As filed with the Securities and Exchange Commission on September 30, 2002
Registration No. 333-_________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
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 IDENTIFICATION NO.)
CLASSIFICATION
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)
----------
Copy to:
Phillip Torrence
Miller, Canfield, Paddock and Stone, PLC
444 W. Michigan Ave.
Kalamazoo, Michigan 49007
(616) 383-5804
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
- ---------------------------------------------------------------------------------------------------
Common stock (no par value) 16,407 N/A $282,036 $26
===================================================================================================
(1) Based on 23,901 shares of common stock, $6.50 par value, of Detroit
Commerce Bank, which is the maximum number of shares of Detroit common
stock (excluding shares held by Capitol) that may be outstanding
immediately prior to the consummation of the exchange transaction. Based
also on the fixed exchange ratio of .686436 shares of Capitol common stock
for each share of Detroit common stock.
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, as
amended, the registration fee has been calculated based on a price of
$17.19 per share of Capitol common stock (the average of the high and low
price per share of common stock of Capitol as reported on the Nasdaq
National Market on September 27, 2002), and the fixed exchange ratio of
.686436 Capitol shares that may be issued in the consummation of the
exchange transaction contemplated.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
[DETROIT LOGO]
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On ____________, 2002
To the Shareholders of Detroit Commerce Bank:
The annual meeting of the shareholders of Detroit Commerce Bank will be
held at Detroit Commerce Bank at 645 Griswold, Suite 70, Detroit, Michigan 48226
on ____________, 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 September ___, 2002, between Capitol Bancorp Ltd. and
Detroit Commerce Bank under which all shareholders of Detroit (other than
Capitol) will exchange their stock in Detroit for stock in Capitol, according to
an exchange ratio, as described in the attached proxy statement/prospectus. A
copy of the Plan of Share Exchange is attached to the proxy statement/prospectus
as Annex A.
2. Election of Directors.
3. 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 August 31, 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 Detroit'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/ Linda Watters
President
PROXY STATEMENT/PROSPECTUS
PROPOSED PLAN OF SHARE EXCHANGE
The Board of Directors of Detroit Commerce Bank has approved a Plan of
Share Exchange that contemplates the exchange of the shares of Detroit common
stock held by all shareholders other than Capitol Bancorp Ltd. Capitol currently
holds 92.5% of Detroit's common stock. As a result of the exchange, Detroit will
become a wholly-owned subsidiary of Capitol.
If the exchange is approved, each share of Detroit common stock will be
converted into the right to receive Capitol common stock according to a fixed
exchange ratio. The exchange ratio is calculated by dividing $15.00, the share
value per share of Detroit common stock, by $21.852, the average closing prices
of Capitol common stock for the month ended June 30, 2002. If the exchange ratio
is approved, each shareholder of Detroit would receive in the exchange .686436
shares of Capitol common stock for each share of Detroit common stock.
Capitol estimates that Capitol will issue approximately 16,407 shares of
Capitol common stock to Detroit shareholders in the exchange. Those shares will
represent less than 5% of the outstanding Capitol common stock after the
exchange. Capitol's common stock trades on the Nasdaq National Market System
under the symbol "CBCL."
Detroit's Board of Directors has scheduled the annual meeting of Detroit
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' meeting.
This document gives you detailed information about the meeting and the
proposed exchange. You are encouraged to read this document carefully. IN
PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 14 FOR
A DESCRIPTION OF VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING THE EXCHANGE OF
YOUR DETROIT COMMON STOCK FOR CAPITOL'S COMMON STOCK.
- --------------------------------------------------------------------------------
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 October ___, 2002, and is first
being mailed to shareholders of Detroit on or about October ___, 2002.
1
[This page intentionally left blank]
2
TABLE OF CONTENTS
ANSWERS TO FREQUENTLY ASKED QUESTIONS....................................... 5
SUMMARY..................................................................... 8
Reasons for the Exchange............................................... 8
The Annual Shareholders' Meeting....................................... 8
Recommendation to Shareholders......................................... 8
Votes Required......................................................... 9
Record Date; Voting Power.............................................. 9
What Shareholders will Receive in the Exchange......................... 9
Accounting Treatment................................................... 9
Tax Consequences of the Exchange to Detroit Shareholders............... 9
Dissenters' Rights..................................................... 10
Opinion of Financial Advisor........................................... 10
The Plan of Share Exchange............................................. 10
Termination of the Exchange............................................ 10
Your Rights as a Shareholder Will Change............................... 10
SELECTED CONSOLIDATED FINANCIAL DATA........................................ 11
RISK FACTORS................................................................ 14
RECENT DEVELOPMENTS......................................................... 19
CAPITALIZATION.............................................................. 20
DIVIDENDS AND MARKET FOR COMMON STOCK....................................... 21
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................... 22
INFORMATION ABOUT CAPITOL................................................... 23
INFORMATION ABOUT DETROIT................................................... 23
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................................ 24
THE ELECTION OF DIRECTORS................................................... 25
THE EXCHANGE................................................................ 26
General................................................................ 26
Background of the Exchange............................................. 26
Detroit's Reasons for the Exchange..................................... 27
Capitol's Reasons for the Exchange..................................... 27
Terms of the Exchange.................................................. 27
Detroit Board Recommendation........................................... 28
Accounting Treatment................................................... 28
Pro Forma Data......................................................... 28
Material Federal Income Tax Consequences............................... 28
Regulatory Matters..................................................... 30
Dissenters' Rights..................................................... 30
Federal Securities Laws Consequences; Stock Transfer Restrictions...... 30
OPINION OF FINANCIAL ADVISOR................................................ 31
3
THE CLOSING................................................................. 33
Effective Time......................................................... 33
Shares Held by Capitol................................................. 33
Procedures for Surrender of Certificates; Fractional Shares............ 33
Fees and Expenses...................................................... 34
Nasdaq Stock Market Listing............................................ 34
Amendment and Termination.............................................. 34
THE ANNUAL SHAREHOLDERS' MEETING............................................ 35
Date, Time and Place................................................... 35
Matters to be Considered at the Shareholders' Meeting.................. 35
Record Date; Stock Entitled to Vote; Quorum............................ 35
Votes Required......................................................... 35
Share Ownership of Management.......................................... 35
Voting of Proxies...................................................... 36
General Information.................................................... 36
Solicitation of Proxies; Expenses...................................... 36
COMPARISON OF SHAREHOLDER RIGHTS............................................ 37
DESCRIPTION OF CAPITAL STOCK OF CAPITOL..................................... 39
Rights of Common Stock................................................. 39
Shares Available for Issuance.......................................... 39
Capitol's Preferred Securities......................................... 40
Anti-Takeover Provisions............................................... 40
WHERE YOU CAN FIND MORE INFORMATION......................................... 42
LEGAL MATTERS............................................................... 43
EXPERTS..................................................................... 43
LIST OF ANNEXES
ANNEX A Plan of Share Exchange......................................... A-1
ANNEX B Opinion of Financial Advisor................................... B-1
ANNEX C Tax Opinion of Miller, Canfield, Paddock and Stone, PLC........ C-1
ANNEX D Financial Information Regarding Detroit Commerce Bank.......... D-1
ANNEX E Financial and Other Information Regarding Capitol Bancorp Ltd.. E-1
4
ANSWERS TO
FREQUENTLY ASKED QUESTIONS
Q: Why am I receiving these materials?
A: Detroit's Board of Directors has approved the exchange of the 7.5% of
Detroit's common stock not owned by Capitol for shares of common stock of
Capitol. The exchange requires the approval of Detroit's shareholders.
Detroit is sending you these materials to help you decide whether to
approve the exchange. These materials also include information regarding
Detroit's election of directors.
Q: What will I receive in the exchange?
A: You will receive shares of Capitol common stock, which are publicly traded
on the National Market System of the Nasdaq Stock Market, Inc. under the
symbol "CBCL." If the exchange is approved, you would receive .686436
shares of Capitol common stock for each share of Detroit common stock you
own.
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 President of Detroit 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 _________, 2002; or
. by attending the shareholders' meeting and voting in person.
Q: What vote is required to approve the exchange?
A: In order to complete the exchange, holders of a majority of the shares of
Detroit common stock (other than Capitol) must approve the Plan of Share
Exchange. If you do not vote your Detroit shares, the effect will be a vote
against the Plan of Share Exchange.
5
Q: Should I send in my stock certificates at this time?
A: No. After the exchange is approved, Capitol or Capitol's stock transfer
agent will send Detroit shareholders written instructions for exchanging
their stock certificates.
Q: When do you expect to complete the exchange?
A: As quickly as possible after November 30, 2002. Approval by Detroit's
shareholders at the shareholders' meeting must be obtained first. It is
anticipated the exchange will be completed by December 31, 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 or included with this document. This information is available to
you without charge upon written or oral request. You can obtain the
documents incorporated by reference in this proxy statement/prospectus
through the Securities and Exchange Commission website at WWW.SEC.GOV or by
requesting them in writing or by telephone from Capitol at the following
address:
Capitol Bancorp Ltd.
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
Attention: General Counsel
Telephone Number: (517) 487-6555
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
STOCKHOLDERS' MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN __________,
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:
Detroit Commerce Bank
645 Griswold, Suite 70
Detroit, Michigan 48226
(313) 967-9700
Attention: Linda Watters
President
or
Capitol Bancorp Limited
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
Attention: Brian K. English
General Counsel
If you would like additional copies of this
proxy statement/prospectus you should contact:
Capitol Bancorp Ltd. 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 Ltd. 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 29 wholly or majority-owned bank subsidiaries, including Detroit
Commerce Bank. Each bank is viewed by management as being a separate business
from the perspective of monitoring performance and allocation of financial
resources. Capitol uses a unique strategy of bank ownership and development
through a tiered structure.
Capitol's operating strategy is to provide transactional, processing and
administrative support and mentoring to aid in the effective growth and
development of its banks. It provides access to support services and management
with significant experience in community banking. These administrative and
operational support services do not require a direct interface with the bank
customer and therefore can be consolidated more efficiently without affecting
the bank customer relationship. Subsidiary banks have full decision-making
authority in structuring and approving loans and in the delivery and pricing of
other banking services.
Detroit Commerce Bank is a commercial bank with its headquarters at 645
Griswold, Suite 70, Detroit, Michigan 48226. Detroit's telephone number is (313)
967-9700.
Detroit has been, since it commenced business, a 92.5% owned subsidiary of
Capitol. Detroit commenced the business of banking on December 14, 1998.
REASONS FOR THE EXCHANGE (PAGE 27)
It is believed that the exchange will provide you with greater liquidity
and flexibility because Capitol's common stock is publicly traded. The exchange
will also provide you with greater diversification, since Capitol is active in
more than one geographic area and across a broader customer base.
THE ANNUAL SHAREHOLDERS' MEETING (PAGE 35)
The meeting of Detroit shareholders will be held on _________, 2002 at 9:00
a.m., local time, at Detroit Commerce Bank at 645 Griswold, Suite 70, Detroit,
Michigan 48226. At the shareholders' meeting, you will elect Detroit's Board of
Directors and be asked to approve the Plan of Share Exchange.
RECOMMENDATION TO SHAREHOLDERS (PAGE 28)
A majority of the Detroit board members and officers believe that the
proposed exchange is fair to you and in the best interests of both you and
Detroit and recommends that you vote FOR approval of the share exchange.
8
VOTES REQUIRED (PAGE 35)
Approval of the Plan of Share Exchange requires the favorable vote of a
majority of the outstanding shares of Detroit common stock excluding the shares
held by Capitol. This is more than the vote required by law, but Detroit's board
has set the vote requirement to be sure the exchange is what you, the
shareholders of Detroit, want. Capitol holds 92.5% of the outstanding shares of
Detroit common stock. Detroit's officers and directors hold 1.49% of the
outstanding shares of Detroit common stock, or 20.09% of all shares not held by
Capitol. The majority of the Board of Directors have agreed to vote their shares
FOR approval of the Plan of Share Exchange.
RECORD DATE; VOTING POWER (PAGE 35)
Detroit shareholders may vote at the shareholders' meeting if they owned
shares of common stock at the close of business on September 15, 2002. At the
close of business on August 31, 2002, approximately 23,901 shares of Detroit
common stock were outstanding (excluding shares held by Capitol). For each share
of Detroit 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.
WHAT SHAREHOLDERS WILL RECEIVE IN THE EXCHANGE (PAGE 27)
In the exchange, each outstanding share of Detroit common stock will be
automatically converted into the right to receive Capitol common stock,
according to a fixed exchange ratio. The exchange ratio is determined by
dividing the Detroit Share Value by the Capitol Share Value, where:
DETROIT SHARE VALUE. The value of each share of Detroit common stock
shall be $15.00.
CAPITOL SHARE VALUE. The value of each share of Capitol common stock
shall be $21.852, the average of the closing prices of Capitol common
stock for the month ended June 30, 2002, as reported by the Nasdaq
Stock Market, Inc.
Each Detroit shareholder (except Capitol) will receive shares of Capitol
common stock in exchange for his, her or their Detroit common stock calculated
by multiplying the number of shares of Detroit common stock held by the
shareholder by the exchange ratio. Any fractional shares will be paid in cash.
ACCOUNTING TREATMENT (PAGE 28)
Capitol's acquisition of the minority interest of Detroit will be accounted
for under the purchase method of accounting. After the exchange, 100% of
Detroit's results from operations will be included in Capitol's income
statement, as opposed to 92.5% as is currently reported.
TAX CONSEQUENCES OF THE EXCHANGE TO DETROIT SHAREHOLDERS (PAGE 28)
Capitol's tax counsel has rendered its opinion that the exchange should be
treated as a reorganization for United States federal income tax purposes.
Accordingly, Detroit shareholders generally will not recognize any gain or loss
for United States federal income tax purposes on the exchange of their Detroit
shares for shares of Capitol's common stock in the exchange, except for any gain
or loss recognized in connection with the receipt of cash instead of a
fractional share of Capitol's common stock. Tax counsel's opinion is attached as
Annex C to this proxy statement/prospectus.
Tax matters are very complicated, and the tax consequences of the exchange
to each Detroit 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.
9
DISSENTERS' RIGHTS (PAGE 30)
Michigan law provides that if the consideration in a share exchange is
shares listed on a national securities exchange or held of record by 2,000 or
more persons, the holders of the stock to be exchanged are not entitled to
dissenters' rights. Since Capitol's common stock is listed in a national
securities exchange, there are no dissenters' rights.
OPINION OF FINANCIAL ADVISOR (PAGE 31)
Detroit retained JMP Financial, Inc. as its financial advisor and agent in
connection with the exchange to render a financial fairness opinion to the
Detroit shareholders.
In deciding to approve the exchange, the Detroit board considered this
opinion, which stated that as of its date and subject to the considerations
described in it, the consideration to be received in the exchange by holders of
Detroit common stock is fair from a financial point of view. The opinion is
attached as Annex B to this proxy statement/prospectus.
THE PLAN OF SHARE EXCHANGE (PAGE 26)
The Plan of Share Exchange is attached as Annex A to this proxy
statement/prospectus. You are encouraged to read the Plan of Share Exchange
because it is the legal document that governs the exchange.
TERMINATION OF THE EXCHANGE
Detroit and Capitol can jointly agree to terminate the plan of exchange at
any time without completing the exchange.
Detroit can terminate the exchange if a majority of Detroit's shareholders
(other than Capitol) fail to approve the exchange at the shareholders' meeting;
or a governmental authority prohibits the exchange.
YOUR RIGHTS AS A SHAREHOLDER WILL CHANGE
Your rights as a Detroit shareholder are determined by Michigan's banking
law and by Detroit's articles of incorporation and by-laws. When the exchange is
completed, your rights as a Capitol stockholder will be determined by Michigan
law relating to business corporations (not the banking law) and by Capitol's
articles of incorporation and by-laws. See "Comparison of Shareholders Rights".
10
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial data below summarizes historical consolidated
financial information for the periods indicated and should be read in
conjunction with the financial statements and other information included in
Capitol's Annual Report on Form 10-K for the year ended December 31, 2001, which
is attached as part of Annex E. The unaudited consolidated financial data below
for the interim periods indicated has been derived from, and should be read in
conjunction with, Capitol's Quarterly Report on Form 10-Q for the period ended
June 30, 2002, which is attached as part of Annex E 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, necessary for a fair presentation. Interim results for
the six months ended June 30, 2002 are not necessarily indicative of results
which may be expected in future periods, including the year ending December 31,
2002. 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 HISTORICAL PERFORMANCE AND PREDICTING CAPITOL'S FUTURE
OPERATING RESULTS.
Capitol's audited consolidated financial statements as of and for the years
ended December 31, 2001 and 2000 and related statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 2001, 2000
and 1999 are attached as part of Annex E in this proxy statement/prospectus. The
selected financial data provided below as of and for the six months ended June
30, 2002 and 2001 have been derived from Capitol's consolidated financial
statements which are attached as part of Annex E in this proxy
statement/prospectus. Results of operations data and selected balance sheet data
as of and for the years ended December 31, 1998 and 1997 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 assets and liabilities of subsidiaries (including Detroit) are
included in Capitol's consolidated balance sheet. Capitol's consolidated net
income, however, only includes its subsidiaries' (including Detroit's) 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
those losses 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
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30 YEARS ENDED DECEMBER 31
----------------------- --------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED RESULTS OF OPERATIONS DATA:
Interest income $ 75,816 $ 76,708 $ 153,797 $ 132,311 $ 93,602 $ 69,668 $ 49,549
Interest expense 28,572 38,544 73,292 65,912 46,237 36,670 24,852
Net interest income 47,244 38,164 80,505 66,399 47,365 32,998 24,697
Provision for loan losses 4,774 3,321 8,167 7,216 4,710 3,523 2,049
Net interest income after provision
for loan losses 42,470 34,843 72,338 59,183 42,655 29,475 22,648
Noninterest income 6,222 4,612 9,585 6,137 4,714 3,558 2,157
Noninterest expense 37,833 31,489 64,136 52,846 40,257 26,325 16,721
Income before income tax expense,
minority interest and cumulative
effect of change in accounting
principle 10,859 7,966 17,787 12,474 7,112 6,708 8,084
Income tax expense 3,694 2,801 5,824 4,289 3,213 2,584 2,888
Income before minority interest and
cumulative effect of change in
accounting principle 7,165 5,165 11,963 8,185 3,899 4,124 5,196
Minority interest in net losses
(income) of consolidated
subsidiaries (208) (182) (1,245) (150) 1,707 504 361
Income before cumulative effect
of change in accounting
principle 6,957 4,983 10,718 8,035 5,606 4,628 5,557
Cumulative effect of change in
accounting principle (1) (197)
Net income 6,957 4,983 10,718 8,035 5,409 4,628 5,557
11
CAPITOL BANCORP LIMITED
-----------------------------------------------------------------------------------------------
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30 YEARS ENDED DECEMBER 31
------------------------- -------------------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
PER SHARE DATA:
Net income per common share:
Before cumulative effect of
change in accounting
principle (1):
Basic $ 0.75 $ 0.64 $ 1.38 $ 1.14 $ 0.87 $ 0.74 $ 0.91
Diluted 0.73 0.63 1.35 1.13 0.86 0.72 0.88
After cumulative effect of
change in accounting
principle (1):
Basic 0.75 0.64 1.38 1.14 0.84 0.74 0.91
Diluted 0.73 0.63 1.35 1.13 0.83 0.72 0.88
Cash dividends declared 0.20 0.20 0.40 0.36 0.36 0.33 0.30
Book value 12.16 9.69 10.24 9.18 8.08 7.77 7.22
Dividend payout ratio 26.67% 31.25% 28.99% 31.58% 42.86% 43.63% 32.95%
Weighted average number of
common shares outstanding 9,301 7,742 7,784 7,065 6,455 6,284 6,130
SELECTED BALANCE SHEET DATA:
Total assets $ 2,233,766 $ 1,881,967 $ 2,044,006 $ 1,630,076 $ 1,305,987 $ 1,024,444 $ 690,556
Investment securities 44,241 43,979 43,687 68,926 107,145 86,464 64,470
Portfolio loans 1,897,776 1,564,666 1,734,589 1,355,798 1,049,204 724,280 502,755
Allowance for loan losses (26,310) (20,420) (23,238) (17,449) (12,639) (8,817) (6,229)
Deposits 1,908,359 1,629,577 1,740,385 1,400,899 1,112,793 890,890 604,407
Debt obligations 88,248 71,288 89,911 58,150 47,400 23,600
Minority interests in
consolidated subsidiaries 40,377 66,238 70,673 62,575 54,593 27,576 11,020
Trust preferred securities 51,551 24,345 48,621 24,327 24,291 24,255 24,126
Stockholders' equity 130,223 75,765 80,172 70,404 54,668 49,292 45,032
PERFORMANCE RATIOS: (2)
Return on average equity 13.23% 13.64% 15.22% 13.78% 10.66% 10.19% 13.28%
Return on average assets 0.65% 0.57% 0.58% 0.55% 0.47% 0.55% 0.96%
Net interest margin (fully
taxable equivalent) 4.74% 4.66% 4.60% 4.80% 4.44% 4.15% 4.54%
Efficiency ratio (3) 70.76% 73.61% 71.19% 72.85% 77.30% 70.63% 60.92%
ASSET QUALITY:
Non-performing loans (4) $ 23,310 $ 11,064 $ 17,238 $ 6,757 $ 4,124 $ 7,242 $ 4,011
Allowance for loan losses to
non-performing loans 112.87% 184.56% 134.81% 258.24% 306.47% 121.75% 155.30%
Allowance for loan losses to
portfolio loans 1.39% 1.31% 1.34% 1.29% 1.20% 1.22% 1.24%
Non-performing loans to total
portfolio loans 1.23% 0.71% 0.99% 0.50% 0.39% 1.00% 0.80%
Net loan losses to average
portfolio loans 0.19% 0.05% 0.15% 0.20% 0.10% 0.15% 0.09%
CAPITAL RATIOS:
Average equity to average assets 4.92% 4.16% 3.78% 4.26% 4.46% 5.36% 7.22%
Tier 1 risk-based capital ratio 10.73% 9.99% 10.54% 11.10% 10.78% 13.42% 14.26%
Total risk-based capital ratio 11.98% 11.24% 11.85% 12.35% 11.62% 14.60% 16.61%
Leverage ratio 5.83% 4.03% 3.92% 4.32% 4.35% 4.88% 6.65%
- ----------
(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
SUPPLEMENTAL FINANCIAL INFORMATION
Statement No. 142, "Goodwill and Other Intangible Assets" is effective for
fiscal years beginning January 1, 2002. 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 Statement No. 142.
Capitol's previous business combinations (generally, acquisitions of minority
interests) have been accounted for using the purchase method. As of June 30,
2002, the net carrying amount of reporting-unit goodwill approximated $12.8
million and other intangible assets approximated $2.6 million. Upon
implementation, this new standard has not had a material effect on Capitol's
consolidated financial statements, other than the elimination of goodwill
amortization.
Statement No. 142 requires that intangible assets not subject to
amortization, such as Capitol's reporting-unit goodwill, be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Such potential impairment is measured
by comparing the fair value of a reporting unit with its carrying amount within
the consolidated group.
When goodwill is reviewed for potential impairment, impairment losses must
be charged against earnings if and when determined. Substantially all of
Capitol's recorded reporting-unit goodwill relates to acquisitions of minority
interests in consolidated subsidiaries. Such acquisitions have been made at
modest premiums in relation to the underlying fair value of net assets when
acquired. Based on management's review of recorded reporting-unit goodwill at
the transition date for Statement No. 142, January 1, 2002, no impairment losses
were identified as of that date.
Paragraph 61 of Statement No. 142 requires supplemental disclosure of
historical information, as adjusted to exclude amortization of goodwill no
longer being amortized, which is summarized below (in $1,000s except per share
amounts):
Six Months Ended
June 30 Year Ended December 31
----------------------- ------------------------------------
2002 2001 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Net income, as reported $ 6,957 $ 4,983 $ 10,718 $ 8,035 $ 5,409
Add back -- goodwill
amortization -- 386 979 561 318
---------- ---------- ---------- ---------- ----------
Net income, as adjusted $ 6,957 $ 5,369 $ 11,697 $ 8,596 $ 5,727
========== ========== ========== ========== ==========
Net income per share,
as reported:
Basic $ 0.75 $ 0.64 $ 1.38 $ 1.14 $ 0.84
========== ========== ========== ========== ==========
Diluted $ 0.73 $ 0.63 $ 1.35 $ 1.13 $ 0.83
========== ========== ========== ========== ==========
Add back -- goodwill
amortization per share:
Basic -- $ 0.05 $ 0.12 $ 0.08 $ 0.05
========== ========== ========== ==========
Diluted -- $ 0.05 $ 0.12 $ 0.08 $ 0.05
========== ========== ========== ==========
Net income per share,
as adjusted:
Basic $ 0.75 $ 0.69 $ 1.50 $ 1.22 $ 0.89
========== ========== ========== ========== ==========
Diluted $ 0.73 $ 0.68 $ 1.47 $ 1.21 $ 0.88
========== ========== ========== ========== ==========
13
RISK FACTORS
THE SHARES OF COMMON STOCK THAT ARE BEING OFFERED ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTING IN CAPITOL'S COMMON STOCK WILL PROVIDE YOU WITH AN EQUITY
OWNERSHIP INTEREST IN CAPITOL. AS A CAPITOL SHAREHOLDER, YOUR INVESTMENT MAY BE
IMPACTED BY RISKS INHERENT IN ITS BUSINESS. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS, AS WELL AS OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE DECIDING TO VOTE TO EXCHANGE YOUR DETROIT 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 bank subsidiaries are less than three years old and
Capitol's oldest bank is 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, 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 has rapidly and significantly expanded its operations and
anticipates that further expansion will be required to realize its growth
strategy. Capitol's rapid growth has placed significant demands on its
management and other resources which, given its expected future growth rate, are
likely to continue. To manage future growth, Capitol will need to attract, hire
and retain highly skilled and motivated officers and employees and improve
existing systems and/or implement new systems for:
- transaction processing;
- operational and financial management; and
- training, integrating and managing Capitol's growing employee base.
FAVORABLE ENVIRONMENT FOR FORMATION OF NEW BANKS COULD CHANGE ADVERSELY, 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.
14
CAPITOL'S SMALL SIZE MAY MAKE IT DIFFICULT TO COMPETE WITH LARGER INSTITUTIONS
BECAUSE CAPITOL IS 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 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 banks are intended to be small in size. They each generally
operate from single locations. They are very small relative to the dynamic
markets in which they operate. Each of those markets has a variety of large and
small competitors that have resources far beyond those of Capitol's banks. While
it is the intention of Capitol's banks to operate as niche players within their
geographic markets, their continued existence is dependent upon being able to
attract and retain loan customers in those large markets that are dominated by
substantially larger regulated and unregulated financial institutions.
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. Capitol's current bank affiliates are regulated primarily by the
state banking regulators and the FDIC and, in the case of one national bank, the
Office of the Comptroller of the Currency (OCC).
Federal and the various state laws and regulations govern numerous aspects
of the banks' operations, including;
- adequate capital and financial condition,
- permissible types and amounts of extensions of credit and investments,
- permissible nonbanking activities, and
- restrictions on dividend payments.
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.
15
REGULATORY ACTION COULD SEVERELY LIMIT FUTURE EXPANSION PLANS.
To carry out some of its expansion plans, Capitol is required to obtain
permission from the Federal Reserve Board. Applications for the formation of new
banks are submitted to the state and federal bank regulatory agencies for their
approval.
While Capitol's recent experience with the regulatory application process
has been favorable, the future climate for regulatory approval is impossible to
predict. Regulatory agencies could prohibit or otherwise significantly restrict
the expansion plans of Capitol, its current bank subsidiaries and future new
start-up banks.
THE BANKS' ALLOWANCES FOR LOAN LOSSES MAY PROVE INADEQUATE TO ABSORB ACTUAL 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 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
loan losses could increase significantly. As a result, such losses could exceed
current allowance estimates. No assurance can be provided that the allowance
will be sufficient to cover actual future loan losses should such losses be
realized.
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 banks. Because many of Capitol'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 2002. Capitol's loan losses in this interim
2002 period have increased. Further, 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 provision for loan losses or to recognize further loan charge-offs based
upon judgments different from those of management. Any increase in the allowance
required by regulatory agencies could have a negative impact on Capitol's
operating results.
CAPITOL'S COMMERCIAL LOAN CONCENTRATION 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 banks make various types of loans, including commercial,
consumer, residential mortgage and construction loans. Capitol's strategy
emphasizes lending to small businesses and other commercial enterprises. Loans
to small and medium-sized businesses are generally riskier than single-family
mortgage loans. Typically, the success of a small or medium-sized business
depends on the management talents and efforts of one or two persons or a small
group of persons, and the death, disability or resignation of one or more of
these persons could have a 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.
16
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 2001, the FRBOMC decreased interbank interest rates 11 times, which was
an unprecedented action to reduce rates 475 basis points within a year. Interest
rates have remained relatively stable in the first half of 2002, however, future
stability and FRBOMC policy are uncertain.
CHANGES IN THE YIELD CURVE. Changes in the difference between short and
long-term interest rates, commonly known as the yield curve, may also harm
Capitol's business. For example, short-term deposits may be used to fund
longer-term loans. When differences between short-term and long-term interest
rates shrink or disappear, the spread between rates paid on deposits and
received on loans could narrow significantly, decreasing net interest income.
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.
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 June 30, 2002, 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.
17
POSSIBLE VOLATILITY OF STOCK PRICE.
The market price of Capitol's common stock may fluctuate in response to
numerous factors, including variations in the annual or quarterly financial
results of Capitol, or its competitors, changes by financial research analysts
in their estimates of the earnings of Capitol or its competitors or the failure
of Capitol or its competitors to meet such estimates, conditions in the economy
in general or the banking industry in particular, or unfavorable publicity
affecting Capitol, its banks, or the industry. In addition, equity markets have,
on occasion, experienced significant price and volume fluctuations that have
affected the market price for many companies' securities which have been
unrelated to the operating performance of those companies. Any fluctuation may
adversely affect the prevailing market price of Capitol's common stock.
CAPITOL'S BANK SUBSIDIARIES HAVE DECENTRALIZED MANAGEMENT WHICH COULD HAVE A
NEGATIVE IMPACT ON THE RATE OF GROWTH AND PROFITABILITY OF CAPITOL AND ITS BANK
SUBSIDIARIES.
Capitol'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's
ability to uniformly implement holding company strategy at the bank level. It
may slow Capitol'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.
18
RECENT DEVELOPMENTS
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 Community Bancorp
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.
Sun became a wholly-owned subsidiary of Capitol effective March 31, 2002 and was
merged into Capitol on July 31, 2002.
First California Northern Bancorp, a majority-owned subsidiary of Capitol,
opened its first bank affiliate, Napa Community Bank, in early 2002.
Nevada Community Bancorp Limited, a majority-owned subsidiary of Capitol,
opened its fourth bank affiliate, Bank of Las Vegas, in early 2002.
In early 2002, Capitol announced plans to explore bank development
opportunities on a national basis. Also, in early 2002, Sunrise Bank of Arizona
announced opening of two loan production offices in Texas (Dallas and Houston),
a loan production office in Atlanta, Georgia, and a private banking center in
Scottsdale, Arizona.
On August 1, 2002, Capitol announced a 20% increase in its quarterly cash
dividend to $0.12 per share.
Effective September 30, 2002, two share exchange transactions were pending
which, if completed, would result in Capitol issuing 447,516 shares of common
stock. These two share exchanges relate to Sunrise Capital Corporation
("Sunrise") and Indiana Community Bancorp Ltd. ("ICBL"), which are
majority-owned subsidiaries of Capitol. The Sunrise share exchange (for which
266,523 shares of Capitol common stock may be issued) is subject to the approval
of Sunrise's shareholders (other than Capitol) at a meeting to be held on
September 30, 2002. Both share exchanges are expected to be consummated
effective September 30, 2002.
In addition to the proposed Detroit share exchange, Capitol has proposed a
share exchange transaction regarding East Valley Community Bank ("East Valley"),
a majority-owned subsidiary of Capitol, subject to the approval of East Valley's
shareholders (other than Capitol). If the East Valley share exchange is
approved, Capitol estimates issuing approximately 38,000 shares of Capitol
common stock.
19
CAPITALIZATION
The table presented below shows Capitol's actual total capitalization as of
June 30, 2002, and as adjusted to reflect pending share exchanges with certain
subsidiaries of Capitol (as described below) and the exchange of Capitol's
common stock for Detroit's common stock as described in this proxy
statement/prospectus.
AS OF JUNE 30, 2002
-----------------------------------------------------------
(In thousands, except per share amounts)
AS ADJUSTED
FOR THE
AS ADJUSTED AS ADJUSTED DETROIT AND
FOR OTHER FOR THE OTHER PENDING
PENDING SHARE DETROIT SHARE
ACTUAL EXCHANGES(4) EXCHANGE(5) EXCHANGES(6)
--------- ------------ ----------- ------------
DEBT OBLIGATIONS ...................................... $ 88,248 $ 88,248 $ 88,248 $ 88,248
TRUST-PREFERRED SECURITIES ............................ 51,551 51,551 51,551 51,551
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ....... 40,377 33,979 40,195 33,797
STOCKHOLDERS' EQUITY(1):
Common stock, no par value; 25,000,000 shares
authorized; issued, and outstanding:
Actual - 10,705,378 shares ........................ 112,648
As adjusted for other pending exchanges -
11,152,894 shares(4) ............................ 123,124
As adjusted for the Detroit exchange -
10,721,785 shares(5) ............................ 112,995
As adjusted for both the Detroit and other
pending share exchanges - 11,169,301 shares(6) .. 123,471
Retained earnings ................................... 19,273 19,273 19,273 19,273
Market value adjustment for available-for-sale
securities (net of tax effect) ..................... 153 153 153 153
Less note receivable from exercise of stock options
and unallocated ESOP shares ........................ (1,851) (1,851) (1,851) (1,851)
--------- --------- --------- ---------
Total stockholders' equity ....................... $ 130,223 $ 140,699 $ 130,570 $ 141,046
========= ========= ========= =========
Book value per share of common stock .................. $ 12.16 $ 12.61 $ 12.18 $ 12.63
========= ========= ========= =========
TOTAL CAPITALIZATION(2) ............................... $ 170,600 $ 174,678 $ 170,765 $ 174,843
========= ========= ========= =========
TOTAL CAPITAL FUNDS(3) ................................ $ 222,151 $ 226,229 $ 222,316 $ 226,394
========= ========= ========= =========
CAPITAL RATIOS:
Stockholders' equity to total assets ................ 5.83% 6.30% 5.84% 6.31%
Total capitalization to total assets ................ 7.64% 7.82% 7.64% 7.83%
Total capital funds to total assets ................. 9.95% 10.13% 9.95% 10.14%
- ----------
(1) Does not include approximately 2.1 million shares of common stock issuable
upon exercise of stock options. See "Management--Stock Option Program."
Also, does not include approximately 59,000 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) Assumes issuance of 447,516 shares of Capitol common stock for pending
share exchange transactions regarding Sunrise Capital Corporation and
Indiana Community Bancorp Ltd, which are currently majority-owned
subsidiaries of Capitol.
(5) Assumes issuance of 16,407 shares of Capitol common stock upon completion
of Detroit share exchange.
(6) Assumes issuance of 463,923 shares of Capitol common stock upon completion
of pending share exchange transactions regarding Sunrise Capital
Corporation and Indiana Community Bancorp Ltd, which are currently
majority-owned subsidiaries of Capitol, and the Detroit share exchange.
Does not include 37,890 shares of Capitol common stock which may be issued
upon shareholder approval of a share exchange regarding East Valley
Community Bank, a majority-owned subsidiary of Capitol.
20
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 $16.85 on September 27, 2002.
Cash Dividends
2001 High Low Paid
- ---- --------- --------- ---------
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 ended March 31 16.820 13.300 0.10
Quarter ended June 30 23.860 16.450 0.10
Quarter ending September 30
(through September 27, 2002) 24.250 15.810 0.12
As of ________, 2002, there were a total of approximately ______ beneficial
holders of Capitol's common stock based on information supplied by its stock
transfer agent and other sources.
Holders of common stock are entitled to receive dividends when, as and if
declared by Capitol's Board of Directors out of funds legally available.
Although Capitol has paid dividends on its common stock for the preceding five
years, there is no assurance that dividends will be paid in the future. The
declaration and payment of dividends on Capitol's common stock depends upon the
earnings and financial condition of Capitol, liquidity and capital requirements,
the general economic and regulatory climate, Capitol's ability to service debt
obligations senior to the common stock and other factors deemed relevant by
Capitol's Board of Directors. Regulatory authorities impose limitations on the
ability of banks to pay dividends to Capitol and the ability of Capitol to pay
dividends to its shareholders.
There is no market for Detroit's common stock. Any transfers have been made
privately and are not reported. Detroit has never paid a dividend on its common
stock.
21
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes forward-looking statements.
Capitol has based these forward-looking statements on its current expectations
and projections about future events. These forward-looking statements may be
impacted by risks, uncertainties and assumptions. Examples of some of the risks,
uncertainties or assumptions that may impact the forward-looking statements are:
- the results of management's efforts to implement Capitol's business
strategy including planned expansion into new markets in Arizona,
Nevada, New Mexico, Indiana, California and elsewhere;
- adverse changes in the banks' loan portfolios and the resulting credit
risk-related losses and expenses;
- adverse changes in the economy of the banks' market areas that could
increase credit-related losses and expenses;
- adverse changes in real estate market conditions that could also
negatively affect credit risk;
- the possibility of increased competition for financial services in
Capitol's markets;
- fluctuations in interest rates and market prices, which could
negatively affect net interest margins, asset valuations and expense
expectations; and
- other factors described in "Risk Factors".
22
INFORMATION ABOUT CAPITOL
This proxy statement/prospectus is accompanied by a copy of the following
documents as indicated in Annex E:
- Report on Form 10-Q for period ended June 30, 2002
- Report on Form 10-Q for period ended March 31, 2002
- Annual Report to Shareholders for year ended December 31, 2001
- Annual Report on Form 10-K for year ended December 31, 2001
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 2, 2002.
INFORMATION ABOUT DETROIT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Management's discussion and analysis of financial condition and results of
operations for the periods ended June 30, 2002 and December 31, 2001 are
included in this proxy statement/prospectus as part of Annex D.
FINANCIAL STATEMENTS.
Unaudited interim condensed financial statements of Detroit as of June 30,
2002 and for the six months ended June 30, 2002 and 2001 are included in this
proxy statement/prospectus as part of Annex D. Audited financial statements of
Detroit as of and for the years ended December 31, 2001, 2000 and 1999 are
included in this proxy statement/prospectus as part of Annex D.
VOTING SECURITIES AND PRINCIPAL HOLDERS.
The following table shows the share holdings of each director and officer
of Detroit and all directors and officers as a group. Where applicable, the
table includes shares held by members of their immediate families.
Detroit shares beneficially owned
---------------------------------------------
Percentage of
all Detroit
Percentage shares
of all excluding
Detroit Detroit shares
Name of Beneficial owner Number shares owned by Capitol
- ------------------------ ---------- ---------- ----------------
Capitol Bancorp Ltd. 295,599 92.5% N/A
========== ========== ==========
Detroit's Directors and Officers:
Ralph J. Burrell 1,000 0.31% 4.18%
Vivian L. Carpenter 1,000 0.31% 4.18%
Robert C. Carr 0 -- --
Donald M. Davis, Jr 800 0.25% 3.35%
Barbara B. Gattorn 0 -- --
Douglas H. Graham 100 0.03% 0.42%
John R. Hirzel 200 0.06% 0.84%
Martha K. Richardson 200 0.06% 0.84%
Benjamin L. Schwegman 0 -- --
James F. Stapleton 0 -- --
Linda A. Watters 1,500 0.47% 6.28%
Neal Zalenko 0 -- --
---------- ---------- ----------
Total of Officers and Directors, as a group 4,800 1.49% 20.09%
========== ========== ==========
Other than Capitol, no individual owns 5% or more of the outstanding shares
of Detroit.
23
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Because Detroit is already a majority-owned subsidiary of Capitol, it is
already included in Capitol's consolidated financial statements. Consummation of
the exchange is not expected to have a material impact on the consolidated
financial position or consolidated results of operation of Capitol. Accordingly,
pro forma consolidated financial information illustrating the exchange and
Capitol's purchase of the minority interest of Detroit is not required to be
presented in this prospectus.
24
THE ELECTION OF DIRECTORS
Detroit's Articles of Incorporation and By-Laws provide that the number of
Directors, as determined from time to time by the Board of Directors, shall be
no less than (5) and no more than (25). The Board of Directors has presently
fixed the number of Directors at twelve.
The Board of Directors has nominated the twelve (12) directors named below
for a one-year term. All nominees are willing to be elected and to serve in such
capacity for one year and until the election and qualification of their
successors. All of the nominees for election to the Board of Directors are
currently members of Detroit's Board of Directors.
The proposed nominees for election as Directors are willing to be elected
and serve but in the event that any nominee at the time of election is unable to
serve or is otherwise unavailable for election, the Board of Directors may
select a substitute nominee, and in that event the persons named in the enclosed
proxy intend to vote such proxy for the person selected.
The affirmative vote of a plurality of the votes cast at the meeting is
required for the nominees to be elected.
The table following sets forth information regarding Detroit's Directors
based on the data furnished by them:
NAME, PROFESSIONAL POSITIONS & POSITIONS HELD WITH DETROIT
Ralph J. Burrell, President, Symcon; Director
Vivian L. Carpenter, President, Atwater Entertainment Associates; Director
Robert C. Carr, Executive Vice President and Treasurer, Capitol Bancorp Limited;
Director
Donald M. Davis, Jr., VP Human Resources/Support Services, Health Alliance Plan;
Director
Barbara B. Gattorn, Senior Advisor to the President, Detroit Regional Chamber;
Director
Douglas H. Graham, Chairman and Chief Executive Officer, Detroit Technology
Ventures, L.L.C.; Director
John Hirzel, Certified Public Accountant, Hirzel, Jackson and Swaine, P.C.;
Director
Martha K. Richardson, President, Services Marketing Specialists, Inc.; Director
Benjamin Schwegman, President, Schwegman & Associates, Inc.; Director
James F. Stapleton, President, B & R Consultants; Director
Linda A. Watters, President & Chief Executive Officer, Detroit Commerce Bank;
Director
Neal Zalenko, Certified Public Accountant & President, Zalenko & Associates,
P.C.; Director
25
THE EXCHANGE
GENERAL
The Detroit Board of Directors is using this proxy statement/prospectus to
solicit proxies from the holders of Detroit common stock for use at the annual
shareholders' meeting.
At the annual shareholders' meeting to be held on _________, 2002, Detroit
common shareholders will be asked to approve the exchange. The Plan of Share
Exchange provides for Detroit's minority shareholders to exchange the 7.5% of
the common stock of Detroit not owned by Capitol for Capitol common stock. Upon
consummation of the exchange, Detroit will become a wholly-owned subsidiary of
Capitol. In the exchange, Detroit shareholders will receive shares of Capitol's
common stock.
BACKGROUND OF THE EXCHANGE
The concept of a potential share exchange transaction with Capitol has been
discussed informally from time to time from the beginning of Detroit's
operations. Capitol expressed a willingness to extend an offer of an exchange
around the Bank's 36th month of operation. These discussions occurred at various
Detroit board meetings during that period. The objectives of the potential
exchange would be to enable shareholders of Detroit to achieve liquidity in
their investment, a reasonable return on their investment in the form of a
`premium' and to accomplish such an exchange on a tax-free basis. Without the
exchange, shareholders of Detroit will continue to hold Detroit stock which has
no market and is illiquid.
Detroit's board of directors have not solicited or received any other
proposals for the potential exchange or sale of the Detroit's shares of common
stock which are not owned by Capitol. If other proposals were under
consideration for sale or exchange of Detroit's shares to an entity other than
Capitol, Capitol would be permitted to vote its shares of Detroit. By virtue of
Capitol's majority ownership of Detroit, it is likely that Capitol would not
vote its shares of Detroit in favor of any other proposals regarding a share
exchange or sale of the minority interest in Detroit with another party. In
addition, Capitol currently has no intentions of selling its majority interest
in Detroit. Hence, the only proposal under consideration is Capitol's proposal.
Capitol based its proposal on its prior transactions whereby it has
acquired the minority interest in banks it controls. In those prior
transactions, Capitol has offered the minority shareholders an opportunity to
exchange their bank shares for Capitol common stock on or about the 36th month
of the bank's operations. Although Capitol is under no contractual obligation to
make such an offer to acquire the minority interests in any of its present bank
subsidiaries, it has made this proposal to Detroit's board of directors
consistent with its informal discussions with Detroit's board during the past
three years.
Consensus between Capitol and Detroit's directors who are not employees or
officers of Capitol was reached in September 2002, to approve the proposed
exchange subject only to:
- obtaining an independent opinion that the proposed share exchange is
fair to Detroit's shareholders from a financial point of view; and
- obtaining approval for the proposed exchange by a majority of
Detroit's shares not already owned by Capitol.
In September 2002, the Detroit board approved the Plan of Share Exchange
and each agreed to call a shareholder meeting for a shareholder vote to approve
the Plan of Share Exchange.
26
DETROIT'S REASONS FOR THE EXCHANGE.
Detroit's reasons for the exchange are that the shareholders of Detroit
will be best served by the exchange in order to maximize their shareholder value
and to provide them:
. better protection through diversification geographically and by
customer base through Capitol's subsidiary banks rather than
dependence upon the resources of a single bank.
. the Detroit shareholders will receive publicly traded shares,
providing them liquidity as opposed to the Detroit common stock for
which there is no public market. Detroit 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.
. Detroit's shareholders will receive stock upon which historically
there has been a dividend paid. See "Dividends and Market for Common
Stock." The fact that Capitol has paid dividends for the past five
years is not a guaranty that dividends will continue to be paid.
Capitol's Board of Directors will declare and pay dividends as and
when it appears to Capitol's board that dividends are appropriate.
CAPITOL'S REASONS FOR THE EXCHANGE
Capitol believes that profitability of Detroit will continue to increase.
As noted elsewhere in this proxy statement/prospectus, while Detroit's assets
are reported as part of Capitol's assets for purposes of its consolidated
financial statements, Detroit's income is attributed to Capitol only in the
percentage which Capitol owns of Detroit common stock. Capitol desires to
acquire the remainder of Detroit's common stock so that Capitol can include 100%
of Detroit's income in Capitol's consolidated income statement.
TERMS OF THE EXCHANGE
Terms of the exchange are set forth in the Plan of Share Exchange. The Plan
of Share Exchange is included an Annex A to this proxy statement/prospectus. You
should review the Plan of Share Exchange in its entirety.
The terms of the exchange can be summarized as follows:
Upon approval of the exchange by a majority of the 7.5% of the shares
of Detroit held by shareholders other than Capitol, each share of
Detroit common stock will be exchanged for shares of Capitol common
stock according to a fixed exchange ratio. The exchange ratio is
determined by dividing the Detroit share value by the Capitol share
value. The Detroit share value shall be $15.00.
Capitol's share value shall be $21.852, the average closing prices of
Capitol common stock for the month ended June 30, 2002, as reported by
the Nasdaq Stock Market, Inc.
The exchange ratio is determined by dividing the Detroit share value by the
Capitol share value. Each Detroit shareholder (except Capitol) will receive
shares of Capitol common stock in exchange for his, her or their Detroit common
stock calculated by multiplying the number of shares in Detroit common stock
held by the shareholder by the exchange ratio. Any fractional shares will be
paid in cash.
27
DETROIT BOARD RECOMMENDATION
THE DETROIT BOARD HAS DETERMINED THAT THE EXCHANGE IS FAIR TO AND IN THE
BEST INTERESTS OF THE DETROIT SHAREHOLDERS, HAS APPROVED THE PLAN OF SHARE
EXCHANGE AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF
SHARE EXCHANGE.
ACCOUNTING TREATMENT
Capitol expects the exchange to be treated as the acquisition of a minority
interest using the purchase method of accounting.
PRO FORMA DATA
In light of the respective total assets and net income of Capitol and
Detroit and since Detroit has, since its inception, always been a consolidated
subsidiary of Capitol, pro forma financial statements are not included in this
proxy statement/prospectus. The pro forma effect of the exchange is deemed to be
immaterial.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The income tax discussion below represents the opinion of Miller, Canfield,
Paddock and Stone, PLC, tax counsel to Capitol, on the material federal income
tax consequences of the exchange. This discussion is not a comprehensive
description of all of the tax consequences that may be relevant to you. For
example, counsel did not address tax consequences that arise from rules that
apply generally to all taxpayers or to some classes of taxpayers, or tax
consequences that are generally assumed to be known by investors. This
discussion is based upon the Internal Revenue Code, the regulations of the U.S.
Treasury Department, and court and administrative rulings and decisions in
effect on the date of this proxy statement/prospectus. These laws may change,
possibly retroactively, and any change could affect the continuing validity of
this discussion.
This discussion also is based upon certain representations made by Detroit
and Capitol. You should read carefully the full text of the tax opinion of
Miller, Canfield, Paddock and Stone, PLC. The opinion is included in this proxy
statement/prospectus as Annex C. This discussion also assumes that the exchange
will be effected pursuant to applicable state law and otherwise completed
according to the terms of the Plan of Share Exchange. You should not rely upon
this discussion if any of these factual assumptions or representations is, or
later becomes, inaccurate.
This discussion also assumes that shareholders hold their shares of Detroit
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;
. Detroit shareholders who received their Detroit common stock through
the exercise of employee stock options or otherwise as compensation;
. Detroit shareholders who are not U.S. persons; and
. Detroit shareholders who hold Detroit common stock as part of a hedge,
straddle or conversion transaction.
28
The discussion also does not address any consequences arising under the
laws of any state, locality or foreign jurisdiction. No rulings have been or
will be sought from the Internal Revenue Service regarding any matters relating
to the exchange.
Based on the assumptions and representations above, it is the opinion of
Miller, Canfield, Paddock and Stone, PLC, tax counsel to Capitol, that:
* the exchange will qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code;
* no gain or loss will be recognized by the shareholders of Detroit who
exchange their Detroit 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
Detroit shareholders who exchange all of their Detroit common stock
for Capitol common stock in the exchange will be the same as the
aggregate tax basis of the Detroit 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 Detroit common stock surrendered in
exchange; and
* a holder of Detroit common stock that receives cash instead of a
fractional share of Capitol common stock will, in general, provided
the redemption is not essentially equivalent to a dividend under
Section 302(b)(1) of the Internal Revenue Code, 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 Detroit 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 Detroit common stock exchanged for the
fractional share of Capitol common stock satisfies the long-term
holding period requirement.
The tax opinion of Miller, Canfield, Paddock and Stone, PLC is not binding
upon the Internal Revenue Service or the courts.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE EXCHANGE
TO YOU WILL DEPEND ON YOUR PARTICULAR SITUATION. YOU ARE ENCOURAGED TO CONSULT
YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY OF FEDERAL,
STATE, LOCAL AND FOREIGN TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGE IN THE
TAX LAWS.
29
REGULATORY MATTERS
Detroit is subject to regulation by the Michigan Financial Institutions
Bureau and the FDIC. The Financial Institutions Bureau has been advised by
Capitol of the proposed share exchange. The FDIC is not required to give
permission or otherwise review the exchange prior to consummation.
As a bank holding company, Capitol is subject to regulation by the Federal
Reserve Board. Federal Reserve Board rules require Capitol to obtain the Federal
Reserve Board's permission to acquire at least 51% of a subsidiary bank. The
rules of the Federal Reserve Board do not differentiate between ownership of 51%
and ownership of 100% of the stock of the subsidiary bank. Of course, Capitol
received permission to acquire 51% or more ownership of Detroit prior to Detroit
commencing the business of banking. Accordingly, Capitol will not be required to
seek any further approval from the Federal Reserve Board for the exchange.
It is a condition of the exchange that the shares of Capitol stock to be
issued pursuant to the Plan of Share Exchange be approved for listing on the
Nasdaq Stock Market, Inc., subject to official notice of issuance. An
application will be filed to list Capitol's shares. Accordingly, the shares of
Capitol common stock to be issued in exchange for the Detroit common stock will
be publicly tradable upon consummation of the exchange. There will be no
restriction on the ability of a former Detroit shareholder to sell in the open
market the Capitol common stock received (unless the Detroit shareholder is also
an officer, director or affiliate of either Detroit or Capitol, in which case
Rule 144 and Rule 145 issued by the SEC do impose certain restrictions on sale
of Capitol common stock).
DISSENTERS' RIGHTS
Michigan law provides that where the consideration to be received in a
share exchange is common stock which is publicly tradable on a national
securities exchange, or held of record by 2,000 or more persons, dissenters'
rights are not available. Capitol's common stock is tradable on the National
Market System of the Nasdaq Stock Market, Inc. and, accordingly, qualifies as
stock traded on a national securities exchange. Therefore, no dissenters' rights
will be available in the exchange.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
This proxy statement/prospectus does not cover any resales of the Capitol
common stock you will receive in the exchange, and no person is authorized to
make any use of this proxy statement/prospectus in connection with any such
resale.
All shares of Capitol common stock you will receive in the exchange will be
freely transferable, except that if you are deemed to be an "affiliate" of
Detroit under the Securities Act of 1933 at the time of the annual 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 Detroit for those purposes generally include
individuals or entities that control, are controlled by, or are under common
control with, Detroit, and would not include shareholders who are not officers,
directors or principal shareholders of Detroit.
The affiliates of Detroit may not offer, sell or otherwise dispose of any
of the shares of Capitol common stock issued to that affiliate in the exchange
or otherwise owned or acquired by that affiliate:
(1) for a period beginning 30 days prior to the exchange and continuing
until financial results covering at least 30 days of post-exchange
combined operations of Capitol and Detroit have been publicly filed by
Capitol; or
(2) in violation of the Securities Act.
30
OPINION OF FINANCIAL ADVISOR
Detroit has retained JMP Financial, Inc. to provide a financial fairness
opinion in connection with the exchange. The board selected JMP Financial, Inc.
to act as Detroit's financial advisor based on its qualifications, expertise and
reputation. JMP Financial, Inc. has rendered its opinion, in writing, that,
based upon and subject to the various considerations set forth in the opinion,
the consideration to be received pursuant to the exchange by the holders of
Detroit common stock is fair from a financial point of view.
The full text of the written opinion of JMP Financial, Inc. are attached as
Annex B to this proxy statement/prospectus and sets forth, among other things,
the assumptions made, procedures followed, matters considered and limitations on
the scope of the review undertaken by JMP Financial, Inc. in rendering its
opinion. Detroit shareholders are urged to, and should, read the opinion
carefully and in its entirety. The opinion is directed to the Detroit board and
addresses only the fairness from a financial point of view of the consideration
received pursuant to the exchange as of the date of the respective opinion. It
does not address any other aspect of the exchange and does not constitute a
recommendation to any holder of Detroit common stock as to how to vote at the
annual shareholders' meeting. The summary of the opinion of JMP Financial, Inc.
set forth in this document is qualified in its entirety by reference to the full
text of the opinion.
In connection with rendering its opinion, JMP Financial, Inc. among other
things:
. reviewed certain internal financial statements and other financial and
operating data concerning Detroit prepared by the management of
Detroit;
. discussed the past and current operations and financial condition and
the prospects of Detroit with senior executives of Detroit;
. reviewed certain publicly available financial statements and other
information of Capitol;
. discussed the past and current operations and financial condition and
the prospects of Capitol with senior executives of Capitol;
. reviewed the reported prices and trading activity for Capitol common
stock;
. compared the financial performance of Detroit and Capitol and the
prices and trading activity of Capitol common stock with that of
certain other comparable publicly traded companies and their
securities;
. reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
. reviewed the Plan of Share Exchange; and
. performed such other analyses and considered such other factors as JMP
Financial, Inc. deemed appropriate.
In rendering its opinion, JMP Financial, Inc. performed the following
analyses:
(1) JMP Financial, Inc., reviewed the performance of a sample of publicly
traded stocks of Michigan banks and bank holding companies. No bank or
bank holding company was identical to Detroit or Capitol. JMP
Financial, Inc., did, however, note that the Detroit share value and
the Capitol share value were generally within the range of the share
values of comparable size banks and bank holding companies.
(2) JMP Financial, Inc., also consulted a private database to construct a
group of banks and bank holding companies it deemed to be similar to
either Detroit or Capitol, considering, but not limiting its analysis
to, such factors as size, financial condition and performance,
geography and market performance. Once again, although no bank or bank
holding company was identical to Detroit or Capitol, JMP Financial,
Inc., noted that the estimated share value of Capitol was within the
range of trading prices of institutions of a similar size and in a
similar market or markets.
31
(3) JMP Financial, Inc., reviewed the pricing ratios in those mergers and
acquisitions of banks and bank holding companies pending or completed
during the past six months for which public information was available.
JMP Financial, Inc., found that the premium to book value ratios
offered to selling shareholders generally ranged from 107 percent to
281 percent, with both median and average premium to book values
falling between 180 percent and 182 percent. All of these transactions
involved the transfer of control to the acquiring institution. JMP
also reviewed the trading prices and histories of small publicly
traded banks it deemed comparable to Detroit to determine the
approximate fair market value of small minority positions in those
institutions and found that price-to-book value ratios ranged from 61
percent to 225 percent with averages and medians ranging from 101 to
108 percent. The banks which JMP Financial, Inc., reviewed and which
it defined as "small publicly traded banks" are all listed on the
Nasdaq National Market System and average a weekly trading volume of
about 1/2 of one percent of their outstanding stock. Among the
significant differences between these small publicly traded banks and
Detroit is that the Detroit stock is illiquid. A number of historical
studies and valuation practices estimate liquidity discounts in a
range from 10 to 30 percent. The transaction at issue is somewhere
between the sale of all of the stock of an entire financial
institution and the sale of a minority block of stock in a community
bank; however, JMP Financial, Inc., believes the exchange bears more
characteristics of the latter than the former. The most dramatic
difference, in the view of JMP Financial, Inc., between the exchange
and an acquisition of all of the stock of an entire institution is the
"change of control" by which the acquiring institution acquires all of
the outstanding stock of the acquired institution. In such
transactions, control of the acquired institution changes hands, for
which the acquiring institution may pay a significant premium. In the
present transaction, JMP Financial, Inc., noted that Capitol has had
control of Detroit from the outset and would not be expected to pay a
"premium" for control, since it already owns control of Detroit. JMP
Financial, Inc., would expect that the premium over book value would
be closer to the price paid in the sale of a minority block of stock
in a small publicly traded bank, which in fact is the case. JMP
Financial, Inc. therefore concluded that the exchange was fair to the
shareholders of Detroit from a financial point of view.
The opinion and presentation of JMP Financial, Inc. to the board of Detroit
was one of many factors taken into consideration by Detroit's board in making
its decision to approve the exchange. The analyses as described above should not
be viewed as determinative of the opinion of the Detroit board with respect to
the exchange or of whether the Detroit board would have been willing to agree to
a transaction with a different form or amount of consideration.
The Detroit board retained JMP Financial, Inc. based upon its
qualifications, experience and expertise. JMP Financial, Inc. is a recognized
investment banking and advisory firm which has special expertise in the
valuation of banks.
Under the terms of its engagement, JMP Financial, Inc. provided financial
advisory services and a financial fairness opinion in connection with the
exchange, and Detroit agreed to pay JMP Financial a fee of $8,500 plus
out-of-pocket expenses. In addition, Detroit has agreed to indemnify JMP
Financial, Inc. and its affiliates, against certain liabilities and expenses,
including certain liabilities under the federal securities laws.
32
THE CLOSING
EFFECTIVE TIME
The exchange will be effective at 5:00 p.m., Eastern Time, on _______,
2002, and will be closed as soon as possible after the vote at the meeting of
Detroit's shareholders. If the exchange is approved, as of the effective date,
each outstanding share of Detroit common stock will be automatically converted
into the right to receive Capitol common stock according to the exchange ratio.
SHARES HELD BY CAPITOL
Shares of Detroit common stock owned by Capitol since its inception will be
unaffected by the exchange. Those shares will not be exchanged for any
securities of Capitol or other consideration.
PROCEDURES FOR SURRENDER OF CERTIFICATES; FRACTIONAL SHARES
As soon as reasonably practicable after the effective date of the exchange,
Capitol or Capitol's transfer agent will send you a letter of transmittal. The
letter of transmittal will contain instructions with respect to the surrender of
your Detroit 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 Detroit shares in
accordance with the instructions in the letter of transmittal, you will be
entitled to receive stock certificates representing shares of Capitol's common
stock into which those Detroit 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 Detroit stock will represent only the right to receive the shares of
Capitol's common stock into which shares of Detroit stock were converted in the
exchange, and the right to receive cash in lieu of fractional shares of
Capitol's common stock as described below.
Until your Detroit certificates are surrendered to Capitol or Capitol's
agent, you will not be paid any dividends or distributions on the Capitol common
stock into which your Detroit 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.
Detroit'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 Detroit stock that is not registered in the
records of Detroit has occurred, then, so long as the Detroit 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's common stock will be issued upon surrender
of certificates previously representing Detroit shares. Instead, Capitol will
pay you an amount in cash determined by multiplying the fractional share
interest to which you would otherwise be entitled by the Capitol share value
used in determining the exchange ratio.
33
FEES AND EXPENSES
Whether or not the exchange is completed, Capitol and Detroit 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 Detroit shareholders in the exchange, and Capitol must
use reasonable best efforts to obtain approval for the listing of Capitol common
shares on the Nasdaq Stock Market, Inc.
AMENDMENT AND TERMINATION
Capitol and Detroit 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.
34
THE ANNUAL SHAREHOLDERS' MEETING
DATE, TIME AND PLACE
The shareholders meeting will be held on ________, 2002 at Detroit Commerce
Bank, 645 Griswold, Suite 70, Detroit, Michigan 48226 at 9:00 a.m., local time.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETING
At the shareholders' meeting, holders of Detroit common stock will vote on
whether to approve the exchange. See "The Exchange". Shareholders will also vote
on the election of directors for Detroit. See "Election of Directors".
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Holders of record of Detroit common stock at the close of business on
September 15, 2002, the record date for the shareholders' meeting, are entitled
to receive notice of and to vote at the shareholders' meeting. At August 31,
2002, 319,500 shares of Detroit common stock were issued and outstanding and
held by approximately 69 holders of record. Capitol held 295,599 shares of
Detroit common stock on that date and 23,901 were held by shareholders other
than Capitol.
A majority of the shares of the Detroit 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 Detroit common stock on the record date are each entitled
to one vote per share with respect to approval of the exchange at Detroit's
shareholders' meeting.
Detroit does not expect any other matters to come before the shareholders'
meeting. However, if any other matters are properly presented at the meeting for
consideration, the persons named in the enclosed form of proxy, and acting
thereunder, will have discretion to vote or not vote on those matters in
accordance with their best judgment, unless authorization to use that discretion
is withheld. If a proposal to adjourn the 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. Detroit is
not aware of any matters expected to be presented at the meeting other than as
described in the notice of the annual meeting.
VOTES REQUIRED
Although approval of two-thirds of the shares entitled to vote is all that
is required by law, Detroit and Capitol have agreed that approval of the
exchange will require the affirmative vote of a majority of the shares of
Detroit common stock outstanding on the record date, excluding the 92.5% of
Detroit's shares held by Capitol. Abstentions and broker non-votes will have the
same effect as a vote against the proposal to approve the exchange.
SHARE OWNERSHIP OF MANAGEMENT
As of the close of business on August 31, 2002, the directors and executive
officers of Detroit and their affiliates were entitled to vote approximately
4,800 shares of Detroit common stock. These shares represent approximately 1.49%
of the outstanding shares of Detroit common stock and 20.09% of Detroit's shares
held by shareholders other than Capitol. The directors and executive officers
have agreed to vote their shares of Detroit common stock in favor of the
exchange.
35
VOTING OF PROXIES
SUBMITTING PROXIES
You may vote by attending the 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 Detroit stock will be
mailed by Capitol to former Detroit 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 president
of Detroit, by a later-dated proxy signed and returned by mail or by attending
the shareholders' meeting and voting in person. Attendance at Detroit's
shareholders' meeting will not in and of itself constitute a revocation of a
proxy. Any written notice of a revocation of a proxy must be sent so as to be
delivered before the taking of the vote at the shareholders' meeting to:
Detroit Commerce Bank
645 Griswold, Suite 70
Detroit, Michigan 48226
Attn: Linda A. Watters, President
If you require assistance in changing or revoking a proxy, you should
contact Linda Watters at the address above or at phone number (313) 967-9700.
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.
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.
SOLICITATION OF PROXIES; EXPENSES
Capitol or Detroit will pay the cost of solicitation of proxies. In
addition to solicitation by mail, the directors, officers and employees of
Detroit may also solicit proxies from shareholders by telephone, telecopy,
telegram or in person.
36
COMPARISON OF SHAREHOLDER RIGHTS
As a result of the exchange, holders of shares of Detroit common stock
will become holders of shares of Capitol common stock. The following chart
summarizes the material differences between the rights of Detroit shareholders
(left column), and the rights of shareholders of Capitol (right column). This
summary is not intended to be complete and is qualified by reference to the
Michigan Banking Code and the Michigan Business Corporation Act, as well as to
Detroit's articles of incorporation and by-laws (copies of which may be obtained
from Detroit) and Capitol's articles of incorporation and by-laws, (copies of
which are on file with the SEC).
DETROIT: CAPITOL:
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNING LAW: Michigan Banking Code Michigan Business Corporation Act
Public Act 276 of 1999 Public Act 284 of 1972
ASSESSABILITY OF SHARES: Shareholders may be assessed to restore the Shares of common stock are non-assessable and
capital of the bank up to its stated capital shareholders have no liability in excess of
in the event of losses. their initial investment. MCLA 450.1317
MCLA 487.13807
AUTHORIZED BUT Under the Banking Code, banks can only have Capitol has authorized but unissued shares,
UNISSUED SHARES: authorized but unissued shares to be issued in which may be issued by the Board of Directors
exchange for securities with respect to which in the Board's discretion and without a
conversion privileges exist, with the approval shareholder vote. MCLA 450.1202
of the Banking Commissioner.
MCLA 487.13801
DIVIDENDS: Bank shareholders may share in dividends as Capitol common stockholders may share in
and when declared by the bank's Board of dividends as and when declared by the Board
Directors (although none have been to date). of Directors (see "Dividends and Market for
The Board of Directors may only declare Common Stock"); dividends may be paid out
dividends out of net profits from operations of any funds available unless the payment of
and must have a surplus equal to 20% of the the dividend renders the business corporation
bank's stated capital on hand after the insolvent. MCLA 450.1345
declaration and payment of any dividend.
MCLA 487.13806
AMENDMENT TO ARTICLES Needs approval of the Banking Commissioner and Approval of a majority of the shareholders.
OF INCORPORATION: approval of a majority of the shareholders to MCLA 450.1611
amend the articles. MCLA 487.13203
ISSUANCE OF NEW SHARES: Approval of the Banking Commissioner and a Capitol's Board of Directors may issue new
two-thirds vote of the shareholders of the shares without a vote of the shareholders
bank. MCLA 487.13804 under Michigan law up to the authorized but
unissued shares; any additional shares in
excess of the authorized but unissued shares
would require approval of a majority of the
shareholders. MCLA 450.1611
VOTE ON DIRECTORS: Detroit has 12 Directors who are elected Capitol has 16 directors who are elected
annually for one-year terms. There is no annually to one year terms. There is no
cumulative voting. cumulative voting.
37
DETROIT: CAPITOL:
- ---------------------------------------------------------------------------------------------------------------------------
BUSINESS COMBINATIONS: A consolidation of the bank with any other A business combination involving Capitol
banking institution would require the approval would require the approval of a majority of
of the Banking Commissioner and the approval the outstanding shareholders. MCLA 450.1703A;
of a two-thirds vote of the bank's shareholders. the Michigan Business Corporation Act has
MCLA 487.13701 certain anti-takeover provisions as described
in "Description of the Capital Stock of
Capitol" which are not included in the
Michigan Banking Code.
INDEMNIFICATION OF The Michigan Banking Code provides for the Indemnification of directors and officers is
DIRECTORS AND OFFICERS: indemnification of directors and officers. provided for under the Michigan Business
See MCLA 487.13904-13910 Corporation Act in substantially similar
language to that in the Michigan Banking
Code. See MCLA 450.1561-.1567
LIMITATION OF LIABILITY: The Michigan Banking Code permits banking The Michigan Business Corporation Act
corporations to limit the liability of directors allows corporations to limit the liabilities
and officers. MCLA 487.13504. Detroit has of the directors and officers in substantially
adopted a provision in its Articles of similar language to the Michigan Banking
Incorporation which limits the liability of Code. MCLA 450.1209. Capitol has adopted
directors and officers to the greatest extent a provision in its Articles of Incorporation
permitted by law. which limits directors and officers liability
to the greatest extent permitted by law.
38
DESCRIPTION OF THE CAPITAL STOCK OF CAPITOL
Capitol's Articles of Incorporation, as amended to date, authorize the
issuance of up to 25,000,000 shares of common stock, without par value.
Capitol's articles of incorporation do not authorize the issuance of any other
class of stock. As of June 30, 2002, 10,705,378 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 or vote by Capitol's
shareholders. As noted, Capitol's shareholders have no preemptive rights to
subscribe to newly issued shares.
Moreover, it will be possible that additional shares of common stock would
be issued for the purpose of making an acquisition by an unwanted suitor of a
controlling interest in Capitol more difficult, time consuming or costly or
would otherwise discourage an attempt to acquire control of Capitol. Under such
circumstances, the availability of authorized and unissued shares of common
stock may make it more difficult for shareholders to obtain a premium for their
shares. Such authorized and unissued shares could be used to create voting or
other impediments or to frustrate a person seeking to obtain control of Capitol
by means of a merger, tender offer, proxy contest or other means. Such shares
could be privately placed with purchasers who might cooperate with the board of
directors of Capitol in opposing such an attempt by a third party to gain
control of Capitol. The issuance of new shares of common stock could also be
used to dilute ownership of a person or entity seeking to obtain control of
39
Capitol. Although Capitol does not currently contemplate taking that action,
shares of Company common stock could be issued for the purposes and effects
described above, and the board of directors reserves its rights (if consistent
with its fiduciary responsibilities) to issue shares for such purposes.
CAPITOL'S PREFERRED SECURITIES
Capitol has issued debentures to Capitol Trust I, a Delaware business trust
subsidiary of Capitol. Capitol Trust I purchased the debentures with the
proceeds of preferred securities (which are traded on the Nasdaq National Stock
Market under the symbol "CBCLP"). Capitol also has additional trust-preferred
securities which were privately 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 or semi-annually.
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.
40
As of February 15, 2002 Capitol's management beneficially owned (including
immediately exercisable stock options) control of approximately 27.85% 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.
41
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 Detroit 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 Detroit for the annual meeting. As allowed by SEC rules, this proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement.
In addition, Capitol files reports, proxy statements and other information
with the SEC under the Exchange Act. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. You may read and copy this
information at the following locations of the SEC:
Public Reference Room 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, who file electronically with the SEC. The address of
that site is www.sec.gov. You can also inspect reports, proxy statements and
other information about Capitol at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
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 June 30, 2002
* Quarterly Report on Form 10-Q Quarter ended March 31, 2002
* Current Report on Form 8-K Filed March 29, 2002
* Proxy Statement on Schedule 14A Annual Meeting Held May 2, 2002
* Annual Report on Form 10-K Year ended December 31, 2001
* Registration Statement on Form 8-A Filed April 19, 1990
filed April 19, 1990
In addition, all subsequent documents filed with the SEC by Capitol
pursuant Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 after the date of this proxy statement/ prospectus shall be deemed to be
incorporated by reference into this proxy statement/prospectus and to be a part
hereof from the date of filing such documents. Any statement contained in this
proxy statement/prospectus or in a document incorporated or deemed to be
incorporated by reference in this prospectus or another such document shall be
deemed to be modified or superseded for purposes of this proxy
statement/prospectus to the extent that a statement contained in this proxy
statement/prospectus or another such document or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modified or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified superseded, to constitute a part of
this proxy statement/prospectus.
42
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY __________, 2002 TO
RECEIVE THEM BEFORE THE SHAREHOLDERS' MEETING. If you request exhibits to any
incorporated documents from us, Capitol will mail them to you by first class
mail, or another equally prompt means, within one business day after Capitol
receives your request.
No one has been authorized to give any information or make any
representation about Detroit, 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 Detroit has been supplied by Detroit.
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of Capitol
common stock offered by this proxy statement/prospectus will be passed upon for
Capitol by Brian English, Capitol's General Counsel. Certain federal income tax
matters relating to the exchange will be passed upon for Capitol by Miller,
Canfield, Paddock and Stone, PLC.
EXPERTS
The consolidated financial statements of Capitol attached and incorporated
by reference 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
incorporated herein by reference, and is attached and incorporated herein in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Detroit attached to this proxy
statement/prospectus as Annex D have been audited by BDO Seidman, LLP,
independent certified public accountants, to the extent and for the periods
stated in their report, which is attached as part of Annex D, and included in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
43
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44
ANNEX A
PLAN OF SHARE EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into effective September
___, 2002 between and among CAPITOL BANCORP LTD., a Michigan corporation
("Capitol") and the SHAREHOLDERS of DETROIT COMMERCE BANK ("Bank").
R E C I T A L S
A. Detroit is a Michigan banking corporation which commenced the business
of banking December 14, 1998.
B. Capitol is now and has been since Detroit commenced the business of
banking the holder of 295,599 shares (92.5%) of the duly issued and outstanding
common stock of Detroit ("Detroit common stock").
C. Detroit common stock is privately held and not traded in any public
market.
D. Capitol's common stock ("Capitol common stock") is traded on the
National Market System of the Nasdaq Stock Market, Inc.
E. Detroit's Board of Directors has determined that it would be in the
best interest of Detroit's stockholders to exchange their shares of stock in
Detroit 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 Detroit common stock
will exchange his, her or their shares of Detroit common stock for shares of
Capitol common stock according to a fixed exchange ratio determined as follows:
DETROIT SHARE VALUE. The value of each share of Detroit common
stock shall be $15.00.
CAPITOL SHARE VALUE. The value of each share of Capitol common
stock shall be $21.852, the average of the closing prices of
Capitol common stock for the month ended June 30, 2002, as
reported by the Nasdaq Stock Market, Inc.
EXCHANGE RATIO. The exchange ratio will be determined by dividing
the Detroit Share Value by the Capitol Share Value.
Each Detroit shareholder (except Capitol) will receive shares of Capitol
common stock in exchange for his, her or their Detroit common stock calculated
by multiplying the number of shares of Detroit 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 Detroit shall have approved and
adopted the Plan.
b. The Board of Directors of Capitol (acting through its
Executive Committee or otherwise, Capitol's Board having
already approved the exchange in principle) shall have
approved and adopted the Plan.
c. A majority of the common stock of Detroit (exclusive of the
shares held by Capitol) shall have been voted to approve and
adopt the Plan at the annual meeting of the shareholders
called for that purpose.
d. The Securities and Exchange Commission shall have declared
effective the Registration Statement registering the shares
of stock of Capitol's common stock to be issued in the
exchange.
e. The Financial Institutions Bureau of the State of Michigan
shall not have issued any objection to the Plan (a letter
indicating the Financial Institutions Bureau does not object
has already been received).
3. FAIRNESS OPINION. The Board of Directors of Detroit 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 Detroit.
4. TAX OPINION. Miller, Canfield, Paddock and Stone, PLC shall have
issued its legal opinion that the share exchange constitutes a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended, and that the exchange shall not be a taxable event to the shareholders
of Detroit (except to the extent of the cash received in lieu of fractional
shares).
5. SURRENDER OF CERTIFICATES. Each shareholder of Detroit common
stock shall surrender to Capitol his, her or their certificate(s) for shares of
Detroit common stock within thirty (30) days after the effective date of this
Plan. Capitol shall direct its transfer agent, UMB Bank, n.a., to issue
certificate(s) of Capitol common stock to be issued in the exchange.
Certificate(s) of Capitol common stock shall be issued and registered in the
same name as the shares of Detroit common stock surrendered in exchange
therefor, and shall thereafter be transferable in the same manner as otherwise
provided for Capitol common stock. In the event any shareholder of Detroit
common stock fails to surrender his, her or their certificate(s) within thirty
(30) days of the effective date of this Plan, such certificate(s) shall
nonetheless be canceled and deemed surrendered, and certificate(s) for Capitol
common stock shall be issued and registered in the name of the person who is the
registered holder on the books of Detroit on the effective date of this Plan,
and the Detroit certificate(s) shall thereafter be null and void and of no force
or effect whatever.
6. NEW BANK CERTIFICATE. Detroit shall issue its certificate
registering in the name of Capitol all shares of stock now registered to
shareholders other than Capitol.
ANNEX B
JMP FINANCIAL, INC.
753 GRAND MARAIS
GROSSE POINTE PARK, MI 48230
TEL/FAX (313) 824-1711
September 30, 2002
Board of Directors
Detroit Commerce Bank
645 Griswold, Suite 70
Detroit, Michigan 48226
Gentlemen:
We have examined the proposed Plan of Share Exchange (the "Agreement")
dated _______, 2002, to be entered into between Capitol Bancorp Ltd., a Michigan
Corporation ("CBCL") and the shareholders (the "Shareholders") of Detroit
Commerce Bank ("Detroit"), a Michigan Corporation by which CBCL shall acquire
from the Shareholders their outstanding shares of Detroit, not already owned by
CBCL, in exchange for shares of CBCL (the "Exchange").
The terms of the transaction contemplated by the Agreement provide that
each share of Detroit's common stock, not already owned by CBCL and issued and
outstanding as of _______, 2002 (the "Effective Date") shall be exchanged,
pursuant to the Exchange Ratio specified in the Agreement, into shares of CBCL.
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange.
JMP Financial, Inc. ("JMP"), as a regular part of its investment banking
business, is engaged in the valuation of the securities of commercial and
savings banks as well as the holding companies of commercial and savings banks
in connection with mergers, acquisition, and divestitures, and for other
purposes.
In connection with this engagement and rendering this opinion, we reviewed
materials deemed necessary and appropriate by us under the circumstances,
including;
* Audited financial statements of Detroit and CBCL for the years ended
December 31, 2001, 2000 and 1999, as available;
* Unaudited financial statements of Detroit for the period ended June
30, 2002;
* Certain unaudited internal financial information concerning the
capital ratios of Detroit;
* Publicly available information concerning CBCL;
* Publicly available information with respect to certain other bank
holding companies, which we deemed, appropriate, including competitors
of CBCL and Detroit;
* Publicly available information with respect to the nature and terms of
certain other transactions which we consider relevant;
* The Agreement;
* Reviewed certain historical market prices and trading volumes of
Detroit's and CBCL's common stock to the extent reasonably available.
Page Two
Board of Directors
Detroit Commerce Bank
September 30, 2002
We have assumed and relied upon, without independent verification, the
accuracy and completeness of all of the financial statements and other
information reviewed by us for the purposes of the opinion expressed herein. We
have not made an independent evaluation or appraisal of the assets and
liabilities of Detroit or CBCL or any of its subsidiaries and we have not been
furnished with any such evaluation or appraisal. Additionally, we are not
experts in the evaluation of reserves for loan losses, and we have not reviewed
any individual credit files. For purposes of this opinion, we have assumed that
CBCL's and Detroit's loan loss reserves are adequate in all material respects
and that, in the aggregate, other conditions at CBCL and Detroit are
satisfactory and this opinion is conditioned upon such assumption. We have also
assumed that there has been no material change in Detroit's or CBCL's assets,
financial condition, results of operations, business, or prospects since the
date of the last financial statements made available to us for Detroit and CBCL,
respectively. This opinion is necessarily based on economic, market and other
conditions in effect on, and the information made available to us as of, the
date hereof. It should be understood that subsequent developments may effect the
opinion and that JMP does not have any litigation to update, revise or reaffirm
it.
The opinion expressed herein is being rendered to the Board of Directors of
Detroit for its use in evaluation of the proposed transaction, assuming the
transaction is consummated upon the terms set forth in the Agreement.
Based upon the terms and conditions of the Exchange and the current market
value of CBCL's common stock, and based further upon such other considerations
as we deem relevant, JMP is, subject to the foregoing, of the opinion on the
date hereof, that the consideration to be received by the Shareholders in the
Exchange would be fair from a financial point of view if the transaction
contemplated by the Agreement is in fact consummated pursuant to the terms
thereof.
Sincerely,
/s/ John Palffy
John Palffy
President
JMP Financial, Inc.
ANNEX C
OPINION OF MILLER, CANFIELD, PADDOCK AND STONE, PLC
September 30, 2002
Capitol Bancorp Limited
200 Washington Square North, 4th Floor
Lansing, Michigan 48933
Re: Federal Tax Consequences of Plan of Share Exchange
Gentlemen:
We have acted as special counsel to Capitol Bancorp Limited ("Capitol") in
connection with the Plan of Share Exchange (the "Plan") between Capitol and the
shareholders of Detroit Commerce Bank ("Detroit") dated as of __________, 2002.
Capitol has filed 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 Detroit in
connection with the Plan. 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"). In rendering our opinion, we
have relied upon the facts stated in the Proxy Statement, the representations
provided to us by Capitol and Detroit, as summarized below, and upon such other
documents as we have deemed appropriate, including the information about Capitol
and Detroit referenced in the Proxy Statement.
We have assumed that (i) all parties to the Plan, and to any other
documents reviewed by us, have acted, and will act, in accordance with the terms
of the Plan, (ii) all facts, information, statements and representations
qualified by the knowledge and/or belief of Capitol and/or Detroit will be
complete and accurate as of the effective date of the Plan as though not so
qualified, (iii) the Plan will be consummated pursuant to the terms and
conditions set forth in the Plan without the waiver or modification of any such
terms and conditions, and (iv) the Plan will be authorized by and will be
effected pursuant to applicable state law. We have also assumed that each
Detroit shareholder holds the shares of Detroit common stock to be surrendered
under the Plan as a capital asset.
This opinion does not address the specific tax consequences that may be
relevant to a particular shareholder receiving special treatment under some
federal income tax laws, including: (i) banks; (ii) tax-exempt organizations;
(iii) insurance companies; (iv) dealers in securities or foreign currencies; (v)
Detroit shareholders, if any, who received their Detroit common stock through
the exercise of employee stock options or otherwise as compensation; (vi)
Detroit shareholders who are not U.S. persons; and (vii) Detroit shareholders
who hold Detroit common stock as part of a hedge, straddle, or conversion
transaction.
Our opinion also does not address any consequences arising under the laws
of any state, locality, or foreign jurisdiction. No rulings have been or will be
sought from the Internal Revenue Service regarding any matters relating to the
exchange.
Capitol Bancorp Limited
September 30, 2002
Page 2
Our opinion is predicated on the accuracy of the following representations
provided to us by Capitol:
1. The fair market value of the Capitol common stock to be received by the
Detroit shareholders will be approximately equal to the fair market value of the
Detroit common stock surrendered under the Plan.
2. Capitol has no plan or intention to liquidate Detroit; to merge Detroit
into another corporation; to cause Detroit to sell or otherwise dispose of any
of its assets, except for dispositions made in the ordinary course of business;
or to sell or otherwise dispose of any of the Detroit common stock acquired in
the transaction.
3. Capitol has no plan or intention to reacquire any of its common stock
issued under the Plan.
4. Capitol, Detroit, and the shareholders of Detroit will pay their
respective expenses, if any, incurred in connection with the Plan.
5. The only consideration that will be received by the shareholders of
Detroit for their common stock of Detroit is voting common stock of Capitol.
Further, no liabilities of Detroit or any Detroit shareholder will be assumed by
Capitol, nor will any of the Detroit stock acquired by Capitol be subject to any
liabilities.
6. Capitol will not own as of immediately before the effective date of the
Plan, directly or indirectly, any Detroit common stock other than the Detroit
common stock first acquired by Capitol upon the formation of Detroit June 30,
1999.
7. Capitol will not make any cash payments, directly or indirectly, to
dissenting shareholders of Detroit, nor will Capitol, directly or indirectly,
reimburse Detroit for any payments made by Detroit to dissenting shareholders.
8. Any cash payment made by Capitol to Detroit shareholders in lieu of
fractional shares of Capitol is solely for the purpose of avoiding the expense
and inconvenience to Capitol of issuing fractional shares and does not represent
separately bargained-for consideration.
9. Capitol is not an investment company as defined in Section
368(a)(2)(F)(iii) or (iv) of the Internal Revenue Code of 1986, as amended (the
"Code").
10. The Plan will be consummated in compliance with the material terms
contained in the Registration Statement, none of the material terms and
conditions therein have been or will be waived or modified and Capitol has no
plan or intention to waive or modify any such material condition.
Capitol Bancorp Limited
September 30, 2002
Page 3
Our opinion is also predicated on the accuracy of the following
representations provided to us by Detroit:
1. The Plan will be consummated in compliance with the material terms
contained in the Registration Statement, none of the material terms and
conditions therein have been or will be waived or modified and Detroit has no
plan or intention to waive or modify any such material condition.
2. The fair market value of the Capitol common stock to be received by the
Detroit shareholders will be approximately equal to the fair market value of the
Detroit common stock surrendered under the Plan.
3. Detroit has no plan or intention to issue additional shares of its stock
that would result in Capitol losing "control" of Detroit within the meaning of
Section 368(c) of the Code.
4. Capitol, Detroit, and the shareholders of Detroit will pay their
respective expenses, if any, incurred in connection with the Plan.
5. At the time the Plan is executed, Detroit will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire any stock in Detroit.
6. Following the execution of the Plan, Detroit will continue its historic
business or use a significant portion of its historic business assets in a
business.
7. Detroit is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
8. Detroit will pay any dissenting shareholders the value of their stock
out of its own funds.
9. On the effective date of the Plan, the fair market value of the assets
of Detroit will exceed the sum of its liabilities plus, the liabilities, if any,
to which the assets are subject.
Based upon and subject to the foregoing, and subject to the qualifications,
limitations, representations and assumptions contained in the portion of the
Proxy Statement captioned "Material Federal Income Tax Consequences" and
incorporated by reference in this opinion, we are of the opinion that:
1) The exchange will qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Code;
2) No gain or loss will be recognized by the shareholders of Detroit
who exchange their Detroit common stock solely for Capitol common stock (except
with respect to cash received instead of fractional shares of Capitol common
stock);
3) The aggregate tax basis of the Capitol common stock received by
Detroit shareholders who exchange all of their Detroit common stock for Capitol
common stock in the exchange will be the same as the aggregate tax basis of the
Detroit common stock surrendered in the exchange (reduced by any adjusted basis
allocable to a fractional share of Capitol common stock for which cash is
received);
Capitol Bancorp Limited
September 30, 2002
Page 4
4) The holding period of the Capitol common stock received by a former
shareholder of Detroit will include the holding period of shares of Detroit
common stock surrendered in the exchange; and
5) A holder of Detroit common stock who receives a cash payment
instead of a fractional share of Capitol common stock will recognize capital
gain or loss to the extent such cash payment is treated pursuant to Section 302
of the Code as made in exchange for the fractional share. Such gain or loss will
be equal to the difference between the cash amount received and the portion of
the holder's adjusted basis in shares of Detroit common stock allocable to the
fractional share, and such gain or loss will be long-term capital gain or loss
for federal income tax purposes if the holder's holding period in the Detroit
common stock satisfies the long-term holding period requirement.
No opinion is expressed on any matters other than those specifically
stated. This opinion is furnished to you for use in connection with the
Registration Statement and may not be used for any other purpose without our
prior express written consent. We hereby consent to the inclusion of this
opinion as an appendix to the Proxy Statement and to the use of our name in that
portion of the Proxy Statement captioned "Material Federal Income Tax
Consequences." In giving such consent, we do not thereby admit that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/ Miller, Canfield, Paddock and Stone, PLC
Miller, Canfield, Paddock and Stone, PLC
ANNEX D
FINANCIAL INFORMATION REGARDING DETROIT COMMERCE BANK
Management's discussion and analysis of financial condition
and results of operations.............................................. D-2
Condensed interim financial statements as of and for the six months
ended June 30, 2002 and 2001 (unaudited)............................... D-5
Audited financial statements as of and for the years ended December 31,
2001, 2000 and 1999.................................................... D-11
D-1
Management's Discussion and Analysis of Financial Condition
and Results of Operations
DETROIT COMMERCE BANK
PERIODS ENDED JUNE 30, 2002 AND DECEMBER 31, 2001
FINANCIAL CONDITION
Detroit Commerce Bank is engaged in commercial banking activities from its sole
location in Detroit, Michigan. From its inception in December 1998, the Bank
provides a full array of banking services, principally loans and deposits, to
entrepreneurs, professionals and other high net worth individuals in its
community.
Total assets approximated $31.8 million at June 30, 2002, compared with $33.8
million at December 31, 2001. The Bank's total assets approximated $30.3 million
at year-end 2000.
Total portfolio loans approximated $28.4 million at June 30, 2002, a slight
decrease of approximately $800,000 from the $29.2 million level at December 31,
2001. At December 31, 2000, total portfolio loans approximated $21.1 million.
Portfolio loan growth since 1998 has been significant. Commercial loans
approximated 99% of total portfolio loans at June 30, 2002 consistent with the
Bank's emphasis on commercial lending activities. Installment loans approximated
1% of total portfolio loans at June 30, 2002.
The allowance for loan losses at June 30, 2002 approximated $328,000 or 1.15% of
total portfolio loans, compared to an allowance ratio of 1.20% at December 31,
2001.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the loan portfolio at the
balance sheet date. Management's determination of the adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors. The allowance for loan losses is based upon
management's estimate of potential loan losses incurred at the respective
balance sheet dates.
Net loan charge-offs approximated $61,000 for the first half of 2002 (none in
the corresponding interim 2001 period). Net loan charge-offs approximated
$171,000 for the year ended December 31, 2001 (none in 2000 or 1999).
The Bank's growth has been funded primarily by deposits, most of which are
interest-bearing. Total deposits approximated $28.8 million at June 30, 2002, a
decrease of approximately $1.8 million from the $30.6 million level at December
31, 2001. Deposits increased significantly in 2000 to $27.6 million.
The Bank emphasizes obtaining noninterest-bearing deposits as a means to reduce
its cost of funds. Noninterest-bearing deposits approximated $3.4 million at
June 30, 2002 or about 12% of total deposits, a decrease of approximately
$900,000 from December 31, 2001. Noninterest-bearing deposits fluctuate
significantly from day to day, depending upon customer account activity.
Stockholders' equity approximated $2.7 million at June 30, 2002 or approximately
8.6% of total assets. Capital adequacy is discussed elsewhere in this narrative.
D-2
RESULTS OF OPERATIONS
The Bank's net loss for the six months ended June 30, 2002 approximated $29,000,
compared with $86,000 in the six month 2001 period.
The Bank's net loss in 2001 was $187,000. For the year ended December 31, 2000,
the Bank reported net income of $10,000, compared to a net loss of $341,000 in
the Bank's first full calendar year of operations in 1999.
The principal source of operating revenues is interest income. Total interest
income for the six months ended June 30, 2002 approximated $1.1 million,
compared with $1.3 million in the first six months of 2001. The interim 2002
decrease in interest income (and interest expense) relates primarily to lower
interest rates. For the year ended December 31, 2001, total interest income
approximated $2.5 million, compared with $2.4 million in 2000 and $1.6 million
in 1999.
Interest expense on deposits has also changed significantly during these
periods, consistent with changes in interest rates and the growth in the
interest-bearing deposits. Total interest expense approximated $428,000 for the
six months ended June 30, 2002, compared with $729,000 for the first six months
of 2001. For the year ended December 31, 2001, total interest expense
approximated $1.4 million, compared with $1.2 million in 2000 and $898,000 in
1999.
Net interest income approximated $709,000 for the six months ended June 30,
2002, compared with $547,000 for the 2001 corresponding period. Net interest
income for the year ended December 31, 2001 approximated $1.2 million, compared
with $1.2 million in 2000 and $700,000 in 1999.
Provisions for loan losses ($38,000 and $70,000 for the six months ended June
30, 2002 and 2001, respectively; $277,000 for the year ended December 31, 2001,
$36,000 in 2000 and $203,000 in 1999) have been based primarily upon amounts
necessary to increase the allowance for loan losses to the regulatorily-imposed
ratio requirement of not less than 1% of total portfolio loans outstanding.
Noninterest income has also increased. Total noninterest income approximated
$51,000 for the six months ended June 30, 2002 ($32,000 in the corresponding
period in 2001) and approximated $84,000 for the year ended December 31, 2001,
$46,000 in 2000 and $32,000 in 1999.
Noninterest expenses have increased significantly during the period of the
Bank's existence. Total noninterest expense approximated $774,000 for the six
months ended June 30, 2002, compared with $647,000 for the corresponding 2001
period. For the year ended December 31, 2001, total noninterest expense
approximated $1.3 million, compared with $1.2 million in 2000 and $1.0 million
in the 1999 period.
The principal component of noninterest expense is salaries and employee benefits
which has increased during these periods based upon the increased staffing
required to serve customers and to facilitate growth.
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination activities is
deposits. Changes in deposits and loans were previously discussed in this
narrative. As stated previously, most of the deposit growth has been deployed
into commercial loans, consistent with the Bank's emphasis on commercial lending
activities.
Cash and cash equivalents approximated $2.4 million at June 30, 2002, compared
with $3.7 million at December 31, 2001 and $5.1 million at December 31, 2000. As
liquidity levels vary continuously based upon customer activities, amounts of
cash and cash equivalents can vary widely at any given point in time. Management
believes the Bank's liquidity position at June 30, 2002 is adequate to fund loan
demand and to meet depositor needs.
D-3
In addition to cash and cash equivalents, a source of long-term liquidity is the
Bank's portfolio of marketable investment securities. Liquidity requirements
have not historically necessitated the sale of investments in order to meet
liquidity needs. The Bank also has not engaged in active trading of its
investments and has no intention of doing so in the foreseeable future. At June
30, 2002 and December 31, 2001, the Bank had approximately $504,000 and
$513,000, respectively, of investment securities classified as available for
sale which can be utilized to meet various liquidity needs as they arise.
The Bank has secured lines of credit with the Federal Home Loan Bank of
Indianapolis. Availability on this credit facility approximated $479,000 at June
30, 2002.
All banks are subject to a complex series of capital ratio requirements which
are imposed by state and federal banking agencies. In the case of Detroit
Commerce Bank, as a young bank, it is subject to a more restrictive requirement
than is applicable to most banks inasmuch as the Bank must maintain a
capital-to-asset ratio of not less than 8% for its early years of operation.
Since inception, the Bank's asset growth has been significant. In order to
maintain compliance with the above-mentioned ratio requirement, Capitol Bancorp
Ltd., the Bank's majority owner, has made capital infusions amounting to
$310,000 through June 30, 2002. Those capital infusions have been accounted for
as an increase in the Bank's surplus account, specifically earmarked as
supplemental capital infusions from the Bank's parent. Such capital infusions,
however, have not been treated as a change in the parent's ownership percentage
of the Bank.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (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 standard did not have a
material effect on the Bank's 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, was
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. As of June 30, 2002 and December
31, 2001, the Bank had no recorded goodwill.
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 Detroit's consolidated financial statements.
D-4
DETROIT COMMERCE BANK
----------
CONDENSED INTERIM FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
D-5
BALANCE SHEETS
DETROIT COMMERCE BANK
June 30 December 31
2002 2001
------------ ------------
(unaudited)
ASSETS
Cash and due from banks $ 2,337,085 $ 400,560
Interest-bearing deposits with banks 7,477 16,494
Federal funds sold 100,000 3,300,000
------------ ------------
Cash and cash equivalents 2,444,562 3,717,054
Investment securities:
Available for sale, carried at market value 504,062 512,812
Held for long-term investment, carried at amortized
cost which approximates market value 61,900 37,200
------------ ------------
Total investment securities 565,962 550,012
Portfolio loans:
Commercial 28,225,662 28,991,968
Real estate mortgage 2,041 2,547
Installment 209,968 248,468
------------ ------------
Total portfolio loans 28,437,671 29,242,983
Less allowance for loan losses (328,000) (351,000)
------------ ------------
Net portfolio loans 28,109,671 28,891,983
Premises and equipment 342,814 320,558
Accrued interest income 167,311 168,965
Other assets 160,441 119,696
------------ ------------
TOTAL ASSETS $ 31,790,761 $ 33,768,268
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 3,444,781 $ 4,347,850
Interest-bearing 25,353,100 26,227,596
------------ ------------
Total deposits 28,797,881 30,575,446
Accrued interest on deposits and other liabilities 247,847 413,350
------------ ------------
Total liabilities 29,045,728 30,988,796
STOCKHOLDERS' EQUITY:
Common stock, par value $6.50 per share,
319,500 shares authorized,
issued and outstanding 2,076,750 2,076,750
Surplus 1,233,250 1,233,250
Retained-earnings deficit (567,648) (538,984)
Market value adjustment (net of tax effect) for
investment securities available for sale 2,681 8,456
------------ ------------
Total stockholders' equity 2,745,033 2,779,472
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 31,790,761 $ 33,768,268
============ ============
See notes to interim financial statements.
D-6
STATEMENTS OF OPERATIONS (UNAUDITED)
DETROIT COMMERCE BANK
Six Months Ended
June 30
------------------------------
2002 2001
------------ ------------
Interest income:
Portfolio loans (including fees) $ 1,109,006 $ 1,056,518
Taxable investment securities 14,502 71,127
Federal funds sold 11,567 135,014
Interest-bearing deposits with banks and other 1,460 13,106
------------ ------------
Total interest income 1,136,535 1,275,765
Interest expense:
Demand deposits 17,727 55,477
Savings deposits 1,005 2,099
Time deposits 408,909 671,624
------------ ------------
Total interest expense 427,641 729,200
------------ ------------
Net interest income 708,894 546,565
Provision for loan losses 37,654 69,951
------------ ------------
Net interest income after
provision for loan losses 671,240 476,614
Noninterest income:
Service charges on deposit accounts 30,694 12,617
Trust income 736 610
Other 19,932 18,276
------------ ------------
Total noninterest income 51,362 31,503
Noninterest expense:
Salaries and employee benefits 331,831 273,654
Occupancy 95,708 93,987
Other 346,728 279,774
------------ ------------
Total noninterest expense 774,267 647,415
------------ ------------
Loss before federal income taxes (51,665) (139,298)
Federal income taxes (benefit) (23,000) (53,000)
------------ ------------
NET LOSS $ (28,665) $ (86,298)
============ ============
NET LOSS PER SHARE $ (0.09) $ (0.27)
============ ============
See notes to interim financial statements.
D-7
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
DETROIT COMMERCE BANK
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Surplus Deficit Income Total
------------ ------------ ----------- ------------ ------------
SIX MONTHS ENDED JUNE 30, 2001
- ------------------------------
Balances at January 1, 2001 $ 2,076,750 $ 923,250 $ (351,861) $ (3,362) $ 2,644,777
Supplemental capital infusions from Capitol
Bancorp Limited 310,000 310,000
Components of comprehensive loss:
Net loss for the period (86,298) (86,298)
Market value adjustment for investment
securities available for sale (net of tax effect) 11,039 11,039
------------
Comprehensive loss for the period (75,259)
------------ ------------ ----------- ------------ ------------
BALANCES AT JUNE 30, 2001 $ 2,076,750 $ 1,233,250 $ (438,159) $ 7,677 $ 2,879,518
============ ============ =========== ============ ============
SIX MONTHS ENDED JUNE 30, 2002
- ------------------------------
Balances at January 1, 2002 $ 2,076,750 $ 1,233,250 $ (538,983) $ 8,456 $ 2,779,473
Components of comprehensive loss:
Net loss for the period (28,665) (28,665)
Market value adjustment for investment
securities available for sale (net of tax effect) (5,775) (5,775)
------------
Comprehensive loss for the period (34,440)
------------ ------------ ----------- ------------ ------------
BALANCES AT JUNE 30, 2002 $ 2,076,750 $ 1,233,250 $ (567,648) $ 2,681 $ 2,745,033
============ ============ =========== ============ ============
See notes to interim financial statements.
D-8
STATEMENTS OF CASH FLOWS (UNAUDITED)
DETROIT COMMERCE BANK
Six Months Ended
June 30
------------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss for the period $ (28,665) $ (86,298)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for loan losses 37,654 69,951
Depreciation of premises and equipment 31,048 51,327
Net accretion of investment security discounts (6,790)
Deferred taxes (23,000) (53,000)
Increase in accrued interest income and other assets (13,114) (20,396)
Increase (decrease) in accrued interest on deposits and
other liabilities (165,503) 305,575
------------ ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (161,580) 260,369
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available for sale 2,500,000
Purchases of investment securities held for long-term
investment (24,700) (11,100)
Net decrease (increase) in portfolio loans 744,658 (5,969,904)
Purchases of premises and equipment (53,305)
------------ ------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 666,653 (3,481,004)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (1,010,766) 3,492,209
Net decrease in certificates of deposit (766,799) (399,479)
Supplemental capital infusions from majority stockholder 310,000
------------ ------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (1,777,565) 3,402,730
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,272,492) 182,095
Cash and cash equivalents at beginning of period 3,717,054 5,124,556
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 2,444,562 $ 5,306,651
============ ============
See notes to interim financial statements.
D-9
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
DETROIT COMMERCE BANK
NOTE A--BASIS OF PRESENTATION
The accompanying condensed financial statements of Detroit Commerce Bank
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature which Detroit considers necessary for a fair presentation of the interim
periods.
The results of operations for the six-month period ended June 30, 2002 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2002.
NOTE B--NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (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 standard did not have
a material effect on the Bank'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, was
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. As of December 31, 2001 and June
30, 2002, the Bank had no recorded goodwill.
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 Detroit's consolidated financial statements.
D-10
DETROIT COMMERCE BANK
----------
FINANCIAL STATEMENTS
PERIODS ENDED DECEMBER 31, 2001, 2000 AND 1999
D-11
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Detroit Commerce Bank
We have audited the accompanying balance sheets of Detroit Commerce Bank as of
December 31, 2001 and 2000, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Detroit Commerce Bank as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2002
D-12
BALANCE SHEETS
DETROIT COMMERCE BANK
December 31
---------------------------
2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 400,560 $ 674,556
Interest-bearing deposits with banks 16,494
Federal funds sold 3,300,000 4,450,000
------------ ------------
Cash and cash equivalents 3,717,054 5,124,556
Investment securities--Note B:
Available for sale, carried at market value 512,812 3,488,168
Held for long-term investment, carried at
amortized cost which approximates
market value 37,200 26,100
------------ ------------
Total investment securities 550,012 3,514,268
Portfolio loans--Note C:
Commercial 28,991,968 20,977,850
Real estate mortgage 2,547 5,062
Installment 248,468 98,383
------------ ------------
Total portfolio loans 29,242,983 21,081,295
Less allowance for loan losses (351,000) (245,000)
------------ ------------
Net portfolio loans 28,891,983 20,836,295
Premises and equipment--Note E 320,558 416,013
Accrued interest income 168,965 189,117
Other assets 119,696 188,968
------------ ------------
TOTAL ASSETS $ 33,768,268 $ 30,269,217
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 4,347,850 $ 1,974,691
Interest-bearing--Note G 26,227,596 25,596,372
------------ ------------
Total deposits 30,575,446 27,571,063
Accrued interest on deposits and other liabilities 413,350 53,377
------------ ------------
Total liabilities 30,988,796 27,624,440
STOCKHOLDERS' EQUITY--Note K:
Common stock, par value $6.50 per share,
319,500 shares authorized,
issued and outstanding 2,076,750 2,076,750
Surplus 1,233,250 923,250
Retained-earnings deficit (538,984) (351,861)
Market value adjustment (net of tax effect) for
investment securities available for sale 8,456 (3,362)
------------ ------------
Total stockholders' equity 2,779,472 2,644,777
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 33,768,268 $ 30,269,217
============ ============
See notes to financial statements.
D-13
STATEMENTS OF OPERATIONS
DETROIT COMMERCE BANK
- Year Ended December 31 -
2001 2000 1999
------------ ------------ ------------
Interest income:
Portfolio loans (including fees) $ 2,271,987 $ 1,953,299 $ 1,112,683
Taxable investment securities 92,529 263,293 152,419
Federal funds sold 157,546 143,424 256,999
Other 13,868 3,745 75,798
------------ ------------ ------------
Total interest income 2,535,930 2,363,761 1,597,899
Interest expense on deposits 1,363,701 1,205,392 898,278
------------ ------------ ------------
Net interest income 1,172,229 1,158,369 699,621
Provision for loan losses--Note C 276,951 36,000 203,000
------------ ------------ ------------
Net interest income after provision
for loan losses 895,278 1,122,369 496,621
Noninterest income:
Service charges on deposit accounts 42,577 16,298 8,256
Trust fee income 2,996 47
Other 38,282 29,820 23,367
------------ ------------ ------------
Total noninterest income 83,855 46,165 31,623
Noninterest expense:
Salaries and employee benefits 542,843 470,545 360,555
Occupancy 198,947 176,780 171,876
Equipment rent, depreciation and maintenance 103,732 101,020 96,098
Other 475,734 403,506 413,226
------------ ------------ ------------
Total noninterest expense 1,321,256 1,151,851 1,041,755
------------ ------------ ------------
Income (loss) before federal income taxes and
minority interest (342,123) 16,683 (513,511)
Federal income taxes (benefit)--Note F (155,000) 7,000 (173,000)
------------ ------------ ------------
NET INCOME (LOSS) $ (187,123) $ 9,683 $ (340,511)
============ ============ ============
NET INCOME (LOSS) PER SHARE $ (0.59) $ .03 $ (1.07)
============ ============ ============
See notes to financial statements.
D-14
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DETROIT COMMERCE BANK
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Surplus Deficit Income Total
------------ ------------ ------------ ------------ ------------
Balances at January 1, 1999 $ 2,076,750 $ 923,250 $ (21,033) $ -0- $ 2,978,967
Components of comprehensive loss:
Net loss for 1999 (340,511) (340,511)
Market value adjustment for investment
securities available for sale (net of
income tax effect) (47,414) (47,414)
------------
Comprehensive loss for 1999 (387,925)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1999 2,076,750 923,250 (361,544) (47,414) 2,591,042
Components of comprehensive income:
Net income for 2000 9,683 9,683
Market value adjustment for investment
securities available for sale (net of
income tax effect) 44,052 44,052
------------
Comprehensive income for 2000 53,735
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2000 2,076,750 923,250 (351,861) (3,362) 2,644,777
Supplemental capital infusions from Capitol
Bancorp Limited 310,000 310,000
Components of comprehensive loss:
Net loss for 2001 (187,123) (187,123)
Market value adjustment for investment
securities available for sale (net of
income tax effect) 11,818 11,818
------------
Comprehensive loss for 2001 (175,305)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2001 $ 2,076,750 $ 1,233,250 $ (538,984) $ 8,456 $ 2,779,472
============ ============ ============ ============ ============
See notes to financial statements.
D-15
STATEMENTS OF CASH FLOWS
DETROIT COMMERCE BANK
- Year Ended December 31 -
2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) for the period $ (187,123) $ 9,683 $ (340,511)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Provision for loan losses 276,951 36,000 203,000
Depreciation of premises and equipment 102,925 102,655 97,145
Net accretion of investment security
discounts (6,737) (7,558) (2,334)
Deferred income taxes 71,000 7,000 (173,000)
Decrease (increase) in accrued interest income
and other assets 22,442 84,238 (164,854)
Increase in accrued interest on deposits and other
liabilities 359,973 17,524 17,687
------------ ------------ ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 639,431 249,542 (362,867)
INVESTING ACTIVITIES
Proceeds from calls and maturities of investment
securities available for sale 3,000,000 1,250,000
Purchases of investment securities held for
long-term investment (11,100) (26,100)
Purchases of investment securities available
for sale (10,107) (4,733,371)
Net increase in portfolio loans (8,332,639) (387,685) (20,187,610)
Purchases of premises and equipment (7,470) (200,823)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (5,361,316) 836,215 (25,121,804)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW
accounts and savings accounts 2,666,057 1,576,731 2,262,802
Net increase in certificates of deposit 338,326 374,467 7,648,153
Supplemental capital infusions from majority
shareholder 310,000
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 3,314,383 1,951,198 9,910,955
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,407,502) 3,036,955 (15,573,716)
Cash and cash equivalents at beginning of period 5,124,556 2,087,601 17,661,317
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,717,054 $ 5,124,556 $ 2,087,601
============ ============ ============
See notes to financial statements.
D-16
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION: Detroit Commerce Bank (the
"Bank") is a full-service commercial bank located in Detroit, Michigan. The Bank
commenced operations in December 1998. The Bank is 93% owned by Capitol Bancorp
Ltd., a bank development company headquartered in Lansing, Michigan.
The Bank provides a full range of banking services to individuals, businesses
and other customers located in its community. A variety of deposit products are
offered, including checking, savings, money market, individual retirement
accounts and certificates of deposit. The principal market for the Bank's
financial services is the community in which it is located and the areas
immediately surrounding that community.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks (interest-bearing and noninterest-bearing) and federal
funds sold. Generally, federal funds transactions are entered into for a one-day
period.
INVESTMENT SECURITIES: Investment securities "available for sale" (generally
most debt securities investments of the Bank) 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). All other
investment securities are classified as held for long-term investment and are
carried at amortized cost, which approximates market value. Investments are
classified as available for sale 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.
D-17
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Consistent with the Bank's emphasis on business lending, there are
concentrations of credit in loans secured by commercial real estate, equipment
and other business assets. The maximum potential credit risk to the Bank,
without regard to underlying collateral and guarantees, is the total of loans
and loan commitments outstanding. Management reduces the Bank's exposure to
losses from credit risk by requiring collateral and/or guarantees for loans
granted and by monitoring concentrations of credit, in addition to recording
provisions for loan losses and maintaining an allowance for loan losses.
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.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of portfolio
loans generally approximate the direct costs of successful loan originations.
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,
none at December 31, 2001 and 2000) 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.
D-18
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Bank is not included in the
balance sheet because it is not an asset of the Bank. Trust fee income is
recorded on the accrual method.
FEDERAL INCOME TAXES: The Bank is included in the consolidated federal income
tax return of its parent, Capitol Bancorp Ltd. The Bank provides for income
taxes on a separate income tax return basis. Deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect on deferred income taxes of a change in tax laws or rates is
recognized in income in the period that includes the enactment date.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based on the
weighted average number of common shares outstanding (319,500 shares).
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) is the sum of net
income (loss) and certain other items which are charged or credited to
stockholders' equity. For the periods presented, the Bank's only element of
comprehensive income (loss) 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.
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 the Bank's
financial statements.
In 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.
D-19
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
In June 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 the Bank's 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. As of December 31, 2001, the Bank
had no recorded goodwill.
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 the Bank's financial statements.
NOTE B--INVESTMENT SECURITIES
Investment securities consisted of the following at December 31:
2001 2000
----------------------- -----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Available for sale:
United States government agency
securities $ 500,000 $ 512,812 $3,242,539 $3,237,200
Other 250,724 250,968
---------- ---------- ---------- ----------
500,000 512,812 3,493,263 3,488,168
Held for long-term investment:
Federal Home Loan Bank stock 37,200 37,200 26,100 26,100
---------- ---------- ---------- ----------
$ 537,200 $ 550,012 $3,519,363 $3,514,268
========== ========== ========== ==========
Investment in Federal Home Loan Bank stock is restricted and may only be resold
to or redeemed by the issuer.
D-20
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE B--INVESTMENT SECURITIES--CONTINUED
At December 31, 2001, no securities were pledged to secure public and trust
deposits and for other purposes as required by law.
Gross unrealized gains (losses) of investment securities were as follows at
December 31:
2001 2000
----------------- -----------------
Gains Losses Gains Losses
------- ------- ------- -------
United States government
agency securities $12,812 $ -- $ 2,156 $ 7,495
Other -- -- 244 --
------- ------- ------- -------
$12,812 $ -- $ 2,400 $ 7,495
======= ======= ======= =======
There were no gross realized gains and losses from sales and calls of investment
securities available for sale during the periods presented.
Scheduled maturities of investment securities available for sale as of December
31, 2001 were as follows:
Estimated
Amortized Market
Cost Value
--------- ---------
Due in one year or less $500,000 $512,812
Securities held for long-term investment,
without stated maturities 37,200 37,200
-------- --------
$537,200 $550,012
======== ========
NOTE C--LOANS
Transactions in the allowance for loan losses are summarized below:
2001 2000 1999
--------- --------- ---------
Balance at January 1 $ 245,000 $ 209,000 $ 6,000
Provision charged to operations 276,951 36,000 203,000
Loans charged off (deduction) (170,951) -- --
Recoveries -- -- --
--------- --------- ---------
Balance at December 31 $ 351,000 $ 245,000 $ 209,000
========= ========= =========
D-21
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE C--LOANS--CONTINUED
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. Nonperforming loans
(i.e., loans which are 90 days or more past due and loans on nonaccrual status)
are summarized below:
December 31
-------------------
2001 2000
-------- --------
Nonaccrual loans:
Commercial $539,000 --
Real estate -- --
Installment -- --
-------- --------
Total nonaccrual loans 539,000 -0-
Past due (>90 days) loans:
Commercial -- --
Real estate -- --
Installment -- 1,000
-------- --------
Total past due loans -0- 1,000
-------- --------
Total nonperforming loans $539,000 $ 1,000
======== ========
If nonperforming loans had performed in accordance with their contractual terms
during the year, additional interest income of approximately $45,000 would have
been recorded in 2001 (none in 2000 and 1999). Interest income recognized on
loans in nonaccrual status in 2001 operations approximated $21,000 (none in 2000
and 1999). At December 31, 2001, there were no material amounts of loans which
were restructured or otherwise renegotiated as a concession to troubled
borrowers.
The amounts of the allowance for loan losses allocated in the following table
are based on management's estimate of losses inherent in the portfolio at the
balance sheet date, and should not be interpreted as an indication of future
charge-offs:
December 31, 2001 December 31, 2000
---------------------- ----------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
-------- ---------- -------- ---------
Commercial $347,490 1.19% $242,550 1.15%
Installment 3,510 0.01 2,450 0.01
-------- ----- -------- -----
Total allowance for loan losses $351,000 1.20% $245,000 1.16%
======== ===== ======== =====
D-22
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE D--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Bank makes loans to officers and
directors of the Bank including their immediate families and companies in which
they are principal owners. At December 31, 2001 and 2000, total loans to these
persons approximated $414,000 and $400,000, respectively. During 2001, $14,000
of new loans were made to these persons. Such loans are made at the Bank's
normal credit terms.
Such officers and directors of the Bank (and their associates, family and/or
affiliates) are also depositors of the Bank. Such deposits are similarly made at
the Bank's normal terms as to interest rate, term and deposit insurance.
The Bank purchases certain data processing and management services from Capitol
Bancorp Ltd. Amounts paid for such services approximated $284,000, $288,000 and
$259,000 in 2001, 2000 and 1999, respectively.
NOTE E--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
2001 2000
--------- ---------
Leasehold improvements $ 313,343 $ 313,343
Equipment and furniture 309,939 302,469
--------- ---------
623,282 615,812
Less accumulated depreciation (302,724) (199,799)
--------- ---------
$ 320,558 $ 416,013
========= =========
The Bank rents office space under an operating lease. Rent expense under this
lease agreement approximated $129,000, $126,000 and $122,000 in 2001, 2000 and
1999, respectively.
At December 31, 2001, future minimum rental payments under operating leases that
have initial or remaining noncancelable lease terms in excess of one year were
as follows:
2002 $ 133,000
2003 136,000
2004 139,000
2005 143,000
2006 146,000
2007 and thereafter 289,000
---------
Total $ 986,000
=========
D-23
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE F--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
2001 2000 1999
--------- --------- ---------
Current $(226,000) $ -0- $ -0-
Deferred 71,000 7,000 (173,000)
--------- --------- ---------
$(155,000) $ 7,000 $(173,000)
========= ========= =========
No federal income taxes were paid to the parent during 2001, 2000 or 1999. The
Bank received income tax related remittances of $226,000 in 2001 from its
parent, representing the parent's utilization of the Bank's net operating losses
in its consolidated federal income tax return.
Net deferred income tax assets consisted of the following at December 31:
2001 2000
--------- ---------
Allowance for loan losses $ 119,000 $ 83,000
Net operating loss carryforward 119,000
Market value adjustment for investment
securities available for sale (4,000) 2,000
Other, net (13,000) (25,000)
--------- ---------
$ 102,000 $ 179,000
========= =========
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $22.7
million and $22.5 million as of December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of time deposits of $100,000 or
more were as follows:
2002 $14,932,000
2003 7,765,000
-----------
Total $22,697,000
===========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
D-24
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE H--EMPLOYEE BENEFIT PLANS
Subject to eligibility requirements, the Bank's employees participate in the
employee benefit plans of Capitol Bancorp Ltd. Amounts charged to expense by the
Bank for these defined contribution plans approximated $13,000, $11,000 and
$3,000 in 2001, 2000 and 1999, respectively.
NOTE I--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments at December
31 were as follows (in thousands):
2001 2000
--------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
Financial Assets:
Cash and cash equivalents $ 3,717 $ 3,717 $ 5,125 $ 5,125
Investment securities:
Available for sale 513 513 3,488 3,488
Held for long-term investment 37 37 26 26
-------- -------- -------- --------
550 550 3,514 3,514
Portfolio loans:
Fixed rate 19,810 19,881 14,834 14,979
Variable rate 9,433 9,430 6,247 6,246
-------- -------- -------- --------
Total portfolio loans 29,243 29,311 21,081 21,225
Less allowance for loan losses (351) (351) (245) (245)
-------- -------- -------- --------
Net portfolio loans 28,892 28,960 20,836 20,980
Financial Liabilities:
Deposits:
Noninterest-bearing 4,348 4,348 1,975 1,975
Interest-bearing:
Demand accounts 2,560 2,557 2,267 2,272
Time certificates of deposit less
than $100,000 970 983 852 854
Time certificates of deposit
$100,000 or more 22,697 22,877 22,477 22,523
-------- -------- -------- --------
Total interest-bearing deposits 26,227 26,417 25,596 25,649
-------- -------- -------- --------
Total deposits 30,575 30,765 27,571 27,624
D-25
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE I--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--CONTINUED
Estimated fair values of financial assets and liabilities are based upon a
comparison of current interest rates on financial instruments and the timing of
related scheduled cash flows to the estimated present value of such cash flows
using current estimated market rates of interest unless quoted market values or
other fair value information is more readily available. Such estimates of fair
value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial
reporting requirements.
NOTE J--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of Bank customers. Such loan commitments include
stand-by letters of credit, lines of credit, and various commitments for other
commercial, consumer and mortgage loans. Stand-by letters of credit, when
issued, commit the Bank to make payments on behalf of customers when certain
specified future events occur and are used infrequently (none outstanding at
December 31, 2001 and 2000). Other loan commitments outstanding consist of
unused lines of credit and approved, but unfunded, specific loan commitments
($2.6 million and $1.9 million at December 31, 2001 and 2000, respectively).
These loan commitments (stand-by letters of credit and unfunded loans) generally
expire within one year and are reviewed periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the Bank's normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
Deposits at the Bank are insured up to the maximum amount covered by FDIC
insurance.
NOTE K--CAPITAL REQUIREMENTS
The Bank is subject to certain capital requirements. Federal financial
institution regulatory agencies have established certain risk-based capital
guidelines for banks. Those guidelines require all banks to maintain certain
minimum ratios and related amounts based on "Tier 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 the
Bank's financial statements.
D-26
NOTES TO FINANCIAL STATEMENTS
DETROIT COMMERCE BANK
DECEMBER 31, 2001
NOTE K--CAPITAL REQUIREMENTS--CONTINUED
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 a condition of charter approval, the Bank is required to maintain a core
capital (Tier 1) to average total assets of not less than 8% and an allowance
for loan losses of not less than 1% of portfolio loans for the first three years
of operations.
As of December 31, 2001, the most recent notification received by the Bank from
regulatory agencies has advised that the Bank is classified as
"well-capitalized" as that term is defined by the applicable agencies. There are
no conditions or events since those notifications that management believes would
change the regulatory classification of the Bank.
Management believes, as of December 31, 2001, that the Bank meets all capital
adequacy requirements to which it is subject.
The Bank's various amounts of regulatory capital and related ratios as of
December 31 are summarized below (amounts in thousands):
2001 2000
----------- -----------
Tier 1 capital to average total assets:
Minimum required amount >= $ 1,320 >= $ 2,351
Actual amount $ 2,665 $ 2,471
Ratio 8.08% 8.41%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >= $ 1,182 >= $ 923
Actual amount $ 2,665 $ 2,471
Ratio 9.02% 10.71%
Combined Tier 1 and Tier 2 capital to risk-weighted assets:
Minimum required amount(2) >= $ 2,364 >= $ 1,845
Amount required to meet "Well-Capitalized" category(3) >= $ 2,954 >= $ 2,307
Actual amount $ 3,016 $ 2,716
Ratio 10.21% 11.77%
(1) The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%.
(2) The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted
assets is 8%.
(3) 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.
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ANNEX E
FINANCIAL AND OTHER INFORMATION REGARDING CAPITOL BANCORP LTD.
The following items accompany this Proxy Statement/Prospectus as mailed to the
shareholders of Detroit Commerce Bank:
- Report on Form 10-Q for period ended June 30, 2002
- Report on Form 10-Q for period ended March 31, 2002
- Annual report to shareholders for year ended December 31, 2001
- Annual report on Form 10-K for year ended December 31, 2001
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 2, 2002
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561-571 of the Michigan Business Corporation Act, as amended (the
"MBCA"), grant the Registrant broad powers to indemnify any person in connection
with legal proceedings brought against him by reason of his present or past
status as an officer or director of the Registrant, provided that the person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The MBCA also gives the Registrant broad powers to indemnify any
such person against expenses and reasonable settlement payments in connection
with any action by or in the right of the Registrant, provided the person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, except that no indemnification may be made
if such person is adjudged to be liable to the Registrant unless and only to the
extent the court in which such action was brought determines upon application
that, despite such adjudication, but in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for reasonable
expenses as the court deems proper. In addition, to the extent that any such
person is successful in the defense of any such legal proceeding, the Registrant
is required by the MBCA to indemnify him against expenses, including attorneys'
fees, that are actually and reasonably incurred by him in connection therewith.
The Registrant's Articles of Incorporation contain provisions entitling
directors and executive officers of the Registrant to indemnification against
certain liabilities and expenses to the full extent permitted by Michigan law.
Under an insurance policy maintained by the Registrant, the directors and
officers of the Registrant are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits or
proceedings, which may be brought against them by reason of being or having been
such directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
Reference is made to the Exhibit Index at Page II-7 of the
Registration Statement.
(b) Financial Statement Schedules included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001 is
incorporated herein by reference.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto that are incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
II-1
(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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Lansing, Michigan on September 30,
2002.
CAPITOL BANCORP LTD.
By: /s/ JOSEPH D. REID
------------------------------------
JOSEPH D. REID
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph D. Reid, Cristin Reid English, and Lee W.
Hendrickson and each of them (with full power to each of them to act alone), his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, including any Registration Statement for the
same offering that is to be effective upon filing pursuant to Rule 462(b) under
the Securities Act of 1933, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 30, 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
/s/ DAVID O'LEARY Secretary, Director
- ----------------------------
DAVID O'LEARY
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/ MICHAEL J. DEVINE Director
- ----------------------------
MICHAEL J. DEVINE
/s/ JAMES C. EPOLITO Director
- ----------------------------
JAMES C. EPOLITO
/s/ GARY A. FALKENBERG Director
- ----------------------------
GARY A. FALKENBERG
/s/ JOEL I. FERGUSON Director
- ----------------------------
JOEL I. FERGUSON
II-5
Signature Title
- --------- -----
/s/ KATHLEEN A. GASKIN Director
- -----------------------------
KATHLEEN A. GASKIN
/s/ H. NICHOLAS GENOVA Director
- -----------------------------
H. NICHOLAS GENOVA
/s/ MICHAEL F. HANNLEY Director
- -----------------------------
MICHAEL F. HANNLEY
/s/ L. DOUGLAS JOHNS Director
- -----------------------------
L. DOUGLAS JOHNS
/s/ MICHAEL L. KASTEN Director
- -----------------------------
MICHAEL L. KASTEN
/s/ JOHN S. LEWIS Director
- -----------------------------
JOHN S. LEWIS
/s/ HUMBERTO S. LOPEZ Director
- -----------------------------
HUMBERTO S. LOPEZ
/s/ LEONARD MAAS Director
- -----------------------------
LEONARD MAAS
/s/ LYLE W. MILLER Director
- -----------------------------
LYLE W. MILLER
/s/ KATHRYN L. MUNRO Director
- -----------------------------
KATHRYN L. MUNRO
/s/ CRISTIN REID ENGLISH Director
- -----------------------------
CRISTIN REID ENGLISH
/s/ RONALD K. SABLE Director
- -----------------------------
RONALD K. SABLE
II-6
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Plan of Share Exchange (included in the Proxy
Statement/Prospectus as Annex A).
5 Opinion of Brian K. English, General Counsel, as to the validity
of the shares.
8 Tax Opinion of Miller, Canfield, Paddock and Stone, PLC (included
in the Proxy Statement/Prospectus as Annex C).
23.1a Consent of BDO Seidman, LLP.
23.1b Consent of BDO Seidman, LLP.
23.2 Consent of Miller, Canfield, Paddock and Stone, PLC (included in
Exhibit 8).
23.4 Consent of JMP Financial, Inc. (financial advisor).
24 Power of Attorney (included on the signature page of the
Registration Statement).
99 Form of proxy for the Annual Meeting of Shareholders of Detroit
Commerce Bank.
II-7