As filed with the Securities and Exchange Commission on February 12, 2002
Registration No. 333-73624
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4 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 6711 38-2761672
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
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)
Cristin Reid English, Esq.
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:
Terry Morris Roman, Esq. John Sharp, Esq.
Snell & Wilmer, L.L.P. Strobl Cunningham Caretti & Sharp P.C.
One Arizona Center 300 East Long Lake Road, Suite 200
Phoenix, AZ 85004-0001 Bloomfield Hills, MI 48304
(602) 382-6000 (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. [ ]
================================================================================
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 Proposed Maximum Proposed Maximum
Class Of Securities Being Amount To Be Offering Price Aggregate Offering Amount Of
Registered Registered (1) Per Share Price (2) Registration Fee
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Common stock (no par value) 2,719,858 N/A $37,092,335 $9,273 (3)
====================================================================================================
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(1) Based on 3,705,528 shares of common stock, no par value, of Sun Community
Bancorp, which is the maximum number of shares of Sun common stock
(excluding shares held by Capitol) that may be outstanding immediately
prior to the consummation of the exchange transaction, multiplied by the
proposed fixed exchange ratio of .734 shares of Capitol common stock for
each share of Sun 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 $10.01, the
average of the high and low price per share of Sun common stock, as
reported on the Nasdaq National Market on November 13, 2001, multiplied by
3,705,528, the maximum number of shares of Sun common stock as described in
Note 1 above.
(3) Previously remitted.
[SUN LOGO]
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On March 27, 2002
To the Shareholders of Sun Community Bancorp Limited:
A special meeting of the shareholders of Sun Community Bancorp Limited will
be held at the offices of Sun Community Bancorp Limited at 2777 East Camelback
Road, Suite 375, Phoenix, Arizona 85016 on March 27, 2002, 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 November 16, 2001, between Capitol Bancorp Limited and Sun
Community Bancorp Limited under which all shareholders of Sun (other than
Capitol) will exchange their common stock in Sun for common 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
shareholders' meeting or any adjournment or postponement.
Only shareholders of record at the close of business on February 15, 2002
are entitled to notice of, and to vote at, the meeting or any adjournment or
postponement.
You are cordially invited to attend the meeting of Sun'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 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/ Richard N. Flynn
Secretary
[CAPITOL LOGO]
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On March 28, 2002
To the Shareholders of Capitol Bancorp Limited:
A special meeting of the shareholders of Capitol Bancorp Limited will be
held at the offices of Capitol Bancorp Limited at 200 Washington Square North,
4th Floor, Lansing, Michigan 48933 on March 28, 2002, at 4:00 p.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 November 16, 2001, between Capitol Bancorp Limited and Sun
Community Bancorp Limited under which all shareholders of Sun (other than
Capitol) will exchange their common stock in Sun for common 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. Under Michigan corporate law, Capitol is
not required to obtain the approval of its common stock shareholders. Rules of
Nasdaq Stock Market, Inc., however, require shareholder approval when the
proposed transaction involves the issuance of 20% or more of the common stock of
the issuer. Capitol is also seeking its shareholder approval for the proposed
share exchange because of the inherent conflicts of interest which exist because
of shared management, common directors and other transactions and agreements
between Capitol and Sun.
2. To act on any other matters that may properly be brought before the
shareholders' meeting or any adjournment or postponement.
Only shareholders of record at the close of business on February 15, 2002
are entitled to notice of, and to vote at, the meeting or any adjournment or
postponement.
You are cordially invited to attend the meeting of Capitol'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 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/ David O'Leary
Secretary
PROXY STATEMENT/PROSPECTUS
PROPOSED PLAN OF SHARE EXCHANGE
The Boards of Directors of Sun Community Bancorp Limited and Capitol
Bancorp Limited have each approved a Plan of Share Exchange that contemplates
the exchange of the shares of Sun common stock held by all shareholders other
than Capitol for shares of Capitol common stock. Capitol currently has a
controlling interest in Sun's common stock. As a result of the exchange, Sun
will become a wholly-owned subsidiary of Capitol.
If the exchange is approved, each share of Sun common stock will be
converted into the right to receive Capitol common stock according to an
exchange ratio. The exchange ratio is calculated by multiplying the number of
shares of Sun common stock by a fixed exchange ratio of .734 Capitol shares for
each Sun share of common stock (excluding shares of Sun already owned by
Capitol). The exchange ratio is based on an assumed value of $10.497 for each
share of Sun common stock and a value of $14.301 for each share of Capitol
common stock. These assumed values are based on the arithmetic average of the
closing prices of the common stock of Sun and Capitol for the period of October
5, 2001 through November 2, 2001 as reported by the Nasdaq National Market. The
exchange ratio is fixed and is not subject to adjustment.
Capitol estimates that Capitol will issue approximately 2,719,858 shares of
Capitol common stock to Sun shareholders in the exchange. Those shares will
approximate 26% of the outstanding Capitol common stock after the exchange.
Capitol's common stock trades on the Nasdaq National Market System under the
symbol "CBCL." Sun's common stock currently trades on the Nasdaq National Market
System under the symbol "SCBL"; however, if the proposed share exchange is
approved and consummated, all of Sun's common stock will be owned by Capitol and
accordingly, Sun's shares will no longer be publicly traded or listed.
Sun's and Capitol's Boards of Directors have scheduled separate meetings of
their respective 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 shareholders' meetings.
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 BEGINNING ON PAGE 15 FOR
A DESCRIPTION OF VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING THE EXCHANGE OF
YOUR SUN 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.
- --------------------------------------------------------------------------------
This proxy statement/prospectus is dated February 15, 2002, and is first
being mailed to shareholders of Sun and Capitol on or about February 22, 2002.
1
TABLE OF CONTENTS
ANSWERS TO FREQUENTLY ASKED QUESTIONS....................................... 5
SUMMARY..................................................................... 8
Reasons for the Exchange.................................................. 8
Sun Shareholders Will Not Recognize Any Gain or Loss for US Income
Tax Purposes ........................................................... 9
Dissenters' Rights Are Not Available to Sun's or Capitol's Shareholders... 9
Financial Advisors Opined that the Exchange Transaction is Fair........... 9
Terms and Conditions of the Plan of Share Exchange........................ 9
Capitol's Acquisition Will Be Accounted for Under the Purchase Method
of Accounting .......................................................... 10
Record Date and Voting Power Applicable to Sun and Capitol Shareholders... 10
The Rights of Sun's Shareholders Will Change.............................. 10
The Shareholders' Meetings................................................ 10
Sun's and Capitol's Boards Recommend Shareholders Vote in Favor of the
Share Exchange ......................................................... 10
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPITOL............................. 11
SELECTED CONSOLIDATED FINANCIAL DATA OF SUN................................. 13
RISK FACTORS................................................................ 15
RECENT DEVELOPMENTS......................................................... 20
COMPARATIVE HISTORICAL, PRO FORMA AND PRO FORMA EQUIVALENT PER
SHARE INFORMATION......................................................... 24
CAPITALIZATION.............................................................. 25
DIVIDENDS AND MARKET FOR COMMON STOCK....................................... 26
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................... 27
INFORMATION ABOUT SUN....................................................... 27
Description of Sun's Business and Property................................ 27
Legal Proceedings......................................................... 37
Market Prices and Dividends on Sun's Common Stock......................... 37
Financial Statements of Sun............................................... 37
Selected Financial Data and Supplementary Financial Information........... 38
Cautionary Statement About Forward-Looking Statements..................... 38
Management's Discussion and Analysis of Financial Condition and Results
of Operations:
As of and for the Interim Periods Ended September 30, 2001 and 2000 .. 39
As of and for the Years Ended December 31, 2000, 1999 and 1998 ....... 47
Change in and Disagreements With Accountants on Accounting
and Financial Disclosure................................................ 56
Quantitative and Qualitative Disclosures About Market Risk................ 56
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...................... 56
THE EXCHANGE................................................................ 60
General................................................................... 60
Background of the Exchange................................................ 60
Sun's Reasons for the Exchange............................................ 61
Capitol's Reasons for the Exchange........................................ 61
Terms of the Plan of Share Exchange....................................... 61
Sun's Board Recommendation................................................ 62
Capitol's Board Recommendation............................................ 63
2
TABLE OF CONTENTS - Continued
Accounting Treatment...................................................... 64
Pro Forma Data............................................................ 64
Material Federal Income Tax Consequences.................................. 65
Regulatory Matters........................................................ 66
Dissenters' Rights Are Not Available...................................... 67
Federal Securities Laws Consequences; Stock Transfer Restrictions......... 67
OPINION OF SUN'S FINANCIAL ADVISOR.......................................... 68
OPINION OF CAPITOL'S FINANCIAL ADVISOR...................................... 74
THE CLOSING................................................................. 81
Effective Time............................................................ 81
Shares Held by Capitol.................................................... 81
Procedures for Surrender of Certificates; Fractional Shares............... 81
Fees and Expenses......................................................... 82
NASDAQ Stock Market Listing............................................... 82
Amendment and Termination................................................. 82
THE SHAREHOLDERS' MEETINGS.................................................. 83
Date, Time and Place...................................................... 83
Matters to be Considered at the Shareholders' Meetings.................... 83
Record Date; Stock Entitled to Vote; Quorum............................... 83
Votes Required............................................................ 83
Dissenters' Rights are not Available...................................... 84
Share Ownership of Sun's Management....................................... 84
Share Ownership of Capitol's Management................................... 85
Voting of Proxies......................................................... 85
General Information....................................................... 85
Solicitation of Proxies; Expenses......................................... 86
COMPARISON OF SHAREHOLDER RIGHTS............................................ 87
DESCRIPTION OF CAPITAL STOCK OF CAPITOL..................................... 88
Rights of Common Stock.................................................... 88
Shares Available for Issuance............................................. 88
Capitol's Trust-Preferred Securities...................................... 89
Anti-Takeover Provisions.................................................. 89
WHERE YOU CAN FIND MORE INFORMATION......................................... 91
LEGAL MATTERS............................................................... 92
EXPERTS..................................................................... 92
LIST OF ANNEXES
ANNEX A Plan of Share Exchange.......................................... A-1
ANNEX B Opinion of Sun's Financial Advisor.............................. B-1
ANNEX C Opinion of Capitol's Financial Advisor.......................... C-1
ANNEX D Tax Opinion of Strobl Cunningham Caretti & Sharp, P.C........... D-1
3
TABLE OF CONTENTS - Continued
FINANCIAL STATEMENTS OF SUN.................................................F-1
Condensed Consolidated Interim Financial Statements:
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 ....................................................F-2
Consolidated Statements of Income for the Nine Months
Ended September 30, 2001 and 2000.....................................F-3
Consolidated Statements of Changes in Stockholders' Equity for the
Nine Months Ended September 30, 2001 and 2000 ........................F-4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000 ....................................F-5
Notes to Consolidated Interim Financial Statements......................F-6
Audited Consolidated Financial Statements:
Report of Independent Auditors..........................................F-9
Consolidated Balance Sheets as of December 31, 2000 and 1999............F-10
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998................................F-11
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998 F-12
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998................................F-13
Notes to Consolidated Financial Statements..............................F-14
4
ANSWERS TO
FREQUENTLY ASKED QUESTIONS
Q: Why am I receiving these materials?
A: Sun's and Capitol's Board of Directors have each approved the exchange of
Sun's common stock not owned by Capitol for shares of common stock of
Capitol. The exchange requires the approval of Sun's shareholders. Under
Michigan corporate law, Capitol is not required to obtain the approval of
its common stock shareholders. Rules of Nasdaq Stock Market, Inc., however,
require shareholder approval when the proposed transaction involves the
issuance of 20% or more of the common stock of the issuer. Capitol is also
seeking its shareholder approval for the proposed share exchange because of
the inherent conflicts of interest which exist because of shared
management, common directors and other transactions and agreements between
Capitol and Sun. Sun and Capitol are sending these materials to each of
their respective shareholders to help them decide whether to approve the
exchange.
Q: What will Sun's shareholders receive in the exchange?
A: In the exchange, each outstanding share of Sun common stock will be
automatically converted into the right to receive Capitol common stock,
according to a fixed "exchange ratio". The exchange ratio is based on an
assumed value of $10.497 for each share of Sun common stock and a value of
$14.301 for each share of Capitol common stock. These assumed values are
based on the arithmetic average of the closing prices of the common stock
of Sun and Capitol for the period of October 5, 2001 through November 2,
2001 as reported by the Nasdaq Stock Market, Inc. Based on these relative
values, each Sun share would be exchanged for .734 shares of Capitol's
common stock, if the proposed share exchange is approved. The exchange
ratio is fixed and is not subject to adjustment.
Each Sun shareholder (except Capitol) will receive shares of Capitol common
stock in exchange for his, her or their Sun common stock calculated by
multiplying the number of shares of Sun common stock held by the
shareholder by the exchange ratio. Any fractional shares will be paid in
cash. In addition, outstanding stock options of Sun will be exchanged for
stock options of Capitol with the same vesting and expiration dates.
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 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 shareholders' meeting and
will ensure that your shares are voted if you later find you cannot attend
the 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 Secretary of Sun or Capitol, as
applicable, prior to the 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 shareholders' meeting, no later than March 15, 2002; or
- by attending the shareholders' meeting and voting in person.
5
Q: What vote is required to approve the exchange?
A. Sun's Board has decided to set the vote required for approval of the
exchange at a majority of the shares of Sun's common stock held by
shareholders other than Capitol. Capitol already holds 49.91% of Sun's
common stock (3,696,727 shares as of December 31, 2001), and will vote its
shares FOR the exchange. A majority of Sun's common stock held by
shareholders other than Capitol is 25.51% of all of Sun's common stock.
Therefore, 75.47% of Sun's common stock must be voted in favor of the
exchange for the exchange to be approved. This is far more than Arizona law
requires for approval of the exchange, but Sun's Board has decided that the
exchange should only take place if a majority of Sun's shareholders other
than Capitol approve the exchange. Sun's directors and executive management
hold 14.66% of Sun's common stock and have said they will vote FOR the
exchange. Capitol's directors and executive management who are not also
Sun's directors and executive management hold a nominal amount (less than
1%) of Sun's common stock. Capitol and Sun's and Capitol's directors and
executive management hold a total of about 65% of Sun's common stock, so
approval of the exchange by the holders of 75.47% of Sun's common stock is
not assured.
Capitol is not required under Michigan corporate law to obtain the approval
of its common stock shareholders. Capitol is seeking its shareholder
approval for the proposed share exchange because of the inherent conflicts
of interest which exist because of shared management, common directors and
other transactions and agreements between Capitol and Sun. A vote of the
majority of the outstanding shares of Capitol (or >50%) in favor of the
exchange will be required. Capitol's executive management and Board of
Directors hold 26.54% of the outstanding shares of Capitol common stock.
The majority of Capitol's Board of Directors have informally agreed to vote
their shares FOR approval of the Plan of Share Exchange; however, they are
under no obligation to vote in favor of the proposed share exchange.
Q: Should I send in my Sun stock certificates at this time?
A: No. If the proposed share exchange is approved, Capitol or Capitol's stock
transfer agent will send Sun shareholders written instructions for
exchanging their stock certificates.
Q: When do you expect to complete the exchange?
A: As quickly as possible after the shareholder meetings. Approval by Sun's
shareholders at the shareholders' meeting must be obtained first. Capitol
is also seeking approval by Capitol's shareholders, which is a condition to
completing the exchange. It is anticipated the exchange will be completed
by May 15, 2002.
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
delivered with this document. Certain exhibits are not included in those
documents; however, Capitol will provide you with copies of those exhibits,
without charge, upon written or oral request to:
Capitol Bancorp Limited
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
SHAREHOLDERS' MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN MARCH 15,
2002.
For more information on the matters incorporated by reference in this
document, see "Where You Can Find More Information".
6
WHO CAN ANSWER YOUR QUESTIONS?
If you have additional questions, you should contact:
Sun Community Bancorp Limited
2777 East Camelback Road, Suite 375
Phoenix, Arizona 85016
(602) 955-6100
Attention: Cristin Reid English
or
Capitol Bancorp Limited
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
Attention: Lee W. Hendrickson
If you would like additional copies of this
proxy statement/prospectus you should contact:
Capitol Bancorp Limited at the above address and phone number.
7
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 Limited is a bank holding company with headquarters located
at 200 Washington Square North, Fourth Floor, Lansing, Michigan 48933. Capitol's
telephone number is (517) 487-6555.
Capitol is a uniquely structured affiliation of community banks. It
currently has 27 wholly or majority-owned bank subsidiaries, including 14 bank
subsidiaries which are wholly or majority-owned directly or indirectly by Sun.
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 strategy is the model which was used for the
formation of Sun and its bank subsidiaries. Capitol and Sun are already closely
related in several important ways.
Sun Community Bancorp Limited is a bank holding company with its
headquarters at 2777 East Camelback Road, Suite 375, Phoenix, Arizona 85016.
Sun's telephone number is (602) 955-6100.
Sun is now and has been, since it commenced business, a controlled
subsidiary of Capitol. Sun commenced operations in June 1997. Capitol owns
49.91% of the outstanding shares of Sun common stock (3,696,727 shares as of
December 31, 2001). Sun's executive management and Board of Directors holds
14.66% of the outstanding shares of Sun common stock, or 27.01% of all shares
not held by Capitol. Capitol's executive management and Board of Directors that
are not executive management and directors of Sun hold less than 1% of the
outstanding shares of Sun's common stock. In addition to shares of Sun held by
Capitol and Capitol's executive management and directors, Capitol has an
agreement with Joseph D. Reid (Sun's and Capitol's Chairman and CEO) granting
Capitol assignment of a right to call stock options of Sun held by Joseph D.
Reid (see "Recent Developments").
Capitol's and Sun's operating strategies are to provide transactional,
processing and administrative support and mentoring to aid in the effective
growth and development of their banks. They provide 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.
Capitol and Sun have entered into a Plan of Share Exchange which, if
approved by both Sun's and Capitol's shareholders, would result in the exchange
of Sun's common stock (excluding shares held by Capitol) for shares of Capitol's
common stock.
It is not anticipated that any changes will be made to the directors or
management of Sun and Capitol as a result of the proposed share exchange.
REASONS FOR THE EXCHANGE (PAGE 61)
It is believed that the exchange will provide Sun's shareholders with
greater liquidity and flexibility because Capitol's common stock is publicly
traded and historically has been more actively traded than Sun's shares have
been in the past. The exchange will also provide Sun's shareholders with greater
diversification, since Capitol is active in more than one geographic area and
across a broader customer base. Capitol has been paying quarterly cash dividends
to its common shareholders (although there is no assurance such dividends will
continue in the future). Sun has never paid a cash dividend. In 2001, Capitol
has been paying quarterly cash dividends of $0.10 per share ($0.09 per share in
2000 and 1999). Future payment of cash dividends by Capitol, if any, is
dependent upon many variables and is subject to approval by Capitol's Board of
Directors.
8
SUN SHAREHOLDERS WILL NOT RECOGNIZE ANY GAIN OR LOSS FOR US INCOME TAX PURPOSES
(PAGE 65)
Strobl Cunningham Caretti & Sharp, P.C., has rendered its opinion that Sun
shareholders will not recognize any gain or loss for federal income tax purposes
on the exchange of their Sun shares for shares of Capitol's common stock, 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 D to this proxy statement/prospectus. Tax Counsel's opinion is
subject to certain assumptions which may limit its application in particular
instances.
Tax matters are very complicated, and the tax consequences of the exchange
to each Sun 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 ARE NOT AVAILABLE TO SUN'S OR CAPITOL'S SHAREHOLDERS (PAGE
67)
Holders of Sun common stock are not entitled to dissenters' rights under
Arizona law in connection with the exchange. This is because Sun's common stock
is listed on the Nasdaq National Market.
Michigan law does not provide any dissenters' rights to Capitol
shareholders who vote against the exchange.
FINANCIAL ADVISORS OPINED THAT THE EXCHANGE TRANSACTION IS FAIR (PAGE 68)
Sun retained Friedman, Billings, Ramsey & Co., Inc. as its financial
advisor and agent in connection with the exchange to render a financial fairness
opinion to the Sun shareholders. Friedman, Billings, Ramsey & Co., Inc. was paid
a fee in the amount of $150,000 for its work in rendering the fairness opinion.
In deciding to approve the exchange, Sun's board of directors 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
Sun common stock is fair from a financial point of view. Sun's Board of
Directors adopted the fairness opinion as its own when forming its
recommendation that Sun's shareholders vote for the exchange. The opinion is
attached as Annex B to this proxy statement/prospectus.
Capitol retained Stifel, Nicolaus & Company, Incorporated as its financial
advisor and agent in connection with the exchange to render a financial fairness
opinion to the Capitol shareholders. Stifel, Nicolaus & Company, Incorporated
was paid a fee in the amount of $65,000 for its work in rendering the fairness
opinion.
In deciding to approve the exchange, Capitol's board of directors
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 Capitol common stock is fair from a financial point of view.
Capitol's Board of Directors adopted the fairness opinion as its own when
forming its recommendation that Capitol's shareholders vote for the exchange.
The opinion is attached as Annex C to this proxy statement/prospectus.
TERMS AND CONDITIONS OF THE PLAN OF SHARE EXCHANGE (PAGE 61)
The Plan of Share Exchange is attached as Annex A to this proxy
statement/prospectus. If the plan of share exchange is approved, Sun's
shareholders will receive .734 shares of Capitol for each Sun share, based on a
fixed exchange ratio. You are encouraged to read the Plan of Share Exchange
because it is the legal document that governs the exchange.
As of the date of this proxy statement/prospectus, the following conditions
to consummation of the proposed exchange remain:
* approval by a majority of Sun's common stock (excluding shares held by
Capitol);
* approval by a majority of Capitol's common stock; and
* the SEC shall have declared effective the registration statement
registering the shares of Capitol common stock to be issued in the
exchange.
9
Sun and Capitol can jointly agree to terminate the plan of exchange at any
time without completing the exchange.
Sun can terminate the exchange if a majority of Sun's shareholders (other
than Capitol) fail to approve the exchange at Sun's shareholders' meeting or any
adjournment or postponement thereof; or a governmental authority prohibits the
exchange.
Capitol can terminate the exchange if a majority of Capitol's shareholders
fail to approve the exchange at Capitol's shareholders' meeting or any
adjournment or postponement thereof; or a governmental authority prohibits the
exchange.
CAPITOL'S ACQUISITION WILL BE ACCOUNTED FOR UNDER THE PURCHASE METHOD OF
ACCOUNTING (PAGE 64)
Capitol's acquisition of the shares of Sun not already owned by Capitol
will be accounted for under the purchase method of accounting. After the
exchange, 100% of Sun's results from operations will be included in Capitol's
income statement, as opposed to about 50%, prior to the exchange.
RECORD DATE AND VOTING POWER APPLICABLE TO SUN AND CAPITOL SHAREHOLDERS (PAGE
83)
Sun shareholders may vote at the Sun shareholders' meeting if they owned
shares of common stock of Sun at the close of business on February 15, 2002. At
the close of business on December 20, 2001, 3,705,528 shares of Sun common stock
were outstanding (excluding shares held by Capitol). For each share of Sun
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 shareholders' meeting on
the proposal to approve the Plan of Share Exchange.
Capitol shareholders may vote at the Capitol shareholders' meeting if they
owned shares of common stock of Capitol at the close of business on February 15,
2002. At the close of business on December 20, 2001, 7,825,689 shares of Capitol
common stock were outstanding. For each share of Capitol 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 shareholders' meeting on the proposal to
approve the Plan of Share Exchange.
THE RIGHTS OF SUN'S SHAREHOLDERS WILL CHANGE (PAGE 87)
Rights as a Sun shareholder are currently determined by Arizona law
relating to business corporations and by Sun's articles of incorporation and
by-laws. Rights as a Capitol shareholder are determined by Michigan law relating
to business corporations and by Capitol's articles of incorporation and by-laws.
See "Comparison of Shareholders Rights".
THE SHAREHOLDERS' MEETINGS (PAGE 83)
The meeting of Sun's shareholders will be held on March 27, 2002 at 9:00
a.m., local time, at the offices of Sun Community Bancorp Limited, 2777 East
Camelback Road, Suite 375, Phoenix, Arizona 85016. At the meeting, Sun's
shareholders will be asked to approve the Plan of Share Exchange.
The meeting of Capitol's shareholders will be held on March 28, 2002 at
4:00 p.m., local time, at the offices of Capitol Bancorp Limited, 200 Washington
Square North, 4th Floor, Lansing, Michigan 48933. At the meeting, Capitol's
shareholders will be asked to approve the Plan of Share Exchange.
SUN'S AND CAPITOL'S BOARDS RECOMMEND SHAREHOLDERS VOTE IN FAVOR OF THE SHARE
EXCHANGE (PAGE 62)
Sun's board of directors believes that the exchange is fair and in the best
interests of Sun's shareholders and Sun and recommends that Sun's shareholders
vote FOR approval of the share exchange.
Capitol's board of directors believes that the exchange is fair and in the
best interests of Capitol's shareholders and Capitol and recommends that
Capitol's shareholders vote FOR approval of the share exchange.
10
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPITOL
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, 2000, which
is incorporated herein by reference. The 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
September 30, 2001, which is incorporated herein by reference. See "Where You
Can Find More Information". The interim results include all adjustments of a
normal recurring nature that are, in the opinion of management, considered
necessary for a fair presentation. Interim results for the nine months ended
September 30, 2001 are not necessarily indicative of results which may be
expected in future periods, including the year ending December 31, 2001. BECAUSE
OF THE NUMBER OF BANKS ADDED THROUGHOUT THE PERIOD OF CAPITOL'S EXISTENCE, AND
BECAUSE OF THE DIFFERING OWNERSHIP PERCENTAGE OF BANKS INCLUDED IN THE
CONSOLIDATED AMOUNTS, HISTORICAL OPERATING RESULTS ARE OF LIMITED RELEVANCE IN
EVALUATING FINANCIAL PERFORMANCE AND PREDICTING CAPITOL'S FUTURE OPERATING
RESULTS.
Capitol's consolidated balance sheets as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended December 31, 2000, 1999 and 1998 are
incorporated herein by reference. The selected financial data provided below as
of and for the nine months ended September 30, 2001 and 2000 have been derived
from Capitol's consolidated financial statements which are incorporated herein
by reference. Results of operations data and selected balance sheet data as of
and for the years ended December 31, 1998, 1997 and 1996 were derived from
consolidated financial statements which are not incorporated 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 assets and liabilities of subsidiaries (including Sun) are
included in Capitol's consolidated balance sheet. Capitol's consolidated net
income, however, only includes its subsidiaries' (including Sun) 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.
CAPITOL BANCORP LIMITED
------------------------------------------------------------------------------------
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 30 YEARS ENDED DECEMBER 31
---------------------- ----------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED RESULTS OF OPERATIONS DATA:
Interest income $ 115,766 $ 95,481 $ 132,311 $ 93,602 $ 69,668 $ 49,549 $ 36,479
Interest expense 56,894 47,169 65,912 46,237 36,670 24,852 17,800
Net interest income 58,872 48,312 66,399 47,365 32,998 24,697 18,679
Provision for loan losses 5,637 4,996 7,216 4,710 3,523 2,049 1,196
Net interest income after provision
for loan losses 53,235 43,316 59,183 42,655 29,475 22,648 17,483
Noninterest income 6,994 4,374 6,137 4,714 3,558 2,157 1,705
Noninterest expense 47,358 38,888 52,846 40,257 26,325 16,721 12,307
Income before income tax expense,
minority interest and cumulative
effect of change in accounting
principle 12,871 8,802 12,474 7,112 6,708 8,445 6,881
Income tax expense 4,238 3,041 4,289 3,213 2,584 2,888 2,245
Income before minority interest and
cumulative effect of change in
accounting principle 8,633 5,761 8,185 3,899 4,124 5,557 4,636
Minority interest in net losses (income)
of consolidated subsidiaries (878) (33) (150) 1,707 504 243 106
Income before cumulative effect
of change in accounting
principle 7,755 5,728 8,035 5,606 4,628 5,557 4,636
Cumulative effect of change in
accounting principle (1) (197)
Net income 7,755 5,728 8,035 5,409 4,628 5,557 4,636
11
CAPITOL BANCORP LIMITED
----------------------------------------------------------------------------------------------
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 30 YEARS ENDED DECEMBER 31
------------------------ ------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
PER SHARE DATA:
Net income per common share:
Before cumulative effect of
accounting change:
Basic $ 1.00 $ 0.81 $ 1.14 $ 0.87 $ 0.74 $ 0.91 $ 0.85
Diluted 0.98 0.80 1.13 0.86 0.72 0.88 0.82
After cumulative effect of
accounting change:
Basic 1.00 0.81 1.14 0.84 0.74 0.91 0.85
Diluted 0.98 0.80 1.13 0.83 0.72 0.88 0.82
Cash dividends declared 0.30 0.27 0.36 0.36 0.33 0.30 0.25
Book value 9.96 8.81 9.18 8.08 7.77 7.22 7.43
Dividend payout ratio 30.61% 33.33% 31.58% 42.86% 43.63% 32.95% 29.05%
Weighted average number of
common shares outstanding 7,769 7,029 7,065 6,455 6,284 6,130 5,477
SELECTED BALANCE SHEET DATA:
Total assets $1,975,379 $1,568,423 $1,630,076 $1,305,987 $1,024,444 $ 690,556 $ 492,263
Investment securities 43,865 77,520 68,926 107,145 86,464 64,470 48,725
Portfolio loans 1,660,042 1,298,002 1,355,798 1,049,204 724,280 502,755 357,623
Allowance for loan losses (21,849) (16,415) (17,449) (12,639) (8,817) (6,229) (4,578)
Deposits 1,687,494 1,350,208 1,400,899 1,112,793 890,890 604,407 436,166
Debt obligations 77,437 53,075 58,150 47,400 23,600 6,500
Minority interests in
consolidated subsidiaries 67,182 63,860 62,575 54,593 27,576 11,020 391
Trust preferred securities 48,606 24,318 24,327 24,291 24,255 24,126 --
Stockholders' equity 77,902 63,210 70,404 54,668 49,292 45,032 40,159
PERFORMANCE RATIOS: (2)
Return on average equity 13.94% 12.96% 12.85% 10.41% 9.81% 13.05% 12.01%
Return on average assets 0.57% 0.53% 0.55% 0.47% 0.55% 0.96% 1.08%
Net interest margin (fully
taxable equivalent) 4.60% 4.79% 4.80% 4.44% 4.15% 4.54% 4.62%
Efficiency ratio (3) 71.90% 73.81% 72.85% 77.30% 70.63% 60.92% 60.38%
ASSET QUALITY:
Non-performing loans (4) $ 11,642 $ 6,611 $ 6,757 $ 4,124 $ 7,242 $ 4,011 $ 2,699
Allowance for loan losses to
non-performing loans 187.67% 248.30% 258.24% 306.47% 121.75% 155.30% 169.62%
Allowance for loan losses to
portfolio loans 1.32% 1.26% 1.29% 1.20% 1.22% 1.24% 1.28%
Non-performing loans to total
portfolio loans 0.70% 0.51% 0.50% 0.39% 1.00% 0.80% 0.75%
Net loan losses to average
portfolio loans 0.11% 0.10% 0.20% 0.10% 0.15% 0.09% 0.10%
CAPITAL RATIOS:
Average equity to average assets 4.11% 4.02% 4.26% 4.46% 5.36% 7.22% 8.97%
Tier 1 risk-based capital ratio 10.69% 11.26% 11.10% 10.78% 13.42% 14.26% 11.91%
Total risk-based capital ratio 12.12% 12.51% 12.35% 11.62% 14.60% 16.61% 12.88%
Leverage ratio 3.94% 4.03% 4.32% 4.35% 4.88% 6.65% 8.16%
- ----------
(1) Accounting change relates to new accounting standard which required
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.
12
SELECTED CONSOLIDATED FINANCIAL DATA OF SUN
The consolidated financial data below summarizes historical consolidated
financial information for the periods indicated and should be read in
conjunction with the financial statements for the year ended December 31, 2000,
which appear elsewhere in this proxy statement/prospectus. The consolidated
financial data below for the interim periods indicated has been derived from,
and should be read in conjunction with, Condensed Consolidated Interim Financial
Statements, which appear elsewhere in this proxy statement/prospectus. See
"Where You Can Find More Information". The interim results include all
adjustments of a normal recurring nature that are, in the opinion of management,
considered necessary for a fair presentation. Interim results for the nine
months ended September 30, 2001 are not necessarily indicative of results which
may be expected in future periods, including the year ending December 31, 2001.
BECAUSE OF THE NUMBER OF BANKS ADDED THROUGHOUT THE PERIOD OF SUN'S EXISTENCE,
AND BECAUSE OF THE DIFFERING OWNERSHIP PERCENTAGE OF BANKS INCLUDED IN THE
CONSOLIDATED AMOUNTS, HISTORICAL OPERATING RESULTS ARE OF LIMITED RELEVANCE IN
EVALUATING FINANCIAL PERFORMANCE AND PREDICTING SUN'S FUTURE OPERATING RESULTS.
Sun's consolidated balance sheets as of December 31, 2000 and 1999, and the
related statements of operations, changes in stockholders' equity and cash flows
for the years ended December 31, 2000, 1999 and 1998 which appear elsewhere in
this proxy statement/prospectus. The selected financial data provided below as
of and for the nine months ended September 30, 2001 and 2000 have been derived
from Sun's consolidated financial statements which appear elsewhere in this
proxy statement/prospectus. Results of operations data and selected balance
sheet data as of and for the years ended December 31, 1998, 1997 and 1996 were
derived from consolidated financial statements which are not presented 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 assets and liabilities are included in Sun's consolidated
balance sheet. Sun's consolidated net income, however, only includes its
subsidiaries' 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, Sun will
only reflect that loss based on its ownership percentage. Conversely, when banks
generate income, Sun will only reflect that income based on its ownership
percentage.
SUN COMMUNITY BANCORP LIMITED
------------------------------------------------------------------------------
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 30 YEARS ENDED DECEMBER 31
-------------------- -------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED RESULTS OF OPERATIONS DATA:
Interest income $ 43,511 $ 27,499 $ 40,005 $ 17,920 $ 7,344 $ 2,871 $ 354
Interest expense 16,865 9,558 14,417 5,368 2,280 914 123
Net interest income 26,646 17,941 25,588 12,552 5,064 1,957 231
Provision for loan losses 2,770 2,667 3,926 1,753 379 268 49
Net interest income after provision
for loan losses 23,876 15,274 21,662 10,799 4,685 1,689 182
Noninterest income 1,146 695 1,011 759 334 125 10
Noninterest expense 22,210 15,579 21,841 14,503 5,330 2,037 440
Income (loss) before income tax
expense, minority interest and
cumulative effect of change in
accounting principle 2,813 390 832 (2,945) (311) (109) (248)
Income tax expense (benefit) 899 134 305 (529) 29 (33) (84)
Income (loss) before minority interest
and cumulative effect of change in
accounting principle 1,914 255 527 (2,417) (340) (72) (164)
Minority interest in net losses (income)
of consolidated subsidiaries (462) 250 280 1,210 397 118 --
Income (loss)before cumulative effect
of change in accounting principle 1,452 505 807 (1,207) 57 (72) (164)
Cumulative effect of change in
accounting principle (1) (386)
Net income (loss) 1,452 505 807 (1,593) 57 (72) (164)
13
SUN COMMUNITY BANCORP LIMITED
---------------------------------------------------------------------------------------
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 30 YEARS ENDED DECEMBER 31
---------------------- -------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PER SHARE DATA:
Net income (loss) per common share:
Before cumulative effect of
change in accounting principle(1):
Basic $ 0.25 $ 0.09 $ 0.14 $ (0.26) $ 0.02 $ (0.05) $ (0.14)
Diluted 0.25 0.09 0.14 (0.26) 0.02 (0.05) (0.14)
After cumulative effect of
change in accounting principle(1):
Basic 0.25 0.09 0.14 (0.34) 0.02 (0.05) (0.14)
Diluted 0.25 0.09 0.14 (0.34) 0.02 (0.05) (0.14)
Cash dividends paid -- -- -- -- -- -- --
Book value--historical 9.58 9.23 9.29 9.09 6.92 5.10 4.51
Pro forma equivalent book value
per Capitol share (2) 8.40 N/A N/A N/A N/A N/A N/A
Weighted average number of
common shares outstanding 5,765 5,559 5,591 4,674 2,853 1,593 1,149
SELECTED BALANCE SHEET DATA:
Total assets $ 732,824 $ 476,558 $ 526,833 $ 300,390 $ 135,578 $ 55,007 $ 17,276
Investment securities 13,185 13,609 13,609 35,440 12,923 11,534 10,872
Portfolio loans 593,393 376,933 422,344 206,232 68,080 31,236 4,850
Allowance for loan losses (7,903) (4,632) (5,440) (2,371) (696) (317) (49)
Deposits 633,581 393,776 442,563 225,007 98,782 42,899 12,021
Debt obligations 8,288 1,050 -- -- -- -- --
Minority interests in
consolidated subsidiaries 25,887 25,321 27,246 21,384 9,411 2,011 --
Stockholders' equity 59,751 52,568 52,694 50,003 26,627 9,690 5,189
PERFORMANCE RATIOS: (3)
Return on average equity 3.44% 1.31% 1.57% -- 0.34% -- --
Return on average assets 0.31% 0.17% 0.20% -- 0.06% -- --
Net interest margin (fully
taxable equivalent) 4.47% 5.25% 4.91% 4.84% 4.51% 4.51% 1.33%
Efficiency ratio (4) 79.92% 83.60% 82.11% 108.96% 98.74% 97.83% 182.57%
ASSET QUALITY:
Non-performing loans (5) $ 3,330 $ 1,664 $ 1,807 $ 34 -- -- --
Allowance for loan losses to
non-performing loans 237.33% 278.37% 301.05% -- -- -- --
Allowance for loan losses to
portfolio loans 1.33% 1.23% 1.29% 1.15% 1.02% 1.01% 1.30%
Non-performing loans to total
portfolio loans 0.56% 0.44% 0.43% 0.02% -- -- --
Net loan losses to average
portfolio loans 0.08% 0.19% 0.27% -- -- -- --
CAPITAL RATIOS:
Average equity to average assets 8.93% 13.20% 12.27% 18.10% 18.35% 20.47% 8.24%
Tier 1 risk-based capital ratio 12.99% 19.06% 17.74% 25.71% 42.43% 11.91% 9.80%
Total risk-based capital ratio 14.24% 20.21% 18.96% 26.56% 43.25% 12.88% 10.91%
Leverage ratio 8.15% 11.03% 10.00% 16.65% 19.64% 8.16% 7.16%
- ----------
N/A - Not applicable
(1) Accounting change relates to a new accounting standard which required
write-off of previously capitalized start-up costs as of January 1, 1999.
(2) Based on the proposed fixed exchange ratio of .734 shares of Capitol for
each share of Sun.
(3) These ratios are annualized for the periods indicated.
(4) Efficiency ratio is computed by dividing noninterest expense by the sum of
net interest income and noninterest income.
(5) Non-performing loans consist of loans on nonaccrual status and loans more
than 90 days delinquent.
14
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 SUN'S 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 THAT COULD
NEGATIVELY AFFECT THE AVAILABILITY OF EARNINGS TO SUPPORT FUTURE GROWTH.
Several of Capitol's (and Sun's) bank subsidiaries are less than three
years old and Capitol's oldest bank is slightly less than twenty years 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.
Current accounting rules require immediate write-off, rather than capitalization
and amortization, 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.
IF CAPITOL IS UNABLE TO MANAGE ITS GROWTH, ITS ABILITY TO PROVIDE QUALITY
SERVICES TO CUSTOMERS COULD BE IMPAIRED AND CAUSE ITS CUSTOMER AND EMPLOYEE
RELATIONS TO SUFFER.
Capitol and Sun have rapidly and significantly expanded their operations
and anticipate that further expansion will be required to realize their growth
strategies. Capitol's (and Sun's) rapid growth has placed significant demands on
its management and other resources which, given its expected future growth rate,
are likely to continue. Capitol's future growth and revenue will be negatively
impacted if it is unable to provide quality service to its customers, or to
manage future growth; Capitol will need to attract, hire and retain highly
skilled and motivated officers and employees and expand 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, WHICH
COULD SEVERELY LIMIT CAPITOL'S EXPANSION OPPORTUNITIES.
Capitol's growth strategy includes the addition of 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.
15
CAPITOL'S (AND SUN'S) SMALL SIZE MAY MAKE IT DIFFICULT TO COMPETE WITH LARGER
INSTITUTIONS BECAUSE CAPITOL (AND SUN) ARE NOT ABLE TO COMPETE WITH LARGE BANKS
IN THE OFFERING OF SIGNIFICANTLY LARGER LOANS.
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 (and Sun'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. The inability to offer larger loans limits the revenues that can
be earned from interest amounts charged on larger loan balances.
Capitol's (and Sun'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 and depositors in those large
markets that are dominated by substantially larger regulated and unregulated
financial institutions.
IF CAPITOL CANNOT RECRUIT ADDITIONAL HIGHLY QUALIFIED PERSONNEL, CAPITOL'S
CUSTOMER SERVICE COULD SUFFER, CAUSING ITS CUSTOMER BASE TO DECLINE.
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. Sun is also a bank holding company and regulated primarily by the
Federal Reserve Board. Capitol's and Sun's current bank affiliates are regulated
primarily by the state banking regulators and the FDIC.
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.
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.
16
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, which could limit its ability to increase revenue.
THE BANKS' ALLOWANCES FOR LOAN LOSSES MAY PROVE INADEQUATE TO ABSORB ACTUAL LOAN
LOSSES, WHICH MAY ADVERSELY IMPACT NET INCOME OR INCREASE OPERATING 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 at the balance sheet date. Management's estimates are
used to determine the allowance and 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 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
future loan losses could increase significantly. No assurance can be provided
that the allowance will be sufficient to cover actual future loan losses should
such losses be realized.
Loan loss experience, which is helpful in estimating the requirements for
the allowance for loan losses at any given balance sheet date, has been minimal
at many of Capitol's (and Sun's) banks. Because many of Capitol's (and Sun's)
banks are young, they do not have seasoned loan portfolios, and it is likely
that the ratio of the allowance for loan losses to total loans may need to be
increased in future periods as the loan portfolios become more mature and loss
experience evolves. 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 may adversely impact net income
or increase operating losses.
Widespread media reports of concerns about the health of the domestic
economy have continued throughout 2001. While local economic conditions appear
to indicate a weakening environment, Capitol's loan losses in this interim 2001
period have increased only slightly in comparison to the level with the prior
year's period. In 2001, however, nonperforming loans have increased and it is
anticipated that levels of nonperforming loans and related loan losses may
increase as economic conditions, locally and nationally, evolve.
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 allowance 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 would have a negative impact on Capitol's
operating results.
CAPITOL'S COMMERCIAL LOAN CONCENTRATION TO SMALL BUSINESSES INCREASES THE RISK
OF DEFAULTS BY BORROWERS AND SUBSTANTIAL CREDIT LOSSES COULD RESULT, CAUSING
SHAREHOLDERS TO LOSE THEIR INVESTMENT IN CAPITOL'S COMMON STOCK.
Capitol's (as well as Sun's) banks make various types of loans, including
commercial, consumer, residential mortgage and construction loans. Capitol's (as
well as Sun'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 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, causing shareholders to lose their entire investment in Capitol's common
stock.
17
IN 2001, THE OPEN MARKET COMMITTEE OF THE FEDERAL RESERVE BOARD (FRBOMC) HAS
TAKEN UNPRECEDENTED ACTIONS TO SIGNIFICANTLY REDUCE INTEREST RATES AND DECREASES
IN INTEREST RATES MAY ADVERSELY AFFECT CAPITOL'S NET INTEREST INCOME.
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.
In January 2001, the FRBOMC decreased interbank interest rates on two
separate dates, for a total decrease of 100 basis points. In March 2001, another
50 basis points decrease was initiated by the Federal Reserve, followed by
decreases of 50 basis points in both April and May 2001 and 25 basis points in
June 2001. In the third quarter of 2001, the Federal Reserve decreased interest
rates 25 basis points in August and 50 basis points in September, followed by a
reduction of 50 basis points in early November 2001 and one final 2001 reduction
of 25 basis points in December.
Because variable rate loans reprice more rapidly than interest-bearing
deposits, such market interest rate decreases compressed net interest margins at
Capitol's banks in 2001. As the FRBOMC continues to influence interest rates and
other economic policy in 2001 and beyond, including the potential of additional
rate decreases, net interest margins may become more compressed (having an
adverse impact on earnings) as the year progresses, and thereafter.
CHANGES IN THE YIELD CURVE. Changes in the difference between short-term
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.
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 (and Sun'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.
CAPITOL HAS DEBT SECURITIES OUTSTANDING WHICH MAY PROHIBIT FUTURE CASH DIVIDENDS
ON CAPITOL'S COMMON STOCK OR OTHERWISE ADVERSELY AFFECT REGULATORY CAPITAL
COMPLIANCE.
As of September 30, 2001, Capitol had notes payable to an unaffiliated bank
outstanding in the amount of approximately $14 million. Under this credit
facility, additional borrowings of $20 million are permitted, subject to certain
conditions. Capitol is reliant upon its bank subsidiaries' earnings and
dividends to service this debt obligation which may be inadequate to service the
obligations. In the event of violation of the covenants relating to the credit
facility, or due to failure to make timely payments of interest and debt
principal, the lender may terminate the credit facility. In addition, upon such
occurrences, dividends on Capitol's common stock may be prohibited or Capitol
may be otherwise unable to make future dividends payments or obtain replacement
credit facilities.
Capitol also has three series of trust-preferred securities outstanding,
totaling about $50 million, which are treated as capital for regulatory ratio
compliance purposes. Although these securities are viewed as capital for
regulatory purposes, they are debt securities which have numerous covenants and
other provisions which, in the event of noncompliance, could have an adverse
effect on Capitol. For example, these securities permit Capitol to defer the
periodic payment of interest for various periods, however, if such payments are
deferred, Capitol is prohibited from paying cash dividends on its common stock
during deferral periods and until deferred interest is paid. Future payment of
interest is dependent upon Capitol's bank subsidiaries' earnings and dividends
which may be inadequate to service the obligations. Continued classification of
these securities as elements of capital for regulatory purposes is subject to
future changes in regulatory rules and regulations and the actions of regulatory
agencies, all of which is beyond the control or influence of Capitol.
18
BOTH CAPITOL AND SUN'S BANK SUBSIDIARIES HAVE DECENTRALIZED MANAGEMENT WHICH
COULD HAVE A NEGATIVE IMPACT ON THE RATE OF GROWTH AND PROFITABILITY OF CAPITOL,
SUN, AND THEIR BANK SUBSIDIARIES.
Capitol and Sun's bank subsidiaries have independent boards of directors
and management teams. This decentralized structure gives the banks control over
the day-to-day management of the institution including the selection of
management teams, the pricing of loans and deposits, marketing decisions and the
strategy in handling problem loans. This decentralized structure may impact
Capitol and Sun's ability to uniformly implement holding company strategy at the
bank level. It may slow Capitol and Sun's ability to react to changes in
strategic direction due to outside factors such as rate changes and changing
economic conditions. The structure may cause additional management time to be
spent on internal issues and could negatively impact the growth and
profitability of the banks individually and the holding company.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
19
RECENT DEVELOPMENTS
Capitol and Sun have had similar strategies for the development and
formation of bank start-ups. Capitol has, since the formation of its first bank
(circa 1982), expanded to a total of 13 banks in the states of Michigan and
Indiana. Of the 13 banks, Capitol or its management were involved in the
start-up of 12; one became an affiliate through a purchase transaction.
Capitol's expansion into the Southwestern region of the United States was
made initially through its involvement in the formation of Bank of Tucson in
1996. Bank of Tucson subsequently became a subsidiary of Sun through a share
exchange transaction and, as a result, Sun then became a subsidiary of Capitol.
In periods after 1997, Sun embarked on the development of a total of 14 banks in
the states of Arizona, California, Nevada and New Mexico.
During the past five years, Capitol (and Sun, as applicable) have started
new banks using a similar strategy. Because Sun was formed by Capitol, and
Capitol and Sun share management and common systems, Sun's start-up banks are
designed and formed using Capitol's strategy and design for start-up banks.
These start-up banks are, by design, intended to be relatively small and single
location institutions which are locally managed, but share the efficiencies of
common data processing, accounting and risk management. These start-up banks
usually are organized around one or more key management personnel, the most
senior one becoming the new banks' president.
It is this future leadership of a new bank in formation which will be the
primary influence on selecting prospective bank directors, the new banks'
location and the business focus of the proposed bank. The person selected to
become the new banks' president is usually a well seasoned commercial banker who
may not have been a bank president previously, but has significant lending
experience and is a leader in the local business community. The seeking-out of
this management talent happens in a number of ways through a combination of
word-of-mouth, bankers seeking new opportunities (particularly in the context of
the adverse consequences of mega-mergers) or community business leaders
exploring the possibilities of forming a new bank in their community, but
needing the experience and resources that Capitol or Sun can provide in
development of a new community bank.
Each of these new banks are formed as separately chartered and regulated
commercial banks. Capitol or Sun, as the case may be, purchases at least 51% (or
sometimes a higher percentage) of the new banks' common stock. This permits the
bank holding company to include the banks in its financial statements as a
consolidated subsidiary. It also gives the bank holding company a controlling
voting interest in such things as the election of directors for the bank and
other matters routinely subject to a vote of the banks' shareholders. Although
Capitol or Sun have this voting control over the election of directors for these
banks, each bank's board of directors are comprised mainly of local business
leaders. The banks' boards of directors, and the banks' management, have full
authority in credit decisions, product pricing and other matters impacting the
delivery of banking services in that community by that bank. Product design,
data processing, accounting, financial reporting and risk management are
services provided to the banks by Capitol or Sun on a fee basis.
For the portion of the new banks' start-up capital not provided by Capitol
or Sun (that is, 49% or less, a minority interest), those funds are obtained
through an exempt offering of common stock of the bank, mainly within the banks'
business community. Capitol (or Sun, as the case may be) seeks minority
interests in its start-up banks to gain local capital investment in its
community banks. Local investment at the outset of a start-up community bank
draws more enthusiasm and potential customers than would occur in a branch or
wholly-owned bank start-up. This strategy also benefits Capitol (or Sun, as the
case may be) by leveraging its capital resources and minimizing the adverse
earnings impact of early-period operating losses of start-up banks, because
Capitol (and Sun) recognize those losses to the extent of their ownership of the
banks.
Although there is no obligation to do so, Capitol or Sun has, on a
case-by-case basis, offered those minority shareholders an opportunity to
exchange their shares in the bank at a later date for shares of the bank holding
company having the majority interest in that bank. These exchange offers, which
are subject to a vote of the respective bank's minority shareholders, have
usually been made near the bank's third anniversary of commencing operations.
These exchange offers have been based on an exchange ratio of 150% of the
respective banks' adjusted book value per share. The exchange ratio is
determined by the board of directors of the bank holding company making the
exchange offer.
20
Capitol's and Sun's boards of directors determined, earlier in 2001, to
reduce the annual number of new bank start-ups in the near term in contrast to
the preceding three years. This decision was based, in part, on the objective of
reducing the impact of start-up costs and early-period operating losses which
tend to negatively impact consolidated earnings.
In June 2001, Capitol entered into a stock option call agreement with
Joseph D. Reid, Capitol's (and Sun's) Chairman and Chief Executive Officer. This
agreement assigns Capitol a right to call stock options of Sun held by Joseph D.
Reid. The call agreement has the effect of permitting Capitol to exercise such
stock options contingent upon a directive from the Federal Reserve Board
requiring Capitol to increase its ownership position in Sun. As of November 16,
2001, no such directive has been issued by the Federal Reserve Board. The effect
of the agreement is that Capitol could currently increase its ownership in Sun
to materially exceed 50%. It is anticipated that this agreement will be
cancelled upon completion of the proposed exchange.
Additional expansion through the development of new banks in the states of
California and Nevada is currently underway by Sun or its subsidiary bank
development entities.
Camelback Community Bank reached its 36th month of operation in May 2001.
In June 2001, Sun offered the minority owners of Camelback an opportunity to
exchange their Camelback shares (about 45%) for shares of Sun. The exchange
ratio was based on 150% of Camelback's adjusted book value and was completed
effective June 30, 2001. As a result of the share exchange, the minority owners
of Camelback became shareholders of Sun. About 280,500 new shares of Sun's
common stock were issued in the Camelback share exchange transaction. Effective
September 30, 2001, Sun entered into a similar share exchange transaction with
the minority shareholders (about 49%) of Southern Arizona Community Bank
(previously a majority-owned subsidiary of Sun), issuing about 282,600 new
shares of Sun's common stock.
At September 30, 2001, a similar proposed share exchange transaction was
pending regarding the minority shareholders of Mesa Bank (about 47%). At a
shareholders' meeting in October 2001, Mesa's shareholders (other than Sun)
approved the proposed share exchange. Such share exchange (resulting in the
issuance of about 286,800 new shares of Sun's common stock effective October 31,
2001) will be completed prior to December 31, 2001.
As a result of those share exchanges, Camelback Community Bank, Southern
Arizona Community Bank and Mesa Bank became 100%-owned subsidiaries of Sun.
In 1997, Sun entered into an antidilution agreement with Capitol. Under the
terms of the antidilution agreement, Capitol has the right to purchase
additional shares of Sun's common stock, when Sun issues previously unissued Sun
shares to shareholders other than Capitol. Capitol is entitled to purchase
shares of Sun at a price equal to the per-share value ascribed to the shares
issued to shareholders other than Capitol, at a ratio based on 51% of the total
number of new shares being issued by Sun (including the shares to be purchased
by Capitol). Capitol's purchase price for such shares is to be paid to Sun in
cash. In October 2001, Capitol exercised its rights under the antidilution
agreement as to the above-mentioned Camelback exchange and, accordingly,
purchased about 292,000 new shares of Sun's common stock. Capitol is expected to
exercise its rights under the antidilution agreement as to the above-mentioned
share exchanges involving Southern Arizona Community Bank and the pending
exchange regarding Mesa Bank, both prior to December 31, 2001. It is estimated
that, in conjunction with Capitol's exercise of those rights, Sun will receive
cash consideration of about $6 million and issue about 592,700 new shares of
Sun's common stock to Capitol. It is anticipated that this agreement will be
cancelled upon completion of the proposed exchange.
On November 5, 2001, Capitol announced that its total banking assets (which
includes the banking assets of Sun) surpassed the $2 billion level during
October.
First California Northern Bancorp, a majority-owned subsidiary of Sun,
anticipates that its first bank affiliate, Napa Community Bank, will open in
February 2002.
Nevada Community Bancorp Limited, a majority-owned subsidiary of Sun,
anticipates that its fourth bank affiliate, Bank of Las Vegas, will open in
February 2002.
21
CAPSULE INFORMATION REGARDING CAPITOL'S UNAUDITED 4TH QUARTER AND YEAR END 2001
RESULTS
On January 31, 2002, Capitol announced its results of operations for the periods
ended December 31, 2001:
(in thousands, except per share data)
Three Months Ended Year Ended
December 31 December 31
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited) (unaudited)
SUMMARY OF RESULTS OF OPERATIONS
Interest income $ 38,031 $ 36,830 $153,797 $132,311
Interest expense 16,398 18,743 73,292 65,912
-------- -------- -------- --------
Net interest income 21,633 18,087 80,505 66,399
Provision for loan losses 2,530 2,220 8,167 7,216
-------- -------- -------- --------
Net interest income after
provision for loan losses 19,103 15,867 72,338 59,183
Noninterest income 2,591 1,763 9,585 6,137
Noninterest expense 17,145 14,075 65,381 52,996
-------- -------- -------- --------
Income before federal income
taxes 4,549 3,555 16,542 12,324
Federal income taxes 1,586 1,248 5,824 4,289
-------- -------- -------- --------
Net income $ 2,963 $ 2,307 $ 10,718 $ 8,035
======== ======== ======== ========
Net income per share:
Basic $ 0.38 $ 0.32 $ 1.38 $ 1.14
======== ======== ======== ========
Diluted $ 0.37 $ 0.32 $ 1.35 $ 1.13
======== ======== ======== ========
December 31 December 31
2001 2000
----------- -----------
(unaudited)
SUMMARY OF CONSOLIDATED FINANCIAL POSITION
Total assets $2,044,006 $1,630,076
Portfolio loans 1,734,589 1,355,798
Deposits 1,740,385 1,400,899
Stockholders' equity 80,172 70,404
In announcing this capsule information, management noted earnings growth for the
three months and year ended December 31, 2001 in comparison to the corresponding
periods of 2000. Asset growth was also reported. These increases were attributed
to the ongoing growth of Capitol's affiliated banks.
As of December 31, 2001, nonperforming loans increased to $17.2 million. Most of
the increase relates to a small number of loans in various stages of resolution
which management believes to be adequately collateralized or otherwise
appropriately considered in its determination of the adequacy of the allowance
for loan losses.
As of February 12, 2002, Capitol's audited consolidated financial statements as
of and for the year ended December 31, 2001 were not available.
On February 4, 2002 Capitol announced a quarterly dividend of $.10 payable on
March 1, 2002 to shareholders of record on February 14, 2002.
22
CAPSULE INFORMATION REGARDING SUN'S UNAUDITED 4TH QUARTER AND YEAR END 2001
RESULTS
On January 31, 2002, Sun announced its results of operations for the periods
ended December 31, 2001:
(in thousands, except per share data)
Three Months Ended Year Ended
December 31 December 31
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited) (unaudited)
SUMMARY OF RESULTS OF OPERATIONS
Interest income $ 15,025 $ 12,506 $ 58,536 $ 40,005
Interest expense 5,244 4,859 22,109 14,417
-------- -------- -------- --------
Net interest income 9,781 7,647 36,427 25,588
Provision for loan losses 1,209 1,259 3,979 3,926
-------- -------- -------- --------
Net interest income after
provision for loan losses 8,572 6,388 32,448 21,662
Noninterest income 409 316 1,555 1,011
Noninterest expense 7,563 6,231 30,234 21,561
-------- -------- -------- --------
Income before federal income
taxes 1,418 473 3,769 1,112
Federal income taxes 580 171 1,479 305
-------- -------- -------- --------
Net income $ 838 $ 302 $ 2,290 $ 807
======== ======== ======== ========
Net income per share:
Basic $ 0.12 $ 0.05 $ 0.38 $ 0.14
======== ======== ======== ========
Diluted $ 0.12 $ 0.05 $ 0.37 $ 0.14
======== ======== ======== ========
December 31 December 31
2001 2000
----------- -----------
(unaudited)
SUMMARY OF CONSOLIDATED FINANCIAL POSITION
Total assets $ 780,161 $ 526,833
Portfolio loans 638,736 422,344
Deposits 665,692 442,563
Stockholders' equity 72,346 52,694
In announcing this capsule information, management noted earnings growth for the
three months and year ended December 31, 2001 in comparison to the corresponding
periods of 2000. Asset growth was also reported. These increases were attributed
to the ongoing growth of Sun's affiliated banks.
As of December 31, 2001, nonperforming loans increased to $7.1 million. Most of
the increase relates to a small number of loans in various stages of resolution
which management believes to be adequately collateralized or otherwise
appropriately considered in its determination of the adequacy of the allowance
for loan losses.
As of February 12, 2002, Sun's audited consolidated financial statements as of
and for the year ended December 31, 2001 were not available.
23
COMPARATIVE HISTORICAL, PRO FORMA AND PRO FORMA EQUIVALENT
PER SHARE INFORMATION
The following table, which should be read in conjunction with the unaudited pro
forma condensed consolidated balance sheet, pro forma condensed statements of
operations and related notes to the pro forma financial statements, which appear
elsewhere herein, summarizes per share information:
As of and for the As of and for the
Nine Months Ended Year Ended
September 30, 2001 December 31, 2000
------------------ -----------------
Capitol common stock:
Net income per share:
Basic:
Historical $ 1.00 $ 1.14
Pro forma consolidated 0.79 0.84
Diluted:
Historical 0.98 1.13
Pro forma consolidated 0.78 0.83
Cash dividends per share:
Historical 0.30 0.36
Pro forma consolidated (A) 0.30 0.36
Book value per share at period end:
Historical 9.96 9.18
Pro forma consolidated $11.44 $10.73
Sun common stock:
Net income per share:
Basic:
Historical $ 0.25 $ 0.14
Pro forma equivalent (B) 0.58 0.62
Diluted:
Historical 0.25 0.14
Pro forma equivalent (B) 0.72 0.83
Cash dividends per share:
Historical -- --
Pro forma equivalent (B) 0.22 0.26
Book value per share at period end:
Historical 9.58 9.29
Pro forma equivalent (B) $ 8.40 $ 7.88
A--The Capitol pro forma consolidated dividends per share represent historical
dividends per share.
B--The Sun pro forma equivalent per share amounts are calculated by multiplying
Capitol pro forma consolidated per share amounts by the exchange ratio of
.734.
24
CAPITALIZATION
The table presented below shows Capitol's actual total capitalization as of
September 30, 2001, as adjusted for Sun's share exchange with the minority
shareholders of Mesa Bank and as adjusted to reflect the exchange of Capitol's
common stock for Sun's common stock as described in this proxy
statement/prospectus.
AS OF SEPTEMBER 30, 2001
---------------------------------------------
(dollars in thousands, except per share data)
AS ADJUSTED FOR AS ADJUSTED FOR
THE MESA BANK THE SUN
ACTUAL EXCHANGE(4) EXCHANGE(5)
--------- --------- ---------
DEBT OBLIGATIONS $ 77,437 $ 77,437 $ 77,437
========= ========= =========
TRUST-PREFERRED SECURITIES 48,606 48,606 48,606
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 67,182 68,076 36,703
STOCKHOLDERS' EQUITY(1):
Common stock, no par value; 25,000,000 shares
authorized; issued, and outstanding:
Actual - 7,823,690 shares 67,631
As adjusted for the Mesa Bank exchange -
7,823,690 shares 67,631
As adjusted for the Sun exchange -
10,543,548 shares(5) 110,368
Retained earnings 11,996 11,996 11,996
Market value adjustment for available-for-sale
securities (net of tax effect) 271 271 271
Less unallocated ESOP shares and note receivable
from sale of common stock (1,996) (1,996) (1,996)
--------- --------- ---------
Total stockholders' equity $ 77,902 $ 77,902 $ 120,639
========= ========= =========
Book value per share of common stock $ 9.96 $ 9.96 $ 11.44
========= ========= =========
TOTAL CAPITALIZATION(2) $ 145,084 $ 145,977 $ 157,342
========= ========= =========
TOTAL CAPITAL FUNDS(3) $ 193,690 $ 194,584 $ 205,948
========= ========= =========
CAPITAL RATIOS:
Stockholders' equity to total assets 3.94% 3.94% 6.07%
Total capitalization to total assets 7.34% 7.39% 7.91%
Total capital funds to total assets 9.80% 9.85% 10.35%
- ----------
(1) Does not include 1,184,913 shares of common stock issuable upon exercise of
stock options. See "Management--Stock Option Program." Also, does not
include 82,568 warrants each of which permits the holder to purchase a
share of Capitol common stock.
(2) Total capitalization includes stockholders' equity and minority interests
in consolidated subsidiaries.
(3) Total capital funds include stockholders' equity, minority interests in
consolidated subsidiaries and trust-preferred securities.
(4) Amounts are also adjusted for Sun's share exchange with the minority
shareholders of Mesa Bank (about 47%) effective October 31, 2001, resulting
in the issuance of 286,848 shares of Sun's common stock. After the Mesa
Bank exchange, Sun owned 100% of Mesa Bank's common stock. See "Unaudited
Pro Forma Consolidated Financial Information."
(5) Assumes issuance of 2,719,858 shares of Capitol common stock upon
completion of Sun exchange. Does not include 1,162,080 stock options of Sun
which will convert to options in Capitol at the same ratio as the shares of
common stock. See "Unaudited Pro Forma Consolidated Financial Information."
25
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. The table reflects
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. The last reported sale price of Capitol's
common stock was $14.850 on February 8, 2002.
Cash Dividends
2000 High Low Paid
- ---- ------- ------- -----
Quarter ended March 31 $16.938 $ 8.063 $0.09
Quarter ended June 30 13.875 10.750 0.09
Quarter ended September 30 12.375 9.625 0.09
Quarter ended December 31 13.375 8.750 0.09
2001
- ----
Quarter ended March 31 14.250 9.688 0.10
Quarter ended June 30 15.660 12.000 0.10
Quarter ended September 30 17.500 12.250 0.10
Quarter ended December 31 15.200 12.800 0.10
2002
- ----
Quarter Ending March 31
(through February 8, 2002) 15.250 13.300 --
As of December 20, 2001, there were approximately 3,230 beneficial holders
of record of Capitol's common stock based on information supplied by its stock
transfer agent and other sources.
Sun's common stock is listed on the Nasdaq National Market under the symbol
"SCBL." In April 2000, Sun announced plans to purchase up to $3 million of its
common stock in open market purchases over a future period of time. Through
November 16, 2001 Sun has repurchased 138,100 of Sun's shares on the open
market. The following table shows the high and low sale prices per share of
common stock as reported on the Nasdaq National Market. The table reflects
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. The pro forma equivalent dividends paid per
share is based on the fixed exchange ratio of .734 shares of Capitol for each
share of Sun. The last reported sale price of Sun's common stock was $10.500 on
February 8, 2002.
SCBL, as reported by Cash Dividends
Nasdaq Paid
--------------------- ----------------------
Pro forma
CBCL
2000 High Low Actual Equivalent
- ---- ---- --- ------ ----------
Quarter ended March 31 $ 9.750 $7.125 -- $0.066
Quarter ended June 30 11.125 8.875 -- 0.066
Quarter ended September 30 11.000 6.500 -- 0.066
Quarter ended December 31 8.250 6.000 -- 0.066
2001
- ----
Quarter ended March 31 8.875 6.250 -- 0.0734
Quarter ended June 30 11.000 6.650 -- 0.0734
Quarter ended September 30 12.250 8.800 -- 0.0734
Quarter ended December 31 11.250 9.250 -- 0.0734
2002
- ----
Quarter Ending March 31
(through February 8, 2002) 10.900 8.900 -- --
As of December 20, 2001, there were approximately 1,466 beneficial holders
of record of Sun's common stock based on information supplied by its stock
transfer agent and other sources. Sun has never paid a cash dividend on its
common stock.
26
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 future expansion;
- 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; and
- other factors described in "Risk Factors".
INFORMATION ABOUT SUN
DESCRIPTION OF SUN'S BUSINESS AND PROPERTY
Sun defines itself as a BANK DEVELOPMENT COMPANY. In the highly regulated
business of banking, it is viewed by governmental agencies as a bank holding
company. Sun views bank DEVELOPMENT as a much more dynamic activity than the
regulatory label for bank holding companies.
Bank development at Sun is the business of mentoring, monitoring and
managing its investments in community banks. Bank development is also the
activity of adding new banks through start-up, or DE NOVO, formation or through
other affiliation efforts, such as acquiring existing banks.
The banks have similar characteristics:
* Each bank has an on-site president and management team, as local
decision makers.
* Each bank has a local board of directors which has actual authority
over the bank.
* Each bank generally operates from only one office location.
* Each bank can fully meet customers' needs anywhere, anytime through
bankers-on-call, courier services, telephone banking and other
delivery methods.
* Each bank has access to an efficient back-room processing facility and
leading-edge technology through shared resources.
Sun's banks seek the profitable customer relationships which are often
displaced through mergers, mass marketing, megabanks and an impersonal approach
to handling customers. The banks are focused on commercial banking activities,
emphasizing business customers, although they also offer a complete array of
financial products and services.
Each bank has a separate charter. A bank charter is similar to articles of
incorporation and enables each bank to exist as a distinct legal entity. Sun's
banks are state-chartered which means they are organized under a particular
state's banking laws. All of the banks are FDIC insured. Banks are highly
regulated by state and federal agencies. Because each bank has its own charter,
each bank is examined by both state and federal agencies as a separate and
distinct legal entity for safety, soundness and compliance with banking laws and
regulations.
27
Sun became a bank holding company in 1997 when it acquired Bank of Tucson
in a share exchange transaction. Bank of Tucson had been formed in 1996 by a
group of individuals which included some of the same organizers of Sun. A second
start-up bank was added in 1997. Four start-up banks were added in 1998, three
in 1999 and four in 2000. Through the first nine months of 2001, one new bank
has been added, and applications were pending for two additional new banks
expected to open in 2002.
At January 15, 2002, Sun consisted of 14 community banks, with operations
in four states.
Sun's bank development philosophy is one of "SHARED VISION", which
encompasses a commitment to community banking emphasizing local leadership and
investment, with the shared resources of efficient management. Sun provides
shared resources to its banks which includes common data processing systems,
centralized item processing, loan review, internal audit, credit administration,
accounting and risk management.
SUN'S STRUCTURE
Sun is an approximately 50%-owned subsidiary of Capitol Bancorp Ltd.
Capitol is a bank development company headquartered in Lansing, Michigan. It has
consolidated total assets of about $1.6 billion, which includes Sun's
consolidated assets. Sun's financial statements are included in Capitol's
because of Capitol's ownership of Sun.
The organizational structure of Sun is complex. It is a mixture of banks
which Sun owns directly and others which are owned indirectly through subsidiary
bank development companies. Additionally, Sun's direct and indirect ownership
percentages of these entities differ.
Headquartered in Phoenix, Arizona, Sun became a public company in 1999 and
is carrying out all of its current bank development activities in the
southwestern region of the United States. At year-end 2000, its consolidated
assets were $527 million ($300 million at year-end 1999). It is comprised of a
combination of directly-owned banks and bank development subsidiaries:
Sun Community Bancorp Limited
Approx. 50% owned by Capitol Bancorp
|
+----------------------------------+------------------------------------------+
| | |
Arizona bank development Nevada bank development through Sunrise Capital Corporation, multi-
through 8 majority- Nevada Community Bancorp Limited and state bank development emphasizing
owned community banks its 3 majority-owned community banks specialized lending (SBA) through 2
majority-owned community banks
The current group of banks comprising bank development in Arizona follows:
Arizona Bank Development
(direct subsidiaries of
Sun Community Bancorp Limited)
|
Bank of Tucson | Valley First
(Tucson -- 1996) -------+------- Community Bank
100% ownership by Sun | (Scottsdale -- 1997)
| 100% ownership by Sun
|
Mesa Bank | Camelback
(Mesa -- 1998) -------+------- Community Bank
100% ownership by Sun | (Phoenix -- 1998)
| 100% ownership by Sun
|
Southern Arizona | East Valley
Community Bank -------+------- Community Bank
(Tucson -- 1998) | (Chandler -- 1999)
100% ownership by Sun | 85% ownership by Sun
|
Arrowhead | Yuma
Community Bank -------+------- Community Bank
(Glendale -- 2000) (Yuma -- 2000)
51% ownership by Sun 51% ownership by Sun
28
All of these banks are young. The most mature bank of the group, Bank of
Tucson, completed its 48th month of operation in June 2000. The youngest bank,
Yuma Community Bank, opened in mid-December, 2000. These banks ranged in size
from $5 million in assets to $98 million at year-end 2000. Five of the banks are
located in or near greater Phoenix, while two are located in Tucson.
Bank development activities in Nevada are carried out through Nevada
Community Bancorp Limited, which is 54% owned by Sun, and was formed in 1999:
Nevada Community Bancorp Limited
54% ownership by Sun
|
+----------------------------+-----------------------------+
| | |
Black Mountain Desert Community Bank Red Rock Community Bank
Community Bank (Las Vegas -- 1999) (Las Vegas -- 1999)
(Henderson -- 2000) 51% ownership by NCBL 51% ownership by NCBL
51% ownership by NCBL
Two of the Nevada banks opened in the second half of 1999 and the Henderson
(Las Vegas area) bank opened in the first half of 2000. The three banks'
combined total assets was $106 million at year-end 2000 ($34 million in 1999).
Sunrise Capital Corporation was formed in 1999 and is approximately 60%
owned by Sun at year-end 2000. It is focused on developing banks in several
states with a slightly different emphasis on commercial lending than the other
bank affiliates of Sun. Its banks are focused on offering loan products
structured through the SBA, or US Small Business Administration, in addition to
the full array of typical bank products:
Sunrise Capital Corporation
SBA Bank Development
(Approx. 60% owned by Sun)
|
+----------------------+----------------------+
| |
Sunrise Bank of Arizona Sunrise Bank of Albuquerque
Phoenix, Arizona Albuquerque, New Mexico
(1998) (2000)
100% ownership by SCC 87% ownership by SCC
In 2000, a loan production office of Sunrise Bank of Arizona was
established in San Diego, California. It subsequently evolved into Sunrise Bank
of San Diego, which opened in early January 2001.
All of these banks and subsidiary bank development companies are combined,
or consolidated, for financial reporting purposes because Sun has ownership
control of them. Current accounting rules require consolidated reporting when
one entity has majority voting control of another. The reporting entity is the
parent organization and entities which are majority-owned by the parent are
subsidiaries. In the circumstances of Sun, this parent and subsidiary
relationship applies also to second tier subsidiaries which have consolidated
subsidiaries of their own.
At December 31, 2001, Sun and its subsidiaries employed 273 full time
equivalent employees.
The following tables (Tables A to F, inclusive), present certain
statistical information regarding Sun's business as of and for the years ended
December 31, 2000, 1999 and 1998, in addition to some information relating to
prior periods:
29
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A)
SUN COMMUNITY BANCORP LIMITED
Net interest income, the primary component of earnings, represents the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Net interest income depends upon the
volume of interest-earning assets and interest-bearing liabilities and the rates
earned or paid on them. This table shows the daily average balances for the
major asset and liability categories and the actual related interest income and
expense (in $1,000s) and average yield/cost for 2000, 1999 and 1998.
Year Ended December 31
----------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- ---------------------------- --------------------------
(1) (1) (1)
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
-------- ------- ------ -------- -------- ------ ------- ------- ------
ASSETS
Investment securities:
U.S. Treasury and government agencies $ 832 $ 50 6.01% $ 343 $ 21 6.12% $ 1,604 $ 98 6.11%
States and political subdivisions (2) 19,761 1,137 5.76% 22,631 1,335 5.90% 10,973 647 5.90%
Other 9 -- -- 1,929 91 4.72% 325 18 5.54%
Interest-bearing deposits with banks 12,538 764 6.08% 8,397 482 5.74% 535 25 4.67%
Federal funds sold 38,726 2,460 6.35% 32,553 1,594 4.90% 23,269 1,230 5.29%
Loans held for resale 2,937 312 10.62% 904 116 12.83% 445 30 6.74%
Portfolio loans (3) 314,972 35,282 11.20% 125,811 14,281 11.35% 45,225 5,296 11.71%
-------- ------- ------ -------- -------- ------ ------- ------- ------
Total interest-earning
assets/interest income 389,775 40,005 10.26% 192,568 17,920 9.31% 82,376 7,344 8.92%
Allowance for loan losses (deduct) (3,650) (1,270) (415)
Cash and due from banks 17,220 8,859 4,094
Premises and equipment, net 5,559 3,633 1,706
Other assets 7,603 4,348 1,910
-------- -------- -------
Total assets $416,507 $208,138 $89,671
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
Savings deposits $ 1,020 $ 26 2.55% $ 626 $ 14 2.24% $ 285 $ 9 3.16%
Time deposits under $100,000 49,456 3,524 7.13% 13,499 668 4.95% 5,480 287 5.24%
Time deposits of $100,000 or more 88,694 4,876 5.50% 28,715 1,611 5.61% 10,073 557 5.53%
Other interest-bearing deposits 130,097 5,991 4.61% 77,242 3,073 3.98% 35,784 1,427 3.99%
Debt obligations -- -- -- -- -- -- -- -- --
Other 415 -- -- 6 -- -- 33 -- --
-------- ------- ------ -------- -------- ------ ------- ------- ------
Total interest-bearing
liabilities/interest expense 269,682 14,417 5.35% 120,088 5,366 4.47% 51,655 2,280 4.41%
Noninterest-bearing demand deposits 68,324 34,560 16,242
Accrued interest on deposits and
other liabilities 3,066 424 200
Minority interest in consolidated
subsidiaries 24,315 15,397 5,120
Stockholders' equity 51,120 37,669 16,454
-------- -------- -------
Total liabilities and
stockholders' equity $416,507 $208,138 $89,671
======== ------- ======== -------- ======= -------
Net Interest Income $25,588 $ 12,554 $ 5,064
======= ======== =======
Interest Rate Spread (4) 4.91% 4.84% 4.51%
====== ====== ======
Net Yield on Interest-Earning Assets (5) 6.56% 6.52% 6.15%
====== ====== ======
Ratio of Average Interest-Earning
Assets to Interest-Bearing Liabilities 1.45 X 1.60 X 1.59 X
======== ======== =======
- ----------
(1) Average yield/cost is determined by dividing the actual interest
income/expense by the daily average balance of the asset or liability
category.
(2) Tax equivalent yield.
(3) Average balance of loans includes non-accrual loans.
(4) Interest rate spread represents the average yield on interest-earning
assets less the average cost of interest-bearing liabilities.
(5) Net yield is based on net interest income as a percentage of average total
interest-earning assets.
30
CHANGES IN NET INTEREST INCOME (TABLE B)
SUN COMMUNITY BANCORP LIMITED
The table below summarizes the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Sun's net interest income during the periods indicated
(in $1,000s). The change in interest attributable to volume is calculated by
multiplying the annual change in volume by the prior year's rate. The change in
interest attributable to rate is calculated by multiplying the annual change in
rate by the current year's average balance. Any variance attributable jointly to
volume and rate changes has been allocated to each category based on the
percentage of each to the total change in both categories.
Year Ended December 31
------------------------------------------------------------------------------------------
2000 compared to 1999 1999 compared to 1998 1998 compared to 1997
----------------------------- ---------------------------- ---------------------------
Volume Rate Net Total Volume Rate Net Total Volume Rate Net Total
------- ------- --------- ------- ----- --------- ------ ----- ---------
Increase (decrease) in interest income:
Investment securities:
U.S. Treasury and government agencies $ 30 $ (1) $ 29 $ (77) -- $ (77) $ (47) $ 5 $ (42)
States and political subdivisions (169) (29) (198) 687 $ 1 688 59 (1) 58
Other (91) -- (91) 89 (16) 73 10 1 11
Interest-bearing deposits with banks 240 42 282 367 90 457 25 -- 25
Federal funds sold 303 563 866 491 (127) 364 1,006 (65) 941
Loans held for resale 261 (65) 196 31 55 86 30 -- 30
Portfolio loans 21,472 (471) 21,001 9,437 (452) 8,985 3,569 (119) 3,450
------- ------- ------- ------- ----- ------- ------ ----- ------
Total 22,046 39 22,085 11,025 (449) 10,576 4,653 (180) 4,473
Increase (decrease) in interest
expense deposits:
Savings deposits 9 3 12 11 (6) 5 4 (1) 3
Time deposits under $100,000 1,779 1,077 2,856 420 (39) 381 131 6 137
Time deposits of $100,000 or more 3,366 (101) 3,265 1,031 23 1,054 454 (29) 425
Other interest-bearing deposits 2,104 814 2,918 1,653 (7) 1,646 725 76 801
Debt obligations -- -- -- -- -- -- -- -- --
Other -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ----- ------- ------ ----- ------
Total 7,258 1,793 9,051 3,115 (29) 3,086 1,315 51 1,366
------- ------- ------- ------- ----- ------- ------ ----- ------
Increase (decrease) in net
interest income $14,788 $(1,754) $13,034 $ 7,910 $(420) $ 7,490 $3,338 $(231) $3,107
======= ======= ======= ======= ===== ======= ====== ===== ======
31
LOAN PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE C)
SUN COMMUNITY BANCORP LIMITED
Portfolio loans outstanding as of December 31 are shown below (in 1,000s):
2000 1999 1998 1997 1996
----------------- ----------------- ---------------- ---------------- ---------------
Commercial $399,056 94.49% $191,825 93.01% $60,366 88.67% $26,062 83.43% $3,768 77.69%
Real estate mortgage 13,713 3.25% 7,459 3.62% 4,372 6.42% 2,607 8.35% 534 11.01%
Installment 9,575 2.27% 6,949 3.37% 3,342 4.91% 2,567 8.22% 548 11.30%
-------- ------ -------- ------ ------- ------ ------- ------ ------ ------
Total portfolio loans $422,344 100.00% $206,233 100.00% $68,080 100.00% $31,236 100.00% $4,850 100.00%
======== ====== ======== ====== ======= ====== ======= ====== ====== ======
The table below summarizes (in $1,000s) the remaining maturity of portfolio
loans outstanding at December 31, 2000 according to scheduled repayments of
principal:
Fixed Variable
Rate Rate Total
-------- -------- --------
Aggregate maturities of portfolio loan
balances which are due:
In one year or less $ 35,040 $104,307 $139,347
After one year but within five years 52,457 74,434 126,891
After five years 22,606 133,500 156,106
-------- -------- --------
Total $110,103 $312,241 $422,344
======== ======== ========
The following summarizes, in general, Sun's various loan classifications:
Commercial:
Comprised of a broad mix of business use and multi-family housing
properties, including office, retail, warehouse and light industrial uses.
Also includes a range of business credit products, current asset lines of
credit and equipment term loans. These products bear higher inherent
economic risk than other types of lending activities. A typical loan size
approximates $500,000.
Real Estate Mortgage:
Includes single family residential loans held for permanent portfolio, and
home equity lines of credit. Risks are nominal, borne out by loss
experience, housing economic data and loan-to-value percentages.
Installment:
Includes a broad range of consumer credit products, secured by automobiles,
boats, etc., with typical consumer credit risks.
All loans are subject to underwriting procedures commensurate with the loan
size, nature of collateral, industry trends, risks and experience factors.
Appropriate collateral is required for most loans, as is documented evidence of
debt repayment sources.
32
TABLE C, CONTINUED
SUN COMMUNITY BANCORP LIMITED
The aggregate amount of nonperforming portfolio loans is shown below.
Nonperforming loans comprise (a) loans accounted for on a nonaccrual basis, and
(b) loans contractually past due 90 days or more as to principal and interest
payments (but not included in nonaccrual loans in (a) above) and consist
primarily of commercial real estate loans. Nonperforming portfolio loans include
all loans for which, based on the Sun's loan rating system, management has
concerns. Loans are placed in nonaccrual status when, in management's opinion,
there is a reasonable probability of not collecting 100% of future principal and
interest payments. In addition, certain loans, although current based on Sun's
rating criteria, are placed in nonaccrual status. Generally, loans are placed in
nonaccrual status when they become 90 days delinquent; however, management may
elect to continue the accrual of interest in certain circumstances. When
interest accruals are discontinued, interest previously accrued (but unpaid) is
reversed. If non-performing loans (including loans in nonaccrual status) had
performed in accordance with their contractual terms during the year, additional
interest income of $50,000 would have been recorded in 2000. Interest income
recognized on loans in nonaccrual status in 2000 operations approximated $1,000.
At December 31, 2000, there were no material amounts of loans which were
restructured or otherwise renegotiated as a concession to troubled borrowers.
December 31
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in $1,000s)
Nonperforming loans:
Nonaccrual loans: Commercial $ 1,793 $ 34
Real estate 14
Installment
--------- --------- --------- --------- ---------
Total nonaccrual loans 1,807 34 0 0 0
Past due loans: Commercial
Real estate
Installment
--------- --------- --------- --------- ---------
Total past due loans 0 0 0 0 0
--------- --------- --------- --------- ---------
Total nonperforming loans $ 1,807 $ 34 $ 0 $ 0 $ 0
========= ========= ========= ========= =========
Nonperforming loans as a percentage
of total portfolio loans 0.43% * -- -- --
========= ========= ========= ========= =========
Nonperforming loans as a percentage
of total assets 0.34% * -- -- --
========= ========= ========= ========= =========
Allowance for loan losses as a
percentage of nonperforming loans 301.05% N.M. N/A N/A N/A
========= ========= ========= ========= =========
* Less than .01%.
N.M. - Not meaningful.
N/A - Not applicable.
33
SUMMARY OF LOAN LOSS EXPERIENCE (TABLE D)
SUN COMMUNITY BANCORP LIMITED
The table below summarizes changes in the allowance for loan losses and related
portfolio data and ratios for each period:
Year Ended December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in $1,000s)
Allowance for loan losses at January 1 $ 2,371 $ 696 $ 317 $ 49 0
Loans charged-off:
Commercial 805 78
Real estate 35
Installment 93
-------- -------- -------- -------- --------
Total charge-offs 933 78 0 0 0
Recoveries:
Commercial 61
Real estate 5
Installment 10
-------- -------- -------- -------- --------
Total recoveries 76 0 0 0 0
-------- -------- -------- -------- --------
Net charge-offs 857 78 0 0 0
Additions to allowance charged to expense 3,926 1,753 379 268 49
-------- -------- -------- -------- --------
Allowance for loan losses at December 31 $ 5,440 $ 2,371 $ 696 $ 317 $ 49
======== ======== ======== ======== ========
Total portfolio loans outstanding at December 31 $422,344 $206,232 $ 68,080 $ 31,236 $ 4,850
======== ======== ======== ======== ========
Ratio of allowance for loan losses to
portfolio loans outstanding 1.29% 1.15% 1.02% 1.01% 1.01%
======== ======== ======== ======== ========
Average total portfolio loans for the year $314,972 $125,811 $ 45,225 $ 15,407 $ 2,425
======== ======== ======== ======== ========
Ratio of net charge-offs to average
portfolio loans outstanding 0.27% 0.06% 0.00% 0.00% 0.00%
======== ======== ======== ======== ========
The allowance for loan losses has been established as a general allowance for
losses in the loan portfolio estimated at the balance sheet date. For internal
purposes, management allocates the allowance to all loan classifications. The
amounts allocated in the following table, which include all loans which, based
on Sun's loan rating system, management has concerns, should not be interpreted
as an indication of future charge-offs and the amounts allocated are not
intended to reflect the amount that may be available for future losses since the
allowance is a general allowance.
December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in $1,000s)
Commercial $ 2,683 $ 1,006 $ 318 $ 145 $ 15
Real estate mortgage 30 50 11 17 2
Installment 110 28 33 13 2
Unallocated 2,617 1,287 334 142 30
-------- -------- -------- -------- --------
Total allowance for loan losses $ 5,440 $ 2,371 $ 696 $ 317 $ 49
======== ======== ======== ======== ========
Total portfolio loans outstanding $422,344 $206,232 $ 68,080 $ 31,236 $ 4,850
======== ======== ======== ======== ========
Ratio of allowance to portfolio loans outstanding 1.29% 1.15% 1.02% 1.01% 1.01%
======== ======== ======== ======== ========
34
AVERAGE DEPOSITS (TABLE E)
SUN COMMUNITY BANCORP LIMITED
The table below summarizes the average balances of deposits (in $1,000s) and the
average rates of interest for the years ended December 31, 2000, 1999 and 1998:
December 31
----------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- ------- --------- ------- -------- -------
Noninterest-bearing demand deposits $ 68,324 $ 34,560 $ 16,242
Savings deposits 1,020 2.55% 626 2.24% 285 3.16%
Time deposits under $100,000 49,456 7.13% 13,499 4.95% 5,480 5.24%
Time deposits of $100,000 or more 88,694 5.50% 28,715 5.61% 10,073 5.53%
Other interest-bearing deposits 130,097 4.61% 77,242 3.98% 35,784 3.99%
--------- --------- --------
Total deposits $ 337,591 $ 154,642 $ 67,864
========= ========= ========
The table below sets forth the amount of time certificates of deposit issued in
amounts of $100,000 or more, by time remaining until maturity, which were
outstanding at December 31, 2000 (in $1,000s):
Three months or less $ 31,619
Three months to twelve months 70,337
Over 12 months 24,249
---------
Total $ 126,205
=========
35
FINANCIAL RATIOS (TABLE F)
SUN COMMUNITY BANCORP LIMITED
Year Ended December 31
----------------------------
2000 1999 1998
----- ----- -----
Net income (loss) as a percentage of:
Average stockholders' equity 1.58% (4.23)% 0.34%
Average total assets 0.19% (0.77)% 0.06%
Capital ratios:
Average stockholders' equity as a
percentage of average total assets 12.27% 18.10% 18.35%
Average total equity (stockholders' equity and
minority interests in consolidated subsidiaries)
as a percentage of average total assets 18.11% 25.50% 24.06%
Dividend payout ratio (cash dividends per share
as a percentage of net income per share):
Basic -- -- --
Diluted -- -- --
36
Each of Sun's banks operates from a single location, except Red Rock
Community Bank (which opened an additional Las Vegas office in late 2001).
Most of the bank facilities are generally small (i.e., less than 10,000
square feet), first floor offices with convenient access to parking. Some of the
banks have drive-up customer service. The banks are typically located in or near
high traffic centers of commerce in their respective communities. Customer
service is enhanced through utilization of ATMs to process some
customer-initiated transactions and some of the banks also make available a
courier service to pick up transactions at customers' locations. Most of the
banks' locations are leased (see Note F of the Notes to 2000 Consolidated
Financial Statements). Management believes Sun's and its banks' offices to be in
good and adequate condition and adequately covered by insurance.
The principal offices of Sun are located within the same building as
Camelback Community Bank in Phoenix, Arizona. Those headquarters include
administrative, operations, accounting and executive staff. Sun's data center is
located in Tempe, Arizona.
LEGAL PROCEEDINGS
As of February 11, 2002, there were no material pending legal proceedings
to which Sun or its subsidiaries is a party or to which any of its property was
subject, except for proceedings which arise in the ordinary course of business.
In the opinion of management, pending legal proceedings will not have a material
effect on the consolidated financial position or results of operations of Sun.
MARKET PRICES AND DIVIDENDS ON SUN'S COMMON STOCK
Market information regarding Sun's commons stock is shown on page 26. To
date, Sun has not paid any cash dividends on its common stock.
FINANCIAL STATEMENTS OF SUN
Sun's condensed consolidated interim financial statements as of September
30, 2001 and 2000 and for the nine months then ended appear at the back of this
proxy statement/prospectus, beginning on page F-1.
Sun's audited consolidated financial statements as of December 31, 2000 and
1999 and for each of the years ended December 31, 2000, 1999 and 1998 appear at
the back of this proxy statement/prospectus, beginning on page F-9.
37
SELECTED FINANCIAL DATA AND SUPPLEMENTARY FINANCIAL INFORMATION
A comparative summary regarding Sun's financial position and results of
operations for 2000, 1999, 1998, 1997 and 1996 and similar information as of and
for the nine months ended September 30, 2001 and 2000 appears on pages 13 and
14.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this proxy statement/prospectus,
including Sun's interim consolidated financial statements, Management's
Discussion and Analysis of Financial Condition and Results of Operations that
are not historical facts, including, without limitation, statements of future
expectations, projections of results of operations and financial condition,
statements of future economic performance and other forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, are
subject to known and unknown risks, uncertainties and other factors which may
cause the actual future results, performance or achievements of Sun and/or its
subsidiaries and other operating units to differ materially from those
contemplated in such forward-looking statements. The words "intend", "expect",
"project", "estimate", "predict", "anticipate", "should", "believe", and similar
expressions also are intended to identify forward-looking statements. Important
factors which may cause actual results to differ from those contemplated in such
forward-looking statements include, but are not limited to: (i) the results of
Sun's efforts to implement its business strategy, (ii) changes in interest
rates, (iii) legislation or regulatory requirements adversely impacting Sun's
banking business and/or expansion strategy, (iv) adverse changes in business
conditions or inflation, (v) general economic conditions, either nationally or
regionally, which are less favorable than expected and that result in, among
other things, a deterioration in credit quality and/or loan performance and
collectability, (vi) competitive pressures among financial institutions, (vii)
changes in securities markets, (viii) actions of competitors of Sun's banks and
their ability to respond to such actions, (ix) the cost of capital, which may
depend in part on Sun's asset quality, prospects and outlook, (x) changes in
governmental regulation, tax rates and similar matters, and (xi) other risks
detailed in Sun's other filings with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes may vary materially from
those indicated. All subsequent written or oral forward-looking statements
attributable to Sun or persons acting on its behalf are expressly qualified in
their entirety by the foregoing factors. Investors and other interested parties
are cautioned not to place undue reliance on such statements, which speak as of
the date of such statements. Sun undertakes no obligation to release publicly
any revisions to these forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
unanticipated events.
[The remainder of this page intentionally left blank]
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AS OF AND FOR THE INTERIM PERIODS ENDED
SEPTEMBER 30, 2001
Financial Condition
Total assets approximated $732.8 million at September 30, 2001, an increase
of $206.0 million from the December 31, 2000 level of $526.8 million. The
balance sheets include Sun and its consolidated subsidiaries. In January 2001,
Sunrise Bank of San Diego located in San Diego, California, commenced operations
and was added to the consolidated group as a majority-owned subsidiary of
Sunrise Capital Corporation, a majority-owned subsidiary of Sun.
Portfolio loans increased during the nine-month period by approximately
$171.0 million. Loan growth was funded primarily by higher levels of time
deposits and borrowings. The majority of portfolio loan growth occurred in
commercial loans, which increased approximately $161.9 million, consistent with
the banks' emphasis on commercial lending activities.
The allowance for loan losses at September 30, 2001 approximated $7.9
million or 1.33% of total portfolio loans, an increase from the year-end 2000
ratio of 1.29%.
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 table below summarizes portfolio loan balances and activity in the
allowance for loan losses for the nine-month periods (in thousands):
2001 2000
------ ------
Allowance for loan losses at January 1 $5,440 $2,371
Loans charged-off 355 480
Recoveries 48 74
------ ------
Net charge-offs 307 406
Additions to allowance charged to expense 2,770 2,667
------ ------
Allowance for loan losses at September 30 $7,903 $4,632
====== ======
39
The amounts summarized in the following table (in thousands), include all
loans for which management has concerns based on Sun's loan rating system, and
should not be interpreted as an indication of future charge-offs.
September 30, 2001 December 31, 2000
------------------ ---------------------
Percent Percent
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
-------- ----- -------- ---------
Commercial $ 7,493 1.26% $ 5,170 1.22%
Real estate mortgage 275 0.05 58 0.01
Installment 135 0.02 212 0.05
-------- ----- -------- ---------
Total allowance for loan losses $ 7,903 1.33% $ 5,440 1.29%
======== ===== ======== =========
Total portfolio
loans outstanding $593,393 $422,344
======== ========
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 in 2000 and through
September 30, 2001.
Nonperforming loans (i.e., loans which are 90 days or more past due and
loans on nonaccrual status) are summarized below (in thousands):
September 30 December 31
2001 2000
------------ -----------
Nonaccrual loans:
Commercial $ 3,017 $ 1,793
Real estate 14
Installment
------------ -----------
Total nonaccrual loans 3,017 1,807
Past due (>90 days) loans:
Commercial 263
Real estate 50
Installment
------------ -----------
Total past due loans 313 --
------------ -----------
Total nonperforming loans $ 3,330 $ 1,807
============ ===========
Nonperforming loans increased $1.5 million during the first nine months of
2001; however, they continued at a low level in relation to total loans. These
consist of a small number of loans, in various stages of resolution, which
management believes to be adequately collateralized or otherwise appropriately
considered in its determination of the adequacy of the allowance for loan
losses.
In addition to the identification of nonperforming loans involving
borrowers with payment performance difficulties (i.e., nonaccrual loans and
loans past-due 90 days or more), management utilizes an internal loan review
process to identify other potential problem loans which may warrant additional
monitoring or other attention. This loan review process is a continuous activity
which periodically updates internal loan classifications. At inception, all
loans are individually assigned a classification which grade the credits on a
risk basis, based on the type and discounted value of collateral, financial
strength of the borrower and guarantors and other factors such as nature of the
borrowers' business climate, local economic conditions and other subjective
factors. The loan classification process is fluid and subjective.
40
Potential problem loans include loans which are generally performing as
agreed, however, because of loan review's and/or lending staff's risk
assessment, increased monitoring is deemed appropriate. In addition, some loans
are assigned a more adverse classification, with specific performance issues or
other risk factors requiring close management and development of specific
remedial action plans.
Loan review and loan classification activities were augmented in September
2001 in response to continued and worsening general conditions of the United
States economy, in part due to the terrorist attacks in New York, Pennsylvania
and the Nation's Capitol. With deterioration of general economic conditions
prior to September 11, 2001--the events on that date and
subsequently--management undertook a more thorough and deeper review of all
loans and related loan classifications.
At September 30, 2001, potential problem loans (including nonperforming
loans) approximated $20.3 million or less than 4% of total consolidated
portfolio loans. Such totals doubled in the period ended September 30, 2001 as a
result of management's ongoing and augmented loan review and loan classification
activities. It is important to note that these potential problem loans do not
necessarily have significant loss exposure (nor are they necessarily deemed
`impaired'), but rather are classified by management in this manner to aid in
loan administration and risk management. Management believes such loans to be
adequately considered in its evaluation of the adequacy of the allowance for
loan losses. Management believes, however, that current general economic
conditions may result in higher levels of future loan losses, in comparison to
previous years.
The following comparative analysis summarizes each bank's total portfolio
loans, allowance for loan losses, nonperforming loans and allowance ratios
(dollars in thousands):
Allowance as a
Percentage
Total Allowance for Nonperforming of Total
Portfolio Loans Loan Losses Loans Portfolio Loans
---------------------- ------------------- ------------------- ---------------
Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31
2001 2000 2001 2000 2001 2000 2001 2000
--------- --------- ------- ------- ------- ------- ----- -----
Arrowhead Community Bank(1) $ 26,175 $ 4,724 $ 393 $ 71 1.50% 1.50%
Bank of Tucson 84,484 75,359 1,208 1,023 1.43 1.36
Camelback Community Bank 53,993 37,822 692 483 $ 250 1.28 1.28
East Valley Community Bank(1) 27,062 25,937 423 357 219 1.56 1.38
Mesa Bank(1) 39,922 28,930 511 374 $ 27 1.28 1.29
Southern Arizona Community Bank 45,607 36,135 582 434 50 1.28 1.20
Valley First Community Bank 41,089 42,759 526 663 963 306 1.28 1.55
Yuma Community Bank(1) 15,786 800 236 13 1.49 1.62
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 36,778 17,052 552 257 240 241 1.50 1.41
Desert Community Bank(1) 47,760 29,426 716 441 1,293 1,089 1.50 1.50
Red Rock Community Bank(1) 62,490 38,666 938 586 1.50 1.52
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 26,851 16,259 377 238 263 1.40 1.46
Sunrise Bank of Arizona(1) 57,278 59,465 770 650 52 35 1.34 1.09
Sunrise Bank of San Diego(1) 28,118 380 1.35
Other, net 9,010 (401) (150) 109
--------- --------- ------- ------- ------- ------- ----- -----
Consolidated $ 593,393 $ 422,344 $ 7,903 $ 5,440 $ 3,330 $ 1,807 1.33% 1.29%
========= ========= ======= ======= ======= ======= ===== =====
(1) As a condition of charter approval, bank is required to maintain an
allowance for loan losses of not less than 1% for the first three years of
operations.
41
Results of Operations
Net income for the nine months ended September 30, 2001 approximated
$1,452,000 ($0.25 per share), compared to $505,000 ($0.09 per share) during the
corresponding period of 2000. Net income of $657,000 ($0.11 per share) for the
three months ended September 30, 2001 significantly surpassed the corresponding
2000 period results of $244,000 ($.04 per share).
Operating results and total assets (dollars in thousands) were as follows:
Nine months ended September 30
--------------------------------------------------------------
Return on Return on
Total Assets Net Income Beginning Equity Average Assets
----------------------- ----------------------- ---------------- --------------
Sept 30 Dec 31
2001 2000 2001 2000 2001 2000 2001 2000
--------- --------- --------- --------- ----- ----- ----- ----
Arrowhead Community Bank(1) $ 29,014 $ 8,091 $ (359) $ (201) n/a n/a n/a n/a
Bank of Tucson 117,708 98,285 1,609 1,515 25.08% 29.09% 2.00% 2.25%
Camelback Community Bank 66,317 49,364 325 146 10.94 5.87 .81 .50
East Valley Community Bank 38,902 34,392 (35) (474) n/a n/a n/a n/a
Mesa Bank 46,932 36,529 302 136 9.72 4.67 .95 .60
Southern Arizona Community Bank 50,789 40,156 200 88 6.80 3.16 .58 .35
Valley First Community Bank 50,238 53,081 354 183 8.96 5.87 .86 .52
Yuma Community Bank(1) 18,788 5,064 (356) n/a n/a n/a n/a n/a
Nevada Community Bancorp Limited:
Black Mountain Community Bank(1) 48,930 26,060 (12) (396) n/a n/a n/a n/a
Desert Community Bank 54,916 35,511 100 (152) 2.99 n/a .29 n/a
Red Rock Community Bank 74,804 44,193 542 39 9.12 0.67 1.17 0.19
Sunrise Capital Corporation:
Sunrise Bank of Albuquerque(1) 36,457 19,762 64 (309) 2.36 n/a .27 n/a
Sunrise Bank of Arizona 67,877 63,930 472 101 12.33 3.18 .97 .31
Sunrise Bank of San Diego(2) 36,857 n/a (833) n/a n/a n/a n/a n/a
Other, net (5,705) 12,415 (921) (171) n/a n/a n/a n/a
--------- --------- --------- --------- ----- ----- ----- ----
Consolidated $ 732,824 $ 526,833 $ 1,452 $ 505 3.67% 1.35% 0.31% 0.17%
========= ========= ========= ========= ===== ===== ===== ====
n/a Not applicable
(1) Commenced operations as DE NOVO banks in 2000.
(2) Commenced operations as a DE NOVO bank in 2001.
Net interest income increased to $26.6 million during the nine-month 2001
period versus $17.9 million in the corresponding period of 2000 primarily due to
growth in total assets and the number of banks within the consolidated group.
Noninterest income increased to $1.1 million for the 2001 nine-month
period, as compared with $695,000 in 2000. Service charge revenue nearly doubled
in the 2001 period compared to the same period in 2000. This increase is
primarily related to higher transaction volume and the larger number of
customers resulting from the addition of new banks in recent years.
Provisions for loan losses approximated $2.8 million for the nine months
ended September 30, 2001 compared to $2.7 million during the 2000 period. The
provisions for loan losses are based upon management's analysis of the adequacy
of the allowance for loan losses, as previously discussed.
Noninterest expense for the nine months ended September 30, 2001 was $22.2
million compared with $15.6 million in 2000. The increase in noninterest expense
is associated with newly formed banks, growth and increases in general operating
costs. Increases in employee compensation and occupancy mostly relate to the
growth in number of banks within the consolidated group and the larger number of
data processing and other administrative support staff necessary for the
increased number and size of banks.
42
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination
activities is deposits. Total deposits increased $191 million for the nine-month
2001 period, compared to $168.8 million in 2000. Such growth occurred in all
deposit categories, with the majority from time deposits. The Corporation's
banks generally do not rely on brokered deposits as a key funding source.
Noninterest-bearing deposits approximated 17.6% of total deposits at
September 30, 2001, a decrease from the December 31, 2000 level of 19.4%. Levels
of noninterest-bearing deposits fluctuate based on customers' transaction
activity.
Deposit growth in 2001 has been deployed primarily into commercial loans,
consistent with the banks' emphasis on commercial lending activities.
Some of the banks have lines of credit with unaffiliated banks. Borrowings
thereunder approximated $8 million at September 30, 2001. These borrowings
increased in 2001 as a lower-cost funding source versus various rates and
maturities of time deposits.
Cash and cash equivalents amounted to $102.7 million or 14.0% of total
assets at September 30, 2001 as compared with $73.4 million or 13.9% of total
assets at December 31, 2000. As liquidity levels vary continuously based on
customer activities, amounts of cash and cash equivalents can vary widely at any
given point in time. Management believes the banks' liquidity position at
September 30, 2001 is adequate to fund loan demand and meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity
is the banks' marketable investment securities. Sun's 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 September 30,
2001 Sun and its banks had approximately $13.2 million of investment securities
classified as available for sale which can be utilized to meet various liquidity
needs as they arise.
Sun and its banks are subject to complex regulatory capital requirements,
which require maintaining certain minimum capital ratios. These ratio
measurements, in addition to certain other requirements, are used by regulatory
agencies to determine the level of regulatory intervention and enforcement
applied to financial institutions. Sun and each of its banks are in compliance
with the regulatory requirements and management expects to maintain such
compliance.
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43
Stockholders' equity, as a percentage of total assets, approximated 8.2% at
September 30, 2001, a decrease from the beginning of the year ratio of 10.0%.
Total capital funds (stockholders' equity, plus minority interests in
consolidated subsidiaries) aggregated $85.6 million or 11.7% of total assets at
September 30, 2001. The following table summarizes the amounts (in thousands)
and related ratios of individually significant subsidiaries (assets of $50
million or more at the beginning of 2001) and consolidated regulatory capital
position at September 30, 2001:
Valley First
Sunrise Bank Bank of Community
of Arizona Tucson Bank Consolidated
---------- ------ ---- ------------
Total capital to total assets:
Minimum required amount >= $ 2,715 >= $ 4,708 >= $ 2,010 >= $29,313
Actual amount $ 5,608 $ 9,624 $ 5,625 $59,751
Ratio 8.26% 8.18% 11.20% 8.15%
Tier I capital to risk-weighted assets:
Minimum required amount(1) >= $ 2,219 >= $ 3,641 >= $ 1,780 >= $25,276
Actual amount $ 5,605 $ 9,460 $ 4,654 $82,107
Ratio 10.11% 10.39% 10.46% 12.99%
Combined Tier I and Tier II capital to
risk-weighted assets:
Minimum required amount(2) >= $ 4,437 >= $ 7,281 >= $ 3,560 >= $50,551
Amount required to meet "Well-Capitalized"
category(3) >= $ 5,547 >= $ 9,102 >= $ 4,451 >= $63,189
Actual amount $ 6,299 $10,599 $ 5,180 $90,006
Ratio 11.36% 11.65% 11.64% 14.24%
(1) The minimum required ratio of Tier I capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier I and Tier II capital to risk-weighted
assets is 8%.
(3) In order to be classified as a "well-capitalized" institution, the ratio of
Tier I and Tier II capital to risk-weighted assets must be 10% or more.
Sun's operating strategy continues to be focused on the ongoing growth and
maturity of its existing banks, coupled with new bank expansion in selected
markets as opportunities arise. Accordingly, Sun may invest in or otherwise add
additional banks in future periods, subject to economic conditions and other
factors, although the timing of such additional banking units, if any, is
uncertain. Such future new banks and/or additions of other operating units could
be either wholly-owned, majority-owned or otherwise controlled by Sun. At
September 30, 2001, plans were underway for the formation of additional banks in
California and Nevada.
In April 2000, Sun announced plans to purchase up to $3 million of its
common stock in open market purchases. The shares repurchased in this manner may
be retained as treasury shares, retired, used for implementation of an employee
stock ownership plan or for other business purposes. To the extent such share
purchases are made, they will have the impact of increasing the percentage
ownership of Sun by Capitol Bancorp Ltd., Sun's principal shareholder. The share
purchase program will be funded from Sun's existing resources, principally
short-term loans and investments. Through September 30, 2001, total purchases
approximated $1.3 million.
Camelback Community Bank reached its 36th month of operation in May 2001.
In June 2001, Sun offered the minority owners of Camelback an opportunity to
exchange their Camelback shares for shares of Sun. The exchange ratio was based
on 150% of Camelback's adjusted book value and was completed effective June 30,
2001. As a result of the share exchange, the minority owners of Camelback became
shareholders of Sun. About 280,500 new shares of Sun's common stock were issued
in the Camelback share exchange transaction. Effective September 30, 2001, Sun
entered into a similar share exchange transaction with the minority shareholders
of Southern Arizona Community Bank (previously a majority-owned subsidiary of
Sun), issuing about 282,600 new shares of Sun's common stock.
At September 30, 2001, a similar proposed share exchange transaction was
pending regarding Mesa Bank. At a shareholders' meeting in October 2001, Mesa's
shareholders (other than Sun) approved the proposed share exchange. Such share
exchange will be completed prior to December 31, 2001.
44
Effective June 30, 2000, Sun entered into a share exchange transaction with
the minority shareholders of Valley First Community Bank (previously a
majority-owned subsidiary of Sun), issuing about 298,000 shares of Sun's common
stock.
TRENDS AFFECTING OPERATIONS
One of the most significant trends which can impact the financial condition
and results of operations of financial institutions are changes in market rates
of interest.
Changes in interest rates, either up or down, have an impact on net
interest income (plus or minus), depending on the direction and timing of such
changes. At any point in time, there is an imbalance between interest
rate-sensitive assets and interest rate-sensitive liabilities. This means that
when interest rates change, the timing and magnitude of the effect of such
interest rate changes can alter the relationship between asset yields and the
cost of funds.
In January 2001, the Open Market Committee of the Federal Reserve Board
decreased interbank interest rates on two separate dates, for a total decrease
of 100 basis points. In March 2001, another 50 basis points decrease was
initiated by the Federal Reserve, followed by decreases of 50 basis points in
both April and May 2001 and 25 basis points in June 2001. In the third quarter
of 2001, the Federal Reserve decreased interest rates 25 basis points in August
and 50 basis points in September.
Because variable rate loans reprice more rapidly than interest-bearing
deposits, such market interest rate decreases compressed net interest margins at
Sun's banks in 2001. As the Open Market Committee continues to influence
interest rates and other economic policy in 2001, including the potential of
additional rate decreases, net interest margins may become more compressed
(having an adverse impact on earnings) as the year progresses.
Start-up banks generally incur operating losses during their early periods
of operations. Recently-formed start-up banks are expected to detract from
consolidated earnings performance and additional start-up banks formed in 2001
and beyond will similarly negatively impact short-term profitability. Sun's
Board of Directors has determined to reduce the rate of start-ups in the near
term in contrast to the previous three years.
General economic conditions also have a significant impact on both the
results of operations and the financial condition of financial institutions.
Widespread media reports of concerns about the health of the domestic
economy have continued in 2001. While local economic conditions appear to
indicate a weakening environment, loan losses in this interim period of 2001
have remained at a low level. In 2001, however, nonperforming loans have
increased and it is anticipated that levels of nonperforming loans and related
loan losses may trend upward as economic conditions, locally and nationally,
evolve.
IMPACT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (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 are 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 became
effective January 1, 2001 and had no effect on Sun's consolidated financial
statements.
In early July 2001, the Securities and Exchange Commission, American
Institute of Certified Public Accountants and Federal Financial Institutions
Examination Council each issued new guidance (some of which remains to be
finalized) on accounting for allowances for loan losses. While the new guidance
does not change prior accounting rules in this area, it provides additional
clarification and guidance on how the calculation, adequacy and approval of the
allowances should be documented by management.
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement No. 141 requires that
all business combinations be accounted for under a prior standard of purchase
accounting, eliminating the so-called pooling-method which was used to account
for some business combinations. Statement No. 141 requires that the purchase
method be used for business combinations initiated after June 30, 2001. This new
standard is not expected to have a material effect on Sun's consolidated
financial statements.
45
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead be reviewed for impairment. Amortization of
goodwill ceases upon adoption of the Statement, which for most companies, will
be January 1, 2002. This new standard requires that goodwill be reviewed
periodically for impairment and, accordingly, impairment adjustments of goodwill
be charged against earnings, when determined. Management has not completed its
analysis of this new standard; however, its preliminary review has concluded
that, upon implementation, no material effect on Sun's consolidated financial
statements is expected, other than the elimination of goodwill amortization.
The FASB has also recently issued Statement No. 143 (ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS) and No. 144 (ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS). Management has not completed its review of these new
standards; however, implementation of the new guidance is not expected to have a
material effect on Sun's consolidated 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 Sun's consolidated financial statements.
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46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999, AND 1998
Most of this section discusses items of importance regarding Sun's
financial statements which appear elsewhere in this report. In order to obtain a
full understanding of this discussion, it is important to read it with those
financial statements. However, before discussing the financial statements and
related highlights, an introductory section includes some important background
information about the business of Sun and its banks, Sun's structure and recent
developments. (See "Description of Sun's Business and Property" beginning on
page 27 and "Recent Developments", beginning on page 20)
2000 FINANCIAL OVERVIEW
Sun completed 2000 with total assets of $527 million, an increase of more
than 75% over the year-end 1999 level.
Consolidated net income for 2000 was $807,000 compared to a net loss from
operations of $1.2 million in 1999. The net loss for 1999 was $1.6 million. The
1999 net loss resulted primarily from the early period operating losses of
start-up and young bank subsidiaries and an accounting change which required the
write-off of previously capitalized start-up costs.
CHANGES IN CONSOLIDATED FINANCIAL POSITION
Total assets have grown significantly from $55 million at the beginning of
1998, reaching $527 million at the end of 2000. This rapid asset growth is the
result of adding new banks and the growth and evolution of Sun's young banks.
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
17 55 136 300 527
At year-end 2000, total assets of the four banks formed in 2000
approximated $59 million. The three banks formed in 1999 reported total assets
of $114 million at year-end 2000 ($44 million at year-end 1999). The four banks
formed in 1998 reported total assets of $190 million at the end of 2000, an
increase of $79 million during the year. The most mature bank, formed in 1996,
reported total assets of $98 million at year-end 2000, an increase of about 20%
for the year.
47
The total assets of each bank, the consolidated totals and ownership
percentages are summarized below as of year-end 2000 (in $1,000s):
Percentage Ownership By Total Assets
Sun 2nd Tier 2000 1999
--- -------- ---- ----
Arrowhead Community Bank 51% $ 8,091
Bank of Tucson 100% 98,285 $ 82,113
Camelback Community Bank 55% 49,364 30,254
East Valley Community Bank 85% 34,392 10,757
Mesa Bank 53% 36,529 24,738
Southern Arizona Community Bank 51% 40,156 25,778
Valley First Community Bank 100% 53,081 45,678
Yuma Community Bank 51% 5,064
Nevada Community Bancorp Limited (NCBL): 54%
Black Mountain Community Bank 51% 26,060
Desert Community Bank 51% 35,511 17,839
Red Rock Community Bank 51% 44,193 15,596
-------- --------
Consolidated NCBL 106,155 33,720
Sunrise Capital Corporation (SCC): 60%
Sunrise Bank of Albuquerque 87% 19,762
Sunrise Bank of Arizona 100% 63,930 30,615
-------- --------
Consolidated SCC 84,908 30,615
Other, net 10,808 16,737
-------- --------
Consolidated totals $526,833 $300,390
======== ========
Most of the consolidated assets consist of loans. Portfolio loans
approximated $422 million at year-end 2000, or about 80% of total consolidated
assets ($206 million or 69% at year-end 1999).
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
5 31 68 206 422
The banks emphasize commercial loans, consistent with their focus on
serving small to mid-sized business customers. Commercial loans comprised $399
million or 94% of total portfolio loans at year-end 2000, (93% ratio in 1999).
Loan growth in 2000 was significant--$216 million or a growth rate of 105% for
the year.
48
Asset quality has remained strong in this record period of economic
stability and expansion. Nonperforming loans, which consist of loans more than
90 days past due and loans on nonaccrual status, approximated $1.8 million at
year-end 2000, $34,000 at year-end 1999 and none in 1998. The 2000 increase is
attributable to a small number of loans which are in various stages of
resolution.
The banks maintain an allowance for loan losses to absorb estimated losses
in the loan portfolio at the balance sheet date. At December 31, 2000, the
allowance for loan losses approximated $5.4 million or 1.29% of portfolio loans,
compared to $2.4 million or 1.15% in 1999 and $696,000 or 1.02% in 1998. The
following table summarizes portfolio loans, the allowance for loan losses and
its ratio, and nonperforming loans (in $1,000s) at December 31:
Allowance as
a % of Total
Allowance for Nonperforming Portfolio
Total Portfolio Loans Loan Losses Loans Loans
--------------------- ---------------------- ------------------ -------------
2000 1999 2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ------ ---- ----
Arrowhead Community Bank $ 4,724 $ 71 1.50%
Bank of Tucson 75,359 $ 59,088 1,023 $ 725 1.36% 1.23%
Camelback Community Bank 37,822 22,731 483 228 1.28% 1.00%
East Valley Community Bank 25,937 4,335 357 44 1.38% 1.01%
Mesa Bank 28,930 18,884 374 189 $ 27 1.29% 1.00%
Southern Arizona Community Bank 36,135 20,610 434 207 1.20% 1.00%
Valley First Community Bank 42,759 36,334 663 418 306 $ 34 1.55% 1.15%
Yuma Community Bank 800 13 1.62%
Nevada Community Bancorp Limited (NCBL):
Black Mountain Community Bank 17,052 257 241 1.51%
Desert Community Bank 29,426 11,438 441 154 1,089 1.50% 1.35%
Red Rock Community Bank 38,666 7,861 586 156 1.52% 1.98%
--------- --------- --------- --------- --------- ------
Consolidated NCBL 85,144 19,299 1,284 310 1,330 -0-
Sunrise Capital Corporation (SCC):
Sunrise Bank of Albuquerque 16,259 238 1.46%
Sunrise Bank of Arizona 59,465 24,952 650 250 35 1.09% 1.00%
--------- --------- --------- --------- --------- ------
Consolidated SCC 75,833 24,952 888 250 144 -0-
Other, net 8,901 (1) (150)
--------- --------- --------- --------- --------- ------ ---- ----
Consolidated totals $ 422,344 $ 206,232 $ 5,440 $ 2,371 $ 1,807 $ 34 1.29% 1.15%
========= ========= ========= ========= ========= ====== ====== ======
The allowance for loan losses is maintained at a level believed adequate by
management. It is analyzed quarterly by each bank. The adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentration of
credit), past loss experience, current economic conditions, loan commitments
outstanding, regulatory requirements and other factors.
In 2000, standard-setting bodies, regulatory agencies and the SEC (the
Securities and Exchange Commission) have, on an industry-wide basis, separately
issued proposals on how the allowance for loan losses should be estimated in the
future. Some of these proposals conflict with each other and it is difficult to
predict how such proposals, however finalized, will impact the financial
institution industry, individual banks and bank holding companies. Estimation of
requirements for the allowance for loan losses is an inherently subjective
process which involves significant judgement by management of many variables
potentially impacting borrowers' ability to repay loans and values of underlying
loan collateral.
49
New banks, as a condition of charter approval, are required to maintain an
allowance ratio of not less than 1% for their first three years of operations.
Because they are new banks with new or unseasoned loans and no prior loss
history, 1% is often used as a starting point for the amount of the allowance,
particularly in the earliest years of operation. As some of the younger banks
now have more seasoned loan portfolios and the 1% regulatory requirement
represents only an absolute minimum, loan loss allowance ratios were increased
in 2000 based on management's estimates of loss potential within the loan
portfolios at the balance-sheet date.
CONSOLIDATED RESULTS OF OPERATIONS
Revenue growth has been significant. In 2000, total revenues reached $41
million, a 119% increase over 1999 levels. In 1999, total revenues exceeded
$18.7 million, a 143% increase over the 1998 revenue level of $7.7 million. The
primary revenue source is interest income from loans. Net interest income is the
difference between total interest income and interest expense on deposits and
borrowings. The following graph summarizes growth in total revenue (which
includes noninterest income such as some fees and service charges):
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
0.4 3.0 7.7 18.7 41.0
Of the 2000 revenues, $14.2 million, or about 35%, came from the two banks
formed in 1996 and 1997. The four banks started in 1998 generated total revenues
of $15.9 million or about 39% of the 2000 consolidated total. The youngest
banks, formed in 1999 and 2000, reported total revenues of $10.1 million or 25%
of the consolidated total.
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
0.2 2.0 5.1 12.6 25.6
Growth in the categories of interest income and interest expense, as well
as noninterest income and noninterest expense, is the result of the addition of
new banks during the periods presented and the ongoing growth of Sun's young
banks. The largest component of noninterest expense is salaries, wages and
benefits, which has increased significantly due to the larger number of banks
and bank development subsidiaries and added corporate personnel.
50
The following table summarizes net income for each of the banks and on a
consolidated basis and the related rates of return on average assets and equity,
where applicable (in $1,000s):
Return on Average
Net Income Return on Average Equity Assets
------------------------- ------------------------ ---------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Arrowhead Community Bank $ (419)
Bank of Tucson 2,149 $ 1,086 $ 776 27.69% 16.63% 12.73% 2.33% 1.48% 1.25%
Camelback Community Bank 297 (520) (370) 8.22% 0.74%
East Valley Community Bank (532) (673)
Mesa Bank 268 (207) (118) 6.77% 0.85%
Southern Arizona Community Bank 169 (546) (252) 4.44% 0.47%
Valley First Community Bank 88 36 (81) 1.82% 0.87% 0.18% 0.10%
Yuma Community Bank (176)
Nevada Community Bancorp Limited (NCBL):
Black Mountain Community Bank (468)
Desert Community Bank (180) (358)
Red Rock Community Bank 190 (269) 2.45% 0.62%
------- ------- -------
Consolidated NCBL (483) (469) -0-
Sunrise Capital Corporation (SCC):
Sunrise Bank of Albuquerque (386)
Sunrise Bank of Arizona 206 (634) (26) 4.64% 0.43%
------- ------- -------
Consolidated SCC (243) (634) (26)
Other, net (311) 334 128
------- ------- ------- ---- ----- ---- ---- ----- ----
Consolidated totals $ 807 $(1,593) $ 57 1.57% (3.19)% 0.34% 0.20% (0.86)% 0.06%
======= ======= ======= ===== ===== ===== ===== ===== ====
Provisions for loan losses also increased significantly, commensurate with
the growth in the number of banks and loans.
During 1999, a new accounting standard required the write-off of previously
capitalized start-up costs, which is discussed in a later section of this
narrative. It is reflected as a cumulative effect of a change in accounting
principle in the consolidated statement of operations, and amounted to $.08 per
share.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY
Liquidity for financial institutions consists of cash and cash equivalents,
marketable investment securities and loans held for resale. These categories
totaled $93.7 million at year-end 2000, or about 18% of total assets. This
compares to $86 million or 28% of total assets at year-end 1999.
Liquidity varies significantly daily, based on customer activity. The
change in the liquidity ratio is the result of more assets being deployed into
loans, consistent with the strategy of maximizing interest income. Rates of
interest income on liquid assets are typically less than rates the banks achieve
from commercial loans.
The primary source of funds for the banks is deposits. The banks emphasize
interest-bearing time deposits as part of their funding strategy. The banks also
seek noninterest-bearing deposits, or checking accounts, which reduce the banks'
cost of funds. Noninterest-bearing deposits were about 19% of total deposits at
year-end 2000 and increased $36 million or 73% during the year.
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51
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
12 43 99 225 443
In recent periods, banks in general have experienced some competitive
challenges in obtaining additional deposits to fuel growth. Sun's banks have had
similar experiences in their individual markets. As depositors have wider access
to the Internet and other real-time interest rate monitoring sources, deposit
pricing has become more competitive. Deposit growth is achievable, but at a
higher price, shrinking net interest margins.
In 1999, Sun became a public company through an initial public offering
(IPO) of its common stock with net proceeds of $25 million. Capitol purchased
51% of the offering, maintaining its ownership of Sun. As of December 31, 2000,
approximately $9 million of the IPO proceeds not yet deployed for new bank
development have been loaned to Capitol Bancorp on a short-term basis.
One of the previously majority-owned banks became 100% owned in 2000. When
Valley First Community Bank neared its 36th month of operation, Sun offered the
bank's minority owners an opportunity to exchange their bank shares for shares
of Sun. The exchange ratio was based on 150% of the bank's adjusted book value.
As a result of the share exchange, the minority owners of Valley First became
shareholders of Sun. About 298,000 new shares of Capitol's common stock were
issued in this transaction.
While it is likely that similar exchange transactions may occur in the
future as some banks reach their 36th month of operation, any such transactions
depend upon whether Sun (or one of its subsidiary bank holding companies) offers
such an exchange and whether minority shareholders vote in favor of it on a
transaction-by-transaction basis.
Total stockholders' equity approximated $52.7 million at year-end 2000, an
increase of $2.7 million for the year. During 2000, Sun repurchased 134,200
shares of its common stock for cash consideration of $1.3 million and is
reflected as treasury stock and a deduction from stockholders' equity at
December 31, 2000. No cash dividends have been paid. Future payment of
dividends, if any, is subject to approval by Sun's board of directors and
capital adequacy.
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52
Sun's capital structure consists of these primary elements:
* Minority interests in consolidated subsidiaries, and
* Stockholders' equity.
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
5.2 11.7 36.0 71.4 79.9
Total capitalization at year-end 2000 amounted to $79.9 million or 15.2% of
total assets. This compares to $71.4 million at year-end 1999.
A significant source of capital has been investments provided by minority
shareholders in the subsidiaries which are consolidated for financial reporting
purposes. Total minority interests in consolidated subsidiaries amounted to
$27.2 million at year-end 2000, an increase of $5.9 million from the $21.4
million level at year-end 1999. These minority interests approximated $9.4
million at the end of 1998. The increases in these periods are the result of
Sun's strategy of starting new banks and bank development companies with less
than 100% ownership by Sun.
Sun and each of its banks and bank development subsidiaries are subject to
a complex series of regulatory rules and requirements which require specific
levels of capital adequacy at the bank level and on a consolidated basis. Under
those rules and regulations, banks are categorized as WELL CAPITALIZED,
ADEQUATELY CAPITALIZED or INADEQUATELY CAPITALIZED using several ratio
measurements, including a risk-weighting approach to assets and commitments.
Banks falling into the INADEQUATELY CAPITALIZED category are subject to the
prompt corrective action provisions of the FDIC Improvement Act, which can
result in significant regulatory agency intervention and other adverse action.
Although it is permissible to maintain capital adequacy at the ADEQUATELY
CAPITALIZED level, Sun operates with the objective of its banks meeting the WELL
CAPITALIZED standard. The well capitalized banks benefit from lower FDIC deposit
insurance costs and less restrictive limitations on some banking activities.
New banks, as a condition of regulatory charter approval, are required to
maintain higher ratios of capital adequacy. Generally, they are required to keep
a ratio of capital to total assets of not less than 8% for their first three
years of operation.
In the opinion of management, all of the affiliated banks met the criteria
to be classified as WELL CAPITALIZED at year-end 2000.
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53
TRENDS AFFECTING OPERATIONS
The most significant trends which can impact the financial condition and
results of operations of financial institutions are changes in market rates of
interest and changes in general economic conditions.
Changes in interest rates, either up or down, have an impact on net
interest income (plus or minus), depending on the direction and timing of such
changes. At any point in time, there is an imbalance between interest
rate-sensitive assets and interest rate-sensitive liabilities. This means that
when interest rates change, the timing and magnitude of the effect of such
interest rate changes can alter the relationship between asset yields and the
cost of funds. This timing difference between interest rate-sensitive assets and
interest rate-sensitive liabilities is characterized as a "gap" which is
quantified by the distribution of rate-sensitive amounts within various time
periods in which they reprice or mature. The following table summarizes the
consolidated financial position in relation to "gap" at December 31, 2000 (in
$1,000s):
Interest Rate Sensitivity
------------------------------------------------------
0 to 3 4 to 12 1 to 5 Over
Months Months Years 5 years Total
--------- --------- --------- --------- ---------
Assets
Federal funds sold $ 32,027 $ 32,027
Interest-bearing deposits with banks 15,824 $ 125 15,949
Loans held for resale 6,610 6,610
Investment securities 1,599 6,985 $ 3,985 $ 1,040 13,609
Portfolio loans:
Commercial 216,270 27,357 153,723 1,706 399,056
Real estate mortgage 13,163 20 243 287 13,713
Installment 676 4,281 4,618 9,575
Non-earning assets and other 36,294
--------- --------- --------- --------- ---------
Total assets $ 286,169 $ 38,768 $ 162,569 $ 3,033 $ 526,833
========= ========= ========= ========= =========
Liabilities and stockholders' equity
Interest-bearing deposits:
Time deposits over $100,000 $ 31,619 $ 70,337 $ 24,249 $ 126,205
Time deposits under $100,000 12,354 36,863 18,372 $ 53 67,642
All other interest-bearing deposits 162,835 162,835
--------- --------- --------- --------- ---------
Total interest-bearing deposits 206,808 107,200 42,621 53 356,682
Noninterest-bearing liabilities 90,211
Minority interests in consolidated subsidiaries 27,246
Stockholders' equity 52,694
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 206,808 $ 107,200 $ 42,621 $ 53 $ 526,833
========= ========= ========= ========= =========
Interest rate sensitive period gap $ 79,361 $ (68,432) $ 119,948 $ 2,980
Interest rate sensitive cumulative gap $ 79,361 $ 10,929 $ 130,877 $ 133,857
Period rate sensitive assets/period rate sensitive
liabilities 1.38 0.36 3.81 57.23
Cumulative rate sensitive assets/cumulative rate
sensitive liabilities 1.38 1.03 1.37 1.38
Cumulative gap to total assets 15.06% 2.07% 24.84% 25.41%
The "gap" changes daily based upon changes in the underlying assets and
liabilities at the banks. Analyzing exposure to interest rate risk is prone to
imprecision because the "gap" is constantly changing, the "gap" differs at each
of the banks, and it is difficult to predict the timing, amount and direction of
future changes in market interest rates and the corresponding effect on customer
behavior.
54
The banks endeavor to manage and monitor interest rate risk in concert with
market conditions and risk parameters. Management strives to maintain a
reasonably balanced position of interest rate-sensitive assets and liabilities.
The banks have not engaged in speculative positions through the use of
derivatives in anticipation of interest rate movements. In, for example, periods
of relatively lower interest rates, the banks emphasize variable rate loans and
time deposits to the extent possible in a competitive environment; however,
competitive influences often result in making fixed rate loans, although the
banks seek to limit the duration of such loans. Similarly, low interest rates
generally make competition more intense for deposits, since loan demand will
typically increase during periods of lower rates and, accordingly, result in
higher interest costs on deposits, adversely impacting interest margins. Future
interest rates and the impact on earnings are difficult to predict. In addition
to interest rate risk relating to interest-bearing assets and liabilities,
changes in interest rates also can impact future transaction volume of loans and
deposits at the banks. For activities which are influenced by levels of interest
rates for transaction volume (for example, origination of residential mortgage
loans), pricing margins and demand can become impacted significantly by changes
in interest rates.
As a means of monitoring and managing exposure to interest rate risk,
management uses a computerized simulation model which is intended to estimate
pro forma effects of changes in interest rates. Using the simulation model, the
following table illustrates, on a consolidated basis, changes which would occur
in annual levels of interest income, interest expense and net interest income
assuming one hundred and two hundred basis point ("bp") parallel increases and
decreases in interest rates (in $1,000s):
Pro Forma
Assuming Pro Forma Effect of Pro Forma Effect of
No Change Interest Rate Increases Interest Rate Decreases
in Interest ----------------------- -----------------------
Rates +100 bp +200 bp -100 bp -200 bp
------- ------- ------- ------- -------
Interest income $76,337 $81,021 $85,698 $71,650 $66,961
Interest expense 36,332 41,284 46,236 31,380 26,428
------- ------- ------- ------- -------
Net interest income $40,005 $39,737 $39,462 $40,270 $40,533
======= ======= ======= ======= =======
The pro forma analysis above is intended to quantify theoretical changes in
interest income based on stated assumptions. The pro forma analysis excludes the
effect of numerous other variables such as borrowers' ability to repay loans,
the ability of banks to obtain deposits in a radically changed interest rate
environment and how management would revise its asset and liability management
priorities in concert with rate changes.
In January 2001, the Open Market Committee of the Federal Reserve Board
decreased interbank interest rates on two separate dates, for a total decrease
of 100 basis points. While the pro forma analysis above is intended to estimate
the impact of an immediate 100 and 200 basis point change in rates, actual
results will be different. Those results will differ (and may be materially
different) because a sudden rate change in market rates does not result in an
instantaneous parallel shift in rates on loans and deposits at banks. Further,
any financial model intended to estimate the impact of interest rate changes
will not necessarily incorporate other variables, including management's efforts
to manage its asset and liability interest rate sensitivity, nor customer
behavior.
General economic conditions also have a significant impact on both the
results of operations and the financial condition of financial institutions.
Economic conditions nationally and in the banks' local markets have remained
relatively stable and positive. Local economic conditions, and to some extent
national economic conditions, have a significant impact on levels of loan demand
as well as the ability of borrowers to repay loans and the availability of funds
for customers to make deposits. Throughout 2000, 1999 and 1998, the U.S. economy
continued to prosper in what has developed into the longest peacetime economic
expansion in history. With worldwide economic conditions currently unstable, the
duration of the current economic expansion period in the United States is
questionable.
55
Continuing consolidation of the banking industry on a national basis, and
in the markets of Sun's banks, has presented opportunities for growth. As a
result of consolidation of the banking industry, coupled with the closure of
branch locations by larger institutions and conversion of customer relationships
into perceived `commodities' by the larger banks, many customer relationships
have been displaced, generating opportunities for development by the banks. For
many retail customers, banking services have become a commodity in an
environment that is dominated by larger mega-bank or mass-merchandising
institutions. For the professional, entrepreneur and other customers seeking a
more service-oriented, customized banking relationship, Sun's banks fill that
need through their focus on single-location banks with full, local
decision-making authority. As the banks focus on service delivery and keeping
their size at a manageable level, only a modest market share of deposits and
loan activity is necessary to achieve profitability and investor-oriented
earnings performance.
Start-up banks generally incur operating losses during their early periods
of operations. Recently-formed start-up banks will detract from consolidated
earnings performance and additional start-up banks formed in 2001 and beyond
will similarly negatively impact short-term profitability. On a consolidated
basis, such operating losses reduce net income by the pro rata share of Sun's
ownership percentage in those banks. When those banks become profitable, their
operating results will contribute to consolidated earnings to the extent of
Sun's ownership percentage.
Commercial banks continue to be subject to significant regulatory
requirements which impact current and future operations. In addition to the
extent of regulatory interaction with financial institutions, extensive rules
and regulations governing lending activities, deposit gathering and capital
adequacy (to name a few), translate into a significant cost burden of financial
institution regulation. Such costs include the significant amount of management
time and expense which is incurred in maintaining compliance and developing
systems for compliance with those rules and regulations as well as the cost of
examinations, audits and other compliance activities.
Premiums for FDIC insurance have historically been significant costs of
doing business as financial institutions, but in recent years, deposit insurance
premiums have been maintained at a stable and modest level. Future deposit
insurance premium levels are difficult to predict inasmuch as deposit insurance
premiums will be determined based on general economic conditions, the relative
health of the banking and financial institution industry and other unpredictable
factors. It is reasonable to expect that deposit insurance premiums will
increase at some point in the future. The future of financial institution
regulation, and its costs, is uncertain and difficult to predict.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Through December 27, 2001, there have been no changes in or disagreements
with accountants on accounting or financial disclosure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Trends Affecting Operations" beginning on pages
45 and 54-55 and on page 38 under the caption "Cautionary Statement About
Forward-Looking Statements".
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Sun is already included in Capitol's consolidated financial statements.
Unaudited pro forma consolidated financial information follow, illustrating the
exchange and Capitol's purchase of the minority interest of Sun (adjusted for
Sun's pending share exchange with the minority shareholders of Mesa Bank), which
is being accounted for under the purchase method of accounting, as if it had
occurred effective September 30, 2001 (shown on page 57) and at the beginning of
2000 (shown on page 59). The accompanying notes to the unaudited pro forma
consolidated financial statements are an integral part of the unaudited pro
forma financial information. The unaudited pro forma results of operations for
the period ended September 30, 2001 are not necessarily indicative of results
for the year ending December 31, 2001 or any subsequent period thereafter. The
unaudited pro forma results of operations do not give effect to any potential
cost savings or other synergies that could result from the share exchange.
However, because Sun and Capitol are already related and already share some
executives and common systems, material potential cost savings and other
synergies are not expected upon completion of the share exchange.
56
Unaudited Pro Forma Condensed Consolidated Balance Sheet
Capitol Bancorp Ltd. and Subsidiaries
September 30, 2001
Pro Forma
Adjustments Pro Forma
Regarding Adjustments
(in $1,000s, except share and per-share data) Historical Mesa Bank Pro Forma Regarding
Amounts Share Historical Sun Share Pro Forma
as Reported Exchange Amounts Exchange Amounts
----------- -------- ----------- ---------- -----------
ASSETS
Cash and cash equivalents $ 186,513 $ 186,513 $ 186,513
Loans held for resale 42,319 42,319 42,319
Investment securities 43,865 43,865 43,865
Portfolio loans 1,660,042 1,660,042 1,660,042
Less allowance for loan losses (21,849) (21,849) (21,849)
----------- ----------- -----------
Net portfolio loans 1,638,193 1,638,193 1,638,193
Premises and equipment, net 16,698 16,698 16,698
Goodwill, net 8,011 $ 894 A 8,905 $ 10,699 B 19,604
Other assets 39,780 39,780 1,102 B 40,882
----------- -------- ----------- ---------- -----------
TOTAL ASSETS $ 1,975,379 $ 894 $ 1,976,273 $ 11,801 $ 1,988,074
=========== ======== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,687,494 $ 1,687,494 $ 1,687,494
Debt obligations 77,437 77,437 77,437
Other liabilities 16,758 16,758 $ 438 C 17,196
----------- ----------- ---------- -----------
Total liabilities 1,781,689 1,781,689 438 1,782,127
Trust-preferred securities 48,606 48,606 48,606
Minority interests in consolidated subsidiaries 67,182 $ 894 A 68,076 (31,373)D 36,703
Stockholders' equity:
Common stock 67,631 67,631 42,737 E 110,368
Retained earnings 11,996 11,996 11,996
Other, net (1,725) (1,725) (1,725)
----------- ----------- ---------- -----------
Total stockholders' equity 77,902 77,902 42,737 120,639
----------- -------- ----------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,975,379 $ 894 $ 1,976,273 $ 11,801 $ 1,988,074
=========== ======== =========== ========== ===========
Number of common shares issued and outstanding 7,823,690 7,823,690 2,719,858 10,543,548
=========== =========== ========== ===========
Book value per Capitol share $9.957 $ 9.957 $ 11.442
=========== =========== ===========
Pro forma equivalent book value per Sun share $ 8.398
===========
THE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEET ARE AN INTEGRAL PART OF THIS PRO FORMA PRESENTATION.
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57
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET:
(in $1,000s, except share data)
A -- Additional goodwill arising from Sun's share exchange with
the minority shareholders of Mesa Bank (about 47%) effective October 31,
2001. After the Mesa Bank exchange, Sun owned 100% of Mesa Bank's common
stock.
B -- Allocation of purchase price associated with proposed share exchange
Net estimated proceeds from issuance of common stock
and stock options resulting from proposed share
exchange (see Note E below) $ 42,737
Less estimated book value of underlying net assets (30,935)
Less estimated fair value of indentifiable intangible
assets (net of income tax effect) (1,102)
--------
Resultant goodwill arising from proposed share exchange $ 10,699
========
Based on current estimates, there are no indentifiable
intangible assets other than the estimated deposit core
intangible. The net book value of all other assets and
liabilities of Sun and its subsidiaries approximate
estimated fair value.
C -- Estimated expenses of the proposed share exchange:
Financial advisors and other consultants $ 318
Legal counsel 60
Independent accountants 10
Filing fees, printing and other costs 50
--------
Total $ 438
========
D -- Elimination of minority interests associated with Sun's
shareholders other than Capitol.
E -- Estimated net proceeds applicable to proposed share
exchange with Sun's shareholders other than Capitol:
Issuance of 2,719,858 shares of Capitol common stock in
proposed share exchange $ 38,897
Estimated fair value of approximately 853,000 stock
options of Capitol to be issued in exchange for stock
options of Sun as part of proposed share exchange 4,278
Estimated expenses of the proposed share exchange
(see Note C above) (438)
--------
Total $ 42,737
========
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58
Unaudited Pro Forma Condensed Statements of Operations
Capitol Bancorp Ltd. and Subsidiaries
Nine Months Ended September 30, 2001 Year Ended December 31, 2000
--------------------------------------- --------------------------------------
(in $1,000s, except share and per-share data) Historical Historical
Amounts Pro Forma Pro Forma Amounts Pro Forma Pro Forma
as Reported Adjustments Amounts as Reported Adjustments Amounts
---------- ---------- ----------- ---------- ---------- ----------
Interest income $ 115,766 $ 115,766 $ 132,311 $ 132,311
Interest expense 56,894 56,894 65,912 65,912
---------- ----------- ---------- ----------
Net interest income 58,872 58,872 66,399 66,399
Provision for loan losses 5,637 5,637 7,216 7,216
---------- ----------- ---------- ----------
Net interest income after provision for
loan losses 53,235 53,235 59,183 59,183
Noninterest income 6,994 6,994 6,137 6,137
----------
Noninterest expense 47,358 250 A 47,608 52,846 334 A 53,180
---------- ---------- ----------- ---------- ---------- ----------
Income before federal income taxes
and minority interest 12,871 (250) 12,621 12,474 (334) 12,140
Federal income taxes 4,238 (85) 4,153 4,289 (114) 4,175
---------- ---------- ----------- ---------- ---------- ----------
Income before minority interest 8,633 (165) 8,468 8,185 (220) 7,965
Minority interest in net income of consolidated
subsidiaries (878) 726 B (152) (150) 404 B 254
---------- ---------- ----------- ---------- ---------- ----------
NET INCOME $ 7,755 $ 561 $ 8,316 $ 8,035 $ 183 $ 8,218
========== ========== =========== ========== ========== ==========
NET INCOME PER SHARE:
Basic $ 1.00 $ 0.79 $ 1.14 $ 0.84
========== =========== ========== ==========
Diluted $ 0.98 $ 0.78 $ 1.13 $ 0.83
========== =========== ========== ==========
Pro forma equivalent per Sun share:
Basic $ 0.58 $ 0.62
=========== ==========
Diluted $ 0.57 $ 0.61
=========== ==========
Average number of common shares outstanding
for purposes of computing basic net income
per share--denominator for basic net income
per share 7,769,316 2,719,858 C 10,489,174 7,064,830 2,719,858 C 9,784,688
Effect of dilutive securities--stock options
and warrants 151,008 70,500 D 221,508 49,622 70,500 D 120,122
---------- ---------- ----------- ---------- ---------- ----------
Average number of common shares and dilutive
securities for purposes of computing diluted
net income per share--denominator for diluted
net income per share 7,920,324 2,790,358 10,710,682 7,114,452 2,790,358 9,904,810
========== ========== =========== ========== ========== ==========
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS:
A -- Amount represents pro forma amortization of indentifiable intangible assets
resulting from proposed share exchange, assuming estimated 5-year useful
life.
B -- Amount represents reduction in earnings attributable to Sun's minority
interests due to proposed share exchange between Capitol and Sun.
C -- Assumes issuance of 2,719,858 shares of Capitol common stock in proposed
share exchange with Sun's shareholders other than Capitol.
D -- Estimated pro forma effect of the issuance of approximately 853,000 stock
options of Capitol in exchange for stock options of Sun, in conjunction
with proposed share exchange, using the treasury stock method.
59
THE EXCHANGE
GENERAL
The Boards of Directors of Sun and Capitol are using this proxy
statement/prospectus to solicit proxies from their respective shareholders for
use at the shareholders' meetings of Sun and Capitol.
At Sun's shareholders' meeting to be held on March 27, 2002, Sun's
shareholders will be asked to approve the exchange. The Plan of Share Exchange
provides for Sun's shareholders to exchange common stock of Sun not owned by
Capitol for Capitol common stock. Upon consummation of the exchange, Sun will
become a wholly-owned subsidiary of Capitol. In the exchange, Sun shareholders
will receive shares of Capitol's common stock. Capitol's shareholders are also
being asked to approve the exchange at Capitol's shareholders' meeting to be
held on March 28, 2002.
MATERIAL CONTRACTS OR UNDERSTANDINGS BETWEEN CAPITOL AND SUN
In 1997, Sun entered into an antidilution agreement with Capitol. Under the
terms of the antidilution agreement, Capitol has the right to purchase
additional shares of Sun's common stock, when Sun issues previously unissued Sun
shares to shareholders other than Capitol. Capitol is entitled to purchase
shares of Sun at a price equal to the per-share value ascribed to the shares
issued to shareholders other than Capitol, at a ratio based on 51% of the total
number of new shares being issued by Sun (including the shares to be purchased
by Capitol). Capitol's purchase price for such shares is to be paid to Sun in
cash.
In June 2001, Capitol entered into a stock option call agreement with
Joseph D. Reid, Capitol's (and Sun's) Chairman and Chief Executive Officer. This
agreement assigns Capitol a right to call stock options of Sun held by Joseph D.
Reid. The call agreement has the effect of permitting Capitol to exercise such
stock options contingent upon a directive from the Federal Reserve Board
requiring Capitol to increase its ownership position in Sun. As of November 16,
2001, no such directive has been issued by the Federal Reserve Board. The effect
of the agreement is that Capitol could currently increase its ownership in Sun
to materially exceed 50%. It is anticipated that this agreement will be
cancelled upon completion of the proposed exchange.
Capitol and Sun also share some key executives, common directors and common
systems.
BACKGROUND OF THE EXCHANGE
The concept of a potential share exchange transaction with Capitol was
discussed initially on an informal basis in August 2001. Capitol expressed a
willingness to extend an offer of an exchange. The objectives of the potential
exchange are to enable shareholders of Sun to achieve better liquidity in their
investment, a current dividend and to accomplish such an exchange on a tax-free
basis. Without the exchange, shareholders of Sun will continue to hold Sun stock
which has more limited market activity and is more thinly traded than Capitol's
common stock. Capitol has paid quarterly cash dividends throughout the past five
years (although there is no assurance cash dividends will be paid in the
future).
When considering the possibilities of a potential share exchange
transaction involving Capitol and Sun's shareholders other than Capitol, the
Boards of Directors of Sun and Capitol each noted the conflict of interests
between Capitol and Sun in such a transaction, because of the existing ownership
of Sun by Capitol and that Capitol and Sun have some directors in common, in
addition to having common executive management and shared systems. Because of
that perceived conflict, the Boards of Directors of Sun and Capitol each formed
independent board committees to explore the possibilities of a potential share
exchange transaction between Sun and Capitol. Those committees were formed in
early November 2001. Each of the committees is comprised of three independent
directors. Each committee selected and appointed an investment banking firm in
the capacity of financial advisor to their respective committee, the objective
of which is the issuance of the respective firms' opinion as to whether the
proposed exchange is fair to Sun's or Capitol's shareholders from a financial
point of view. Sun's special board committee selected the firm of Friedman,
Billings, Ramsey & Co., Inc. (FBR). FBR has not previously been engaged by Sun
for market making or other transactions. Capitol's special board committee
selected the firm of Stifel, Nicolaus & Company, Incorporated (Stifel). Capitol
has had prior transactions with Stifel, most recently, participation in a
private placement of pooled trust-preferred securities. Stifel is a market-maker
in Capitol's common stock and Capitol Trust I, a subsidiary of Capitol. Stifel
has also published research reports and an investment rating on Capitol's common
stock.
60
Consensus between Capitol's and Sun's Directors who are not employees or
officers of Capitol was reached on November 16, 2001, to approve the proposed
exchange subject only to:
- obtaining independent opinions that the proposed share exchange is
fair to Sun's and Capitol's shareholders from a financial point of
view; and
- obtaining approval for the proposed exchange by a majority of Sun's
shares not already owned by Capitol and by Capitol's shareholders.
On November 16, 2001, the Sun and Capitol Boards approved the Plan of Share
Exchange and agreed to call separate shareholder meetings for a vote of the
respective shareholders to approve the Plan of Share Exchange.
Sun's Board of Directors has not solicited or received any other proposals
for the potential exchange or sale of Sun's shares of common stock which are not
owned by Capitol. If other proposals were under consideration for sale or
exchange of Sun's shares to an entity other than Capitol, Capitol would be
permitted to vote its shares of Sun. By virtue of Capitol's control of Sun, it
is likely that Capitol would not vote its shares of Sun in favor of any other
proposals regarding a share exchange or sale of the minority interest in Sun to
another party. In addition, Capitol currently has no intentions of selling its
interest in Sun. Hence, the only proposal under consideration is Capitol's
proposal.
SUN'S REASONS FOR THE EXCHANGE.
Sun's reasons for the exchange are that the shareholders of Sun 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 Sun's sole emphasis in the
southwestern United States.
. the Sun shareholders will receive Capitol's common stock which is more
widely traded, providing Sun's shareholders improved liquidity and a
history of cash dividends. Sun common stock has seen limited public
market activity and has not paid any cash dividends. Sun 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.
CAPITOL'S REASONS FOR THE EXCHANGE
Capitol believes that Sun's profitability will increase. As noted elsewhere
in this proxy statement/prospectus, while Sun's assets are reported as part of
Capitol's assets for purposes of its consolidated financial statements, Sun's
income or loss is attributed to Capitol only in the percentage which Capitol
owns of Sun common stock. Capitol desires to acquire the remainder of Sun's
common stock so that Capitol can include 100% of Sun's income or loss in
Capitol's consolidated income statement.
TERMS OF THE PLAN OF SHARE EXCHANGE
Terms of the exchange are set forth in the Plan of Share Exchange. The Plan
of Share Exchange is included as Annex A to this proxy statement/prospectus. You
should review the Plan of Share Exchange in its entirety. The exchange ratio is
based on an assumed value of $10.497 for each share of Sun common stock and a
value of $14.301 for each share of Capitol common stock. These assumed values
are based on the arithmetic average of the closing prices of the common stock of
Sun and Capitol for the period of October 5, 2001 through November 2, 2001 as
reported by the Nasdaq National Market, Inc. These share values result in an
exchange ratio whereby Sun shareholders (other than Capitol) will receive .734
shares of Capitol for each share of Sun common stock. Outstanding stock options
of Sun will be exchanged for stock options of Capitol with the same vesting and
expiration dates.
The effectiveness of the Plan of Share Exchange is subject to the following
conditions:
. approval of the Plan of Share Exchange by a majority of the
outstanding shares of common stock of Sun (exclusive of the shares
held by Capitol);
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. approval of the Plan of Share Exchange by a majority of the
outstanding shares of common stock of Capitol;
. the registration statement on Form S-4 registering the shares of
Capitol common stock to be issued in the exchange, of which this proxy
statement/prospectus forms a part, must have been declared effective
by the Securities and Exchange Commission;
. receipt by Sun of an opinion of a recognized firm of financial
advisors that the Plan of Share Exchange is fair from a financial
point of view to the shareholders of Sun; and
. receipt by Capitol of an opinion of a recognized firm of financial
advisors that the Plan of Share Exchange is fair from a financial
point of view to the shareholders of Capitol.
SUN'S BOARD RECOMMENDATION
SUN'S BOARD HAS DETERMINED THAT THE EXCHANGE IS FAIR TO AND IN THE BEST
INTERESTS OF SUN'S SHAREHOLDERS, HAS APPROVED THE PLAN OF SHARE EXCHANGE AND
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF SHARE
EXCHANGE.
In reaching its conclusion to approve the Plan of Share Exchange, Sun's
board consulted with Sun's management, as well as with its financial and legal
advisors, and considered the factors described under "Sun's Reasons for the
Exchange" and a number of additional factors, including the following:
(i) Sun's board considered the effectiveness of the Plan of Share
Exchange in implementing and accelerating Sun's basic long-term growth
strategy.
(ii) Sun's board analyzed the financial condition, business and
prospects of Sun and Capitol, including, but not limited to, information
with respect to their respective recent and historic stock and earnings
performance and their respective access to the capital markets. Sun's board
considered the detailed financial analyses, pro forma and other information
with respect to Sun and Capitol discussed by its financial advisors, as
well as Sun's board's own knowledge of Sun, Capitol and their respective
businesses. In light of the shared operating platforms and comingled
management of Sun and Capitol, Sun's board did not require a formal due
diligence review of Capitol's business. Sun's board also considered the
likelihood that the Plan of Share Exchange, on a pro forma basis, would be
immediately accretive to Sun's stand-alone 2002 earnings per share, and
that potential near-term dilution in the combined company's earnings per
share would be offset over time due to the anticipated strong earnings
growth trajectory embedded within Sun.
The board assessed the impact of the proposed transaction on both the
consensus Wall Street 2002 full-year earnings projection for Capitol of
approximately $1.57 per share, and the informal, internal 2002 full-year
earnings expectation for Sun of approximately $0.70 per share, to determine
the relative near-term and long-term dilution and/or accretion for each
constituent set of shareholders. Initially, based in large part on the
relative youth and developing maturity of Sun's affiliate banks, it was
anticipated that Capitol shareholders would incur approximately 10-15%
earnings per share (EPS) dilution in calendar 2002 (from the aforementioned
$1.57 per share to a preliminary pro forma estimate of approximately $1.40
per share), subject to timing issues such as the effective closing date of
the proposed transaction and the launching of new affiliates within the
system. At the same time, Sun's shareholders would hypothetically enjoy
approximately 50% EPS accretion, based upon the same assumptions and
subject to revision based upon the effective closing date of the proposed
transaction, in calendar 2002, from the aforementioned hypothetical $0.70
per share to a hypothetical preliminary pro forma estimate of $1.03 per
share. The board assumed that Capitol, with its existent approximate 50%
ownership in Sun, produced an average annualized EPS growth rate of 10-12%
(in line with Wall Street expectations for this growth-oriented
organization in a typically low-growth banking sector), but then adjusted
for the existent 50% ownership interest in Sun to a pro forma 100%
ownership in Sun, which internal projections anticipate that Sun will
experience on a stand-alone basis (simply by virtue of the ongoing
maturation of its affiliate community banks) a continued near-term
approximate 75-100% annualized EPS growth rate (with an assumed
conservative 20% annualized EPS growth trajectory beyond the next two
calendar years). It is conservatively anticipated that the potential
dilution incurred by one set of shareholders (Capitol) and the potential
accretion enjoyed by the other set of shareholders (Sun) would be offset
over time due to this anticipated strong earnings growth trajectory
embedded within Sun. In light of Sun's stock liquidity issue coupled with
the lack of a consistent, sustained investor following in the market, and
Capitol's objective of simplifying its story to the investment community
(which the directors believe may be a contributing factor to the P/E
multiple discount Capitol experiences vis-`a-vis its competitors, as
highlighted in the Opinion
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report prepared by Capitol's financial advisor, Stifel), the board
determined that pursuing the proposed transaction at this time would be in
the best long-term interests of the Corporation and its shareholders.
(iii) Sun's board considered the oral opinion of FBR, subsequently
confirmed in writing, that, as of November 16, 2001, the Plan of Share
Exchange was fair to holders of Sun common stock from a financial point of
view. See "Opinion of Sun's Financial Advisor".
(iv) Sun's board considered the effect on the shareholders' value of
Sun continuing as a stand-alone entity compared to the effect of Sun
combining with Capitol in light of the factors summarized above with
respect to the financial condition and prospects of the two companies on a
stand-alone basis and of the combined company, and the current economic and
financial environment.
(v) Sun's board considered the potential anticipated cost savings and
continued realization of operating efficiencies available to the combined
company from the Plan of Share Exchange; however, because Sun is already
patterned after Capitol and the efficient systems and architecture of its
banks, the board concluded there would probably be no material cost savings
or other operating efficiencies to be realized.
(vi) Sun's board considered the effect of the Plan of Share Exchange
on Sun's other constituencies, including its senior management and other
employees and the communities and customers served by Sun.
The foregoing discussion of the information and factors considered by
Sun's board is not intended to be exhaustive but is believed to include all
material factors considered by Sun's board. In reaching its determination
to approve and recommend the Plan of Share Exchange, Sun's board did not
assign any relative or specific weights to the foregoing factors, and
individual directors may have given differing weights to different factors.
After deliberating with respect to the Plan of Share Exchange, considering,
among other things, the matters discussed above and the opinion of FBR
referred to above, a majority of Sun's board approved and adopted the Plan
of Share Exchange, as being in the best interests of Sun and its
shareholders. A majority of Sun's board recommends that holders of Sun
Common Stock vote "FOR" approval and adoption of the Plan of Share
Exchange.
CAPITOL'S BOARD RECOMMENDATION
CAPITOL'S BOARD HAS DETERMINED THAT THE EXCHANGE IS FAIR TO AND IN THE BEST
INTERESTS OF CAPITOL'S SHAREHOLDERS, HAS APPROVED THE PLAN OF SHARE EXCHANGE AND
RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF SHARE
EXCHANGE.
In reaching its conclusion to approve the Plan of Share Exchange, Capitol's
board consulted with Capitol's management, as well as with its financial and
legal advisors, and considered the factors described under "Capitol's Reasons
for the Exchange" and a number of additional factors, including the following:
(i) Capitol's board considered the effectiveness of the Plan of Share
Exchange in implementing and accelerating Capitol's basic long-term growth
strategy and equity allocation initiatives.
(ii) Capitol's board analyzed the financial condition, business and
prospects of Capitol and Sun, including, but not limited to, information
with respect to their respective recent and historic stock and earnings
performance and their respective access to the capital markets. Capitol's
board considered the detailed financial analyses, pro forma and other
information with respect to Capitol and Sun discussed by its financial
advisors, as well as Capitol's board's own knowledge of Capitol, Sun and
their respective businesses. In light of the shared operating platforms and
comingled management of Capitol and Sun, Capitol's board did not require a
formal due diligence review of Sun's business. Capitol's board also
considered the likelihood that the Plan of Share Exchange, on a pro forma
basis, would be immediately accretive to Capitol's stand-alone 2002
earnings per share, and that potential near-term dilution in the combined
company's earnings per share would be offset over time due to the
anticipated strong earnings growth trajectory embedded within Sun.
The board assessed the impact of the proposed transaction on both the
consensus Wall Street 2002 full-year earnings projection for Capitol of
approximately $1.57 per share, and the informal, internal 2002 full-year
earnings expectation for Sun of approximately $0.70 per share, to determine
the relative near-term and long-term dilution and/or accretion for each
constituent set of shareholders. Initially, based in large part on the
relative youth and developing maturity of Sun's affiliate banks, it was
anticipated that Capitol shareholders would incur approximately 10-15%
earnings per share (EPS) dilution in calendar 2002 (from the aforementioned
$1.57 per share to a preliminary pro forma estimate of approximately $1.40
per share), subject to timing issues such as the effective closing date of
the proposed transaction and the launching of new affiliates within the
system. At the same time, Sun's shareholders would hypothetically enjoy
approximately 50% EPS accretion, based upon the
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same assumptions and subject to revision based upon the effective closing
date of the proposed transaction, in calendar 2002, from the aforementioned
hypothetical $0.70 per share to a hypothetical preliminary pro forma
estimate of $1.03 per share. The board assumed that Capitol, with its
existent approximate 50% ownership in Sun, produced an average annualized
EPS growth rate of 10-12% (in line with Wall Street expectations for this
growth-oriented organization in a typically low-growth banking sector), but
then adjusted for the existent 50% ownership interest in Sun to a pro forma
100% ownership in Sun, which internal projections anticipate that Sun will
experience on a stand-alone basis (simply by virtue of the ongoing
maturation of its affiliate community banks) a continued near-term
approximate 75-100% annualized EPS growth rate (with an assumed
conservative 20% annualized EPS growth trajectory beyond the next two
calendar years). It is conservatively anticipated that the potential
dilution incurred by one set of shareholders (Capitol) and the potential
accretion enjoyed by the other set of shareholders (Sun) would be offset
over time due to this anticipated strong earnings growth trajectory
embedded within Sun. In light of Sun's stock liquidity issue coupled with
the lack of a consistent, sustained investor following in the market, and
Capitol's objective of simplifying its story to the investment community
(which the directors believe may be a contributing factor to the P/E
multiple discount Capitol experiences vis-`a-vis its competitors, as
highlighted in the Opinion report prepared by Capitol's financial advisor,
Stifel), the board determined that pursuing the proposed transaction at
this time would be in the best long-term interests of the Corporation and
its shareholders.
(iii) Capitol's board considered the oral opinion of Stifel,
subsequently confirmed in writing, that, as of November 16, 2001, the Plan
of Share Exchange was fair to holders of Capitol common stock from a
financial point of view. See "Opinion of Capitol's Financial Advisor".
(iv) Capitol's board considered the effect on Capitol shareholders'
value of Capitol continuing as a stand-alone entity compared to the effect
of Capitol combining with Sun in light of the factors summarized above with
respect to the financial condition and prospects of the two companies on a
stand-alone basis and of the combined company, and the current economic and
financial environment.
(v) Capitol's board considered the potential anticipated cost savings
and continued realization of operating efficiencies available to the
combined company from the Plan of Share Exchange; however, because Sun is
already patterned after Capitol and the efficient systems and architecture
of its banks, the board concluded there would probably be no material cost
savings or other operating efficiencies to be realized.
(vi) Capitol's board considered the effect of the Plan of Share
Exchange on Capitol's other constituencies, including its senior management
and other employees and the communities and customers served by Capitol.
The foregoing discussion of the information and factors considered by
Capitol's board is not intended to be exhaustive but is believed to include
all material factors considered by Capitol's board. In reaching its
determination to approve and recommend the Plan of Share Exchange,
Capitol's board did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given differing
weights to different factors. After deliberating with respect to the Plan
of Share Exchange, considering, among other things, the matters discussed
above and the opinion of Stifel referred to above, a majority of Capitol's
board approved and adopted the Plan of Share Exchange, as being in the best
interests of Capitol and its shareholders. A majority of Capitol's board
recommends that holders of Capitol Common Stock vote "FOR" approval and
adoption of the Plan of Share Exchange.
ACCOUNTING TREATMENT
Capitol's acquisition of the shares of Sun not already owned by Capitol
will be treated as the acquisition of a minority interest using the purchase
method of accounting.
PRO FORMA DATA
Because Sun is already a controlled subsidiary of Capitol, it is already
included in Capitol's consolidated financial statements. Unaudited pro forma
consolidated financial information is presented in this document, illustrating
the exchange and Capitol's purchase of the minority interest of Sun (adjusted
for Sun's pending share exchange with the minority shareholders of Mesa Bank),
which is being accounted for under the purchase method of accounting, as if it
had occurred effective September 30, 2001 (shown on page 57) and at the
beginning of 2000 (shown on page 59). The accompanying notes to the unaudited
pro forma consolidated financial statements are an integral part of the
unaudited pro forma financial information. The unaudited pro forma results of
operations for the period ended September 30, 2001 are not necessarily
indicative of results for the year ending December 31, 2001 or any subsequent
period thereafter. The unaudited pro forma results of operations do not give
effect to any potential cost savings or other synergies that could result from
the share exchange. However, because Sun and Capitol are already related and
already share some executives and common systems, potential cost savings and
other synergies are not expected to be material upon completion of the share
exchange.
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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 do
not 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 Sun 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 D. 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 Sun
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;
. Sun shareholders who received their Sun common stock through the
exercise of employee stock options or otherwise as compensation;
. Sun shareholders who are not U.S. persons; and
. Sun shareholders who hold Sun common stock as part of a hedge,
straddle or conversion transaction.
The discussion also does not address any consequences arising under the
laws of any state, locality or foreign jurisdiction.
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. This means that shareholders of Sun
who exchange their Sun common stock solely for Capitol common stock will not
recognize gain or loss for tax purposes (except with respect to cash received
instead of a fractional share of Capitol common stock) and neither Capitol nor
Sun will recognize gain or loss on consummation of the exchange.
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The tax opinion of Strobl Cunningham Caretti & Sharp, P.C. is not binding
upon the Internal Revenue Service or the courts. No rulings have been or will be
sought from the Internal Revenue Service regarding any matters relating to the
exchange.
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.
REGULATORY MATTERS
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 its controlling ownership of Sun prior to Sun
commencing the business of operating as a bank holding company. 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 Sun common stock will be
publicly tradable upon consummation of the exchange. There will be no
restriction on the ability of a former Sun shareholder to sell in the open
market the Capitol common stock received (unless the Sun shareholder is also an
officer, director or affiliate of either Sun or Capitol, in which case Rule 144
and Rule 145 issued by the SEC do impose certain restrictions on the sale of
Capitol common stock).
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DISSENTERS' RIGHTS ARE NOT AVAILABLE
Holders of Sun common stock are not entitled to dissenters' rights under
Arizona law in connection with the exchange. Dissenters' rights under Arizona
law are not available in connection with the exchange because Sun's common stock
is listed on the Nasdaq National Market.
Michigan law does not provide any dissenters' rights to Capitol
shareholders who vote against 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 Sun
or Capitol under the Securities Act of 1933 at the time of the 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 Sun or Capitol for those purposes generally
include individuals or entities that control, are controlled by, or are under
common control with, Sun or Capitol, and would not include shareholders who are
not officers, directors or principal shareholders of Sun or Capitol.
The affiliates of Sun or Capitol may not sell their shares of Capitol
common stock acquired in connection with the exchange except pursuant to:
. an effective registration statement under the Securities Act covering
the resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
. another applicable exemption under the Securities Act.
Capitol's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of Capitol common
stock to be received by affiliates.
Capitol has agreed that it will cause its board of directors to adopt
resolutions consistent with the interpretive guidance of the Securities and
Exchange Commission so that the assumption of Sun stock options and exchange of
Sun common stock by Capitol is an exempt transaction for purposes of Section 16
of the Securities Exchange Act.
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OPINION OF SUN'S FINANCIAL ADVISOR
GENERAL. Pursuant to an engagement letter dated November 9, 2001 between
the Special Committee of the Board of Directors (the "Committee") of Sun
Community Bancorp Limited ("Sun" or the "Company") and Friedman, Billings,
Ramsey & Co., Inc. ("FBR"), Sun retained FBR to act as its sole financial
advisor in connection with the possible exchange of shares of common stock of
Capitol Bancorp Limited ("Capitol") for all of the outstanding shares of common
stock of Sun not presently owned by Capitol (the "Exchange"). As part of its
engagement, FBR agreed, if requested by Sun, to render an opinion with respect
to the fairness, from a financial point of view, to the holders of Sun shares of
common stock other than Capitol (the "Sun Shareholders"), of the number of
shares of common stock of Capitol to be exchanged for each share of common stock
of Sun not presently owned by Capitol (the "Exchange Ratio") as set forth in the
Plan of Share Exchange dated as of November 16, 2001 (the "Plan").
On November 15, 2001, FBR delivered its oral opinion to the Committee that
the Exchange Ratio was fair to Sun Shareholders, from a financial point of view,
as of the date of such opinion. FBR also delivered to the Sun Board of Directors
(the "Sun Board") a written opinion dated as of November 16, 2001, confirming
its oral opinion as of such date. FBR updated its November 16, 2001 opinion as
of the date of this proxy statement/prospectus.
The full text of FBR's written opinion to the Sun Board, dated as of the
date of this proxy statement/prospectus (the "Opinion") is attached as Annex B
and is incorporated herein by reference. The Opinion sets forth the assumptions
made, matters considered and extent of review by FBR. It should be read
carefully and in its entirety in conjunction with this proxy
statement/prospectus. The following summary of FBR's opinion is qualified in its
entirety by reference to the full text of the Opinion. FBR's opinion is directed
only to the fairness, from a financial point of view, of the Exchange Ratio to
the Sun Shareholders, and does not constitute a recommendation to any Sun
Shareholder as to how such shareholder should vote at the Sun Special Meeting
described in this proxy statement/prospectus.
FBR is a nationally recognized specialist in the financial services
industry in general, and in community banks and thrifts in particular. FBR is
regularly engaged in evaluations of similar businesses and in advising
institutions with regard to mergers and acquisitions, as well as raising debt
and equity capital for such institutions. Sun selected FBR as its financial
advisor based upon FBR's qualifications, expertise and reputation in such
capacity.
No limitations were imposed by Sun on FBR with respect to the
investigations made or the procedures followed in rendering its opinion. FBR was
not requested to and did not make any recommendation to the Committee or to
Sun's Board as to the form or amount of the consideration to be paid to the Sun
Shareholders in the Exchange, which was determined through arm's length
negotiations between the parties. FBR was not requested to opine as to, and its
opinion does not address, either Sun's or Capitol's underlying business decision
to proceed with or effect the Exchange or the relative merits of the Exchange
compared to any alternative transaction that might be available to either Sun or
Capitol.
FBR, in connection with rendering its opinion:
* reviewed Sun's Annual Report to Shareholders and Annual Report on Form
10-K for each of the fiscal years ended December 31, 1998, December
31, 1999, and December 31, 2000, including the audited financial
statements contained therein, and Sun's Quarterly Report on Form 10-Q
for each of the quarters ended March 31, 2001, June 30, 2001 and
September 30, 2001;
* reviewed Capitol's Annual Report to Shareholders and Annual Report on
Form 10-K for each of the fiscal years ended December 31, 1998,
December 31, 1999 and December 31, 2000, including the audited
financial statements contained therein, and Capitol's Quarterly Report
on Form 10-Q for each of the quarters ended March 31, 2001, June 30,
2001 and September 30, 2001;
* reviewed certain other public and non-public information, primarily
financial in nature, relating to the respective businesses, earnings,
assets and prospects of Sun and Capitol provided to FBR or publicly
available;
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* participated in meetings and telephone conferences with members of
senior management of Sun and Capitol concerning the financial
condition, business, assets, financial forecasts and prospects of the
respective companies, as well as other matters FBR believed relevant
to its inquiry;
* reviewed certain stock market information for the shares of common
stock of Sun ("Sun Shares") and for the shares of common stock of
Capitol ("Capitol Shares") and compared it with similar information
for certain companies, the shares of common stock of which are
publicly traded;
* compared the results of operations and financial condition of Sun and
Capitol with that of certain companies that FBR deemed to be relevant
for purposes of the Opinion;
* reviewed and discussed the regulatory examinations of both Sun and
Capitol with their respective managements, including safety and
soundness and CRA ratings;
* reviewed the Plan and its schedules and exhibits and certain related
documents;
* reviewed the draft of Form S-4 of Capitol with respect to the Exchange
and its schedules and exhibits; and
* performed such other reviews and analyses as FBR deemed appropriate.
The oral and written opinions provided by FBR to Sun were necessarily based
upon economic, monetary, financial market and other relevant conditions as of
the dates thereof.
In connection with its review and arriving at its opinion, FBR relied upon
the accuracy and completeness of the financial information and other pertinent
information provided by Sun and Capitol to FBR for purposes of rendering its
opinion. FBR did not assume any obligation to verify independently any of the
provided information as being complete and accurate in all material respects.
With regard to the financial forecasts established and developed for Sun and
Capitol with the input of the respective managements, as well as projections of
cost savings, revenue enhancements and operating synergies (which are not
expected to be material because Sun is already patterned after Capitol and the
systems and architecture of its banks), FBR assumed that these materials had
been reasonably prepared on bases reflecting the best available estimates and
judgments of Sun and Capitol as to the future performance of the separate and
combined entities and that the projections provided a reasonable basis upon
which FBR could formulate its opinion. Neither Sun nor Capitol publicly
discloses such internal management projections of the type utilized by FBR in
connection with FBR's role as financial advisor to Sun with respect to the
review of the Exchange. Therefore, such projections cannot be assumed to have
been prepared with a view towards public disclosure. The projections were based
upon numerous variables and assumptions that are inherently uncertain,
including, among others, factors relative to the general economic and
competitive conditions facing Sun and Capitol. Accordingly, actual results could
vary significantly from those set forth in the respective projections.
FBR does not claim to be an expert in the evaluation of loan portfolios or
the allowance for loan losses with respect thereto and therefore assumes that
such allowances for Sun and Capitol are adequate to cover such losses. In
addition, FBR does not assume responsibility for the review of individual credit
files and did not make an independent evaluation, appraisal or physical
inspection of the assets or individual properties of Sun or Capitol, nor was FBR
provided with such appraisals. Furthermore, FBR assumes that the Exchange will
be consummated in accordance with the terms set forth in the Plan, without any
waiver of any material terms or conditions by Sun, and that obtaining the
necessary regulatory approvals for the Exchange will not have an adverse effect
on either separate institution or the combined entity. Moreover, in each
analysis that involves per share data for Sun, FBR adjusted the data to reflect
the effect of the adjustment of the exercise price of outstanding Sun stock
options to reflect the Exchange Ratio. For purposes of the opinion, FBR assumes,
with the consent of Sun, that the Exchange will qualify as a tax-free exchange
under the United States Internal Revenue Code.
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In connection with rendering the Opinion, FBR performed a variety of
financial and comparative analyses, which are briefly summarized below. Such
summary of analyses does not purport to be a complete description of the
analyses performed by FBR. Moreover, FBR believes that these analyses must be
considered as a whole and that selecting portions of such analyses and the
factors considered by it, without considering all such analyses and factors,
could create an incomplete understanding of the scope of the process underlying
the analyses and, more importantly, the opinion derived from them. The
preparation of a financial advisor's opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analyses or a
summary description of such analyses. In its full analysis, FBR also included
assumptions with respect to general economic, financial markets and other
financial conditions. Furthermore, FBR drew from its past experience in similar
transactions, as well as its experience in the valuation of securities and its
general knowledge of the banking industry as a whole. Any estimates in FBR's
analyses were not necessarily indicative of actual future results or values,
which may significantly diverge more or less favorably from such estimates.
Estimates of company valuations do not purport to be appraisals nor to
necessarily reflect the prices at which companies or their respective securities
actually may be sold. None of the analyses performed by FBR were assigned a
greater significance by FBR than any other in deriving its opinion.
SUMMARY OF TERMS OF PROPOSED EXCHANGE: Under the terms of the Plan, each
Sun Share will be converted into the right to receive Capitol Shares according
to the Exchange Ratio. The Exchange Ratio is calculated by dividing the assumed
value of a Sun Share by the assumed value of a Capitol Share. For purposes of
this calculation, the assumed value of a Sun Share is $10.497, and the assumed
value of a Capitol Share is $14.301. These assumed values were calculated by
taking the arithmetic average of the closing prices of the Sun Shares and the
Capitol Shares, respectively, for the period beginning October 5, 2001 and
ending on November 2, 2001 as reported by the NASDAQ Stock Market, Inc. As a
result, the Exchange Ratio is 0.734 Capitol Share for each Sun Share.
[The remainder of this page intentionally left blank]
70
SUMMARY OF RESULTS OF ANALYTICAL METHODOLOGIES: The following table
summarizes the results of the principal analytical methodologies utilized by FBR
in its analysis and the implications for the Sun Shareholders with respect to
the proposed Exchange of 0.734 Capitol Shares for each Sun Share:
IMPLICATIONS FOR
ANALYTICAL METHODOLOGY RESULT SUN SHAREHOLDERS
- ---------------------- ------ ----------------
ANALYSIS OF COMPANIES COMPARABLE TO SUN Imputed Sun Share value Positive - Use of imputed Sun Share
of approximately $7.50 - Value instead of stipulated $10.497
8.50 versus Share value of would have reduced Exchange Ratio
$10.497 used in Exchange from 0.734 to approximately 0.524
Ratio calculation to 0.594
ANALYSIS OF COMPANIES COMPARABLE TO CAPITOL Imputed Capital Share Positive - Use of imputed Capitol
value before Exchange of Share Value instead of stipulated
$17.50-$18.00 versus $14.34 would have reduced Exchange
Share value of $14.301 Ratio from 0.734 to approximately
used in Exchange Ratio 0.583 to 0.600
calculation
PRO FORMA EFFECT OF THE EXCHANGE PER SUN
SHARE ON:
ESTIMATED 2001 EPS 137% increase Positive - EPS increase could provide
increase in market value of Capitol
Shares received versus current market
value of Sun Shares exchanged
ESTIMATED 2002 EPS 50% increase Positive - EPS increase could provide
increase in market value of Capitol
Shares received versus current market
value of Sun Shares exchanged
PRO FORMA BOOK VALUE PER SHARE 9.9% decrease Slightly Negative - Pro Forma Book
Value Per Share decrease could slightly
decrease market value of Capitol Shares
received versus current market value of
Sun Shares exchanged
PRO FORMA TANG. BOOK VALUE PER SHARE 16.3% decrease Slightly Negative - Pro Forma Book Value
Per Share decrease could slightly decrease
market value of Capitol Shares received
versus current market value of Sun Shares
exchanged
CASH DIVIDEND PER SHARE $0.29 versus no current Positive - Cash dividend provides
dividend incremental yield on investment for
Sun Shareholders
DISCOUNTED CASH FLOW ANALYSIS OF THE STAND-
ALONE AGGREGATE VALUE OF SUN Stand-Alone value of Sun Positive - Sun Shareholders will receive
Shares of approximately Capitol Shares having greater value
$7.64 per share versus than Stand-Alone Discounted Cash Flow
approximately $10.50 per Value of Sun Shares
Share value of Capitol
Shares to be received in
Exchange
71
COMPARABLE COMPANY ANALYSIS: FBR reviewed and compared actual stock market
data and actual and estimated selected financial information for Sun with
corresponding information for 17 publicly traded banks headquartered in the
Western United States with total assets between $500 million and $1.0 billion
which FBR deemed to be relevant (the "Sun Peer Group"). The following table
represents a summary analysis of the Sun Peer Group based on market prices as of
November 9, 2001 and the latest publicly available financial data as of or for
the twelve months ended September 30, 2001:
Mean Median Sun
---- ------ ---
Total Assets ($000's) $711,144 $671,828 $732,824
Tangible equity to tangible assets 8.04% 7.66% 7.68%
Price to estimated 2001 earnings 10.75x 10.18x 29.71x
Price to estimated 2002 earnings 9.48x 9.27x 14.64x
Price to book value 155.5% 148.7% 112.3%
Price to tangible book value 164.6% 160.3% 119.2%
Dividend yield 1.14% 0.00% 0.00%
Return on average assets 1.07% 1.14% 0.20%
Return on average equity 13.12% 13.66% 2.43%
Efficiency ratio 61.41% 63.50% 79.91%
FBR reviewed and compared actual stock market data and actual and estimated
selected financial information for Capitol, both prior to and following the
Exchange, with corresponding information for 40 publicly traded community
commercial banks headquartered in the Midwestern and Western United States with
total assets between $1.0 billion and $3.0 billion (the "Capitol Peer Group").
The following table represents a summary analysis of the Capitol Peer Group
based on market prices as of November 9, 2001 and the latest publicly available
financial data as of or for the last twelve months ended September 30, 2001:
Capitol
Before Capitol After
Mean Median Exchange Exchange
---- ------ -------- --------
Total Assets ($000's) $1,833,229 $1,775,280 $1,975,379 $1,981,872
Tangible equity to tangible assets 7.51% 7.33% 3.55% 5.18%
Price to estimated 2001 earnings 13.21x 12.78x 10.44x 12.33X
Price to estimated 2002 earnings 11.20x 11.08x 8.79x 9.75x
Price to book value 174.3% 162.8% 139.46% 124.02%
Price to tangible book value 194.9% 198.7% 155.37% 141.68%
Dividend yield 2.10% 2.21% 2.88% 2.88%
Return on average assets 1.16% 1.10% 0.57% 0.43%*
Return on average equity 14.16% 13.88% 14.68% 7.28%*
Efficiency ratio 56.30% 56.96% 67.79% 67.79%
*Based on total assets at September 30, 2001
PRO FORMA EFFECT OF THE EXCHANGE: FBR reviewed certain estimated future
operating and financial information developed by Sun and Capitol and certain
estimated future operating and financial information for the pro forma combined
entity resulting from the Exchange for the twelve month periods ended December
31, 2002 through December 31, 2006. On the basis of this estimated future
operating and financial information, FBR compared per share equivalent estimated
earnings, pro forma book value and pro forma tangible book value and cash
dividends of the resulting combined company to the stand-alone projections for
Sun. The following summarizes the pro forma impact on Sun Shareholders of the
Exchange on a per share equivalent basis:
Change Per
Sun Share
---------
Estimated 2001 earnings per share 137% increase
Estimated 2002 earnings per share 50% increase
Pro forma book value per share (9/30/01) 9.9% decrease
Pro forma tangible book value per share (9/30/01) 16.3% decrease
72
The analysis also demonstrated that the Exchange would result in the
establishment of a cash dividend for Sun Shareholders equal to approximately
$0.29 per Sun Share, assuming the Capitol Board maintains its current dividend
policy. Additionally, the market liquidity of the Capitol Shares should increase
as the number of Capitol Shares not held by directors, management and employees
of both Capitol and Sun would increase by over 50%.
DISCOUNTED CASH FLOW ANALYSIS: FBR performed a discounted cash flow
analysis with regard to Sun on a stand-alone basis over a five year horizon
beginning with the full year 2002. This analysis utilized a range of discount
rates of 10.0% to 20.0% and a range of terminal earnings multiples of 8 to 12
times. The analysis resulted in a range of present values for Sun of
approximately $28.5 million to $81.6 million and an average value of
approximately $51.5 million. This range of present values was multiplied by the
percentage of Sun Shares not presently owned by Capitol and the resulting
product (approximately $14.0 million to $40.0 million and averaging
approximately $25.2) was compared to the approximately $38.5 million of market
value of Capitol Shares which the Exchange Ratio provides Sun Shareholders. As
indicated above, this analysis was based on Sun's and Capitol's senior
management estimates and is not necessarily indicative of actual values or
actual future results and does not purport to reflect the prices at which any
securities may trade at the present or at any time in the future. FBR noted that
the discounted cash flow analysis was included because it is a widely used
valuation methodology, but noted that the results of such methodology are highly
dependent upon the numerous assumptions that must be made, including earnings
growth rates, asset growth rates, discount rates, and terminal values.
OTHER ANALYSES: FBR also reviewed certain other information including pro
forma estimated balance sheet composition, pro forma financial performance and
pro forma deposit composition.
No company used as a comparison in the above analyses is identical to Sun,
Capitol or the combined entity, and no other transaction is identical to the
Exchange. Accordingly, an analysis of the results of the foregoing is not purely
mathematical; rather, such analyses involve complex considerations and judgments
concerning differences in financial market and operating characteristics of the
companies and other factors that could affect the public trading volume of the
companies to which Sun, Capitol and the combined entity are being compared.
In connection with delivery of its opinion dated as of the date of this
Proxy Statement/Prospectus, FBR performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on which
such analyses described above were based and the factors considered in
connection therewith. FBR did not perform any analyses in addition to those
described above in updating the opinion.
For its financial advisory services provided to Sun, FBR will be paid fees
of $150,000. In addition, Sun has agreed to reimburse FBR for all reasonable
out-of-pocket expenses incurred by it on Sun's behalf, as well as indemnify FBR
against certain liabilities, including any which may arise under the federal
securities laws.
FBR in the conduct of its broker-dealer activities may have from time to
time purchased securities from, and sold securities to, Sun and/or Capitol. As a
market maker, FBR may also have purchased and sold the securities of both Sun
and Capitol for FBR's own account and for the accounts of its customers.
73
OPINION OF CAPITOL'S FINANCIAL ADVISOR
Capitol has retained Stifel, Nicolaus & Company, Incorporated as its
financial advisor in connection with the exchange because Stifel is a nationally
recognized investment-banking firm with substantial expertise in transactions
similar to the exchange. Stifel is an investment banking and securities firm
with membership on all principal United States' securities exchanges. As part of
its investment banking activities, Stifel is regularly engaged in the
independent valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. The following table summarizes Stifel's analytical methodologies,
results and implications for Capitol's shareholders:
- ---------------------------------------------------------------------------------------------------------------------------
ANALYTICAL METHODOLOGY RESULT IMPLICATIONS FOR CAPITOL SHAREHOLDERS
---------------------- ------ -------------------------------------
PRO FORMA EFFECT OF THE EXCHANGE
Per Share Impact on Capitol:
Estimated 12/31/01 Book Value 9.5% increase Positive - pro forma book value per share
of Capitol is greater than the actual
current book value per share
Estimated 12/31/01 Tangible Book Value 10.9% increase Positive - pro forma tangible book value
per share of Capitol is greater than the
actual current tangible book value per
share
Estimated 2002 GAAP Earnings (11.8%) decrease Negative - estimated pro forma EPS is less
Estimated 2003 GAAP Earnings (6.9%) decrease than would be the estimated stand-alone
Estimated 2004 GAAP Earnings (3.9%) decrease EPS of Capitol
Estimated 2005 GAAP Earnings (2.5%) decrease
- ---------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF BANK MERGER TRANSACTIONS
Acquisition Groups:
United States Bank Acquisitions Imputed value for Sun common Positive - implied purchase price based on
stock of between $5.36 and the exchange ratio is within the range of
$16.87 the imputed values for Sun common stock
Western United States Bank Acquisitions Imputed value for Sun common Positive - implied purchase price based
stock of between $5.09 and on the exchange ratio is within the range of
$19.70 the imputed values for Sun common stock
Selected United States Bank Acquisitions Imputed value for Sun common Positive - implied purchase price based on
(Return on Equity Between 3% and 7%) stock of between $6.53 and the exchange ratio is within the range of
$15.71 the imputed values for Sun common stock
- ---------------------------------------------------------------------------------------------------------------------------
PRESENT VALUE ANALYSIS Calculated stand-alone present Slightly Negative - pro forma present
value of Capitol common stock value of Capitol common stock is slightly
ranged from $13.00 to $20.00 less than the stand-alone present value
versus a calculated pro forma
present value for the combined
entity that ranged from $13.00
to $19.00
- ---------------------------------------------------------------------------------------------------------------------------
DISCOUNTED EARNINGS ANALYSIS Imputed equity value reference Positive - implied purchase price based
range for Sun common stock of on the exchange ratio is less than the
between $12.00 and $22.00 imputed equity value reference range for
which equates to Capitol's Sun common stock
purchase value of Sun between
$8.81 and $16.15 based on
exchange ratio
- ---------------------------------------------------------------------------------------------------------------------------
COMPARISON OF SELECTED COMPANIES
Including Control Premium Imputed value for Sun common Positive - implied purchase price based on
stock of between $6.23 and the exchange ratio is within the range of
$13.92 the imputed values for Sun common stock
Excluding Control Premium Imputed value for Sun common Positive - implied purchase price based on
stock of between $4.70 and the exchange ratio is within the range of
$10.50 the imputed values for Sun common stock
- ---------------------------------------------------------------------------------------------------------------------------
74
In connection with the November 15, 2001 meeting of the special committee
of the board of directors, Stifel rendered its opinion that, as of such date,
the exchange ratio pursuant to the plan was fair to the holders of Capitol
common stock from a financial point of view. Stifel has confirmed its November
15, 2001 opinion by delivery of its written opinion to the special committee of
the board of directors, dated the date of this proxy statement/prospectus, that,
based upon and subject to the various considerations set forth therein, as of
the date hereof the exchange ratio pursuant to the plan is fair to the holders
of Capitol common stock from a financial point of view.
Stifel did not ascribe a specific range of values to Capitol or Sun. Its
opinion is based on the financial and comparative analyses described below.
The full text of Stifel's opinion as of the date hereof, which sets forth
the assumptions made, matters considered and limitations of the review
undertaken, is attached as Annex C to this proxy statement/prospectus and should
be read in its entirety in connection with this proxy statement/prospectus. The
summary of the opinion of Stifel set forth in this proxy statement/prospectus is
qualified in its entirety by reference to the full text of such opinion.
No limitations were imposed by Capitol on the scope of Stifel's
investigation or the procedures to be followed by Stifel in rendering its
opinion. Stifel was not requested to and did not make any recommendation to the
special committee of the board of directors or Capitol's board of directors as
to the form or amount of the consideration to be paid to Sun or its
shareholders, which was determined through arm's length negotiations between the
parties. Stifel's opinion addressed only the fairness of the exchange ratio
solely to the shareholders of Capitol from a financial point of view, did not
address any other aspect of the exchange, and was not intended to be and does
not constitute a recommendation to any shareholder of Capitol as to how such
shareholder should vote with respect to the exchange. Stifel was not requested
to opine as to, and its opinion does not address, Capitol's underlying business
decision to proceed with or effect the exchange or the relative merits of the
exchange compared to any alternative transaction that might be available to
Capitol.
In connection with its November 15, 2001 opinion, Stifel:
* reviewed the form of the plan dated November 15, 2001;
* reviewed the financial statements of Capitol included in its 10-Ks for
the five years ended December 31, 2000 and its 10-Qs for the three
quarters ended September 30, 2001;
* reviewed the financial statements of Sun included in its 10-Ks for the
three years ended December 31, 2000, its 10-Qs for the three quarters
ended September 30, 2001, and its initial public offering prospectus,
dated July 2, 1999;
* reviewed internal financial analyses and forecasts for Capitol and Sun
prepared by their respective managements;
* conducted conversations with Capitol's and Sun's senior management
regarding their business plans and financial forecasts;
* compared financial and securities data of Capitol and Sun with various
other companies whose securities are traded in public markets and
reviewed the historical stock prices and trading volumes of the common
stock of Capitol and Sun;
* reviewed the financial terms of other comparable business
combinations, which were deemed relevant; and
* conducted such other financial studies, analyses and investigations as
it deemed appropriate for purposes of its opinion.
Stifel also took into account its assessment of general economic, market
and financial conditions and its experience in other transactions, as well as
its experience in securities valuations and its knowledge of the commercial
banking industry generally.
75
In rendering its opinion, Stifel relied upon and assumed, without
independent verification, the accuracy and completeness of all of the financial
and other information that was provided to it or that was otherwise reviewed by
it and did not assume any responsibility for independently verifying any of such
information. Stifel assumed financial forecasts supplied to it were reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the management of Capitol and Sun as to the future operating and
financial performance of Capitol and Sun, that they would be realized in the
amounts and time periods estimated and that they provided a reasonable basis
upon which Stifel could form its opinion. Stifel also assumed that there were no
material changes in the assets, liabilities, financial condition, results of
operations, business or prospects of either Capitol or Sun since the date of the
last financial statements made available to it. Stifel also assumed, without
independent verification and with Capitol's consent, that the aggregate
allowances for loan losses set forth in the financial statements of Capitol and
Sun are in the aggregate adequate to cover all such losses. Stifel did not make
or obtain any independent evaluation, appraisal or physical inspection of
Capitol's or Sun's assets or liabilities, the collateral securing any of such
assets or liabilities, or the collectibility of any such assets nor did it
review loan or credit files of Capitol or Sun. Stifel relied on advice of
Capitol's counsel and accountants as to legal and accounting matters with
respect to Capitol, the plan and the transactions and other matters contained or
contemplated therein. Stifel assumed, with Capitol's consent, that there are no
factors that would delay or subject to any adverse conditions any necessary
regulatory or governmental approval and that all conditions to the exchange will
be satisfied and not waived.
In rendering its opinion, Stifel assumed that the exchange will be
consummated as provided in the plan, will constitute a tax-free reorganization
as contemplated by the plan. Stifel's opinion was necessarily based on economic,
market, financial and other conditions as they existed on, and on the
information made available to it as of, the date of its opinion, and does not
imply any conclusion as to the price or trading range of the Capitol common
stock or the Sun common stock, which may vary depending upon various factors,
including changes in interest rates, dividend rates, market conditions, economic
conditions and other factors that influence the price of securities.
The financial forecasts furnished to Stifel for Capitol and Sun resulting
from the exchange were prepared by the managements of Capitol and Sun and
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. As a matter of policy, Capitol and Sun
do not publicly disclose internal management forecasts, projections or estimates
of the type furnished to Stifel in connection with its analysis of the financial
terms of the exchange, and such forecasts and estimates were not prepared with a
view towards public disclosure. These forecasts and estimates were based on
numerous variables and assumptions which are inherently uncertain and which may
not be within the control of the management of either Capitol or Sun, including,
without limitation, factors related to the integration of Capitol and Sun and
general economic, regulatory and competitive conditions. Accordingly, actual
results could vary materially from those set forth in such forecasts and
estimates.
In connection with rendering its November 15, 2001 opinion, Stifel
performed a variety of financial analyses that are summarized below. Such
summary does not purport to be a complete description of such analyses. Stifel
believes that its analyses and the summary set forth herein must be considered
as a whole and that selecting portions of such analyses and the factors
considered therein, without considering all factors and analyses, could create
an incomplete view of the analyses and processes underlying its opinions. The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. In its analyses, Stifel made numerous assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which are beyond the control of Capitol or Sun. Any estimates contained in
Stifel's analyses are not necessarily indicative of actual future values or
results, which may be significantly more or less favorable than suggested by
such estimates. Estimates of values of companies do not purport to be appraisals
or necessarily reflect the actual prices at which companies or their securities
actually may be sold. No company or transaction utilized in Stifel's analyses
was identical to Capitol or Sun or the exchange. Accordingly, an analysis of the
results described below is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other facts that could affect the public
trading value of the companies to which they are being compared. None of the
analyses performed by Stifel was assigned a greater significance by Stifel than
any other. The analyses described below does not purport to be indicative of
actual future results, or to reflect the prices at which Capitol common stock or
Sun common stock may trade in the public markets.
76
The following is a summary of the financial analyses performed by Stifel in
connection with providing its opinion on November 15, 2001.
PRO FORMA EFFECT OF THE EXCHANGE. Stifel reviewed estimated future
operating and financial information developed by Capitol and Sun and estimated
future operating and financial information for the pro forma combined entity
resulting from the exchange for the calendar years ended December 31, 2002
through December 31, 2005. Based on this analysis, Stifel compared Capitol's
estimated future per share results with such estimated figures for the pro forma
combined entity. Stifel compared Capitol's estimated future stand-alone GAAP
earnings per share with such estimated figures for the pro forma combined
entity. On a pro forma basis, the exchange is forecast to be approximately 10% -
12% dilutive to earnings per share for the year ending December 31, 2002.
Stifel's analysis also concluded the exchange ratio to be dilutive to earnings
per share for the years ending December 31, 2003 through December 31, 2005, with
the dilution declining in each year. Stifel also reviewed projected financial
information in order to determine the effect of the exchange on Capitol's book
value and tangible book value. Based on this analysis, at December 31, 2001, on
a pro forma basis the exchange is forecast to be accretive to Capitol's book
value per share and tangible book value per share.
Stifel calculated the following book value, tangible book value, and GAAP
earnings impact on Capitol's per share results with respect to the exchange:
Accretion/
Per Share Impact on: (Dilution)
-------------------- ----------
Estimated 12/31/01 Book Value 9.5%
Estimated 12/31/01 Tangible Book Value 10.9%
Estimated 2002 GAAP Earnings (11.8%)
Estimated 2003 GAAP Earnings (6.9%)
Estimated 2004 GAAP Earnings (3.9%)
Estimated 2005 GAAP Earnings (2.5%)
ANALYSIS OF BANK MERGER TRANSACTIONS. Stifel analyzed information relating
to recent transactions in the banking industry (while taking into account the
fact that less than a controlling interest in Sun is to be acquired pursuant to
the exchange), consisting of (1) 145 acquisitions announced between November 8,
2000 and November 8, 2001, involving sellers in all regions of the United States
with announced transaction values and excluding merger of equals transactions,
referred to below as Group A, (2) 12 acquisitions announced between November 8,
2000 and November 8, 2001, involving sellers in the western region of the United
States with announced transaction values and excluding merger of equals
transactions, referred to below as Group B, and (3) 17 acquisitions announced
between November 8, 2000 and November 8, 2001, involving sellers, with a return
on equity between 3% and 7% in the most recent reporting period, in the all
regions of the United States with announced transaction values and excluding
merger of equals transactions, referred to below as Group C. Stifel calculated
the following ratios with respect to the exchange and the selected transactions:
Capitol/
Sun Group A Selected Transactions
---- -----------------------------------------------
Ratios 25th Percentile Median 75th Percentile
- ------ --------------- ------ ---------------
Deal Price Per Share/Book Value
Per Share 106.6% 145.6% 176.4% 213.4%
Deal Price Per Share/Tangible Book
Value Per Share 113.6% 148.3% 180.2% 231.8%
Deal Price Per Share/Last 12
Months Earnings Per Share 33.8x 14.5x 17.8x 21.0x
Deal Price/Assets 13.8% 13.3% 16.2% 20.9%
Premium over Tangible Book
Value/Deposits 2.0% 4.9% 8.1% 13.7%
Deal Price/Deposits 16.3% 15.1% 18.9% 25.1%
77
Capitol/
Sun Group B Selected Transactions
---- -----------------------------------------------
Ratios 25th Percentile Median 75th Percentile
- ------ --------------- ------ ---------------
Deal Price Per Share/Book Value
Per Share 106.6% 151.4% 186.4% 242.2%
Deal Price Per Share/Tangible Book
Value Per Share 113.6% 160.8% 219.4% 262.1%
Deal Price Per Share/Last 12
Months Earnings Per Share 33.8x 16.2x 16.9x 17.3x
Deal Price/Assets 13.8% 15.5% 17.8% 23.3%
Premium over Tangible Book
Value/Deposits 2.0% 6.0% 11.1% 15.5%
Deal Price/Deposits 16.3% 17.7% 20.2% 26.3%
Capitol/
Sun Group C Selected Transactions
---- -----------------------------------------------
Ratios 25th Percentile Median 75th Percentile
- ------ --------------- ------ ---------------
Deal Price Per Share/Book Value
Per Share 106.6% 118.5% 164.2% 197.0%
Deal Price Per Share/Tangible Book
Value Per Share 113.6% 126.4% 173.4% 210.3%
Deal Price Per Share/Last 12
Months Earnings Per Share 33.8x 18.4x 21.6x 27.1x
Deal Price/Assets 13.8% 10.5% 14.8% 16.2%
Premium over Tangible Book
Value/Deposits 2.0% 2.4% 6.0% 8.3%
Deal Price/Deposits 16.3% 11.8% 16.7% 18.0%
This analysis resulted in a range of imputed values for Sun common
stock of between $5.36 and $16.87 based on the median multiples for Group A,
between $5.09 and $19.70 based on the median multiples for Group B and between
$6.53 and $15.71 based on the median multiples for Group C.
PRESENT VALUE ANALYSIS. Applying discounted cash flow analysis to the
theoretical future earnings and dividends of Capitol and Sun, Stifel compared
the calculated value of a Capitol share to the calculated value of the combined
entity. The analysis was based upon management's projected earnings growth, a
range of assumed price/earnings ratios, and a 15.0%, 17.5% and 20.0% discount
rate. Stifel selected the range of terminal price/earnings ratios on the basis
of past and current trading multiples for other publicly traded comparable
commercial banks. The stand-alone present value of Capitol common stock
calculated on this basis ranged from $13.00 to $20.00 per share. The present
value of one share of common stock in the combined entity under the terms of the
plan calculated on this basis ranged from $13.00 to $19.00 per share.
Stifel calculated the following present values with respect to the
exchange:
Discount Rates 15% - 20%
Price-to-Earnings Multiples 12.0x - 15.0x
Stand-Alone Present Value of One Share of Capitol Common Stock $13.00 - $20.00
Present Value of One Share of the Combined Entity's Common Stock $13.00 - $19.00
DISCOUNTED EARNINGS ANALYSIS. Using a discounted earnings analysis, Stifel
estimated the net present value of the future streams of after-tax earnings per
share that Sun could produce on a stand-alone basis. In this analysis, Stifel
assumed that Sun would perform in accordance with management's estimates. Stifel
calculated the sum of (1) the estimated terminal values per share of the
Company's common stock based on assumed multiples to the Company's projected
2006 earnings ranging from 12.0x to 19.5x, plus (2) the assumed 2002 - 2005
earnings streams per share, in each case discounted to present values at assumed
discount rates ranging from 13.0% to 17.0%. This discounted earnings analysis
indicated an implied equity value reference range of $12.00 to $22.00 per share
of Sun's common
78
stock. This analysis did not purport to be indicative of actual future results
and did not purport to reflect the prices at which shares of Sun's common stock
may trade in the public markets. A discounted earnings analysis was included
because it is a widely used valuation methodology, but the results of such
methodology are highly dependent upon the numerous assumptions that must be
made, including earnings growth rates, dividend payout rates and discount rates.
Stifel calculated the following net present values of the future streams of
after-tax earnings per share that Sun could produce on a stand-alone basis with
respect to the exchange:
Discount Rates 13% - 17%
Price-to-Earnings Multiples 12.0x - 19.5x
Net Present Value Per Share $12.00 - $22.00
COMPARISON OF SELECTED COMPANIES. Stifel reviewed and compared multiples
and ratios for the exchange with a peer group of 9 selected de novo banks with
assets between $200 million and $700 million which Stifel deemed to be relevant.
The group of selected banks consisted of Mercantile Bank Corporation, Macatawa
Bank Corporation, QCR Holdings, Inc., Capital Bank Corporation, Bank of the
Northwest, Tower Financial Corporation, Community Central Bank Corporation, St.
Joseph Capital Corporation and Dearborn Bancorp Inc. In order to calculate a
range of imputed values for a share of Sun common stock, Stifel applied a 32.5%
control premium to the trading prices of the selected group of comparable
companies and compared the resulting theoretical offer price to each of book
value, tangible book value, latest 12 month earnings, estimated 2001 earnings as
provided by Institutional Brokers Estimate System ("IBES"), assets, tangible
book value to deposits and deposits. Stifel then applied the resulting range of
multiples and ratios for the peer group specified above to the appropriate
financial results of Sun.
Stifel calculated the following ratios with respect to the 9 selected
comparable companies after application of the 32.5% control premium:
9 Selected
Capitol/ Comparable Companies
Ratios Sun Median
- ------ --- ------
Deal Price Per Share/Book Value
Per Share 106.6% 145.5%
Deal Price Per Share/Tangible Book
Value Per Share 113.6% 152.8%
Deal Price Per Share/Last 12
Months Earnings Per Share 33.8x 20.6x
Deal Price Per Share/Estimated
2001 Earnings Per Share 29.3x 20.3x
Deal Price/Assets 13.8% 13.9%
Premium over Tangible Book
Value/Deposits 2.0% 5.9%
Deal Price/Deposits 16.3% 19.1%
This analysis resulted in a range of imputed values for Sun common stock of
between $6.23 and $13.92 based on the median multiples and ratios for the peer
group. The 32.5% control premium selected by Stifel was based on a 5 year
analysis of market premiums paid in bank and thrift merger transactions.
Additionally, Stifel performed a similar analysis based on the public
trading prices of the selected group of comparable companies which included no
control premium.
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Stifel calculated the following ratios with respect to the 9 selected
comparable companies with no control premium applied:
9 Selected
Capitol/ Comparable Companies
Ratios Sun Median
- ------ --- ------
Deal Price Per Share/Book Value
Per Share 106.6% 109.8%
Deal Price Per Share/Tangible Book
Value Per Share 113.6% 115.3%
Deal Price Per Share/Last 12
Months Earnings Per Share 33.8x 15.6x
Deal Price Per Share/Estimated
2001 Earnings Per Share 29.3x 15.3x
Deal Price/Assets 13.8% 10.5%
Premium over Tangible Book
Value/Deposits 2.0% 1.6%
Deal Price/Deposits 16.3% 14.4%
This analysis resulted in a range of imputed values for Sun common stock of
between $4.70 and $10.50 based on the median multiples and ratios for the peer
group.
As described above, Stifel's opinion was among the many factors taken into
consideration by the special committee of the board of directors in making its
determination to approve the exchange.
Pursuant to the terms of Stifel's engagement, Capitol paid Stifel a
nonrefundable cash fee of $62,500 upon the signing of the definitive plan.
Capitol has also agreed to reimburse Stifel for out-of-pocket expenses and has
agreed to indemnify Stifel, its affiliates and their respective partners,
directors, officers, agents, consultants, employees and controlling persons
against various liabilities, including liabilities under the federal securities
laws.
In the ordinary course of its business, Stifel actively trades equity
securities of Capitol for its own account and for the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities. In addition, Stifel may trade equity securities of Sun for the
accounts of its customers.
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THE CLOSING
EFFECTIVE TIME
The exchange will be effective at 5:00 p.m., Mountain Time, on March 31,
2002 and will be closed as soon as possible after the votes at the meetings of
Sun's and Capitol's shareholders. If the Plan of Share Exchange is approved, as
of the effective date, each outstanding share of Sun common stock will be
automatically converted into the right to receive Capitol common stock according
to the exchange ratio. Outstanding stock options of Sun will similarly be
exchanged for stock options of Capitol with similar vesting and expiration
dates.
SHARES HELD BY CAPITOL
Shares of Sun common stock owned by Capitol since Sun's organization and
thereafter 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 Sun's shareholders a letter of
transmittal. The letter of transmittal will contain instructions with respect to
the surrender of Sun 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 Sun 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 Sun 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 Sun stock will represent only the right to receive the shares of
Capitol common stock into which shares of Sun 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 Sun 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 Sun shares have been converted with a record date after the exchange, and
will not be paid cash in lieu of a fractional share. 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.
Sun'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 Sun stock that is not registered in the records of Sun
has occurred, then, so long as the Sun 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 Sun shares. Instead, Capitol will pay an
amount in cash determined by multiplying the fractional share interest to which
a Sun shareholder would otherwise be entitled by the Capitol share value used in
determining the exchange ratio.
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FEES AND EXPENSES
Whether or not the exchange is completed, Capitol and Sun 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 Sun shareholders in the exchange, and Capitol must use
its reasonable best efforts to obtain approval for the listing of Capitol common
shares on the Nasdaq Stock Market, Inc. It is anticipated that Sun's shares will
be delisted from Nasdaq upon completion of exchange.
AMENDMENT AND TERMINATION
Capitol and Sun 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. The exchange will not occur if the Plan of Share Exchange is
not approved by shareholders of Capitol and Sun in the manner described in this
proxy statement/prospectus.
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THE SHAREHOLDERS' MEETINGS
DATE, TIME AND PLACE
Sun's shareholders' meeting will be held on March 27, 2002 at the offices
of Sun Community Bancorp Limited, at 2777 East Camelback Road, Suite 375,
Phoenix, Arizona 85016 at 9:00 a.m., local time.
Capitol's shareholders' meeting will be held on March 28, 2002 at the
offices of Capitol Bancorp Limited, at 200 Washington Square North, 4th Floor,
Lansing, Michigan 48933 at 4:00 p.m., local time.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETINGS
At the respective shareholders' meeting, holders of Sun and Capitol common
stock, as the case may be, will vote on whether to approve the exchange. See
"The Exchange".
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Holders of record of Sun common stock at the close of business on December
20, 2001, the record date for the shareholders' meeting, are entitled to receive
notice of and to vote at the shareholders' meeting. At December 20, 2001,
7,405,776 shares of Sun common stock were issued and outstanding. Capitol held
3,700,248 shares of Sun common stock on that date and 3,705,528 were held by
shareholders other than Capitol.
Holders of record of Capitol common stock at the close of business on
December 20, 2001, the record date for the shareholders' meeting, are entitled
to receive notice of and to vote at the shareholders' meeting. At December 20,
2001, 7,825,689 shares of Capitol common stock were issued and outstanding.
A majority of the shares of the Sun common stock (excluding shares held by
Capitol) entitled to vote on the record date must be represented in person or by
proxy at the 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 shareholders' meeting, it is expected
that the meeting will be adjourned or postponed to solicit additional proxies.
Holders of record of Sun common stock on the record date are each entitled to
one vote per share with respect to approval of the exchange at Sun's
shareholders' meeting.
A majority of the shares of the Capitol common stock entitled to vote on
the record date must be represented in person or by proxy at the 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 shareholders' meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. Holders of record of Capitol common
stock on the record date are each entitled to one vote per share with respect to
approval of the exchange at Capitol's shareholders' meeting.
No other matters are expected to come before the shareholders' meetings.
However, if any other matters are properly presented at the meetings 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 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 meeting. Neither Sun
nor Capitol is aware of any matters expected to be presented at their respective
meetings other than as described in the notices of the meeting.
VOTES REQUIRED
Although approval of the exchange by a majority of the shares entitled to
vote is all that is required by law, Sun and Capitol have agreed that approval
of the exchange will require the affirmative vote of a majority of the shares of
Sun common stock outstanding on the record date, excluding the shares of Sun
held by Capitol. Approval of the exchange by Capitol's shareholders requires a
simple majority. Abstentions and broker non-votes will have the same effect as a
vote against the proposal to approve the exchange.
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DISSENTERS' RIGHTS ARE NOT AVAILABLE
Holders of Sun common stock are not entitled to appraisal rights under
Arizona law in connection with the exchange. Appraisal rights under Arizona law
are not available in connection with the exchange because Sun's common stock is
listed on the Nasdaq National Market.
Michigan law does not provide any dissenters' rights to Capitol
shareholders who vote against the exchange.
SHARE OWNERSHIP OF SUN'S MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of the close of business on December 20, 2001, the directors and
executive officers of Sun were entitled to vote approximately 1,186,174 shares
of Sun common stock. These shares represent approximately 14.66% of the
outstanding shares of Sun common stock and 27.01% of Sun's shares held by
shareholders other than Capitol. A majority of directors and executive officers
have expressed their intent to vote their shares of Sun common stock in favor of
the exchange. It is not anticipated that any changes will be made to the
directors or management of Sun as a result of the proposed share exhange.
The following table sets forth the share ownership of beneficial owners
known to Sun who own more than 5% of the outstanding shares of Sun, share
ownership of Sun's directors and named executive officers, and the directors and
executive officers of Sun as a group as of December 20, 2001:
Shares of Sun Percent of Sun
Name Common Stock(a) Common Stock
---- --------------- ------------
Capitol Bancorp Limited 3,700,248 49.96%
200 Washington Square North
Lansing, Michigan 48933
David J. Dutton 21,000(b) <1%
Executive Officer
Joseph D. Reid* 3,135,296(c) 4.09%
Director and Executive Officer
Michael L. Kasten* 124,697(d) 1.68%
Director
Richard N. Flynn 63,422(d) <1%
Director
John S. Lewis 201,863(e) 2.66%
Director and Executive Officer
Michael J. Devine 13,440(d) <1%
Director
Michael F. Hannley 102,587(f) 1.37%
Director and Executive Officer
Richard F. Imwalle 7,985 <1%
Director
Humberto S. Lopez 188,632(d) 2.55%
Director
Lyle W. Miller* 4,150 <1%
Director
Kathryn L. Munro 5,357(g) <1%
Director
Ronald K. Sable 33,962(d) <1%
Director
All Directors and Executive Officers as a group 1,186,174(h) 14.66%
(a) Includes all shares as to which the person or entity has voting power
and/or investment power.
(b) Includes 20,000 options.
(c) Includes 275,194 options.
(d) Includes 6,422 options.
(e) Includes 192,635 options.
(f) Includes 85,464 options.
(g) Includes 2,357 options.
(h) Includes 688,760 options.
*Common directors of Sun and Capitol.
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SHARE OWNERSHIP OF CAPITOL'S MANAGEMENT
As of the close of business on December 20, 2001, the directors and
executive officers of Capitol were entitled to vote approximately 2,223,813
shares of Capitol common stock. A majority of directors and executive officers
have expressed their intent to vote their shares of Capitol common stock in
favor of the exchange. It is not anticipated that any changes will be made to
the directors or management of Capitol as a result of the proposed share
exchange.
Beneficial owners of more than 5% of Capitol's common stock and share
ownership of Capitol's directors and named executive officers and the directors
and executive officers as a group are set forth in the proxy statement for
Capitol's Annual Meeting of Shareholders held on May 3, 2001, which is
incorporated herein by reference. There have been no material changes to that
information as of the date of this proxy statement/prospectus.
VOTING OF PROXIES
SUBMITTING PROXIES
You may vote by attending the applicable 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 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
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 Sun stock will be mailed by
Capitol's transfer agent to former Sun 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 shareholders' meeting. Proxies may be
revoked by written notice, including by telegram or telecopy, to the secretary
of Sun or Capitol (as applicable), by a later-dated proxy signed and returned by
mail or by attending the shareholders' meeting and voting in person. Attendance
at the shareholders' meetings 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 shareholders' meeting to:
Sun Community Bancorp Limited Capitol Bancorp Limited
2777 East Camelback Road, Suite 375 200 Washington Square North
Phoenix, Arizona 85016 Lansing, Michigan 48933
Attn: Richard N. Flynn, Secretary Attn: David O'Leary, Secretary
If you require assistance in changing or revoking a proxy, you should
contact Sun and Capitol's internal Securities Counsel, Cristin Reid English, at
either address above or at phone number (517) 487-6555.
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 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.
85
Abstentions may be specified on all proposals. If you submit a proxy with
an abstention, you will be treated as present at the 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.
Capitol and Sun are each responsible for the payment of fees and expenses
of their respective financial advisors, legal counsel and accountants.
SOLICITATION OF PROXIES; EXPENSES
Capitol and Sun will each pay the cost of solicitation of proxies for their
respective meetings which is estimated to approximate $12,000 for each company.
In addition to solicitation by mail, the directors, officers and employees of
Capitol or Sun may also solicit proxies from shareholders by telephone,
telecopy, telegram or in person. As of February 11, 2002, no costs have been
incurred by Capitol or Sun in connection with solicitation of proxies for the
Plan of Share Exchange.
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COMPARISON OF SHAREHOLDER RIGHTS
As a result of the exchange, holders of shares of Sun stock will become
holders of shares of Capitol common stock. This comparison of shareholder rights
is not intended to be complete and is qualified by reference to the Arizona
Revised Statutes, as well as to Sun's articles of incorporation and by-laws
(copies of which are on file with the SEC) and the Michigan Business Corporation
Act as well as to Capitol's articles of incorporation and by-laws, (copies of
which are on file with the SEC).
The following summary compares various rights, privileges and restrictions
applicable to shareholders of Sun and Capitol:
Sun Capitol
---------- -------
Authorized Capital Stock 50,000,000 25,000,000
Preemptive Rights None None
Quorum Requirements Majority Majority
Special Meetings of Stockholders Called by CEO, majority of the Called by CEO, majority of the
board or shareholders board or shareholders
representing 25% of the shares representing 25% of the shares
entitled to vote entitled to vote
Stockholder Action by Written Consent Yes, if unanimous Yes, if unanimous
Inspection of Voting List of Stockholders Inspector may be appointed by Inspector may be appointed by
the Board, by the person the Board, by the person
presiding at shareholders' presiding at shareholders'
meeting or by the request of a meeting or by the request of a
shareholder shareholder
Classification of the Board of Directors No No
Election of the Board of Directors Annually by shareholders Annually by shareholders
Cumulative Voting Yes No
Number of Directors 5-25 5-25
Removal of Directors By a majority of the By a majority of the
outstanding shares of stock outstanding shares of stock
Vacancies on the Board of Directors May be filled by a majority of May be filled by a majority of
the Board of Directors the Board of Directors
Liability of Directors Eliminated to the fullest Eliminated to the fullest
extent provided by law extent provided by law
Indemnification of Directors, Officers,
Employees or Agents Yes Yes
Amendments to Articles of Incorporation By a majority of the By a majority of the
outstanding shares outstanding shares
Amendments to Bylaws By majority of directors By majority of directors
Appraisal/Dissenters' Rights Arizona law provides for
appraisal rights, they are not
applicable in this transaction No
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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 December 20, 2001, 7,825,689 shares of common stock were
outstanding. UMB Bank, n.a., serves as transfer agent and registrar for
Capitol's common stock.
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.
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 a 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
88
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 TRUST-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 also has additional trust-preferred
securities which were private placed. 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 approximates $50 million at an average interest
rate approximating 8.50%-8.75% per annum, payable quarterly.
ANTI-TAKEOVER PROVISIONS
In addition to the utilization of authorized but unissued shares as
described above, the MBCA contains other provisions which could be utilized by
Capitol to impede 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.
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.
89
As of December 20, 2001 Capitol's management beneficially owned (including
immediately exercisable stock options) control of approximately 28.42% of
Capitol's outstanding common stock. It is now unknown what percentage will be
owned by management upon completion of 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.
90
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 Sun 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
Sun and Capitol for the special shareholders' meetings. 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 and Sun file 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 Chicago Regional Office Citicorp Center
450 Fifth Street, N.W. 500 West Madison Street
Room 1024 Suite 1400
Washington, D.C. 20549 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 and Sun, 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 and Sun at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The SEC allows Capitol to "incorporate by reference" the information it
files with the SEC. This permits Capitol to disclose important information to
you by referring to these filed documents. Any information referred to in this
way is considered part of this proxy statement/prospectus, except for any
information superseded by information in, or incorporated by reference in, this
proxy statement/prospectus. Capitol incorporates by reference the following
documents that have been filed with the SEC:
Capitol Bancorp Ltd. SEC Filings
(File No. 0-18461) Period
------------------ ------
* Quarterly Report on Form 10-Q Quarter ended September 30, 2001
* Quarterly Report on Form 10-Q Quarter ended June 30, 2001
* Quarterly Report on Form 10-Q Quarter ended March 31, 2001
* Annual Report on Form 10-K Year ended December 31, 2000
* Proxy Statement on Schedule 14A Annual Meeting Held May 3, 2001
91
In addition, all subsequent documents filed with the SEC by Capitol and Sun
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 after the date of this proxy statement/ prospectus, and prior to the
meetings of shareholders in connection with the exchange, 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 MARCH 15, 2002 TO
RECEIVE THEM BEFORE THE SHAREHOLDERS' MEETING. If you request exhibits to any
documents incorporated by reference, Capitol or Sun (as applicable) will mail
them to you by first class mail, or another equally prompt means, within one
business day after your request is received.
No one has been authorized to give any information or make any
representation about Sun, 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 Sun has been supplied by Sun.
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 Bancorp Limited
incorporated by reference in this proxy statement/prospectus included in Capitol
Bancorp Limited's annual report to shareholders incorporated by reference in the
Company's Annual Report on Form 10-K have been audited by BDO Seidman, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their report incorporated herein by reference in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Sun Community Bancorp Limited
included in this proxy statement/prospectus have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the periods
set forth in their report appearing elsewhere herein and is included in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing.
92
ANNEX A
PLAN OF SHARE EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into effective November 16,
2001 between and among CAPITOL BANCORP LIMITED, a Michigan corporation
("Capitol") and the SHAREHOLDERS of SUN COMMUNITY BANCORP LIMITED ("Sun").
RECITALS
A. Sun is an Arizona corporation whose stock (Sun common stock) is traded
on the National Market System of the NASDAQ Stock Market, Inc. and commenced
operations in 1997.
B. Capitol is now, and has been since Sun commenced operations, the holder
of a controlling interest in the duly issued and outstanding common stock of
Sun.
C. Sun is subject to an antidilution agreement which gives Capitol the
right to acquire additional shares up to a 51% interest in Sun anytime Sun
issues new shares.
D. Capitol's common stock ("Capitol common stock") is traded on the
National Market System of the NASDAQ Stock Market, Inc.
E. Sun's Board of Directors has determined that it would be in the best
interest of Sun's stockholders to exchange their shares of stock in Sun for
shares of Capitol common stock as described in this Plan, and Capitol is willing
to make an exchange on those terms.
The parties adopt this Plan as of the effective date.
1. THE EXCHANGE. Each shareholder who holds Sun common stock will exchange
his, her or their shares of Sun common stock for shares of Capitol common stock
according to an exchange ratio. The exchange ratio is based on an assumed value
of $10.497 for each share of Sun common stock and a value of $14.301 for each
share of Capitol common stock. These assumed values are based on the arithmetic
average of the closing prices of the common stock of Sun and Capitol for the
period of October 5, 2001 through November 2, 2001 as reported by the NASDAQ
Stock Market, Inc. Based on these relative values, each Sun share would be
exchanged for .734 shares of Capitol common stock, if the proposed share
exchange is approved. Outstanding stock options of Sun will be exchanged for
stock options of Capitol with the same vesting and expiration dates.
Each Sun shareholder (except Capitol) will receive shares of Capitol
common stock in exchange for his, her or their Sun common stock calculated by
multiplying the number of shares of Sun 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 Sun shall have approved and adopted the
Plan.
b. The Board of Directors of Capitol shall have approved and adopted
the Plan.
c. A majority of the common stock of Sun (exclusive of the shares
held by Capitol) shall have been voted to approve and adopt the
Plan at a meeting of the shareholders called for that purpose.
d. A majority of the common stock of Capitol shall have been voted
to approve and adopt the Plan at a meeting of the shareholders
for that purpose.
e. The Securities and Exchange Commission shall have declared
effective the Registration Statement registering the shares of
stock of Capitol common stock to be issued in the exchange.
3. FAIRNESS OPINION. The following fairness opinions shall be obtained
prior to the Plan becoming effective:
a. The Board of Directors of Sun 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 Sun.
Such firm has been appointed by a special committee of
independent directors of Sun formed to explore the transaction.
b. The Board of Directors of Capitol 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 Capitol. Such firm has been appointed by a
special committee of independent directors of Capitol formed to
explore the transaction.
4. INDEPENDENT COUNSEL. Independent law firms have been retained to review
the proposed transaction on behalf of both companies. Snell and Wilmer, L.L.P.
has been retained by Sun to review the transaction. The firm of Strobl
Cunningham Caretti & Sharp, P.C. has been retained to review the transaction on
behalf of Capitol and to issue a tax opinion as to whether the share exchange
will constitute a reorganization within the means of section 368 of the Internal
revenue code of 1986, as amended.
5. SURRENDER OF CERTIFICATES. Each shareholder of Sun common stock shall
surrender to Capitol his, her or their certificate(s) for shares of Sun common
stock. 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 Sun common stock surrendered in exchange therefor,
and shall thereafter be transferable in the same manner as otherwise provided
for Capitol common stock. Shareholders of Sun will not be paid dividend
payments, if any, paid by Capitol until such time as their certificates have
been exchanged. Any such withheld dividend payment will be paid upon exchange of
the certificate(s).
6. NEW SUN CERTIFICATE. Sun shall issue its certificate registering in the
name of Capitol all shares of stock now registered to shareholders other than
Capitol.
7. FEES. Each company shall bear the cost of their respective attorney fees
and investment banking fees, as well as fees associated with the solicitation
for and the holding of their special shareholders meeting.
8. The transaction will be governed by the laws of the State of Michigan.
ANNEX B
OPINION OF SUN'S FINANCIAL ADVISOR
November 16, 2001
Board of Directors
Sun Community Bancorp Limited
2777 East Camelback Road, Suite 375
Phoenix, AZ 85016
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR") provide
you with its opinion as to the fairness, from a financial point of view, to the
holders of shares of common stock ("Stockholders") of Sun Community Bancorp
Limited ("Sun" or the "Company") of the Exchange Ratio (as hereinafter defined)
to be utilized in the possible exchange (the "Exchange") of shares of common
stock of Capitol Bancorp Limited ("Capitol") for all of the outstanding shares
of common stock of Sun not presently owned by Capitol (the "Sun Shares") as set
forth in the Plan of Share Exchange dated as of November 16, 2001 (the "Plan").
As used herein, Stockholders shall mean all holders of shares of common stock of
Sun other than Capitol.
Under the terms of the Plan, each Sun Share will be converted into the right to
receive shares of common stock of Capitol (the "Capitol Shares") according to
the Exchange Ratio. The Exchange Ratio is calculated by dividing the assumed
value of a Sun Share by the assumed value of a share of common stock of Capitol.
For purposes of this calculation, the assumed value of a Sun Share is $10.497,
and the assumed value of a Capitol Share is $14.301. These assumed values were
calculated by taking the arithmetic average of the closing prices of the Sun
Shares and the Capitol Shares, respectively, for the period beginning October 5,
2001 and ending on November 2, 2001 as reported by the NASDAQ Stock Market, Inc.
As a result, the Exchange Ratio is 0.734 Capitol Share for each Sun Share. The
complete terms of the proposed transaction are described in the Plan, and this
summary is qualified in its entirety by reference thereto. The Plan will be
considered at a special meeting of the Stockholders of Sun.
FBR, in connection with rendering this opinion:
* reviewed Sun's Annual Report to Shareholders and Annual Report on
Form 10-K for each of the fiscal years ended December 31, 1998,
December 31, 1999, and December 31, 2000, including the audited
financial statements contained therein, and Sun's Quarterly
Report on Form 10-Q for each of the quarters ended March 31,
2001, June 30, 2001 and September 30, 2001;
* reviewed Capitol's Annual Report to Shareholders and Annual
Report on Form 10-K for each of the fiscal years ended December
31, 1998, December 31, 1999 and December 31, 2000, including the
audited financial statements contained therein, and Capitol's
Quarterly report on Form 10-Q for each of the quarters ended
March 31, 2001, June 30, 2001 and September 30, 2001;
* reviewed certain other public and non-public information,
primarily financial in nature, relating to the respective
businesses, earnings, assets and prospects of Sun and Capitol
provided to FBR or publicly available;
* participated in meetings and telephone conferences with members
of senior management of Sun and Capitol concerning the financial
condition, business, assets, financial forecasts and prospects of
the respective companies, as well as other matters FBR believed
relevant to its inquiry;
* reviewed certain stock market information for the Sun Shares and
for the Capitol Shares and compared it with similar information
for certain companies, the shares of common stock of which are
publicly traded;
* compared the results of operations and financial condition of Sun
and Capitol with that of certain companies that FBR deemed to be
relevant for purposes of the Opinion;
* reviewed and discussed the regulatory examinations of both Sun
and Capitol with their respective managements, including safety
and soundness and CRA ratings;
* reviewed the Plan and its schedules and exhibits and certain
related documents;
* reviewed the draft of Form S-4 of Capitol with respect to the
Exchange and its schedules and exhibits; and
* performed such other reviews and analyses as FBR deemed
appropriate.
In rendering this opinion, FBR did not assume responsibility for independently
verifying, and did not independently verify, any financial or other information
concerning Sun and Capitol furnished to it by Sun or Capitol, or the
publicly-available financial and other information regarding Sun, Capitol and
other financial institutions (or their holding companies). FBR has assumed that
all such information is accurate and complete and has no reason to believe
otherwise. FBR has further relied on the assurances of management of Sun and
Capitol that they are not aware of any facts that would make such financial or
other information relating to such entities inaccurate or misleading. With
respect to financial forecasts for Sun and Capitol provided to FBR by their
respective managements, FBR has assumed, for purposes of this opinion, that the
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of such management at the time of preparation as to the
future financial performance of Sun and Capitol. FBR has assumed that there has
been no undisclosed material change in Sun's or Capitol's assets, financial
condition, results of operations, business or prospects since September 30,
2001. FBR did not undertake an independent appraisal of the assets or
liabilities of Sun or Capitol nor was FBR furnished with any such appraisals.
FBR is not an expert in the evaluation of allowances for loan losses, was not
requested to and did not review such allowances, and was not requested to and
did not review any individual credit files of Sun or Capitol. FBR's conclusions
and opinion are necessarily based upon economic, market and other conditions and
the information made available to FBR as of the date of this opinion. FBR
expresses no opinion on matters of a legal, regulatory, tax or accounting nature
related to the Plan.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
savings institutions and financial institution holding companies, initial and
secondary offerings and mutual-to-stock conversions of savings institutions, as
well as business valuations for other corporate purposes for financial
institutions and real estate related companies. FBR has experience in, and
knowledge of, the valuation of bank and thrift securities in Arizona and the
rest of the United States.
FBR has acted as a financial advisor to Sun in connection with the Exchange and
will receive a nonrefunadable fee for services rendered of $150,000. In
addition, Sun has agreed to reimburse FBR for all reasonable out-of-pocket
expenses incurred by it on Sun's behalf, as well as indemnify FBR against
certain liabilities, including any which may arise under the federal securities
laws. In the ordinary course of FBR's business, it may provide investment
banking services to Capitol for which FBR will receive compensation.
Furthermore, FBR may effect transactions in the securities of Sun or Capitol for
its own account and/or for the accounts of its customers and, accordingly, may
at any time hold long or short positions in such securities. From time to time,
principals and/or employees of FBR may also have positions in such securities.
Based upon and subject to the foregoing, as well as any such other matters as we
consider relevant, it is FBR's opinion, as of the date hereof, that the Exchange
Ratio is fair, from a financial point of view, to the Stockholders of Sun.
This letter is solely for the information of the Board of Directors and
Stockholders of Sun and may not be relied upon by any other person or used for
any other purpose, reproduced, disseminated, quoted from or referred to without
FBR's prior written consent; provided, however, this letter may be referred to
and reproduced in its entirety in proxy materials sent to the Stockholders in
connection with the solicitation of approval for the Plan.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
ANNEX C
OPINION OF CAPITOL'S FINANCIAL ADVISOR
November 15, 2001
The Special Committee of the Board of Directors:
Mr. Douglas E. Crist, Chairman
Mr. Louis G. Allen
Mr. Leonard Maas
Capitol Bancorp Ltd.
200 Washington Square North
Lansing, MI 48933
Dear Members of the Special Committee:
You have requested our opinion as to the fairness from a financial point of
view solely to the shareholders of Capitol Bancorp Ltd. ("Capitol") of the
exchange ratio (the "Exchange Ratio") of 0.734 shares of common stock, without
par value per share, of Capitol (the "Capitol Common Stock") to be exchanged for
each share of common stock, without par value per share, of Sun Community
Bancorp Limited ("Sun") pursuant to the terms of the Plan of Share Exchange
dated as of November 16, 2001, between and among Capitol and the shareholders of
Sun (the "Plan"). For the purposes of our opinion, we have assumed that the
exchange between Sun and Capitol pursuant to the Plan (the "Exchange") will
constitute a tax-free reorganization.
Stifel, Nicolaus & Company, Incorporated ("Stifel"), as part of its
investment banking services, is regularly engaged in the independent valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. We
have been retained by Capitol to render a fairness opinion to the Special
Committee of the Board of Directors of Capitol (the "Special Committee") in
connection with the Plan. We will receive a fee for our services under the terms
of our engagement letter with the Special Committee dated November 9, 2001, as
previously provided to and approved by Capitol's Board of Directors. The fee,
which is payable upon delivery of this opinion to the Special Committee, is not
contingent upon the approval or consummation of the transaction. In addition,
Capitol has agreed to indemnify us for certain liabilities that may arise out of
the rendering of this opinion and to reimburse us for our reasonable expenses
incurred in connection with the performance of our services. In the ordinary
course of its business, Stifel actively trades equity securities of Capitol for
its own account and for the accounts of its customers and, accordingly, may at
any time hold a long or short position in such securities. In addition, Stifel
may trade equity securities of Sun for the accounts of its customers.
In rendering our opinion, we have reviewed, among other things: the form of
the Plan; the financial statements of Capitol included in its 10-Ks for the five
years ended December 31, 2000 and its 10-Qs for the three quarters ended
September 30, 2001; the financial statements of Sun included in its 10-Ks for
the three years ended December 31, 2000, its 10-Qs for the three quarters ended
September 30, 2001, and its initial public offering prospectus, dated July 2,
1999; certain internal financial analyses and forecasts for Capitol and Sun
prepared by their respective managements; and certain internal financial
forecasts for Capitol and Sun on a combined basis, giving effect to the
Exchange, prepared by the management of Capitol. We have conducted conversations
with Capitol's senior management regarding recent developments and managements'
financial forecasts for Capitol and Sun. We have also compared certain financial
and securities data of Capitol and Sun with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the common stock of Capitol and Sun, reviewed the
financial terms of certain other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion. We also took into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuations and our
knowledge of the commercial banking industry generally.
The Special Committee of the Board of Directors
November 15, 2001
Page 2
In rendering our opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness of all of the financial
and other information that was provided to us or that was otherwise reviewed by
us and have not assumed any responsibility for independently verifying any of
such information. With respect to the financial forecasts supplied to us
(including without limitation, projected cost savings and operating synergies
resulting from the Exchange), we have assumed with your consent that they were
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of Capitol and Sun as to the future operating and
financial performance of Capitol and Sun, that they would be realized in the
amounts and time periods estimated and that they provided a reasonable basis
upon which we could form our opinion. We also assumed that there were no
material changes in the assets, liabilities, financial condition, results of
operations, business or prospects of either Capitol or Sun since the date of the
last financial statements made available to us. We have also assumed, without
independent verification and with your consent, that the aggregate allowances
for loan losses set forth in the financial statements of Capitol and Sun are in
the aggregate adequate to cover all such losses. We did not make or obtain any
independent evaluation, appraisal or physical inspection of Capitol's or Sun's
assets or liabilities, the collateral securing any of such assets or
liabilities, or the collectibility of any such assets nor did we review loan or
credit files of Capitol or Sun. We relied on advice of Capitol's counsel and
accountants as to certain legal and accounting matters with respect to Capitol,
the Plan and the transactions and other matters contained or contemplated
therein. We have assumed, with your consent, that there are no factors that
would delay or subject to any adverse conditions any necessary regulatory or
governmental approval and that all conditions to the Exchange will be satisfied
and not waived. We have not been requested to analyze, nor are we expressing any
opinion with respect to, the fairness of the exchange ratio to the shareholders
of Sun.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. Our opinion is directed to the Special Committee for
its information and assistance in connection with its consideration of the
financial terms of the transaction contemplated by the Exchange solely from the
financial point of view of the shareholders of Capitol and does not constitute a
recommendation to any shareholder as to how such shareholder should vote on the
proposed transaction, nor have we expressed any opinion as to the prices at
which any securities of Capitol or Sun might trade in the future. Except as
required by applicable law, including without limitation federal securities
laws, our opinion may not be published or otherwise used or referred to, nor
shall any public reference to Stifel be made, without our prior written consent.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion, as of the date hereof, that the Exchange Ratio pursuant to the
Plan is fair to the holders of Capitol Common Stock from a financial point of
view.
Very truly yours,
STIFEL, NICOLAUS & COMPANY, INCORPORATED
ANNEX D
[Letterhead of Strobl Cunningham Caretti & Sharp, P.C.]
February 11, 2002
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 Sun
Community Bancorp Limited ("Sun").
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 Sun 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 Sun 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 Sun 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;
* no gain or loss will be recognized by the shareholders of Sun who
exchange their Sun 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 Sun
shareholders who exchange all of their Sun common stock for Capitol
common stock in the exchange will be the same as the aggregate tax
basis of the Sun 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 Sun common stock surrendered in
exchange; and
Capitol Bancorp Ltd.
Page 2
February 11, 2002
* a holder of Sun common stock who 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 Sun 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 Sun common stock exchanged for the fractional
share of Capitol common stock is more than the long-term holding
period.
* Neither Capitol nor Sun will recognize any gain or loss or any taxable
event upon the consummation of the share exchange.
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. 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.
Index to Financial Statements of Sun
Contents
Condensed Consolidated Interim Financial Statements:
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000 .................................................. F-2
Consolidated Statements of Income for the Nine Months
Ended September 30, 2001 and 2000 .................................. F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2001 and 2000 .............. F-4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000 .................................. F-5
Notes to Consolidated Interim Financial Statements ................... F-6
Audited Consolidated Financial Statements:
Report of Independent Auditors ....................................... F-9
Consolidated Balance Sheets as of December 31, 2000 and 1999 ......... F-10
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998 ............................. F-11
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2000, 1999 and 1998 ............... F-12
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998 ............................. F-13
Notes to Consolidated Financial Statements ........................... F-14
F-1
SUN COMMUNITY BANCORP LIMITED
Consolidated Balance Sheets
As of September 30, 2001 and December 31, 2000
September 30 December 31
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 29,240,740 $ 25,464,080
Interest-bearing deposits with banks 17,410,381 15,949,167
Federal funds sold 56,051,000 32,027,090
------------- -------------
Total cash and cash equivalents 102,702,121 73,440,337
Loans held for resale 10,187,528 6,610,065
Investment securities available for sale,
carried at market value 13,185,430 13,609,399
Portfolio loans:
Commercial 560,931,114 399,056,329
Real estate mortgage 16,114,003 13,712,563
Installment 16,348,096 9,575,197
------------- -------------
Total portfolio loans 593,393,213 422,344,089
Less allowance for loan losses (7,903,000) (5,440,000)
------------- -------------
Net portfolio loans 585,490,213 416,904,089
Premises and equipment, net 5,834,634 5,959,724
Accrued interest income 3,055,706 2,701,454
Other assets 12,368,595 7,607,448
------------- -------------
TOTAL ASSETS $ 732,824,227 $ 526,832,516
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 111,373,005 $ 85,880,783
Interest-bearing 522,207,676 356,682,317
------------- -------------
Total deposits 633,580,681 442,563,100
Debt obligations 8,287,500
Accrued interest on deposits and
other liabilities 5,318,204 4,329,495
------------- -------------
Total liabilities 647,186,385 446,892,595
MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES 25,886,713 27,245,878
STOCKHOLDERS' EQUITY
Common stock, no par value:
10,000,000 shares authorized;
6,373,412 shares issued and outstanding
in 2001 and 5,809,317 in 2000 60,510,358 54,959,627
Retained-earnings (deficit) 486,481 (965,582)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) 68,393 (11,418)
Less treasury stock (1,314,103) (1,288,584)
------------- -------------
Total stockholders' equity 59,751,129 52,694,043
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 732,824,227 $ 526,832,516
============= =============
F-2
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 2001 and 2000
Nine Months Ended
September 30
---------------------------
2001 2000
----------- -----------
Interest income:
Portfolio loans (including fees) $40,208,098 $24,089,988
Loans held for resale 532,684 192,165
Taxable investment securities 496,616 973,450
Federal funds sold and other 2,273,779 2,243,826
----------- -----------
Total interest income 43,511,177 27,499,429
Interest expense:
Demand deposits 5,655,330 4,103,305
Savings deposits 32,123 17,754
Time deposits 11,082,393 5,436,029
Debt obligations and other 95,422 1,353
----------- -----------
Total interest expense 16,865,268 9,558,441
----------- -----------
Net interest income 26,645,909 17,940,988
Provision for loan losses 2,769,613 2,667,480
----------- -----------
Net interest income after provision
for loan losses 23,876,296 15,273,508
Noninterest income:
Service charges on deposit accounts 916,364 476,605
Other 229,679 218,501
----------- -----------
Total noninterest income 1,146,043 695,106
Noninterest expense:
Salaries and employee benefits 13,063,260 8,921,897
Occupancy 2,006,090 1,435,009
Equipment rent, depreciation and
maintenance 1,568,180 1,222,392
Other 5,572,075 3,999,751
----------- -----------
Total noninterest expense 22,209,605 15,579,049
----------- -----------
Income before federal income taxes and
minority interest 2,812,734 389,565
Federal income taxes 899,000 134,000
----------- -----------
Income before minority interest 1,913,734 255,565
Credit (charge) resulting from minority interest in
net losses (income) of consolidated subsidiaries (461,671) 249,579
----------- -----------
NET INCOME $ 1,452,063 $ 505,144
=========== ===========
NET INCOME PER SHARE - Note D
F-3
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Months Ended September 30, 2001 and 2000
Accumulated
Retained Other
Earnings Comprehensive Treasury
Common Stock (Deficit) Income Stock Total
------------ ------------ ------------ ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Balances at January 1, 2000 $ 51,867,516 $ (1,772,622) $ (92,119) $ 50,002,775
Purchase of 102,500 shares of common
stock for treasury $ (1,062,010) (1,062,010)
Net proceeds from issuance of 7,500
shares of common stock upon exercise of
stock options 42,240 42,240
Issuance of 297,947 shares of common
stock upon acquisition of minority
interest in consolidated bank subsidiary 3,049,871 3,049,871
Components of comprehensive income:
Net income for the period 505,144 505,144
Market value adjustment for
investment securities available
for sale (net of tax effect) 29,692 29,692
------------
Comprehensive income for
the period 534,836
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 2000 $ 54,959,627 $ (1,267,478) $ (62,427) $ (1,062,010) $ 52,567,712
============ ============ ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30 2001:
Balances at January 1, 2001 $ 54,959,627 $ (965,582) $ (11,418) $ (1,288,584) $ 52,694,043
Purchase of 3,900 shares of common stock
for treasury (25,519) (25,519)
Issuance of 563,095 shares of common
stock upon acquisition of minority
interests in consolidated bank subsidiaries 5,550,731 5,550,731
Components of comprehensive income:
Net income for the period 1,452,063 1,452,063
Market value adjustment for investment
securities available
for sale (net of tax effect) 79,811 79,811
------------
Comprehensive income
for the period 1,531,874
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 2001 $ 60,510,358 $ 486,481 $ 68,393 $ (1,314,103) $ 59,751,129
============ ============ ============ ============ ============
F-4
SUN COMMUNITY BANCORP LIMITED
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net income $ 1,452,063 $ 505,144
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest in net income (losses)
of consolidated subsidiaries 461,671 (249,579)
Provision for loan losses 2,769,613 2,667,480
Depreciation of premises and equipment 1,252,530 1,006,204
Amortization of goodwill 168,732 45,225
Net accretion of investment security discounts (7,820) (51,831)
Gain from sale of premises and equipment (181)
Origination and purchases of loans held for resale (123,051,289) (41,981,618)
Proceeds from sales of loans held for resale 119,473,826 38,920,681
Decrease (increase) in accrued interest income and other assets (3,484,700) 1,677,205
Increase (decrease) in accrued interest and other liabilities 988,709 (153,585)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,154 2,385,326
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available for sale 11,661,108 44,444,649
Purchases of investment securities available for sale (11,108,393) (23,605,199)
Net increase in portfolio loans (171,356,124) (170,700,567)
Purchases of premises and equipment (1,143,504) (1,613,510)
Proceeds from sale of premises and equipment 16,245
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (171,930,668) (151,474,627)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts 107,867,110 79,308,035
Net increase in certificates of deposit 83,150,471 89,461,120
Proceeds from short-term borrowings 8,287,500 1,050,000
Purchase of common stock for treasury (25,519) (1,062,010)
Net proceeds from issuance of common stock 42,240
Purchase of minority interests (1,507,945)
Resources provided by minority interests 3,397,681 2,038,208
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 201,169,298 170,837,593
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 29,261,784 21,748,292
Cash and cash equivalents at beginning of period 73,440,337 48,814,658
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 102,702,121 $ 70,562,950
============= =============
F-5
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Sun
Community Bancorp Limited (Sun) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q. Accordingly, they do not include all information and
footnotes necessary for a fair presentation of consolidated 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 (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Sun
considers necessary for a fair presentation of the interim periods.
The results of operations for the nine-month period ended September 30,
2001 are not necessarily indicative of the results to be expected for the year
ending December 31, 2001.
The consolidated balance sheet as of December 31, 2000 was derived from
audited consolidated financial statements as of that date. Certain 2000 amounts
have been reclassified to conform to the 2001 presentation.
NOTE B - NEW BANKS AND PENDING BANK APPLICATIONS
Sunrise Bank of San Diego, located in San Diego, California, opened in
January 2001. It is majority-owned by Sunrise Capital Corporation, which is
majority-owned by Sun.
As of September 30, 2001, efforts were underway for the formation of
additional banks in California and Nevada.
NOTE C - ACQUISITION OF MINORITY INTERESTS IN BANK SUBSIDIARIES
Effective June 30, 2001, Camelback Community Bank (previously a
majority-owned subsidiary of Sun) became a wholly-owned subsidiary resulting
from the minority shareholders of Camelback exchanging their Camelback shares
for shares of Sun. The exchange ratio was based on 150% of Camelback's adjusted
book value. As a result of the share exchange, the minority owners of Camelback
became shareholders of Sun. About 280,500 new shares of Sun's common stock were
issued in this transaction.
Effective September 30, 2001, Southern Arizona Community Bank (previously a
majority-owned subsidiary of Sun) became a wholly-owned subsidiary resulting
from the minority shareholders of Southern exchanging their Southern shares for
shares of Sun. The exchange ratio was based on 150% of Southern's adjusted book
value. As a result of the share exchange, the minority owners of Southern became
shareholders of Sun. About 282,600 new shares of Sun's common stock were issued
in this transaction.
At September 30, 2001, a similar proposed share exchange transaction was
pending regarding Mesa Bank. At a shareholders' meeting in October 2001, Mesa's
shareholders (other than Sun) approved the proposed share exchange. Such share
exchange will be completed prior to December 31, 2001.
F-6
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - Continued
NOTE D - NET INCOME PER SHARE
The computations of basic and diluted earnings per share were as follows:
Nine Months Ended September 30
------------------------------
2001 2000
---------- ----------
Numerator--net income for the period $1,452,063 $ 505,144
========== ==========
Denominator:
Weighted average number of common shares
outstanding (denominator for basic
earnings per share) 5,764,732 5,559,335
Effect of dilutive securities - stock options 79,206 77,617
---------- ----------
Denominator for diluted net income per share --
Weighted average number of common shares
and potential dilution 5,843,938 5,636,952
========== ==========
Net income per share:
Basic $ 0.25 $ 0.09
========== ==========
Diluted $ 0.25 $ 0.09
========== ==========
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (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 are 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 became
effective January 1, 2001 and had no effect on Sun's consolidated financial
statements.
In early July 2001, the Securities and Exchange Commission, American
Institute of Certified Public Accountants and Federal Financial Institutions
Examination Council each issued new guidance (some of which remains to be
finalized) on accounting for allowances for loan losses. While the new guidance
does not change prior accounting rules in this area, it provides additional
clarification and guidance on how the calculation, adequacy and approval of the
allowances should be documented by management.
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement No. 141 requires that
all business combinations be accounted for under a prior standard of purchase
accounting, eliminating the so-called pooling-method which was used to account
for some business combinations. Statement No. 141 requires that the purchase
method be used for business combinations initiated after June 30, 2001. This new
standard is not expected to have a material effect on Sun's consolidated
financial statements.
Statement No. 142 requires that goodwill no longer be amortized and charged
against earnings, but instead be reviewed for impairment. Amortization of
goodwill ceases upon adoption of the Statement, which for most companies, will
be January 1, 2002. This new standard requires that goodwill be reviewed
periodically for impairment and, accordingly, impairment adjustments of goodwill
be charged against earnings, when determined. Management has not completed its
analysis of this new standard; however, its preliminary review has concluded
that, upon implementation, no material effect on Sun's consolidated financial
statements is expected, other than the elimination of goodwill amortization.
F-7
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED - Continued
NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS (CONTINUED)
The FASB has also recently issued Statement No. 143 (ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS) and No. 144 (ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS). Management has not completed its review of these new
standards; however, implementation of the new guidance is not expected to have a
material effect on Sun's consolidated 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 Sun's consolidated financial statements.
[The remainder of this page intentionally left blank]
F-8
Board of Directors and Stockholders
Sun Community Bancorp Limited
We have audited the accompanying consolidated balance sheets of Sun Community
Bancorp Limited and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sun Community
Bancorp Limited and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
In accordance with a new accounting standard, as more fully described in Note B
to the consolidated financial statements, the Corporation changed its method of
accounting for start-up and organization costs effective January 1, 1999.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 29, 2001
F-9
CONSOLIDATED BALANCE SHEETS
SUN COMMUNITY BANCORP LIMITED
- December 31 -
2000 1999
------------- -------------
ASSETS
Cash and due from banks $ 25,464,080 $ 8,578,000
Interest-bearing deposits with banks 15,949,167 11,537,608
Federal funds sold 32,027,090 28,699,050
------------- -------------
Cash and cash equivalents 73,440,337 48,814,658
Loans held for resale 6,610,065 1,295,977
Investment securities available for sale--Note C 13,609,399 35,439,821
Portfolio loans, less allowance for loan losses of $5,440,000
in 2000 and $2,371,000 in 1999--Note D 416,904,089 203,861,113
Premises and equipment, net--Note F 5,959,724 5,308,423
Accrued interest income 2,701,454 1,352,719
Other assets 7,607,448 4,317,706
------------- -------------
TOTAL ASSETS $ 526,832,516 $ 300,390,417
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 85,880,783 $ 49,650,744
Interest-bearing--Note G 356,682,317 175,356,132
------------- -------------
Total deposits 442,563,100 225,006,876
Accrued interest on deposits and other liabilities 4,329,495 3,996,658
------------- -------------
Total liabilities 446,892,595 229,003,534
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES--Note A 27,245,878 21,384,108
STOCKHOLDERS' EQUITY--Notes A, H and N:
Common stock, no par value,
10,000,000 shares authorized;
issued and outstanding:
2000--5,809,317 shares
1999--5,503,870 shares 54,959,627 51,867,516
Retained-earnings deficit (965,582) (1,772,622)
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income) (11,418) (92,119)
------------- -------------
53,982,627 50,002,775
Less treasury stock (1,288,584) --
------------- -------------
Total stockholders' equity 52,694,043 50,002,775
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 526,832,516 $ 300,390,417
============= =============
See notes to consolidated financial statements.
F-10
CONSOLIDATED STATEMENTS OF OPERATIONS
SUN COMMUNITY BANCORP LIMITED
- Year Ended December 31 -
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Interest income:
Portfolio loans (including fees) $ 35,281,926 $ 14,281,034 $ 5,296,379
Loans held for resale 312,058 115,587 30,062
Taxable investment securities 1,186,519 1,446,522 762,717
Federal funds sold 2,460,197 1,594,367 1,230,361
Interest-bearing deposits with banks and other 764,006 482,195 24,880
------------ ------------ ------------
Total interest income 40,004,706 17,919,705 7,344,399
Interest expense:
Demand deposits 5,987,778 3,066,878 1,427,457
Savings deposits 26,209 14,204 9,460
Time deposits 8,400,253 2,280,592 843,630
Other 2,455 6,104 252
------------ ------------ ------------
Total interest expense 14,416,695 5,367,778 2,280,799
------------ ------------ ------------
Net interest income 25,588,011 12,551,927 5,063,600
Provision for loan losses--Note D 3,925,711 1,753,183 379,000
------------ ------------ ------------
Net interest income after provision for loan
losses 21,662,300 10,798,744 4,684,600
Noninterest income:
Service charges on deposit accounts 712,979 404,661 223,812
Other 297,787 354,255 110,452
------------ ------------ ------------
Total noninterest income 1,010,766 758,916 334,264
Noninterest expense:
Salaries and employee benefits 12,425,587 7,674,825 2,673,277
Occupancy 2,006,890 1,286,803 545,639
Equipment rent, depreciation and maintenance 1,705,125 1,251,662 557,509
Deposit insurance premiums 53,384 14,767 5,555
Other 5,649,984 4,274,877 1,547,931
------------ ------------ ------------
Total noninterest expense 21,840,970 14,502,934 5,329,911
------------ ------------ ------------
Income (loss) before minority interest, federal
income taxes and cumulative effect of change in
accounting principle 832,096 (2,945,274) (311,047)
Federal income taxes (benefit)--Note J 305,000 (529,000) 29,000
------------ ------------ ------------
Income before minority interest and cumulative
effect of change in accounting principle 527,096 (2,416,274) (340,047)
Minority interest in net losses of consolidated subsidiaries 279,944 1,209,553 396,725
------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 807,040 (1,206,721) 56,678
Cumulative effect of change in accounting principle--Note B (386,228)
------------ ------------ ------------
NET INCOME (LOSS) $ 807,040 $ (1,592,949) $ 56,678
============ ============ ============
NET INCOME (LOSS) PER SHARE--Note K
See notes to consolidated financial statements.
F-11
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SUN COMMUNITY BANCORP LIMITED
ACCUMULATED
RETAINED- OTHER
COMMON EARNINGS COMPREHENSIVE TREASURY
STOCK DEFICIT INCOME STOCK TOTAL
------------ ------------ ------------ ------------ ------------
Balances at January 1, 1998 $ 9,863,512 $ (236,351 $ 62,725 $ 9,689,886
Issuance of 1,947,736 shares of common
stock for cash consideration--Note H 16,931,904 16,931,904
Components of comprehensive income:
Net income for 1998 56,678 56,678
Market value adjustment (net of tax
effect) for investment securities
available for sale (51,386) (51,386)
------------
Total comprehensive income for 1998 5,292
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1998 26,795,416 (179,673) 11,339 26,627,082
Issuance of 6,810 shares of common stock
for cash consideration of $10.00 per
share--Note H 68,100 68,100
Issuance of 1,650,000 shares of common
stock for cash consideration of $16.00
per share--Note H 25,004,000 25,004,000
Components of comprehensive income:
Net loss for 1999 (1,592,949) (1,592,949)
Market value adjustment for
investment securities available for
sale (net of tax effect) (103,458) (103,458)
------------
Total comprehensive loss for 1999 (1,696,407)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1999 51,867,516 (1,772,622) (92,119) 50,002,775
Net proceeds from issuance of 7,500
shares of common stock upon exercise
of stock options 42,240 42,240
Issuance of 297,947 shares of common
stock upon acquisition of minority
interest in consolidated subsidiary --
Note H 3,049,871 3,049,871
Purchase of 134,200 shares of common
stock for treasury $ (1,288,584) (1,288,584)
Components of comprehensive income:
Net income for 2000 807,040 807,040
Market value adjustment for
investment securities available for
sale (net of tax effect) 80,701 80,701
------------
Total comprehensive income for 2000 887,741
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2000 $ 54,959,627 $ (965,582) $ (11,418) $ (1,288,584) $ 52,694,043
============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-12
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUN COMMUNITY BANCORP LIMITED
- Year Ended December 31 -
---------------------------------------------------
2000 1999 1998
------------- ------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ 807,040 $ (1,592,949) $ 56,678
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Minority interest in net losses of consolidated
subsidiaries (279,944) (1,209,553) (396,725)
Provision for loan losses 3,925,711 1,753,183 379,000
Net accretion of investment security discounts (38,127) (46,149) (54,394)
Depreciation of premises and equipment 1,391,694 942,413 421,360
Loss on sale of furniture and equipment 3,915
Deferred income taxes (534,000) (560,000) (420,000)
Cumulative effect of change in accounting principle 386,228
Originations and purchases of loans held for resale (70,098,391) (32,770,882) (15,761,895)
Proceeds from sales of loans held for resale 64,784,303 32,750,693 14,486,107
Increase in accrued interest income and other assets (3,982,175) (2,549,309) (1,531,898)
Increase in accrued interest on deposits and other liabilities 332,837 3,238,779 679,503
------------- ------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (3,691,052) 342,454 (2,138,349)
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for
sale 505,000
Proceeds from maturities of investment securities available
for sale 48,744,650 23,338,039 22,500,000
Purchases of investment securities available for sale (26,736,815) (46,057,490) (24,417,336)
Net increase in portfolio loans (216,111,976) (138,152,204) (36,843,486)
Proceeds from sales of furniture and equipment 10,000
Purchases of premises and equipment (2,042,995) (3,497,115) (1,998,806)
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (196,147,136) (164,368,770) (40,244,628)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 101,009,401 72,687,409 40,850,295
Net increase in certificates of deposit 116,546,823 53,537,663 15,032,938
Net proceeds from issuance of common stock 42,240 25,072,100 16,931,904
Purchase of common stock for treasury (1,288,584)
Resources provided by minority interests 8,153,987 13,182,389 7,798,160
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 224,463,867 164,479,561 80,613,297
------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 24,625,679 453,245 38,230,320
Cash and cash equivalents at beginning of year 48,814,658 48,361,413 10,131,093
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 73,440,337 $ 48,814,658 $ 48,361,413
============= ============= =============
See notes to consolidated financial statements.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A -- NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION
Sun Community Bancorp Limited (Sun or the "Corporation") is a bank
development company headquartered in Phoenix, Arizona. Sun is approximately 50%
owned by Capitol Bancorp Limited, a multibank holding company, headquartered in
Lansing, Michigan.
Sun's consolidated banking subsidiaries (the "Banks") consist of the
following:
Percentage
Owned at
December 31, Year Formed
Affiliate Location 2000 or Acquired
--------- -------- ---- -----------
Arrowhead Community Bank Glendale, Arizona 51% 2000
Bank of Tucson Tucson, Arizona 100% 1996
Camelback Community Bank Phoenix, Arizona 55% 1998
East Valley Community Bank Chandler, Arizona 85% 1999
Mesa Bank Mesa, Arizona 53% 1998
Southern Arizona Community Bank Tucson, Arizona 51% 1998
Valley First Community Bank Scottsdale, Arizona 100% 1997
Yuma Community Bank Yuma, Arizona 51% 2000
Nevada Community Bancorp Limited: 54% 1999
Black Mountain Community Bank Henderson, Nevada 2000
Desert Community Bank Las Vegas, Nevada 1999
Red Rock Community Bank Las Vegas, Nevada 1999
Sunrise Capital Corporation: 60% 1999
Sunrise Bank of Albuquerque Albuquerque, New Mexico 2000
Sunrise Bank of Arizona Phoenix, Arizona 1998
Sun is the majority owner of Nevada Community Bancorp Limited and Sunrise
Capital Corporation which each have majority-owned bank subsidiaries. Sun became
a public company in 1999 through an initial public offering of common stock with
net proceeds approximating $25 million, of which Capitol Bancorp Limited
invested $13 million.
The Banks provide a full range of banking services to individuals,
businesses and other customers located in their respective communities. Each of
the Banks generally operate from a single location and focus their activities on
meeting the various credit and other banking needs of entrepreneurs,
professionals and other high net worth individuals. A variety of deposit
products are offered, including checking, savings, money market, individual
retirement accounts and certificates of deposit. The principal market for the
Banks' financial services are the communities in which they are located and the
areas immediately surrounding those communities. Mortgage banking activities are
offered through Sun Community Mortgage Company, a wholly-owned subsidiary of
Bank of Tucson.
Sun and its Banks are engaged in a single business activity--banking. Each
bank is viewed by management as being a separately identifiable business or
segment from the perspective of monitoring performance and allocation of
financial resources. Although the Banks operate independently and are managed
and monitored separately, each bank is substantially similar in terms of
business focus, type of customers, products and services. Further, the Banks and
Sun are subject to substantially similar laws and regulations unique to the
banking industry. Accordingly, Sun's consolidated financial statements reflect
the presentation of segment information on an aggregated basis.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE A -- NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF
CONSOLIDATION--CONTINUED
The consolidated financial statements include the accounts of Sun and its
majority-owned subsidiaries, after elimination of intercompany accounts and
transactions, and after giving effect to applicable minority interests. Banks
formed during 1998, 1999 and 2000 are included in the consolidated financial
statements for periods after joining the consolidated group. Valley First
Community Bank, previously 52% owned by Sun, became a wholly-owned subsidiary in
2000 through a share exchange of Sun's common stock for minority interests in
the bank's stock. Certain 1999 and 1998 amounts have been reclassified to
conform to the 2000 presentation.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES: The preparation of consolidated 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 consolidated 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 (interest-bearing and noninterest-bearing) and federal
funds sold. Generally, federal funds transactions are entered into for a one-day
period.
LOANS HELD FOR RESALE: Loans held for resale represent residential real
estate mortgage loans held for sale into the secondary market. Loans held for
resale are stated at the aggregate lower of cost or market.
INVESTMENT SECURITIES: Investment securities available for sale (generally
most debt securities investments of the Banks), are carried at market value with
unrealized gains and losses reported as a separate component of stockholders'
equity, net of tax effect (accumulated other comprehensive income). 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. Portfolio loans are made primarily to borrowers in the
Banks' geographic areas. Consistent with the Banks' 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 Banks and Sun, without regard to underlying collateral and guarantees, is
the total of loans and loan commitments outstanding. Management reduces 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.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated 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.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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 (included as a component of other
assets and which, at December 31, 2000 and 1999, approximated $23,000 and
$307,000, respectively) 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.
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded
upon granting of stock options because such stock options are accounted for
under the provisions of Accounting Principles Board (APB) Opinion 25 and are
granted at an exercise price equal to the market price of common stock at grant
date. Pro forma disclosure of alternative accounting recognition is made in Note
H.
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on
deposit, held in a fiduciary or agency capacity by the Banks is not included in
the consolidated balance sheet because it is not an asset of the Banks or Sun.
Trust fee income is recorded on the accrual method.
FEDERAL INCOME TAXES: Sun and subsidiaries owned 80% or more by Sun file a
consolidated federal income tax return. 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 amount 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.
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income (loss)
and certain other items which are charged or credited to stockholders' equity.
For the periods presented, Sun's only element of comprehensive income other than
net income (loss) 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.
COSTS OF START-UP ACTIVITIES: Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," requires start-up costs and organizational costs
to be charged to expense when incurred. In the circumstances of Sun and the
Banks, this new accounting standard applies to previously capitalized preopening
and other start-up costs of its bank subsidiaries which, net of amortization,
approximated $1,149,000 at December 31, 1998 and were classified as a component
of other assets in the consolidated balance sheet. Implementation of this
standard was reflected as a cumulative effect of an accounting change at January
1, 1999 (net of impact of minority interests and income tax effect). Most of the
previously capitalized costs related to start-up and organization costs incurred
in 1998.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE C -- INVESTMENT SECURITIES
Investment securities available for sale consisted of the following at
December 31:
2000 1999
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
United States Treasury securities $ 591,103 $ 590,739 $ -- $ --
United States government agency
securities 13,035,598 13,018,660 35,579,253 35,439,821
----------- ----------- ----------- -----------
$13,626,701 $13,609,399 $35,579,253 $35,439,821
=========== =========== =========== ===========
At December 31, 2000, securities with a market value approximating $2
million were pledged to secure public and trust deposits and for other purposes
as required by law.
Gross unrealized gains and losses on investment securities available for
sale were as follows at December 31:
2000 1999
--------------------- ---------------------
Gains Losses Gains Losses
-------- -------- -------- --------
United States Treasury securities $ -- $ 364 $ -- $ --
United States government agency
securities 8,711 25,649 13,009 152,441
-------- -------- -------- --------
$ 8,711 $ 26,013 $ 13,009 $152,441
======== ======== ======== ========
Gross realized gains and losses from sales and maturities of investment
securities were insignificant for each of the periods presented.
Scheduled maturities of investment securities held as of December 31, 2000
were as follows:
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 8,586,561 $ 8,583,845
After one year, through five years 4,000,000 3,985,414
After ten years 1,040,140 1,040,140
----------- -----------
$13,626,701 $13,609,399
=========== ===========
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE D -- LOANS
Portfolio loans consisted of the following at December 31:
2000 1999
------------- -------------
Commercial $ 399,056,329 $ 191,824,802
Real estate mortgage 13,712,563 7,458,649
Installment 9,575,197 6,948,662
------------- -------------
Total portfolio loans 422,344,089 206,232,113
Less allowance for loan losses (5,440,000) (2,371,000)
------------- -------------
Net portfolio loans $ 416,904,089 $ 203,861,113
============= =============
Transactions in the allowance for loan losses are summarized below:
2000 1999 1998
----------- ----------- -----------
Balance at January 1 $ 2,371,000 $ 696,000 $ 317,000
Provision charged to operations 3,925,711 1,753,183 379,000
Loans charged off (deduction) (933,445) (78,183) --
Recoveries 76,734 -- --
----------- ----------- -----------
Balance at December 31 $ 5,440,000 $ 2,371,000 $ 696,000
=========== =========== ===========
At December 31, 2000 and 1999, 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 E -- RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Banks make loans to officers and
directors of the Banks including their immediate families and companies in which
they are principal owners. At December 31, 2000, total loans to these persons
approximated $12 million ($5.7 million at December 31, 1999). During 2000, $8.8
million of new loans were made to these persons and repayments totaled $2.5
million. Such loans are made at the Banks' normal credit terms.
Such officers and directors of the Corporation and the Banks (and their
associates, family and/or affiliates) are also depositors of the Banks. Such
deposits are similarly made at the Banks' normal terms as to interest rate, term
and deposit insurance.
The Banks purchased certain data processing and management services from
Capitol Bancorp Ltd. Amounts paid for such services are based on Capitol
Bancorp's costs of such services and were not significant for the periods
presented.
In 2000, Sun loaned Capitol Bancorp a portion of its idle funds. Under the
terms of the loan agreement, amounts drawn bear interest at 7.5% ($820,000
interest income recorded by Sun in 2000) and are due on demand by Sun. Capitol
is required to maintain alternative credit facilities in an amount at least
equal to amounts outstanding under this arrangement so long as amounts are
outstanding. $8.9 million was borrowed at December 31, 2000.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE F -- PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at
December 31:
2000 1999
----------- -----------
Leasehold improvements $ 2,369,563 $ 1,880,355
Equipment and furniture 6,502,131 4,948,343
----------- -----------
8,871,694 6,828,698
Less accumulated depreciation (2,911,970) (1,520,275)
----------- -----------
$ 5,959,724 $ 5,308,423
=========== ===========
The Banks rent office space under operating leases. Rent expense under
these lease agreements approximated $1,627,000, $982,000 and $362,000 for the
years ended December 31, 2000, 1999 and 1998, 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, 2000
aggregate $15.5 million, due approximately $1.9 million annually in each of the
years 2001, 2002, 2003, 2004 and 2005 and $6.1 million thereafter.
NOTE G -- DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $126
million and $52 million as of December 31, 2000 and 1999, respectively.
At December 31, 2000, the scheduled maturities of such time deposits were
as follows:
2001 $101,956,000
2002 15,252,000
2003 3,895,000
2004 5,102,000
------------
Total $126,205,000
============
Interest paid approximates amounts charged to operations on an accrual
basis for the periods presented.
NOTE H -- COMMON STOCK AND STOCK OPTIONS
In January 1998, the Corporation completed a private offering of 954,546
shares of common stock at a price of $7.33 per share. In December 1998, the
Corporation sold 993,190 shares of common stock at $10.00 per share in a private
offering of 1,000,000 shares; 6,810 shares of common stock were subsequently
sold in early 1999, completing the offering. In July 1999, the Corporation sold
1,650,000 shares of common stock in a public offering at $16.00 per share. The
proceeds from the offering, net of underwriting commissions and expenses,
approximated $25 million.
Stock options have been granted to certain officers and directors which
provide for the purchase of shares of common stock. Stock options are granted at
an exercise price equal to the fair value of common stock on the grant date,
expire ten years after grant, and are currently exercisable.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE H -- COMMON STOCK AND STOCK OPTIONS--CONTINUED
Stock option activity is summarized as follows:
Weighted
Number of Average
Options Exercise Exercise
Outstanding Price Range Price
------- ----------------- --------
Outstanding at January 1, 1998 282,000 $ 4.67 to $ 6.00 $ 5.08
Granted in 1998 278,973 10.00 10.00
Exercised in 1998 -- -- --
Expired/other in 1998 -- -- --
------- ---------------- ------
Outstanding at December 31, 1998 560,973 4.67 to 10.00 7.53
Granted in 1999 247,500 16.00 16.00
Exercised in 1999 -- -- --
Expired/other in 1999 -- -- --
------- ---------------- ------
Outstanding at December 31, 1999 808,473 4.67 to 16.00 10.12
Granted in 2000 53,902 10.22 10.22
Exercised in 2000 (7,500) 4.67 4.67
Expired/other in 2000 -- -- --
------- ---------------- ------
Outstanding at December 31, 2000 854,875 $ 4.67 to $16.00 $10.17
As of December 31, 2000, stock options outstanding had a weighted average
remaining contractual life of 7.2 years.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", establishes a fair value method of accounting for
stock options whereby compensation expense is recognized based on the computed
fair value of the options on the grant date. However, as permitted by Statement
No. 123, the Corporation accounts for its stock options under APB 25 and,
therefore, does not recognize compensation expense.
By electing this alternative, certain pro forma disclosures of the expense
recognition provisions are required, which are as follows:
2000 1999 1998
-------- ------------ ----------
Fair value assumptions:
Risk-free interest rate 7.0% 6.25% 5.0%
Dividend yield 0% 0% 0%
Stock price volatility .76 .56 0
Expected option life 10 years 10 years 10 years
Pro forma net income (loss) $501,000 $(4,487,000) $(668,000)
Pro forma net income (loss) per diluted share $.09 $(.96) $(.22)
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE I -- EMPLOYEE BENEFIT PLANS
Employees of Sun and its subsidiaries participate in a 401(k) plan, subject
to certain eligibility requirements. Employer contributions to the plan and
charged to expense in 2000, 1999 and 1998 approximated $198,000, $87,500 and
$28,000, respectively.
NOTE J -- INCOME TAXES
Federal income taxes (benefit) consist of the following components:
2000 1999 1998
--------- --------- ---------
Current $ 839,000 $(439,000) $ 449,000
Deferred credit (534,000) (560,000) (420,000)
--------- --------- ---------
$ 305,000 $(999,000) $ 29,000
========= ========= =========
Federal income tax benefit in 1999 shown above includes $470,000 relating
to the cumulative effect of the change in accounting principle. Income taxes
paid in 1999 and 1998 approximated $310,000 and $387,000, respectively; none in
2000.
Differences between federal income tax expense recorded and amounts
computed using the statutory tax rate are reconciled below:
2000 1999 1998
----------- ----------- -----------
Federal income tax (benefit) computed at
statutory rate of 34% $ 283,000 $(1,001,000) $ (106,000)
Tax effect of:
Minority interests in net losses of
consolidated subsidiaries 139,000 411,000 134,000
Cumulative effect of change in
accounting principle (470,000)
Nondeductible expenses 67,000 (44,000)
Other (184,000) 105,000 1,000
----------- ----------- -----------
$ 305,000 $ (999,000) $ 29,000
=========== =========== ===========
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE J -- INCOME TAXES--CONTINUED
Net deferred income tax assets consisted of the following at December 31:
2000 1999
----------- -----------
Allowance for loan losses $ 956,000 $ 780,000
Portion of subsidiaries operating losses applicable to
minority interests (405,000) (586,000)
Net operating loss carryforwards of subsidiaries 813,000 828,000
Cash to accrual temporary differences (297,000) (45,000)
Depreciation, amortization and similar items (332,000) (350,000)
Organization and start-up costs 791,000 655,000
Market value adjustment for investment securities
available for sale 6,000 47,000
Other, net 10,000 (280,000)
----------- -----------
Net deferred tax assets $ 1,542,000 $ 1,049,000
=========== ===========
Certain consolidated subsidiaries have net operating loss carryforwards,
which may reduce income taxes payable in future periods. Such carryforwards
approximate $3.5 million at December 31, 2000, have been recognized for
financial reporting purposes and expire at varying dates through 2020.
NOTE K -- NET INCOME (LOSS) PER SHARE
The computations of basic and diluted net income (loss) per share were as
follows:
2000 1999 1998
----------- ------------ ----------
Numerator:
Income (loss) before cumulative effect of accounting
change $ 807,040 $ (1,206,721) $ 56,678
=========== ============ ==========
Net income (loss) $ 807,040 $ (1,592,949) $ 56,678
=========== ============ ==========
Denominator:
Weighted average number of shares outstanding net of
treasury stock (denominator for basic earnings per
share) 5,591,192 4,674,386 2,853,070
Effect of dilutive stock options 73,810 --(1) 138,735
----------- ------------ ----------
Denominator for diluted earnings per share--weighted
average number of shares and potential dilution 5,665,002 4,674,386 2,991,805
=========== ============ ==========
Basic earnings (loss) per share:
Income before cumulative effect of accounting change $ 0.14 $ (0.26) $ 0.02
=========== ============ ==========
Net income $ 0.14 $ (0.34) $ 0.02
=========== ============ ==========
Diluted earnings (loss) per share:
Income before cumulative effect of accounting change $ 0.14 $ (0.26) $ 0.02
=========== ============ ==========
Net income $ 0.14 $ (0.34) $ 0.02
=========== ============ ==========
(1) Antidilutive for period presented.
Additional disclosures regarding stock options are set forth in Note H.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE L -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments were as
follows at December 31 (in $1,000s):
2000 1999
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
Financial Assets:
Cash and cash equivalents $ 73,440 $ 73,440 $ 48,815 $ 48,815
Loans held for resale 6,610 6,610 1,296 1,296
Investment securities available for sale 13,609 13,609 35,440 35,440
Portfolio loans:
Fixed rate 110,103 111,637 58,127 58,649
Variable rate 312,241 310,829 148,105 146,883
--------- --------- --------- ---------
Total portfolio loans 422,344 422,466 206,232 205,532
Less allowance for loan losses (5,440) (5,440) (2,371) (2,371)
--------- --------- --------- ---------
Net portfolio loans 416,904 417,026 203,861 203,161
Financial Liabilities:
Deposits:
Noninterest-bearing deposits 85,881 85,881 49,651 49,651
Interest-bearing deposits:
Demand accounts 162,835 162,704 98,055 97,947
Time certificates of deposit less
than $100,000 67,642 68,364 25,238 25,226
Time certificates of deposit
$100,000 or more 126,205 127,282 52,063 52,151
--------- --------- --------- ---------
Total interest-bearing deposits 356,682 358,350 175,356 175,324
--------- --------- --------- ---------
Total deposits 442,563 444,231 225,007 224,975
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates of 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.
NOTE M -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of the Banks' 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 Banks to make payments on behalf of customers when certain
specified future events occur and are used infrequently ($2 million and $1.5
million outstanding at December 31, 2000 and 1999, respectively). Other loan
commitments outstanding consist of unused lines of credit and approved, but
unfunded, specific loan commitments ($123.8 million and $64.6 million at
December 31, 2000 and 1999, 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.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE M -- COMMITMENTS AND CONTINGENCIES--CONTINUED
All loan commitments have credit risk essentially the same as that involved
in routinely making loans to customers and are made subject to the Banks' 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.
Sun's banking subsidiaries are required to maintain average reserve
balances in the form of cash on hand and balances due from the Federal Reserve
Bank and certain correspondent banks. The amount of reserve balances required as
of December 31, 2000 was $826,000.
NOTE N -- DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
Current banking regulations restrict the ability to transfer funds from
subsidiaries to their parent in the form of cash dividends, loans or advances.
Subject to various regulatory capital requirements, bank subsidiaries' current
and retained earnings (if any) are available for distribution as dividends to
Sun (and other bank shareholders, as applicable) without prior approval from
regulatory authorities. Substantially all of the remaining net assets of the
subsidiaries are restricted as to payments to Sun.
Sun and its Banks are subject to certain other capital requirements.
Federal financial institution regulatory agencies have established certain
risk-based capital guidelines for banks and bank holding companies. Those
guidelines require all banks and bank holding companies to maintain certain
minimum ratios and related amounts based on `Tier 1' and `Tier 2' 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 Sun's
consolidated 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, 2000, the most recent notification received by the Banks
from regulatory agencies have advised that the Banks are 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 Banks.
Management believes, as of December 31, 2000, that Sun and its Banks meet
all capital adequacy requirements to which they are subject.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE N -- DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS
--CONTINUED
The various amounts of regulatory capital (in $1,000s) and related ratios
of the individually significant subsidiaries (assets of $50 million or more as
of December 31, 2000) and consolidated regulatory capital position as of
December 31, 2000 and 1999 are summarized below:
Valley First
Bank of Community
Tucson Bank Consolidated
------------- ------------- -------------
December 31, 2000
- -----------------
Total Capital to Total Assets:
Minimum Required Amount(1) >= $ 3,923 >= $ 2,123 >= $21,073
Actual Amount $ 8,555 $ 5,265 $52,694
Ratio 8.72% 9.92% 10.00%
Tier 1 Capital to Risk-Weighted Assets:
Minimum Required Amount(2) >= $ 3,154 >= $ 1,801 >= $17,719
Actual Amount $ 8,347 $ 4,145 $78,566
Ratio 10.59% 9.20% 17.74%
Combined Tier 1 and Tier 2 Capital to Risk-Weighted Assets:
Minimum Required Amount(3) >= $ 6,308 >= $ 3,603 >= $35,439
Amount Required to Meet "Well-Capitalized' Category(4) >= $ 7,884 >= $ 4,504 >= $44,299
Actual Amount $ 9,333 $ 4,709 $84,006
Ratio 11.84% 10.45% 18.96%
December 31, 1999
- -----------------
Total Capital to Total Assets:
Minimum Required Amount(1) >= $ 3,285 >= $ 1,827 >= $12,016
Actual Amount $ 6,937 $ 4,126 $50,003
Ratio 8.45% 9.03% 16.65%
Tier 1 Capital to Risk-Weighted Assets:
Minimum Required Amount(2) >= $ 2,516 >= $ 1,595 >= $11,089
Actual Amount $ 6,856 $ 3,958 $71,263
Ratio 10.90% 9.93% 25.71%
Combined Tier 1 and Tier 2 Capital to Risk-Weighted Assets:
Minimum Required Amount(3) >= $ 5,032 >= $ 3,190 >= $22,178
Amount Required to Meet 'Well-Capitalized' Category(4) >= $ 6,290 >= $ 3,988 >= $27,723
Actual Amount $ 7,581 $ 4,376 $73,634
Ratio 12.05% 10.97% 26.56%
- ----------
(1) As a condition of charter approval, de novo banks generally are required to
maintain a capital-to-assets ratio of not less than 8% for the first three
years of operations; such leverage ratio is otherwise required to be not
less than 4%.
(2) The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%.
(3) The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted
assets is 8%.
(4) In order to be classified as a 'well-capitalized' institution, the ratio of
Tier 1 and Tier 2 capital to risk-weighted assets must be 10% or more.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE O -- PARENT COMPANY ONLY INFORMATION
CONDENSED BALANCE SHEETS
- December 31 -
2000 1999
----------- -----------
Assets
Funds on deposit with subsidiary banks $ 1,518,735 $ 8,372,956
Investment securities available for sale 15,510,212
Investment in subsidiaries 38,819,028 27,005,790
Loans to affiliates 10,755,000
Equipment and furniture, net 991,909 1,034,154
Other assets 797,657 907,119
----------- -----------
Total assets $52,882,329 $52,830,231
=========== ===========
Liabilities and Stockholders' Equity
Accounts payable, accrued expenses and other liabilities $ 188,286 $ 2,827,456
Stockholders' equity 52,694,043 50,002,775
----------- -----------
Total liabilities and stockholders' equity $52,882,329 $52,830,231
=========== ===========
CONDENSED STATEMENTS OF OPERATIONS
- Year Ended December 31 -
2000 1999 1998
----------- ----------- -----------
Income
Intercompany fees $ 3,111,733 $ 1,705,609 $ 711,651
Dividends from subsidiary 800,000 200,000
Interest 851,608 785,439 226,186
----------- ----------- -----------
4,763,341 2,691,048 937,837
Expenses
Salaries and employee benefits 3,009,024 1,657,914 581,431
Occupancy 370,768 195,338 70,906
Equipment rent, depreciation and maintenance 515,597 428,523 199,431
Other 2,880,980 1,066,481 305,381
----------- ----------- -----------
6,776,369 3,348,256 1,157,149
----------- ----------- -----------
(2,013,028) (657,208) (219,312)
Equity in undistributed net earnings (losses) of
consolidated subsidiaries 2,611,068 (919,741) 348,990
Federal income taxes (credit) (209,000) 16,000 73,000
----------- ----------- -----------
Net income (loss) $ 807,040 $(1,592,949) $ 56,678
=========== =========== ===========
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUN COMMUNITY BANCORP LIMITED
NOTE O -- PARENT COMPANY ONLY INFORMATION--CONTINUED
CONDENSED STATEMENTS OF CASH FLOW
- Year Ended December 31 -
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES
Net Income (loss) $ 807,040 $ (1,592,949) $ 56,678
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Equity in net losses (earnings) of subsidiaries (2,611,068) 919,741 (348,990)
Depreciation and amortization 351,184 260,772 105,408
Net amortization (accretion) of investment security premiums
(discount) 39,228 (39,228)
Decrease (increase) in other assets 1,383,813 (518,664) (82,774)
Increase (decrease) in accounts payable, accrued expenses and
other liabilities (2,451,873) 2,635,874 115,837
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,481,676) 1,665,546 (153,841)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 15,664,650 8,918,039
Purchases of investment securities available for sale (105,199) (24,457,490)
Net increase in loans to affiliates (10,755,000)
Net cash investment in subsidiaries (7,621,713) (10,834,536) (9,337,077)
Purchases of equipment and furniture (308,939) (911,907) (150,068)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (3,126,201) (27,285,894) (9,487,145)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 42,240 25,072,100 16,931,904
Purchase of common stock for treasury (1,288,584)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,246,344) 25,072,100 16,931,904
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,854,221) (548,248) 7,290,918
Cash and cash equivalents at beginning of year 8,372,956 8,921,204 1,630,286
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,518,735 $ 8,372,956 $ 8,921,204
============ ============ ============
F-27
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561 - 571 of the Michigan Business Corporation Act ("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 (when acting in an
official capacity) or not opposed to (when acting in all other circumstances)
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 powers to indemnify any such person against
reasonable expenses 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 (when acting in an official capacity) or not
opposed to (when acting in all other circumstances) the best interests of the
Registrant, except that no indemnification may be made if such person is
adjudged to be liable to the Registrant, or in connection with any proceeding
charging improper personal benefit to the director whether or not involving
action in the director's official capacity, in which the director was held
liable on the basis that the personal benefit was improperly received by the
director. 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) All Financial Statements Schedules are omitted in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000
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:
II-1
(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");
(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.
II-2
(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 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.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Lansing, Michigan
on February 11, 2002.
CAPITOL BANCORP LIMITED
By: /s/ JOSEPH D. REID
------------------------------------
JOSEPH D. REID
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Registration Statement has been signed by the following persons in the
capacities indicated on February 11, 2002.
II-4
Signature Title
- --------- -----
/s/ JOSEPH D. REID Chairman of the Board and
- ------------------------------ Chief Executive Officer,
JOSEPH D. REID Director (Principal Executive
Officer)
/s/ LEE W. HENDRICKSON Executive Vice President and
- ------------------------------ Chief Financial Officer (Principal
LEE W. HENDRICKSON Financial and Accounting Officer)
/s/ ROBERT C. CARR* Executive Vice President, Treasurer,
- ------------------------------ Director
ROBERT C. CARR
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
/s/ JAMES C. EPOLITO* Director
- ------------------------------
JAMES C. EPOLITO
/s/ GARY A. FALKENBERG* Director
- ------------------------------
GARY A. FALKENBERG
Director
- ------------------------------
JOEL I. FERGUSON
/s/ KATHLEEN A. GASKIN* Director
- ------------------------------
KATHLEEN A. GASKIN
II-5
Signature Title
- --------- -----
/s/ H. NICHOLAS GENOVA* Director
- ------------------------------
H. NICHOLAS GENOVA
/s/ L. DOUGLAS JOHNS* Director
- ------------------------------
L. DOUGLAS JOHNS
/s/ MICHAEL L. KASTEN* Director
- ------------------------------
MICHAEL L. KASTEN
Director
- ------------------------------
LEONARD MAAS
/s/ LYLE W. MILLER* Director
- ------------------------------
LYLE W. MILLER
/s/ CRISTIN REID ENGLISH* Director
- ------------------------------
CRISTIN REID ENGLISH
*By: /s/ JOSEPH D. REID
-------------------------
JOSEPH D. REID
Attorney-in-fact
II-6
EXHIBIT INDEX
INCORPORATED BY
EXHIBIT NO. DESCRIPTION REFERENCE FROM
- ---------- ----------- --------------
2.1 Plan of Share Exchange (included in the proxy statement/prospectus as Annex A).
4 Instruments Defining the Rights of Capitol's Security Holders:
(a) Common Stock Certificate (1)
(b) Indenture dated December 18, 1997 (2)
(c) Subordinated Debenture (2)
(d) Amended and Restated Trust Agreement dated December 18, 1997 (2)
(e) Preferred Security Certificate dated December 18, 1997 (2)
(f) Preferred Securities Guarantee Agreement of Capitol Trust I
dated December 18, 1997 (2)
(g) Agreement as to Expenses and Liabilities of Capitol Trust I (2)
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 D).
23.1a Consent of BDO Seidman, LLP.
23.1b Consent of BDO Seidman, LLP.
23.2 Consent of Strobl Cunningham Caretti & Sharp, P.C. (included in Exhibits 5 and 8).
23.4 Consent of Friedman, Billings, Ramsey & Co., Inc. (Sun's financial advisor).
23.5 Consent of Stifel, Nicolaus & Company, Incorporated (Capitol's financial advisor).
24 Power of Attorney (included on the signature page of the Registration Statement).
99a Form of proxy for the Special Meeting of Shareholders of Sun Community Bancorp Limited.
99b Form of proxy for the Special Meeting of Shareholders of Capitol Bancorp Limited.
KEY:
- ---
(1) Form S-18, Reg. No. 33-24728C, filed September 15, 1988.
(2) Post Effective Amendment No. 1 to Form S-3, Reg. No. 333-41215 and
333-41215-01 filed February 9, 1998.
II-7