL ASSETS $82,918,614 $76,044,445
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 8,007,011 $ 9,392,333
Interest-bearing 67,858,952 59,963,656
----------- -----------
Total deposits 75,865,963 69,355,989
Accrued interest on deposits and other liabilities 439,414 582,463
----------- -----------
Total liabilities 76,305,377 69,938,452
STOCKHOLDERS' EQUITY:
Common stock, $10.64 par value,
400,000 shares authorized;
issued and outstanding:
278,746 shares 2,965,857 2,965,857
Surplus 3,257,148 3,000,148
Retained earnings 411,627 119,467
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated other
comprehensive income) (21,395) 20,521
----------- -----------
Total stockholders' equity 6,613,237 6,105,993
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $82,918,614 $76,044,445
=========== ===========
See notes to interim financial statements.
D-9
60
STATEMENTS OF OPERATIONS (UNAUDITED)
MACOMB COMMUNITY BANK
Six Months Ended June 30
1999 1998
--------------- -----------
Interest income:
Portfolio loans (including fees) $2,070,678 $1,169,177
Taxable investment securities 152,695 144,036
Federal funds sold 349,765 294,065
Interest-bearing deposits with banks and other 249,038 163,260
---------- ----------
Total interest income 2,822,176 1,770,538
Interest expense:
Demand deposits 369,461 102,945
Savings deposits 12,924 7,214
Time deposits 1,234,430 911,438
Other 61
--------- ----------
Total interest expense 1,616,876 1,021,597
---------- ----------
Net interest income 1,205,300 748,941
Provision for loan losses 101,760 93,840
---------- ----------
Net interest income after
provision for loan losses 1,103,540 655,101
Noninterest income:
Service charges on deposit accounts 38,768 20,925
Fees from origination of non-portfolio residential mortgage
loans 44,359 24,215
Other 16,440 8,190
---------- ----------
Total noninterest income 99,567 53,330
Noninterest expense:
Salaries and employee benefits 348,210 265,066
Occupancy 77,514 74,731
Equipment rent, depreciation and maintenance
Deposit insurance premiums
Other 334,223 246,419
---------- ----------
Total noninterest expense 759,947 586,216
---------- ----------
Income before federal income taxes 443,160 122,215
Federal income taxes 151,000 42,000
---------- ----------
NET INCOME $ 292,160 $ 80,215
========== ==========
NET INCOME PER SHARE $ 1.05 $ 0.29
========== ==========
See notes to interim financial statements.
D-10
61
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
MACOMB COMMUNITY BANK
Accumulated
Other
Common Retained- Comprehensive
Stock Surplus Earnings Income Total
---------- ---------- --------- ------------- ----------
Six Months Ended June 30, 1998
- ------------------------------
Balances at January 1, 1998 $2,965,857 $ 742,148 $ (203,695) $ 11,560 $3,515,870
Supplemental capital infusions from Capitol
Bancorp Ltd. 1,155,000 1,155,000
Components of comprehensive income:
Net income for the period 80,215 80,215
Market value adjustment for investment
securities available for sale (net of tax
effect) (577) (577)
----------
Comprehensive income for the period 79,638
---------- ---------- ---------- -------- ----------
BALANCES AT JUNE 30, 1998 $2,965,857 $1,897,148 $ (123,480) $ 10,983 $4,750,508
========== ========== ========== ======== ==========
Six Months Ended June 30, 1999
- --------------------------------------------
Balances at January 1, 1999 $2,965,857 $3,000,148 $ 119,467 $ 20,521 $6,105,993
Supplemental capital infusions from Capitol
Bancorp Ltd. 257,000 257,000
Components of comprehensive income:
Net income for the period 292,160 292,160
Market value adjustment for investment
securities available for sale (net of tax
effect) (41,916) (41,916)
----------
Comprehensive income for period 250,244
---------- ---------- ---------- -------- ----------
BALANCES AT JUNE 30, 1999 $2,965,857 $3,257,148 $ 411,627 $(21,395) $6,613,237
========== ========== ========== ======== ==========
See notes to interim financial statements.
D-11
62
STATEMENTS OF CASH FLOWS (UNAUDITED)
MACOMB COMMUNITY BANK
Six Months Ended June 30
--------------------------------
1999 1998
------------- ------------
OPERATING ACTIVITIES
Net income for the period $ 292,160 $ 80,215
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 101,760 93,840
Depreciation of premises and equipment 41,035 38,263
Net accretion of investment security discounts (27,603) (41,741)
Increase in accrued interest income and other assets (129,500) (42,141)
Increase (decrease) in accrued interest on deposits and other
liabilities (143,049) 88,535
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 134,803 216,971
INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 500,000 1,030,000
Purchases of investment securities available for sale (3,656,680) (1,250,000)
Net increase in portfolio loans (10,166,806) (9,434,680)
Purchases of premises and equipment (13,543) (13,112)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (13,337,029) (9,667,792)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (11,895,883) 8,242,133
Net increase in certificates of deposit 18,405,857 7,929,378
Supplemental capital infusions from majority stockholder 257,000 1,155,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,766,974 17,326,511
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,435,252) 7,875,690
Cash and cash equivalents at beginning of period 29,955,203 15,871,632
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,519,951 $ 23,747,322
============ ============
See notes to interim financial statements.
D-12
63
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
MACOMB COMMUNITY BANK
Note A--Basis of Presentation
The accompanying condensed financial statements of Macomb Community
Bank have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The statements do, however, include all adjustments of a normal
recurring nature which Macomb considers necessary for a fair presentation of the
interim periods.
The results of operations for the six-month period ended June 30, 1999
are not necessarily indicative of the results to be expected for the year ending
December 31, 1999.
Note B--Implementation of New Accounting Standard
AICPA Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities, requires start-up, preopening and organizational costs to be charged
to expense when incurred. The initial application of this statement, which
became effective January 1, 1999, also requires the write-off of any such costs
previously capitalized. Implementation of this new statement had no effect on
the 1999 financial statements of Macomb Community Bank.
Note C--Prospective Impact of New Accounting Standards Not Yet Adopted
FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, requires all derivatives to be recognized in financial
statements and to be measured at fair value. Gains and losses resulting from
changes in fair value would be included in income or in comprehensive income,
depending on whether the instrument qualifies for hedge accounting and the type
of hedging instrument involved. This new standard will become effective in 2001
and, because Macomb Community Bank has not typically entered into derivative
contracts either to hedge existing risks or for speculative purposes, is not
expected to have a material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Macomb Community Bank's financial statements.
D-13
64
MACOMB COMMUNITY BANK
------
FINANCIAL STATEMENTS
PERIODS ENDED DECEMBER 31, 1998, 1997 AND 1996
D-14
65
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Macomb Community Bank
We have audited the accompanying balance sheets of Macomb Community Bank as of
December 31, 1998 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Macomb Community Bank at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
We have reviewed the accompanying statements of operations, changes in
stockholders' equity and cash flows of Macomb Community Bank for the period from
September 18, 1996 (date of inception) to December 31, 1996, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of Macomb
Community Bank.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the 1996 financial statements referred to above in order for them to
be in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
January 29, 1999
D-15
66
BALANCE SHEETS
MACOMB COMMUNITY BANK
December 31
------------------------------------
1998 1997
---------------- ----------------
ASSETS
Cash and due from banks $ 4,503,806 $ 2,843,598
Interest-bearing deposits with banks 18,601,397 2,528,034
Federal funds sold 6,850,000 10,500,000
------------- ------------
Cash and cash equivalents 29,955,203 15,871,632
Investment securities
Available for sale, carried at market value--Note B 4,969,371 4,916,159
Held for long-term investment, carried at amortized
cost which approximates market value 175,400
------------- ------------
Total investment securities 5,144,771 4,916,159
Portfolio loans--Note C:
Commercial 32,612,991 15,522,049
Real estate mortgage 6,602,310 3,304,968
Installment 1,210,576 718,656
------------- ------------
Total portfolio loans 40,425,877 19,545,673
Less allowance for loan losses (405,000) (196,000)
------------- ------------
Net portfolio loans 40,020,877 19,349,673
Premises and equipment--Note D 509,014 565,486
Accrued interest income 295,453 184,297
Other assets 119,127 122,861
------------- ------------
TOTAL ASSETS $ 76,044,445 $ 41,010,108
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 9,392,333 $ 8,023,562
Interest-bearing--Note G 59,963,656 29,203,866
------------- ------------
Total deposits 69,355,989 37,227,428
Accrued interest on deposits and other liabilities 582,463 266,810
------------- ------------
Total liabilities 69,938,452 37,494,238
STOCKHOLDERS' EQUITY--Note K:
Common stock, $10.64 par value,
400,000 shares authorized;
issued and outstanding:
278,746 shares 2,965,857 2,965,857
Surplus 3,000,148 742,148
Retained-earnings (deficit) 119,467 (203,695)
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated other
comprehensive income) 20,521 11,560
------------- ------------
Total stockholders' equity 6,105,993 3,515,870
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 76,044,445 $ 41,010,108
============= ============
See notes to financial statements.
D-16
67
STATEMENTS OF OPERATIONS
MACOMB COMMUNITY BANK
Period Ended
Year Ended December 31 December 31
------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
Interest income:
Portfolio loans (including fees) $ 2,860,288 $ 1,294,354 $ 112,339
Taxable investment securities 283,140 154,284 5,241
Federal funds sold 721,960 525,059 57,962
Interest-bearing deposits with banks and other 348,225 62,228 555
--------------- ---------------- ---------------
Total interest income 4,213,613 2,035,925 176,097
Interest expense:
Demand deposits 366,791 85,621 13,355
Savings deposits 16,925 6,341 460
Time deposits 2,032,566 988,978 38,594
Other 4,443
--------------- ---------------- ---------------
Total interest expense 2,416,282 1,080,940 56,852
--------------- ---------------- ---------------
Net interest income 1,797,331 954,985 119,245
Provision for loan losses--Note C 208,600 140,464 59,000
--------------- ---------------- ---------------
Net interest income after
provision for loan losses 1,588,731 814,521 60,245
Noninterest income:
Service charges on deposit accounts 44,939 29,649 433
Fees from origination of non-portfolio residential mortgage
loans 61,915
Other 17,344 10,145 1,370
--------------- ---------------- ---------------
Total noninterest income 124,198 39,794 1,803
Noninterest expense:
Salaries and employee benefits 565,256 413,216 117,377
Occupancy 155,619 146,542 38,627
Equipment rent, depreciation and maintenance 52,353 39,376 8,833
Deposit insurance premiums 3,903 1,816
Other 445,636 378,835 79,436
--------------- ---------------- ---------------
Total noninterest expense 1,222,767 979,785 244,273
--------------- ---------------- ---------------
Income (loss) before federal income taxes 490,162 (125,470) (182,225)
Federal income tax (benefit)--Note E 167,000 (42,000) (62,000)
--------------- ---------------- ---------------
NET INCOME (LOSS) $ 323,162 $ (83,470) $ (120,225)
=============== ================ ===============
NET INCOME (LOSS) PER SHARE $ 1.16 $ (.30) $ (.43)
=============== ================= ===============
See report of independent accountants and notes to financial statements.
D-17
68
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
MACOMB COMMUNITY BANK
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Surplus (Deficit) Income Total
------ ------- --------- ------ -----
Balances at September 1, 1996, beginning of period
$ 0 $ 0 $ 0 $ 0 $ 0
Issuance of 278,746 shares of common stock in
conjunction with formation of Bank 2,965,857 742,148 3,708,005
Components of comprehensive income (loss):
Net loss for the 1996 period (120,225) (120,225)
Market value adjustment (net of tax effect) for
investment securities available for sale (591) (591)
Total comprehensive income (loss) for -----------
1996 period (120,816)
----------- ----------- ---------- ---------- -----------
BALANCES AT DECEMBER 31, 1996 2,965,857 742,148 (120,225) (591) 3,587,189
Components of comprehensive income (loss):
Net loss for 1997 (83,470) (83,470)
Market value adjustment (net of tax effect) for
investment securities available for sale 12,151 12,151
-----------
Total comprehensive income (loss) for 1997 (71,319)
----------- ----------- ---------- ---------- -----------
BALANCES AT DECEMBER 31, 1997 2,965,857 742,148 (203,695) 11,560 3,515,870
Supplemental capital infusions from Capitol
Bancorp Ltd. 2,258,000 2,258,000
Components of comprehensive income:
Net income for 1998 323,162 323,162
Market value adjustment (net of tax effect) for
investment securities available for sale 8,961 8,961
-----------
Total comprehensive income for 1998 332,123
----------- ----------- ---------- ---------- -----------
BALANCES AT DECEMBER 31, 1998 $ 2,965,857 $ 3,000,148 $ 119,467 $ 20,521 $ 6,105,993
=========== =========== ========== ========== ===========
See report of independent accountants and notes to financial statements.
D-18
69
STATEMENTS OF CASH FLOWS
MACOMB COMMUNITY BANK
Year Ended December 31 Period Ended
------------------------------------ December 31
1998 1997 1996
----------------- ----------------- -----------------
OPERATING ACTIVITIES
Net income (loss) for the period $ 323,162 $ (83,470) $ (120,225)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Provision for loan losses 208,600 140,464 59,000
Depreciation of premises and equipment 77,789 74,329 17,776
Net accretion of investment security discounts (69,635) (57,215) (4,932)
Deferred income taxes (65,000) (42,000) (62,000)
Increase in accrued interest income and other assets (47,038) (158,035) (94,078)
Increase in accrued interest on deposits and other liabilities 315,653 218,219 91,591
------------- -------------- -------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 743,531 92,292 (112,868)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 2,780,000 500,000
Purchases of investment securities available for sale (2,925,400) (4,363,702) (972,795)
Net increase in portfolio loans (20,879,804) (13,727,634) (5,821,503)
Purchases of premises and equipment (21,317) (24,657) (632,934)
------------- -------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (21,046,521) (17,615,993) (7,427,232)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 16,542,845 3,725,660 7,570,590
Net increase in certificates of deposit 15,585,716 22,014,693 3,916,485
Net proceeds from issuance of common stock 3,708,005
Supplemental capital infusions from majority stockholder 2,258,000
------------- -------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,386,561 25,740,353 15,195,080
------------- -------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 14,083,571 8,216,652 7,654,980
Cash and cash equivalents at beginning of period 15,871,632 7,654,980 -0-
------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,955,203 $ 15,871,632 $ 7,654,980
============= ============== =============
See report of independent accountants and notes to financial statements.
D-19
70
NOTES TO FINANCIAL STATEMENTS
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation: Macomb Community Bank (the
"Bank") is a full-service commercial bank located in Clinton Township, Michigan.
The Bank commenced operations in September 1996. The Bank is 51% owned by
Capitol Bancorp Ltd., a bank holding company headquartered in Lansing, Michigan.
The Bank provides a full range of banking services to individuals, businesses
and other customers located in its community. A variety of deposit products are
offered, including checking, savings, money market, individual retirement
accounts and certificates of deposit. The principal market for the Bank's
financial services is the community in which it is located and the areas
immediately surrounding that community.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
Investment Securities: Investment securities available for sale are carried at
market value with unrealized gains and losses reported as a separate component
of stockholders' equity, net of tax effect. All other investment securities are
classified as held for long-term investment and are carried at amortized cost
which approximates market value (see Note B). Investments are classified at the
date of purchase based on management's analysis of liquidity and other factors.
The adjusted cost of specific securities sold is used to compute realized gains
or losses. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Loans, Credit Risk and Allowance for Loan Losses: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Substantially all portfolio loans are made to borrowers in the
Bank's geographic area. Consistent with the Bank's emphasis on business lending,
there are concentrations of credit in loans secured by commercial real estate,
equipment and other business assets. The maximum potential credit risk to the
Bank, without regard to underlying collateral and guarantees, is the total of
loans and loan commitments outstanding. Management reduces the Bank's exposure
to losses from credit risk by requiring collateral and/or guarantees for loans
granted and by monitoring concentrations of credit, in addition to recording
provisions for loan losses and maintaining an allowance for loan losses.
See report of independent accountants.
D-20
71
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the portfolio at the balance sheet
date. Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including potential impairment of individual loans
and concentrations of credit), past loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
Interest and Fees on Loans: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of loans
approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
Premises and Equipment: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
Other Real Estate: Other real estate comprises properties acquired through a
foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These
properties held for sale are carried at the lower of cost or estimated fair
value at the date acquired and are periodically reviewed for subsequent
impairment.
Trust Assets and Related Income: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Bank is not included in the
balance sheet because such property is not an asset of the Bank. Trust fee
income is recorded on the accrual method.
Federal Income Taxes: Deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted tax rates applicable
to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
income taxes of a change in tax laws or rates is recognized in income in the
period that includes the enactment date.
Net Income (Loss) Per Share: Net income (loss) per share is based on the
weighted average number of common shares outstanding (278,746 for all periods
presented).
See report of independent accountants.
D-21
72
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Comprehensive Income: "Comprehensive income", as that term is defined in FASB
Statement No. 130, is the sum of net income and certain other items which are
charged or credited to stockholders' equity. For the periods presented, the
Bank's only element of comprehensive income other than net income was the net
change in the market value adjustment for investment securities available for
sale. Accordingly, the elements and total of comprehensive income are shown
within the statement of changes in stockholders' equity presented herein.
Implementation of this new accounting standard in 1998 had no impact on the
Bank's financial position or results of operations.
NOTE B--INVESTMENT SECURITIES
Investment securities consisted of the following at December 31:
1998 1997
---------------------------------- ----------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------------- --------------- --------------- ---------------
Available for sale:
United States Treasury securities $ 2,438,279 $ 2,467,498 $ 3,398,645 $ 3,415,535
United States government agency
securities 2,000,000 2,001,873 1,000,000 1,000,624
States and political subdivisions 500,000 500,000 500,000 500,000
------------- ------------- ------------- -------------
4,938,279 4,969,371 4,898,645 4,916,159
------------- ------------- ------------- -------------
Held for long-term investment--
Federal Home Loan Bank stock 175,400 175,400
------------- ------------- ------------- -------------
$ 5,113,679 $ 5,144,771 $ 4,898,645 $ 4,916,159
============= ============= ============= =============
At December 31, 1998, no securities were pledged to secure public and trust
deposits and for other purposes as required by law.
Gross unrealized gains and losses of investment securities available for sale
were as follows at December 31:
1998 1997
---------------------------------- ----------------------------------
Gains Losses Gains Losses
--------------- --------------- --------------- ---------------
United States Treasury securities $ 29,219 $ 16,890 $
United States government agency
securities 3,749 $ 1,876 624
------------- -------------- ------------- -------------
$ 32,968 $ 1,876 $ 17,514 $ -0-
============= ============== ============= =============
There were no gross realized gains and losses from sales and maturities of
investment securities available for sale during the periods ended December 31,
1998 and 1997.
See report of independent accountants.
D-22
73
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE B--INVESTMENT SECURITIES--CONTINUED
Scheduled maturities of investment securities available for sale as of December
31, 1998 were as follows:
Estimated
Amortized Market
Cost Value
----------------- ----------------
Due in one year or less $ 1,982,807 $ 1,995,467
After one year, through five years 2,455,472 2,473,904
After five years 675,400 675,400
-------------- --------------
$ 5,113,679 $ 5,144,771
============== ==============
NOTE C--LOANS
Transactions in the allowance for loan losses are summarized below:
1998 1997 1996
----------------- ------------------ ----------------
Balance at beginning of period $ 196,000 $ 59,000 $ -0-
Provision charged to operations 208,600 140,464 59,000
Loans charged off (deduction) -- (3,464) --
Recoveries 400 -- --
---------------- ------------ --------------
$ 405,000 $ 196,000 $ 59,000
================ ============ ==============
At December 31, 1998 and 1997, impaired loans (i.e., loans for which there is a
reasonable probability that borrowers would be unable to repay all principal and
interest due under the contractual terms of the loan documents) were not
material.
NOTE D--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
1998 1997
----------------- ----------------
Leasehold improvements $ 501,184 $ 500,283
Equipment and furniture 177,724 157,308
------------- -----------
678,908 657,591
Less accumulated depreciation (169,894) (92,105)
------------- -----------
$ 509,014 $ 565,486
============= ===========
See report of independent accountants.
D-23
74
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE D--PREMISES AND EQUIPMENT--CONTINUED
The Bank rents office space under an operating lease. Rent expense under this
lease agreement approximated $94,000, $85,000 and $23,000 for the periods ended
December 31, 1998, 1997 and 1996, respectively. Future minimum rental payments
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 1998 aggregate $225,000 due as follows:
$102,000 in 1999, $105,000 in 2000 and $18,000 in 2001.
NOTE E--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
1998 1997 1996
---------------- ----------------- -----------------
Current $ 232,000 $ -0- $ -0-
Deferred (65,000) (42,000) (62,000)
------------- ----------- --------------
$ 167,000 $ (42,000) $ (62,000)
============== =========== ==============
No federal income taxes were paid during the periods presented.
Net deferred income tax assets consisted of the following at December 31:
1998 1997 1996
---------------- ----------------- -----------------
Net operating loss carryforward $ 38,000 $ 43,000
Allowance for loan losses $ 108,000 66,000 20,000
Net accretion of investment security discounts (26,000) (11,000)
Market value adjustment for investment securities
available for sale (11,000) (6,000)
Other, net 10,000 11,000 (1,000)
------------- ------------- --------------
Net deferred tax assets $ 81,000 $ 98,000 $ 98,000
============= ============= ==============
NOTE F--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Bank makes loans to officers and
directors of the Bank including their immediate families and companies in which
they are principal owners. At December 31, 1998 and 1997, total loans to these
persons approximated $4,471,000 and $2,408,000, respectively. During 1998,
$6,135,000 of new loans were made to these persons and repayments totaled
$4,072,000. Such loans are made at the Bank's normal credit terms.
See report of independent accountants.
D-24
75
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE F--RELATED PARTIES TRANSACTIONS--CONTINUED
Such officers and directors of the Bank (and their associates, family and/or
affiliates) are also depositors of the Bank. Such deposits are similarly made at
the Bank's normal terms as to interest rate, term and deposit insurance.
The Bank purchases certain data processing and management services from Capitol
Bancorp Ltd. Amounts paid for such services aggregated $279,000, $270,000 and
$45,000 for the periods ended December 31, 1998, 1997 and 1996, respectively.
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated
$35,402,000 and $22,915,000 as of December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits of $100,000 or
more were as follows:
1999 $ 35,297,252
2000 --
2001 104,748
---------------
Total $ 35,402,000
===============
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE H--EMPLOYEE BENEFIT PLANS
Subject to eligibility requirements, the Bank's employees participate in the
employee benefit plans of Capitol Bancorp Ltd. Amounts charged to expense by the
Bank for these defined contribution plans approximated $22,900 and $4,300 in
1998 and 1997, respectively (none in 1996).
See report of independent accountants.
D-25
76
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE I--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments at December
31 were as follows (in thousands):
1998 1997
------------------------------- -------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
Financial Assets:
Cash and cash equivalents $ 29,955 $ 29,955 $ 15,872 $ 15,872
Investment securities:
Available for sale 4,969 4,969 4,916 4,916
Held for long-term investment 176 176 -- --
--------- --------- --------- ---------
Total investment securities 5,145 5,145 4,916 4,916
Portfolio loans:
Fixed rate 23,328 23,340 11,534 11,550
Variable rate 17,098 17,093 8,012 7,949
--------- --------- --------- ---------
Total portfolio loans 40,426 40,433 19,546 19,499
Less allowance for loan losses (405) (405) (196) (196)
--------- --------- --------- ---------
Net portfolio loans 40,021 40,028 19,350 19,303
Financial Liabilities:
Deposits:
Noninterest-bearing deposits 9,392 9,392 8,023 8,023
Interest-bearing deposits
Demand accounts 18,447 18,666 3,273 3,283
Time certificates of deposit less
than $100,000 6,115 6,047 3,016 2,952
Time certificates of deposit
$100,000 or more 35,402 35,500 22,915 22,954
--------- --------- --------- ---------
Total interest-bearing deposits 59,964 60,213 29,204 29,189
--------- --------- --------- ---------
Total deposits 69,356 69,605 37,227 37,212
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates on financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest unless quoted market values or
other fair value information is more readily available. Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
See report of independent accountants.
D-26
77
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE J--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of Bank customers. Such loan commitments include
stand-by letters of credit, lines of credit, and various commitments for other
commercial, consumer and mortgage loans. Stand-by letters of credit, when
issued, commit the Bank to make payments on behalf of customers when certain
specified future events occur and are used infrequently ($231,000 and $475,000
outstanding at December 31, 1998 and 1997, respectively). Other loan commitments
outstanding consist of unused lines of credit and approved, but unfunded,
specific loan commitments ($6,558,000 and $4,948,000 at December 31, 1998 and
1997, respectively).
These loan commitments (stand-by letters of credit and unfunded loans) generally
expire within one year and are reviewed periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the Bank's normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
NOTE K--CAPITAL REQUIREMENTS
The Bank is subject to certain capital requirements. Federal financial
institution regulatory agencies have established certain risk-based capital
guidelines for banks. Those guidelines require all banks to maintain certain
minimum ratios and related amounts based on `Tier I' and `Tier II' capital and
`risk-weighted assets' as defined and periodically prescribed by the respective
regulatory agencies. Failure to meet these capital requirements can result in
severe regulatory enforcement action or other adverse consequences for a
depository institution, and, accordingly, could have a material impact on the
Bank's financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by regulatory agencies about
components, risk weighting and other factors.
As of December 31, 1998, the most recent notification received by the Bank from
regulatory agencies has advised that the Bank is classified as
"well-capitalized" as that term is defined by the applicable agencies. There are
no conditions or events since those notifications that management believes would
change the regulatory classification of the Bank.
Management believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
See report of independent accountants.
D-27
78
NOTES TO FINANCIAL STATEMENTS--CONTINUED
MACOMB COMMUNITY BANK
DECEMBER 31, 1998
NOTE K--CAPITAL REQUIREMENTS--CONTINUED
The Bank's various amounts of regulatory capital and related ratios as of
December 31, 1998 and 1997 are summarized below (amounts in thousands):
1998 1997
------------- ------------
Total capital to total assets:
Actual amount $ 6,106 $ 3,412
Ratio 8.00% 8.34%
Minimum required amount (8%) > $ 6,084 > $ 3,272
- -
Tier I capital to risk-weighted assets:
Actual amount $ 6,085 $ 3,400
Ratio 13.63% 15.66%
Minimum required amount (4%) > $ 1,786 > $ 869
- -
Combined Tier I and Tier II capital to risk weighted assets:
Actual amount $ 6,490 $ 3,596
Ratio 14.53% 16.56%
Minimum required amount (8%) > $ 3,573 > $ 1,737
Amount required to meet "Well-Capitalized" category - -
(10%) $ 4,466 $ 2,172
As a condition of charter approval, the Bank is required to maintain a ratio of
Tier I capital to total assets of not less than 8% and an allowance for loan
losses of not less than 1% of portfolio loans for the first three years of
operations.
See report of independent accountants.
D-28
79
Page D-29
BUDGET INCOME STATEMENT - MACOMB COMMUNITY BANK - SUMMARY FORM PAGE 1
- --------------------------------------------------------------------------------------------------------------------------
BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET BUDGET
NAME 01/1999 02/1999 03/1999 04/1999 05/1999 06/1999 07/1999
- --------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on portfolio loans 336,285 315,186 356,958 356,276 377,798 376,567 399,030
Taxable investment securities 28,024 26,897 28,590 28,206 29,193 29,132 30,159
Interest-bearing deposits with banks 57,694 57,694 57,694 57,694 57,694 57,694 57,694
Federal funds sold 57,058 48,768 50,936 46,352 44,862 40,479 38,796
Other interest income 0 0 0 0 0 0 0
Dividends 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total interest income 479,061 448,545 494,178 488,528 509,547 503,872 525,679
Interest expense:
Interest-bearing demand deposits 39,105 36,830 42,466 42,752 45,910 46,126 49,439
Savings deposits 2,083 1,899 2,121 2,071 2,159 2,108 2,198
Time deposits 223,990 198,578 215,928 209,168 216,383 209,312 216,253
Other Interest Expense 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total interest income 265,178 237,307 260,515 253,991 264,452 257,546 267,890
------- ------- ------- ------- ------- ------- -------
Net interest income 213,883 211,238 233,663 234,537 245,095 246,326 257,789
Provision for Loan Loss 16,000 16,000 16,000 16,000 16,000 16,000 16,000
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for Loan Loss 197,883 195,238 217,663 218,537 229,095 230,326 241,789
Noninterest income:
Service charges on deposit accounts 4,715 4,730 4,746 4,761 4,770 4,794 4,010
Realized gain (loss) on sale of sec 0 0 0 0 0 0 0
Other 8,503 8,532 8,559 8,589 8,610 8,646 8,674
------- ------- ------- ------- ------- ------- -------
Total noninterest income 13,218 13,262 13,305 13,350 13,396 13,440 13,484
Noninterest expense:
Salaries & employee benefits 57,750 57,925 58,101 58,280 58,458 58,638 58,817
Occupancy 13,270 13,288 13,307 13,326 13,345 13,363 13,382
Other 48,080 54,512 55,081 55,145 55,437 55,508 55,821
------- ------- ------- ------- ------- ------- -------
Total noninterest expense 119,100 125,725 126,489 126,751 127,240 127,509 128,020
------- ------- ------- ------- ------- ------- -------
Income before federal income taxe 92,001 82,775 104,479 105,136 115,251 116,257 127,253
Federal income taxes 31,288 28,144 35,523 35,746 39,185 39,527 43,266
------- ------- ------- ------- ------- ------- -------
NET INCOME 60,721 54,631 68,956 69,390 76,066 76,730 83,987
======= ======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------
BUDGET BUDGET BUDGET BUDGET BUDGET
NAME 08/1999 09/1999 10/1999 11/1999 12/1999 TOTAL
- ------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on portfolio loans 409,782 402,451 420,918 418,306 441,659 4,611,216
Taxable investment securities 30,017 29,288 30,217 30,069 31,035 350,827
Interest-bearing deposits with banks 57,694 57,069 55,923 54,943 54,483 683,970
Federal funds sold 35,767 31,658 29,427 25,274 23,001 472,378
Other interest income 0 0 0 0 0 0
Dividends 0 0 0 0 0 0
------- ------- ------- ------- ------- ---------
Total interest income 533,260 520,466 536,485 528,592 550,178 6,118,391
Interest expense:
Interest-bearing demand deposits 51,239 51,352 54,913 54,956 58,691 573,779
Savings deposits 2,217 2,164 2,255 2,201 2,293 25,769
Time deposits 219,266 213,962 221,429 215,178 222,442 2,581,889
Other Interest Expense 0 0 0 0 0 0
------- ------- ------- ------- ------- ---------
Total interest expense 272,722 267,478 278,597 272,335 283,426 3,181,437
------- ------- ------- ------- ------- ---------
Net interest income 260,538 252,988 257,808 256,257 266,752 2,936,954
Provision for Loan Loss 16,000 16,000 16,000 16,000 16,000 192,000
------- ------- ------- ------- ------- ---------
Net interest income after
provision for Loan Loss 244,538 236,988 241,888 240,257 250,752 2,744,954
Noninterest income:
Service charges on deposit accounts 4,025 4,842 4,857 4,874 4,890 57,622
Realized gain (loss) on sale of sec 0 0 0 0 0 0
Other 8,704 8,733 8,762 8,791 8,819 103,930
------- ------- ------- ------- ------- ---------
Total noninterest income 13,529 13,575 13,619 13,665 13,709 161,552
Noninterest expense:
Salaries & employee benefits 58,995 59,177 59,358 59,541 59,724 704,764
Occupancy 13,401 13,420 13,439 13,459 13,477 160,477
Other 55,927 55,792 60,832 60,838 61,131 674,104
------- ------- ------- ------- ------- ---------
Total noninterest expense 128,323 128,389 133,629 133,838 134,332 1,539,345
------- ------- ------- ------- ------- ---------
Income before federal income taxe 129,744 122,174 121,878 120,084 130,129 1,367,161
Federal income taxes 44,113 41,539 41,438 40,029 44,244 464,834
------- ------- ------- ------- ------- ---------
NET INCOME 85,631 80,635 80,440 79,255 85,805 902,327
======= ======= ======= ======= ======= =========
CAUTION: This Budget was compiled February, 1999 and does not necessarily
represent any actual results of operations. It is presented here
because it was part of the information shared between Macomb and
Capitol prior to the approval of the Plan of Share Exchange.
80
ANNEX E
FINANCIAL AND OTHER INFORMATION REGARDING CAPITOL BANCORP LTD.
The following items accompany this Proxy Statement/Prospectus as
mailed to the Shareholders of Macomb:
- Report on Form 10-Q for period ended June 30, 1999
- Report on Form 10-Q for period ended March 31, 1999
- Annual report to shareholders for year ended December 31, 1998
- Annual report on Form 10-K for year ended December 31, 1998
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 4, 1999
81
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561-571 of the Michigan Business Corporation Act, as amended
(the "MBCA"), grant the Registrant broad powers to indemnify any person in
connection with legal proceedings brought against him by reason of his present
or past status as an officer or director of the Registrant, provided that the
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Registrant, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The MBCA also gives the Registrant broad powers to indemnify any
such person against expenses and reasonable settlement payments in connection
with any action by or in the right of the Registrant, provided the person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, except that no indemnification may be made
if such person is adjudged to be liable to the Registrant unless and only to the
extent the court in which such action was brought determines upon application
that, despite such adjudication, but in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for reasonable
expenses as the court deems proper. In addition, to the extent that any such
person is successful in the defense of any such legal proceeding, the Registrant
is required by the MBCA to indemnify him against expenses, including attorneys'
fees, that are actually and reasonably incurred by him in connection therewith.
The Registrant's Articles of Incorporation contain provisions entitling
directors and executive officers of the Registrant to indemnification against
certain liabilities and expenses to the full extent permitted by Michigan law.
Under an insurance policy maintained by the Registrant, the directors
and officers of the Registrant are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits or
proceedings, which may be brought against them by reason of being or having been
such directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
Reference is made to the Exhibit Index at Page II-7 of the
Registration Statement.
(b) Financial Statement Schedules included in the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1998 is incorporated herein by reference.
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto that are
incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act");
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82
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this registration
statement (or) the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in this registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities
Act, if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this
registration statement or any material change to such
information in this Registration Statement; provided,
however, that the undertakings set forth in paragraphs
(1)(i) and (ii) above do not apply if the information
required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act") that are incorporated by reference
in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) The undersigned Registrant hereby undertakes, that, for purposes
of determining any liability under the Securities Act, each filing
of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d)
of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(C) The undersigned Registrant hereby undertakes:
(1) That, prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a
part of this Registration Statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable
registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph
(1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such
amendment is
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83
effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(D) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(E) The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated
by reference into the prospectus pursuant to Item 4, 10(b),
11, 13 of this Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by
first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the
effective date of the Registration Statement through the date
of responding to the request.
(2) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the Registration Statement when it became
effective.
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84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Lansing,
Michigan on September 15, 1999.
CAPITOL BANCORP LTD.
By: /s/ JOSEPH D. REID
-------------------------------------
JOSEPH D. REID
Chairman of the Board
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated on September 15, 1999.
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85
Signature Title
- --------- -----
/s/ JOSEPH D. REID * Chairman of the Board, President
- -------------------------------- and Chief Executive Officer,
JOSEPH D. REID Director (Principal Executive
Officer)
/s/ LEE W. HENDRICKSON Chief Financial Officer (Principal
- -------------------------------- Financial and Accounting Officer)
LEE W. HENDRICKSON
/s/ ROBERT C. CARR * Executive Vice President, Treasurer,
- -------------------------------- Director
ROBERT C. CARR
/s/ DAVID O'LEARY * Secretary, Director
- --------------------------------
DAVID O'LEARY
/s/ LOUIS G. ALLEN * Director
- --------------------------------
LOUIS G. ALLEN
/s/ PAUL R. BALLARD * Director
- --------------------------------
PAUL R. BALLARD
/s/ DAVID L. BECKER * Director
- --------------------------------
DAVID L. BECKER
/s/ DOUGLAS E. CRIST * Director
- --------------------------------
DOUGLAS E. CRIST
- -------------------------------- Director
JAMES C. EPOLITO
/s/ GARY A. FALKENBERG * Director
- --------------------------------
GARY A. FALKENBERG
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86
Signature Title
- --------- -----
- -------------------------------- Director
JOEL I. FERGUSON
/s/ KATHLEEN A. GASKIN * Director
- --------------------------------
KATHLEEN A. GASKIN
/s/ H. NICHOLAS GENOVA * Director
- --------------------------------
H. NICHOLAS GENOVA
- -------------------------------- Director
L. DOUGLAS JOHNS
- -------------------------------- Director
MICHAEL L. KASTEN
/s/ LEONARD MAAS * Director
- --------------------------------
LEONARD MAAS
/s/ LYLE W. MILLER * Director
- --------------------------------
LYLE W. MILLER
*By: /s/ Joseph D. Reid
----------------------------
Joseph D. Reid
Attorney-in-fact
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87
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Plan of Share Exchange (included in the Proxy Statement/Prospectus as Annex A).
5 Opinion of Strobl Cunningham Caretti & Sharp, P.C. as to the validity of the shares.
8 Tax Opinion of Strobl Cunningham Caretti & Sharp, P.C. (included in the Proxy Statement/Prospectus
as Annex C).
23.1a and b Consent of BDO Seidman, LLP.
23.2 Consent of Strobl Cunningham Caretti & Sharp, P.C. (included in Exhibit 5).
23.3 Consent of Strobl Cunningham Caretti & Sharp, P.C. (included in Exhibit 8).
23.4 Consent of JMP Financial, Inc.
24 Power of Attorney (included on the signature page of the Registration Statement).*
99 Form of proxy for the Special Meeting of Shareholders of Macomb Community Bank.*
- ---------------------
* Incorporated by reference from Registration Statement on Form S-4, File No:
333-86431, filed September 2, 1999
II-7