As filed with the Securities and Exchange Commission on November 15, 2002
Registration No. 333-100197
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
MICHIGAN 6711 38-2761672
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Cristin Reid English, Esq.
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Phillip D. Torrence, Esq.
Miller, Canfield, Paddock and Stone, PLC
444 W. Michigan Ave.
Kalamazoo, Michigan 49007
(269) 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 Class Proposed Maximum Proposed Maximum
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) 37,890 N/A $651,329 $60 (3)
=======================================================================================================
(1) Based on 43,577 shares of common stock, $5.00 par value, of East Valley
Community Bank, which is the maximum number of shares of East Valley 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 .869486 shares of Capitol common stock
for each share of East Valley 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
.869486 Capitol shares that may be issued in the consummation of the
exchange transaction contemplated.
(3) Previously remitted.
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.
[EAST VALLEY LOGO]
------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On December 19, 2002
To the Shareholders of East Valley Community Bank:
The annual meeting of the shareholders of East Valley Community Bank will
be held at East Valley Community Bank at 1940 North Alma School Road, Chandler,
Arizona 85224 on December 19, 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 August 19, 2002, between Capitol Bancorp Ltd. and East
Valley Community Bank under which all shareholders of East Valley (other than
Capitol) will exchange their stock in East Valley 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. Under the Arizona Business Corporation
Act, shareholders of East Valley will have the right to assert dissenters'
rights in connection with the proposed Plan of Share Exchange. See "Dissenters'
Rights" in the proxy statement/prospectus accompanying this notice.
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 October 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 East Valley'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/ Gerry Smith
President
PROXY STATEMENT/PROSPECTUS
PROPOSED PLAN OF SHARE EXCHANGE
The Board of Directors of East Valley Community Bank has approved a Plan of
Share Exchange that contemplates the exchange of the shares of East Valley
common stock held by all shareholders other than Capitol Bancorp Ltd. Capitol
currently holds 85.47% of East Valley's common stock. As a result of the
exchange, East Valley will become a wholly-owned subsidiary of Capitol.
If the exchange is approved, each share of East Valley 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 $19.00, the per
share value of East Valley common stock, by $21.852, the average closing prices
of Capitol's common stock for the month ended June 30, 2002. At June 30, 2002,
the book value per share of East Valley common stock was $12.10, compared to
share value of East Valley of $19.00 based on the proposed exchange. If the
share exchange is approved, each shareholder of East Valley would receive in the
exchange .869486 shares of Capitol common stock for each share of East Valley
common stock.
Capitol estimates that Capitol will issue approximately 37,890 shares of
Capitol common stock to East Valley 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."
East Valley's Board of Directors has scheduled the annual meeting of East
Valley 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 EAST VALLEY 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 November 15, 2002, and is first
being mailed to shareholders of East Valley on or about November 20, 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..................................................... 8
Record Date; Voting Power.......................................... 9
What Shareholders will Receive in the Exchange..................... 9
Accounting Treatment............................................... 9
Tax Consequences of the Exchange to East Valley Shareholders....... 9
Dissenters' Rights................................................. 9
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
COMPARATIVE HISTORICAL, PRO FORMA AND PRO FORMA EQUIVALENT
PER SHARE INFORMATION..................................................... 20
CAPITALIZATION.............................................................. 21
DIVIDENDS AND MARKET FOR COMMON STOCK....................................... 22
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................... 23
INFORMATION ABOUT CAPITOL................................................... 24
INFORMATION ABOUT EAST VALLEY............................................... 24
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................................ 25
THE ELECTION OF DIRECTORS................................................... 26
THE EXCHANGE................................................................ 27
General............................................................ 27
Background of the Exchange......................................... 27
East Valley's Reasons for the Exchange............................. 28
Capitol's Reasons for the Exchange................................. 28
Terms of Exchange.................................................. 28
East Valley Board Recommendation................................... 28
Accounting Treatment............................................... 29
Pro Forma Data..................................................... 29
Material Federal Income Tax Consequences........................... 29
Regulatory Matters................................................. 31
Dissenters' Rights................................................. 31
Federal Securities Laws Consequences; Stock Transfer Restrictions.. 32
3
TABLE OF CONTENTS - Continued
OPINION OF FINANCIAL ADVISOR................................................ 33
THE CLOSING................................................................. 36
Effective Time..................................................... 36
Shares Held by Capitol............................................. 36
Procedures for Surrender of Certificates; Fractional Shares........ 36
Fees and Expenses.................................................. 37
Nasdaq Stock Market Listing........................................ 37
Amendment and Termination.......................................... 37
THE ANNUAL SHAREHOLDERS' MEETING............................................ 38
Date, Time and Place............................................... 38
Matters to be Considered at the Shareholders' Meeting.............. 38
Record Date; Stock Entitled to Vote; Quorum........................ 38
Votes Required..................................................... 38
Share Ownership of Management...................................... 38
Voting of Proxies.................................................. 39
General Information................................................ 39
Solicitation of Proxies; Expenses.................................. 39
COMPARISON OF SHAREHOLDER RIGHTS............................................ 40
DESCRIPTION OF CAPITAL STOCK OF CAPITOL..................................... 41
Rights of Common Stock............................................. 41
Shares Available for Issuance...................................... 41
Capitol's Preferred Securities..................................... 42
Anti-Takeover Provisions........................................... 42
WHERE YOU CAN FIND MORE INFORMATION......................................... 44
LEGAL MATTERS............................................................... 45
EXPERTS..................................................................... 45
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 East Valley
Community Bank......................................... D-1
ANNEX E Financial and Other Information Regarding Capitol
Bancorp Ltd............................................ E-1
ANNEX F Excerpts of Arizona Revised Statutes Regarding
Dissenters' Rights .................................... F-1
4
ANSWERS TO
FREQUENTLY ASKED QUESTIONS
Q: Why am I receiving these materials?
A: East Valley's Board of Directors has approved the exchange of the 14.53% of
East Valley's common stock not owned by Capitol for shares of common stock
of Capitol. The exchange requires the approval of East Valley's
shareholders. East Valley is sending you these materials to help you decide
whether to approve the exchange. These materials also include information
regarding East Valley'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 .869486
shares of Capitol common stock for each share of East Valley 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 East Valley 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 December 6, 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
East Valley common stock (other than Capitol) must approve the Plan of
Share Exchange. If you do not vote your East Valley 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 East Valley shareholders written instructions for
exchanging their stock certificates.
Q: When do you expect to complete the exchange?
A: As quickly as possible after December 31, 2002. Approval by East Valley'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 Limited
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
Attention: General Counsel
Telephone Number: (517) 487-6555
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
SHAREHOLDERS' MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN DECEMBER 2,
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:
East Valley Community Bank
1940 North Alma School Road
Chandler, Arizona 85224
(480) 726-6500
Attention: Gerry J. Smith
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 East
Valley Community Bank. Each bank is viewed by management as being a separate
business from the perspective of monitoring performance and allocation of
financial resources. Capitol uses a unique strategy of bank ownership and
development through a tiered structure.
Capitol's operating strategy is to provide transactional, processing and
administrative support and mentoring to aid in the effective growth and
development of its banks. It provides access to support services and management
with significant experience in community banking. These administrative and
operational support services do not require a direct interface with the bank
customer and therefore can be consolidated more efficiently without affecting
the bank customer relationship. Subsidiary banks have full decision-making
authority in structuring and approving loans and in the delivery and pricing of
other banking services.
East Valley Community Bank is a commercial bank with its headquarters at
1940 North Alma School Road, Chandler, Arizona 85224. East Valley's telephone
number is (480) 726-6500.
East Valley has been, since it commenced business, a majority owned
subsidiary of Sun Community Bancorp. Sun became a wholly-owned subsidiary of
Capitol (previously approximately 50% owned by Capitol) effective March 31,
2002. East Valley commenced the business of banking on June 30, 1999. East
Valley offers a full range of commercial banking services.
REASONS FOR THE EXCHANGE (PAGE 28)
It is believed that the exchange will provide you with greater liquidity
and flexibility because Capitol's common stock is publicly traded. The exchange
will also provide you with greater diversification, since Capitol is active in
more than one geographic area and across a broader customer base.
THE ANNUAL SHAREHOLDERS' MEETING (PAGE 38)
The meeting of East Valley shareholders will be held on December 19, 2002
at 9:00 a.m., local time, at East Valley Community Bank at 1940 North Alma
School Road, Chandler, Arizona 85224. At the shareholders' meeting, you will
elect East Valley's Board of Directors and be asked to approve the Plan of Share
Exchange.
RECOMMENDATION TO SHAREHOLDERS (PAGE 28)
The East Valley board believes that the exchange is fair to you and in the
best interests of both you and East Valley and recommends that you vote FOR
approval of the share exchange.
VOTES REQUIRED (PAGE 38)
Approval of the Plan of Share Exchange requires the favorable vote of a
majority of the outstanding shares of East Valley common stock excluding the
shares held by Capitol. This is more than the vote required by law, but East
Valley's board has set the vote requirement to be sure the exchange is what you,
the shareholders of East Valley, want. Capitol holds 85.47% of the outstanding
shares of East Valley common stock. East Valley's Board of Directors holds 1.33%
of the outstanding shares of East Valley common stock, or 9.18% 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.
8
RECORD DATE; VOTING POWER (PAGE 38)
East Valley shareholders may vote at the shareholders' meeting if they
owned shares of common stock at the close of business on October 31, 2002. At
the close of business on October 31, 2002, 43,577 shares of East Valley common
stock were outstanding (excluding shares held by Capitol). For each share of
East Valley 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 28)
In the exchange, each outstanding share of East Valley common stock will be
automatically converted into the right to receive Capitol common stock,
according to an "exchange ratio". The exchange ratio is fixed, and if the
exchange is approved, each shareholder of East Valley would receive in the
exchange .869486 shares of Capitol common stock for each share of East Valley
common stock. The exchange ratio is determined by dividing the East Valley Share
Value by the Capitol Share Value, where:
EAST VALLEY SHARE VALUE. The value of each share of East Valley common
stock shall be $19.00.
CAPITOL SHARE VALUE. The share 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.
The East Valley Share Value of $19.00 compares to the book value per East
Valley share of $12.10 as of June 30, 2002. Based on the fixed exchange ratio,
and if the exchange is approved, each shareholder would receive .869486 shares
of Capitol common stock for each share of East Valley common stock.
Each East Valley shareholder (except Capitol) will receive shares of
Capitol common stock in exchange for his, her or their East Valley common stock
calculated by multiplying the number of shares of East Valley common stock held
by the shareholder by the exchange ratio. Any fractional shares will be paid in
cash.
ACCOUNTING TREATMENT (PAGE 29)
Capitol's acquisition of the minority interest of East Valley will be
accounted for under the purchase method of accounting. After the exchange, 100%
of East Valley's results from operations will be included in Capitol's income
statement, as opposed to 85.47% as is currently reported.
TAX CONSEQUENCES OF THE EXCHANGE TO EAST VALLEY SHAREHOLDERS (PAGE 29)
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, East Valley shareholders generally will not recognize any gain or
loss for United States federal income tax purposes on the exchange of their East
Valley 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 counsel's opinion is subject to
certain assumptions which may limit its application in particular instances.
Tax matters are very complicated, and the tax consequences of the exchange
to each East Valley shareholder will depend on the facts of that shareholder's
situation. You are urged to consult your tax advisor for a full understanding of
the tax consequences of the exchange to you.
DISSENTERS' RIGHTS (PAGE 31)
Arizona law entitles shareholders to dissent from and obtain fair value for
their shares in the event of the consummation of a plan of share exchange to
which the corporation is a party as the corporation whose shares will be
acquired, if the shareholders are entitled to vote on the plan. Since the
shareholders are entitled to vote on the plan, there are dissenters' rights.
9
OPINION OF FINANCIAL ADVISOR (PAGE 33)
East Valley retained JMP Financial, Inc. as its financial advisor and agent
in connection with the exchange to render a financial fairness opinion to the
East Valley shareholders.
In deciding to approve the exchange, the East Valley 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
East Valley common stock is fair from a financial point of view. The opinion is
attached as Annex B to this proxy statement/prospectus.
The opinion is just one of a number of things the East Valley board
considered in coming to its conclusion to approve the exchange.
THE PLAN OF SHARE EXCHANGE (PAGE 27)
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
East Valley and Capitol can jointly agree to terminate the plan of exchange
at any time without completing the exchange.
East Valley can terminate the exchange if a majority of East Valley'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 an East Valley shareholder are determined by Arizona's
banking law and by East Valley'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
September 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 nine months ended September 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 nine months ended
September 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 East Valley)
are included in Capitol's consolidated balance sheet. Capitol's consolidated net
income, however, only includes its subsidiaries' (including East Valley'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
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 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 $ 116,278 $ 115,766 $ 153,797 $ 132,311 $ 93,602 $ 69,668 $ 49,549
Interest expense 42,841 56,894 73,292 65,912 46,237 36,670 24,852
Net interest income 73,437 58,872 80,505 66,399 47,365 32,998 24,697
Provision for loan losses 8,692 5,637 8,167 7,216 4,710 3,523 2,049
Net interest income after provision
for loan losses 64,745 53,235 72,338 59,183 42,655 29,475 22,648
Noninterest income 10,375 6,994 9,585 6,137 4,714 3,558 2,157
Noninterest expense 56,762 47,358 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 18,358 12,871 17,787 12,474 7,112 6,708 8,084
Income tax expense 6,380 4,238 5,824 4,289 3,213 2,584 2,888
Income before minority interest and
cumulative effect of change in
accounting principle 11,978 8,633 11,963 8,185 3,899 4,124 5,196
Minority interest in net losses (income)
of consolidated subsidiaries (574) (878) (1,245) (150) 1,707 504 361
Income before cumulative effect
of change in accounting
principle 11,404 7,755 10,718 8,035 5,606 4,628 5,557
Cumulative effect of change in
accounting principle (1) (197)
Net income 11,404 7,755 10,718 8,035 5,409 4,628 5,557
11
CAPITOL BANCORP LIMITED
-----------------------------------------------------------------------------------------
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 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 $ 1.17 $ 1.00 $ 1.38 $ 1.14 $ 0.87 $ 0.74 $ 0.91
Diluted 1.12 0.98 1.35 1.13 0.86 0.72 0.88
After cumulative effect of
change in accounting
principle (1):
Basic 1.17 1.00 1.38 1.14 0.84 0.74 0.91
Diluted 1.12 0.98 1.35 1.13 0.83 0.72 0.88
Cash dividends declared 0.32 0.30 0.40 0.36 0.36 0.33 0.30
Book value 12.95 9.96 10.24 9.18 8.08 7.77 7.22
Dividend payout ratio 27.35% 30.00% 28.99% 31.58% 42.86% 43.63% 32.95%
Weighted average number of
common shares outstanding 9,777 7,769 7,784 7,065 6,455 6,284 6,130
SELECTED BALANCE SHEET DATA:
Total assets $2,347,594 $1,975,379 $2,044,006 $1,630,076 $1,305,987 $1,024,444 $ 690,556
Investment securities 45,878 43,865 43,687 68,926 107,145 86,464 64,470
Portfolio loans 1,958,820 1,660,042 1,734,589 1,355,798 1,049,204 724,280 502,755
Allowance for loan losses (27,898) (21,849) (23,238) (17,449) (12,639) (8,817) (6,229)
Deposits 2,018,051 1,687,494 1,740,385 1,400,899 1,112,793 890,890 604,407
Debt obligations 83,168 77,437 89,911 58,150 47,400 23,600
Minority interests in
consolidated subsidiaries 34,342 67,182 70,673 62,575 54,593 27,576 11,020
Trust preferred securities 51,567 48,606 48,621 24,327 24,291 24,255 24,126
Stockholders' equity 144,838 77,902 80,172 70,404 54,668 49,292 45,032
PERFORMANCE RATIOS: (2)
Return on average equity 13.78% 14.82% 15.22% 13.78% 10.66% 10.19% 13.28%
Return on average assets 0.70% 0.57% 0.58% 0.55% 0.47% 0.55% 0.96%
Net interest margin (fully taxable
equivalent) 4.79% 4.60% 4.60% 4.80% 4.44% 4.15% 4.54%
Efficiency ratio (3) 67.73% 71.90% 71.19% 72.85% 77.30% 70.63% 60.92%
ASSET QUALITY:
Non-performing loans (4) $ 26,301 $ 11,642 $ 17,238 $ 6,757 $ 4,124 $ 7,242 $ 4,011
Allowance for loan losses to
non-performing loans 106.07% 187.67% 134.81% 258.24% 306.47% 121.75% 155.30%
Allowance for loan losses to
portfolio loans 1.42% 1.32% 1.34% 1.29% 1.20% 1.22% 1.24%
Non-performing loans to total
portfolio loans 1.34% 0.70% 0.99% 0.50% 0.39% 1.00% 0.80%
Net loan losses to average
portfolio loans 0.29% 0.11% 0.15% 0.20% 0.10% 0.15% 0.09%
CAPITAL RATIOS:
Average equity to average assets 5.12% 4.11% 3.78% 4.26% 4.46% 5.36% 7.22%
Tier 1 risk-based capital ratio 10.60% 10.69% 10.54% 11.10% 10.78% 13.42% 14.26%
Total risk-based capital ratio 11.85% 12.12% 11.85% 12.35% 11.62% 14.60% 16.61%
Leverage ratio 6.17% 3.94% 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 September
30, 2002, the net carrying amount of reporting-unit goodwill approximated $17.9
million and other intangible assets approximated $2.4 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):
Nine Months Ended
September 30 Year Ended December 31
------------------- ------------------------------
2002 2001 2001 2000 1999(1)
-------- -------- -------- -------- --------
Net income, as reported $ 11,404 $ 7,755 $ 10,718 $ 8,035 $ 5,409
Add back -- goodwill
amortization -- 602 979 561 318
-------- -------- -------- -------- --------
Net income, as adjusted $ 11,404 $ 8,357 $ 11,697 $ 8,596 $ 5,727
======== ======== ======== ======== ========
Net income per share,
as reported:
Basic $ 1.17 $ 1.00 $ 1.38 $ 1.14 $ 0.84
======== ======== ======== ======== ========
Diluted $ 1.12 $ 0.98 $ 1.35 $ 1.13 $ 0.83
======== ======== ======== ======== ========
Add back -- goodwill
amortization per share:
Basic -- $ 0.08 $ 0.12 $ 0.08 $ 0.05
======== ======== ======== ========
Diluted -- $ 0.08 $ 0.12 $ 0.08 $ 0.05
======== ======== ======== ========
Net income per share,
as adjusted:
Basic $ 1.17 $ 1.08 $ 1.50 $ 1.22 $ 0.89
======== ======== ======== ======== ========
Diluted $ 1.12 $ 1.06 $ 1.47 $ 1.21 $ 0.88
======== ======== ======== ======== ========
(1) Including cumulative effect of change in accounting principle, which
required write-off of previously capitalized start-up costs as of January
1, 1999 ($197, net of income tax effect, or $.03 per share).
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 EAST VALLEY 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.
INHERENT CONFLICTS OF INTEREST IN THE PROPOSED SHARE EXCHANGE.
East Valley is already a majority-owned and controlled subsidiary of
Capitol. By virtue of the existing relationship between East Valley and Capitol,
the proposed share exchange presents inherent conflicts of interest. For
example, no other share exchanges are being considered and, if there were any,
Capitol would likely vote its East Valley shares against any other share
exchange proposals. Capitol's proposal to value East Valley shares at $19.00 in
the proposed share exchange is based solely on its judgment in making such
proposal. Accordingly, the East Valley Share Value and related exchange ratio
have not been determined absent the inherent conflicts of interest between
Capitol and East Valley. It is unknown what exchange ratio or East Valley Share
Value, if any, that might be negotiated between East Valley and unaffiliated
entities.
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.
14
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.
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.
15
Federal and state regulatory agencies have extensive discretion and power
to prevent or remedy unsafe or unsound practices or violations of law by banks
and bank holding companies. Capitol and its banks also undergo periodic
examinations by one or more regulatory agencies. Following such examinations,
Capitol may be required, among other things, to change its asset valuations or
the amounts of required loan loss allowances or to restrict its operations.
Those actions would result from the regulators' judgments based on information
available to them at the time of their examination.
The banks' operations are required to follow a wide variety of state and
federal consumer protection and similar statutes and regulations. Federal and
state regulatory restrictions limit the manner in which Capitol and its banks
may conduct business and obtain financing. Those laws and regulations can and do
change significantly from time to time, and any such change could adversely
affect Capitol.
REGULATORY ACTION COULD SEVERELY LIMIT FUTURE EXPANSION PLANS.
To carry out some of its expansion plans, Capitol is required to obtain
permission from the Federal Reserve Board. Applications for the formation of new
banks are submitted to the state and federal bank regulatory agencies for their
approval.
While Capitol's recent experience with the regulatory application process
has been favorable, the future climate for regulatory approval is impossible to
predict. Regulatory agencies could prohibit or otherwise significantly restrict
the expansion plans of Capitol, its current bank subsidiaries and future new
start-up banks.
THE BANKS' ALLOWANCES FOR LOAN LOSSES MAY PROVE INADEQUATE TO ABSORB ACTUAL 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.
16
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.
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 interim periods 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 September 30, 2002, Capitol had notes payable to an unaffiliated bank
outstanding in the amount of approximately $10 million. Under this credit
facility, borrowings of up to $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.
17
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.
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
consummated, resulting in Capitol issuing about 450,000 shares of common stock.
These two share exchanges relate to Sunrise Capital Corporation ("Sunrise") and
Indiana Community Bancorp Ltd. ("ICBL"), which were previously majority-owned
subsidiaries of Capitol.
In addition to the proposed East Valley share exchange, Capitol has
proposed a share exchange transaction regarding Detroit Commerce Bank
("Detroit"), a majority-owned subsidiary of Capitol, subject to the approval of
Detroit's shareholders (other than Capitol). If the Detroit share exchange is
approved, Capitol estimates issuing approximately 16,000 shares of Capitol
common stock.
Bank development efforts are currently under consideration at September 30,
2002 in the states of California, Indiana and Michigan. Activities include
pre-development exploratory discussions in a number of other states.
19
COMPARATIVE HISTORICAL, PRO FORMA AND PRO FORMA EQUIVALENT
PER SHARE INFORMATION
The following table summarizes comparative per share information:
As of and for the As of and for the
Nine Months Ended Year Ended
September 30, 2002 December 31, 2001
------------------ -----------------
Capitol common stock:
Net income per share:
Basic:
Historical $ 1.17 $ 1.38
Pro forma consolidated 1.16 1.37
Diluted:
Historical 1.12 1.35
Pro forma consolidated 1.11 1.34
Cash dividends per share:
Historical 0.32 0.40
Pro forma consolidated (A) 0.32 0.40
Book value per share at period end:
Historical 12.95 10.24
Pro forma consolidated $13.00 $10.32
East Valley common stock:
Net income (loss) per share:
Basic:
Historical $(0.92) $ 0.06
Pro forma equivalent (B) 1.01 1.19
Diluted:
Historical (0.92) 0.06
Pro forma equivalent (B) 0.96 1.16
Cash dividends per share:
Historical -- --
Pro forma equivalent (B) 0.28 0.35
Book value per share at period end:
Historical 11.80 12.71
Pro forma equivalent (B) $11.30 $ 8.97
A -- The Capitol pro forma consolidated dividends per share represent
historical dividends per share.
B -- The East Valley pro forma equivalent per share amounts are calculated by
multiplying Capitol pro forma consolidated per share amounts by the
exchange ratio of .869486.
20
CAPITALIZATION
The table presented below shows Capitol's actual total capitalization as of
September 30, 2002, and as adjusted to reflect the exchange of Capitol's common
stock for East Valley's common stock as described in this proxy
statement/prospectus and a pending share exchange regarding another subsidiary
of Capitol (as described below).
AS OF SEPTEMBER 30, 2002
-----------------------------------------------------
(In thousands, except per share amounts)
AS ADJUSTED FOR
AS ADJUSTED FOR THE EAST VALLEY
THE EAST VALLEY AND DETROIT SHARE
ACTUAL EXCHANGE(4) EXCHANGES(5)
--------- ----------- ------------
DEBT OBLIGATIONS .................................................. $ 83,168 $ 83,168 $ 83,168
TRUST-PREFERRED SECURITIES ........................................ 51,567 51,567 51,567
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ................... 34,342 33,943 33,780
STOCKHOLDERS' EQUITY(1):
Common stock, no par value; 25,000,000 shares
authorized; issued, and outstanding:
Actual - 11,181,368 shares .................................. 124,022
As adjusted for the East Valley exchange -
11,219,258 shares(4) ...................................... 125,053
As adjusted for both the East Valley and Detroit
share exchanges - 11,235,665 shares(5) .................... 125,400
Retained earnings ............................................... 22,435 22,435 22,435
Market value adjustment for available-for-sale
securities (net of tax effect) ................................ 232 232 232
Less note receivable from exercise of stock options
and unallocated ESOP shares ................................... (1,851) (1,851) (1,851)
--------- --------- ---------
Total stockholders' equity .................................. $ 144,838 $ 145,869 $ 146,216
========= ========= =========
Book value per share of common stock .............................. $ 12.95 $ 13.00 $ 13.01
========= ========= =========
TOTAL CAPITALIZATION(2) ........................................... $ 179,180 $ 179,812 $ 179,995
========= ========= =========
TOTAL CAPITAL FUNDS(3) ............................................ $ 230,747 $ 231,379 $ 231,562
========= ========= =========
CAPITAL RATIOS:
Stockholders' equity to total assets ........................... 6.17% 6.21% 6.23%
Total capitalization to total assets ........................... 7.63% 7.66% 7.66%
Total capital funds to total assets ............................ 9.83% 9.85% 9.86%
- ----------
(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 37,890 shares of Capitol common stock upon completion
of East Valley share exchange.
(5) Assumes issuance of 37,890 shares of Capitol common stock upon completion
of the East Valley share exchange and 16,407 shares of Capitol common stock
which may be issued upon shareholder approval of a share exchange regarding
Detroit Commerce Bank, a majority-owned subsidiary of Capitol.
21
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 $20.99 on November 14, 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 ended September 30 24.250 15.810 0.12
Quarter ending December 31
(through November 14, 2002) 21.640 15.130 --
As of October 17, 2002, there were 4,572 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 East Valley's common stock. Any transfers have been
made privately and are not reported. East Valley has never paid a dividend on
its common stock.
22
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;
- 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".
23
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 September 30, 2002
- 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 EAST VALLEY
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 September 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 East Valley as of
September 30, 2002 and for the nine months ended September 30, 2002 and 2001 are
included in this proxy statement/prospectus as part of Annex D. Audited
financial statements of East Valley 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 East Valley and all directors and officers as a group. Where applicable, the
table includes shares held by members of their immediate families.
East Valley shares beneficially owned
--------------------------------------------------
Percentage of all
Percentage of East Valley shares
all excluding East Valley
East Valley shares owned by
Name of Beneficial owner Number Shares Capitol
- ------------------------ ------ ------ -------
Capitol Bancorp Limited 256,423 85.47% N/A
======= ====== ======
East Valley's Directors and Officers:
Michael J. Devine 200 0.07% 0.46%
David L. Heuermann 1,000 0.33% 2.29%
Michael L. Kasten 2,000 0.67% 4.59%
Darra L. Rayndon 100 0.03% 0.23%
Gerry J. Smith 100 0.03% 0.23%
James C. Stratton 200 0.07% 0.46%
Joseph A. Tameron 400 0.13% 0.92%
Stephen D. Todd 0 -- --
David M. Anderson 0 -- --
David D. Fortune 0 -- --
J. Dennis Kennedy 0 -- --
Lawrence Nusbaum 0 -- --
------ ------ ------
Total of Directors and Officers 4,000 1.33% 9.18%
====== ====== ======
Other than Capitol, no individual owns greater than 5% of the outstanding
shares of East Valley.
24
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Because East Valley 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 East Valley is not required to be
presented in this prospectus.
25
THE ELECTION OF DIRECTORS
East Valley'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 eight.
The Board of Directors has nominated the eight (8) 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 East Valley'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 East Valley's
Directors based on the data furnished by them:
NAME, PROFESSIONAL POSITIONS & POSITIONS HELD WITH EAST VALLEY
Michael J. Devine, Attorney at Law; Director
David L. Heuermann, President, Axis Mortgage & Investments, LLC; Director
Michael L. Kasten, Managing Partner, Kasten Investments, LLC; Director
Darra L. Rayndon, President & Principal, Rayndon & Longfellow, P.C.; Director
Gerry J. Smith, President, East Valley Community Bank; Director
James C. Stratton, President & Chief Executive Officer, Boys & Girls Clubs of
Scottsdale; Director
Joseph A. Tameron, Certified Public Accountant & Partner, Skinner, Tameron &
Company, LLP; Director
Stephen D. Todd, Director of Bank Performance, Western Region; Director
26
THE EXCHANGE
GENERAL
The East Valley Board of Directors is using this proxy statement/prospectus
to solicit proxies from the holders of East Valley common stock for use at the
annual shareholders' meeting.
At the annual shareholders' meeting to be held on December 19, 2002, East
Valley common shareholders will be asked to approve the exchange. The Plan of
Share Exchange provides for East Valley's minority shareholders to exchange the
14.53% of the common stock of East Valley not owned by Capitol for Capitol
common stock. Upon consummation of the exchange, East Valley will become a
wholly-owned subsidiary of Capitol. In the exchange, East Valley 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 East Valley'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
East Valley board meetings during that period. The objectives of the potential
exchange would be to enable shareholders of East Valley 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 East Valley will continue to hold East Valley stock
which has no market and is illiquid.
East Valley's board of directors has not solicited or received any other
proposals for the potential exchange or sale of East Valley's shares of common
stock which are not owned by Capitol. If other proposals were under
consideration for sale or exchange of East Valley's shares to an entity other
than Capitol, Capitol would be permitted to vote its shares of East Valley. By
virtue of Capitol's majority ownership of East Valley, it is likely that Capitol
would not vote its shares of East Valley in favor of any other proposals
regarding a share exchange or sale of the minority interest in East Valley with
another party. In addition, Capitol currently has no intentions of selling its
majority interest in East Valley. 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 those 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 East Valley's board of directors
consistent with its informal discussions with East Valley's board during the
past three years.
Consensus between Capitol and East Valley's directors who are not employees
or officers of Capitol was reached in August 2002, to approve the proposed
exchange subject only to:
- obtaining an independent opinion that the proposed share exchange is
fair to East Valley's shareholders from a financial point of view; and
- obtaining approval for the proposed exchange by a majority of East
Valley's shares not already owned by Capitol.
In August 2002, the East Valley board approved the Plan of Share Exchange
and agreed to call a shareholder meeting for a shareholder vote to approve the
Plan of Share Exchange.
27
EAST VALLEY'S REASONS FOR THE EXCHANGE.
East Valley's reasons for the exchange are that the shareholders of East
Valley 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 East Valley shareholders will receive publicly traded shares,
providing them liquidity as opposed to the East Valley common stock
for which there is no public market. East Valley shareholders who
choose to do so may continue to hold the Capitol stock they receive in
the exchange without being forced to have their investment reduced by
the immediate recognition of a capital gains tax.
CAPITOL'S REASONS FOR THE EXCHANGE
Capitol believes that East Valley's profitability will increase. As noted
elsewhere in this proxy statement/prospectus, while East Valley's assets are
reported as part of Capitol's assets for purposes of its consolidated financial
statements, East Valley's income is attributed to Capitol only in the percentage
which Capitol owns of East Valley common stock. Capitol desires to acquire the
remainder of East Valley's common stock so that Capitol can include 100% of East
Valley'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 as 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 14.53% of the
shares of East Valley held by shareholders other than Capitol, each
share of East Valley 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 East Valley share value by the
Capitol share value. The East Valley share value shall be $19.00 per
share.
The share 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.
The exchange ratio is determined by dividing the East Valley share value by
the Capitol share value. Each East Valley shareholder (except Capitol) will
receive shares of Capitol common stock in exchange for his, her or their East
Valley common stock calculated by multiplying the number of shares in East
Valley common stock held by the shareholder by the exchange ratio. Any
fractional shares will be paid in cash.
EAST VALLEY BOARD RECOMMENDATION
In determining whether to recommend the proposed share exchange to East
Valley's shareholders, East Valley's board considered the matters discussed in
"East Valley's Reasons for the Exchange". In addition, East Valley's board
considered:
. no other exchange proposals would be offered either by Capitol or
unaffiliated parties;
. Capitol already has an overwhelming majority ownership of East Valley;
. there is no assurance Capitol would repeat or improve its share
exchange proposal at any time in the future;
28
. absent any potential alternatives other than rejecting Capitol's
proposal, which could result in East Valley's minority shareholders
having no future opportunities to exchange, sell or otherwise dispose
of their East Valley shares; and
. East Valley's board obtained an opinion from its financial advisor
that the exchange would be fair to the shareholders of East Valley
from a financial point of view.
THE EAST VALLEY BOARD HAS DETERMINED THAT THE EXCHANGE IS FAIR TO AND IN
THE BEST INTERESTS OF THE EAST VALLEY 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 East
Valley and since East Valley 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 East
Valley 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 East
Valley 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;
29
. East Valley shareholders who received their East Valley common stock
through the exercise of employee stock options or otherwise as
compensation;
. East Valley shareholders who are not U.S. persons; and
. East Valley shareholders who hold East Valley common stock as part of
a hedge, straddle or conversion transaction.
The discussion also does not address any consequences arising under the
laws of any state, locality or foreign jurisdiction. 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 East Valley
who exchange their East Valley 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 East
Valley shareholders who exchange all of their East Valley common stock
for Capitol common stock in the exchange will be the same as the
aggregate tax basis of the East Valley 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 East Valley common stock surrendered
in exchange; and
* a holder of East Valley 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 East Valley 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 East Valley 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.
30
REGULATORY MATTERS
East Valley is subject to regulation by Arizona's State Banking Department
and the FDIC. The State Banking Department 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 East Valley prior to
East Valley 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 East Valley common stock
will be publicly tradable upon consummation of the exchange. There will be no
restriction on the ability of a former East Valley shareholder to sell in the
open market the Capitol common stock received (unless the East Valley
shareholder is also an officer, director or affiliate of either East Valley or
Capitol, in which case Rule 144 and Rule 145 issued by the SEC do impose certain
restrictions on the sale of Capitol common stock).
DISSENTERS' RIGHTS
Arizona law entitles shareholders to dissent from and obtain fair value for
their shares in the event of the consummation of a plan of share exchange to
which the Corporation is a party as the corporation whose shares will be
acquired, if the shareholders are entitled to vote on the plan. Since the
shareholders are entitled to vote on the plan, there are dissenters' rights.
By following the specific procedures set forth in the Arizona Business
Corporation Act (the "ABCA"), holders of East Valley common stock have a
statutory right to dissent from the Plan of Share Exchange. If the exchange is
approved and consummated, any holder of East Valley common stock who properly
perfects his dissenters' rights will be entitled, upon consummation of the
exchange, to receive an amount in cash equal to the fair value of his shares of
East Valley common stock rather than receiving the consideration set forth in
the Plan of Share Exchange. The following summary is not a complete statement of
statutory dissenters' rights of appraisal, and this summary is qualified by
reference to the applicable provisions of the ABCA, which are reproduced in full
in Annex F to this proxy statement/prospectus.
A shareholder must complete each step in the precise order prescribed by
the statute to perfect his dissenter's rights of appraisal.
Any holder of East Valley common stock who desires to dissent from the Plan
of Share Exchange shall (i) deliver to East Valley before the vote is taken at
the shareholders' meeting written notice of the shareholder's intent to demand
payment for the shareholder's shares if the Plan of Share Exchange is
effectuated, and (ii) not vote his shares in favor of the Plan of Share
Exchange.
31
If the Plan of Share Exchange is authorized at the shareholders' meeting,
East Valley will be liable for discharging the rights of the shareholders who
dissented from the Plan of Share Exchange ("Dissenting Shareholder") and shall,
no later than ten (10) days after approval of the Plan of Share Exchange, notify
the Dissenting Shareholders in writing of the location to where the Dissenting
Shareholders' demand for payment must be sent. The written notice must also set
a date by which East Valley must receive the payment demand (the "Notice Date"),
which date shall be at least thirty (30) but not more that sixty (60) days after
the date notice is provided to the Dissenting Shareholders. Each Dissenting
Shareholder so notified must demand payment, certify whether the shareholder
acquired beneficial ownership of the shares before the date of the first
announcement of the terms of the Plan of Share Exchange and deposit his
certificates representing shares of East Valley common stock in accordance with
the terms of the notice. A Dissenting Shareholder who does not demand payment or
deposit his certificates, if required, by the Notice Date is not entitled to
payment for his shares.
Upon receipt of a payment demand, East Valley shall pay each Dissenting
Shareholder the amount East Valley estimates to be the fair value of the
Dissenting Shareholder's shares plus accrued interest.
A Dissenting Shareholder may notify East Valley in writing of his own
estimate of the fair value of his shares and amount of interest due and either
demand payment of the Dissenting Shareholder's estimate, less any previous
payment, or reject East Valley's offer and demand payment of the fair value of
the Dissenting Shareholder's shares and interest due if either (i) the
Dissenting Shareholder believes that the amount paid by East Valley is less than
the fair value of his shares or that the interest due is incorrectly calculated,
(ii) East Valley fails to make payment within sixty (60) days after the date set
for demanding payment, or (iii) East Valley, having failed to effectuate the
exchange, does not return the Dissenting Shareholder's deposited certificates
within sixty (60) days after the date set for demanding payment. A Dissenting
Shareholder waives the right to demand payment pursuant to his own estimate of
the fair value of his shares unless he notifies East Valley of his demand in
writing within thirty (30) days after East Valley made or offered payment for
the Dissenting Shareholder's shares.
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 East
Valley 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 East Valley for those purposes generally
include individuals or entities that control, are controlled by, or are under
common control with, East Valley, and would not include shareholders who are not
officers, directors or principal shareholders of East Valley.
The affiliates of East Valley 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 East Valley have been publicly
filed by Capitol; or
(2) in violation of the Securities Act.
32
OPINION OF FINANCIAL ADVISOR
East Valley has retained JMP Financial, Inc. to provide a financial
fairness opinion in connection with the exchange. The East Valley board selected
JMP Financial, Inc. to act as East Valley'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 East Valley common stock is fair from a financial
point of view.
The full text of the written opinion of JMP Financial, Inc. is attached as
Annex B to this proxy statement/prospectus and sets forth, among other things,
the assumptions made, procedures followed, matters considered and limitations on
the scope of the review undertaken by JMP Financial, Inc. in rendering its
opinion. East Valley shareholders are urged to, and should, read the opinion
carefully and in its entirety. The opinion is directed to the East Valley board
and addresses only the fairness from a financial point of view of the
consideration received pursuant to the exchange as of the date of the opinion.
It does not address any other aspect of the exchange and does not constitute a
recommendation to any holder of East Valley 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 East Valley prepared by the management of
East Valley;
. discussed the past and current operations and financial condition and
the prospects of East Valley with senior executives of East Valley;
. 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 East Valley 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) SHARE MULTIPLES. In order to evaluate the value of Capitol's share
price, JMP Financial, Inc. reviewed the price-to-book value and
price-to-earning ratios ("Multiples"), and performance data, of
publicly traded stocks of all Michigan banks, all bank holding
companies, and Midwest banks of similar size to Capitol ($1 billion to
$5 billion in assets). No bank or bank holding company was identical
to Capitol. JMP Financial, Inc. did, however, note that the Capitol
share value Multiples were generally within the range of the Multiples
of comparable size banks and bank holding companies. In particular,
the price-to-book value and the price-to-earnings ratio of Capitol's
stock as of the date of evaluation were each within two percent of
both the median and average ratios of a comparative group of publicly
traded banks comprised of all 44 banks located in the Midwest with
assets greater than $1 billion and less than $5 billion. Accordingly,
there is a presumption that Capitol was fairly priced in the
securities market at the time of evaluation.
33
(2) CHANGE-OF-CONTROL MULTIPLES. 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 those transactions involved the transfer of control to the
acquiring institution. The price-to-book value ratio to be paid to
East Valley shareholders, 157 percent, to acquire its minority
position, is not materially different than the average or median
ratios paid in these change-of-control transactions.
(3) EAST VALLEY SHARE MULTIPLES. JMP Financial, Inc. also consulted a
private database (compiled from SNL Financial, a publishing firm which
compiles information about banks and other financial institutions) to
construct several groups of banks and bank holding companies it deemed
to be similar to East Valley, considering, but not limiting its
analysis to, such factors as size, financial condition and
performance, geography, and market performance. JMP Financial, Inc.
compared the price-to-book value and price-to-earnings ratios of these
comparative groups to the acquisition Multiples applicable to the
proposed East Valley exchange:
Relative Relative
Publicly Traded Price-to-Book Price/Earnings Number of
Comparison Group Ratio (a) Multiple (b) Banks
---------------- --------- ------------ -----
All Southwestern U.S.
banks--average 173.5% 14.2x 35
All U.S. banks with assets
less than $250 million: 101
Maximum 240.6% 66.8x
Median 104.6% 17.6x
Minimum 61.5% 6.6x
Average 111.3% 18.7x
Proposed East Valley
exchange 157%(c) (d)
(a) Ratio of market value of comparison group's banks' common stock
per share to underlying book value per share.
(b) Ratio of market value of comparison group's banks' common stock
per share to annualized earnings per share of such banks.
(c) Based on proposed exchange ratio and East Valley's book value per
share at June 30, 2002.
(d) Not applicable due to East Valley's operating losses.
Since the Southwest region does not include many small banks, JMP
Financial, Inc. also reviewed a group comprised solely of all the
publicly traded banks in the nation under $250 million assets shown in
the table above. Further, JMP Financial, Inc. noted that the average
and median price-to-book value ratios of a comparative group of
publicly traded banks comprised of all 4 banks in the Southwest with
assets of less than $250 million were 92 percent and 90 percent,
respectively, substantially less than the 157 percent to be received
by East Valley shareholders (of this group, the maximum multiple by
any bank was 111 percent of book value).
From the perspective of JMP Financial, Inc., the Multiple to be paid
to East Valley shareholders is significantly higher than that being
paid to minority shareholders of substantially all comparable
institutions as of the evaluation date.
34
(4) ILLIQUIDITY. On an individual basis there are substantial differences
between the financial and market condition and performance of East
Valley's stock and most other institutions. In the aggregate, the most
striking differences between East Valley and the various comparative
groups were earnings performance and illiquidity. Most other
commercial banks had positive earnings records, as opposed to a
negative history for East Valley. It may be argued that East Valley is
still a maturing institution and therefore direct comparisons of
earnings performance may be difficult. However, all of the publicly
traded banks which JMP Financial, Inc. reviewed and which it defined
as "small publicly traded banks" were listed on the Nasdaq National
Market System. The average weekly trading volume of these institutions
was about 1/2 of one percent of their outstanding stock. In other
words, these institutions provided minority shareholders with
reasonable liquidity. East Valley's stock, on the other hand, was not
publicly traded and was virtually, illiquid. A number of historical
studies and valuation practices estimate liquidity discounts in a
range from 10 to 30 percent, suggesting that the Multiples paid for
East Valley should be lower than those of comparable institutions by
that margin.
(5) NOT AN "ACQUISITION" PREMIUM. The proposed share exchange may be
characterized, at least casually, as an "acquisition" of East Valley
by Capitol. There may be a tendency to compare the acquisition
Multiples applicable to East Valley in this transaction (157 percent
of book value) to "acquisition" Multiples for other commercial banks
as reported in the media and private databases (the average and median
of which were 180 and 182 percent as referenced above). It is
important to note, however, that the "acquisition" Multiples reported
in the media are for change-of-control transactions, generally for 100
percent of the target's stock. In this case, Capitol proposes
acquiring less than 15 percent of the East Valley stock with no single
shareholder holding more than 2 percent. From the perspective of JMP
Financial, Inc., given that the transaction thus represented purchase
of a minority position, direct comparison to change-of-control
premiums may be misleading.
(6) JMP Financial, Inc. therefore concluded that the exchange was fair to
the shareholders of East Valley from a financial point of view.
The opinion and presentation of JMP Financial, Inc. to the East Valley
board was one of many factors taken into consideration by East Valley'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 East Valley board
with respect to the exchange or of whether the East Valley board would have been
willing to agree to a transaction with a different form or amount of
consideration.
The East Valley 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 engagement letter, JMP Financial, Inc. provided financial
advisory services and a financial fairness opinion in connection with the
exchange, and East Valley agreed to pay JMP Financial, Inc. a fee of $8,500 plus
out-of-pocket expenses. In addition, East Valley has agreed to indemnify JMP
Financial, Inc. and its affiliates, against certain liabilities and expenses,
including certain liabilities under the federal securities laws.
35
THE CLOSING
EFFECTIVE TIME
The exchange will be effective at 5:00 p.m., Mountain Time, on December 31,
2002, and will be closed as soon as possible after the vote at the meeting of
East Valley's shareholders. If the Plan of Share Exchange is approved, as of the
effective date, each outstanding share of East Valley 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 East Valley common stock owned by Capitol since Capitol's
organization will be unaffected by the exchange. Those shares will not be
exchanged for any securities of Capitol or other consideration.
PROCEDURES FOR SURRENDER OF CERTIFICATES; FRACTIONAL SHARES
As soon as reasonably practicable after the effective date of the exchange,
Capitol or Capitol's transfer agent will send you a letter of transmittal. The
letter of transmittal will contain instructions with respect to the surrender of
your East Valley 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 East Valley shares in
accordance with the instructions in the letter of transmittal, you will be
entitled to receive stock certificates representing shares of Capitol common
stock into which those East Valley 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 East Valley stock will represent only the right to receive the shares
of Capitol common stock into which shares of East Valley stock were converted in
the exchange, and the right to receive cash in lieu of fractional shares of
Capitol common stock as described below.
Until your East Valley 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 East Valley 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.
East Valley'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 East Valley stock that is not registered in
the records of East Valley has occurred, then, so long as the East Valley stock
certificates are accompanied by all documents required to evidence and effect
the transfer, as set forth in the transmittal letter and accompanying
instructions, a certificate representing the proper number of shares of Capitol
common stock will be issued to a person other than the person in whose name the
certificate so surrendered is registered, together with a cash payment in lieu
of fractional shares, if any, and payment of dividends or distributions, if any.
No fractional share of Capitol common stock will be issued upon surrender
of certificates previously representing East Valley 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.
36
FEES AND EXPENSES
Whether or not the exchange is completed, Capitol and East Valley 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 East Valley 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 East Valley 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.
37
THE ANNUAL SHAREHOLDERS' MEETING
DATE, TIME AND PLACE
The shareholders' meeting will be held on December 19, 2002 at East Valley
Community Bank, 1940 North Alma School Road, Chandler, Arizona 85224 at 9:00
a.m., local time.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETING
At the shareholders' meeting, holders of East Valley common stock will vote
on whether to approve the exchange. See "The Exchange". Shareholders will also
vote on the election of directors for East Valley. See "Election of Directors".
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Holders of record of East Valley common stock at the close of business on
October 31, 2002, the record date for the shareholders' meeting, are entitled to
receive notice of and to vote at the shareholders' meeting. At October 31, 2002,
300,000 shares of East Valley common stock were issued and outstanding and held
by approximately 89 holders of record. Capitol held 256,423 shares of East
Valley common stock on that date and 43,577 were held by shareholders other than
Capitol.
A majority of the shares of the East Valley 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 East Valley common stock on the record date are
each entitled to one vote per share with respect to approval of the exchange at
East Valley's shareholders' meeting.
East Valley 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. East
Valley is not aware of any matters expected to be presented at the meeting other
than as described in the notice of the meeting.
VOTES REQUIRED
Although approval of the exchange by two-thirds of the shares entitled to
vote is all that is required by law, East Valley and Capitol have agreed that
approval of the exchange will require the affirmative vote of a majority of the
shares of East Valley common stock outstanding on the record date, excluding the
85.47% of East Valley'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 October 31, 2002, the directors and
executive officers of East Valley and their affiliates were entitled to vote
approximately 4,000 shares of East Valley common stock. These shares represent
approximately 1.33% of the outstanding shares of East Valley common stock and
9.18% of East Valley's shares held by shareholders other than Capitol. The
directors and executive officers have agreed to vote their shares of East Valley
common stock in favor of the exchange.
38
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 East Valley stock will be
mailed by Capitol to former East Valley 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 East Valley, by a later-dated proxy signed and returned by mail or by
attending the shareholders' meeting and voting in person. Attendance at East
Valley's annual 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:
East Valley Community Bank
1940 North Alma School Road
Chandler, Arizona 85224
Attn: Gerry J. Smith, President
If you require assistance in changing or revoking a proxy, you should
contact Gerry Smith at the address above or at phone number (480) 726-6500.
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 East Valley will pay the cost of solicitation of proxies. In
addition to solicitation by mail, the directors, officers and employees of East
Valley may also solicit proxies from shareholders by telephone, telecopy,
telegram or in person.
39
COMPARISON OF SHAREHOLDER RIGHTS
As a result of the exchange, holders of shares of East Valley stock will
become holders of shares of Capitol common stock. This comparison of shareholder
rights is not intended to be complete and is qualified by reference to the
Arizona Revised Statutes, as well as to East Valley's articles of incorporation
and by-laws and the Michigan Business Corporation Act as well as to Capitol's
articles of incorporation and by-laws, (copies of which are on file with the
SEC).
The following summary compares various rights, privileges and restrictions
applicable to shareholders of East Valley and Capitol:
East Valley Capitol
----------- -------
Authorized Capital Stock 500,000 25,000,000
Preemptive Rights None None
Quorum Requirements Majority Majority
Special Meetings of Stockholders Called by CEO, majority of the Called by CEO, majority of the
board or shareholders board or shareholders
representing 25% of the shares representing 25% of the shares
entitled to vote entitled to vote
Stockholder Action by Written Consent Yes, if unanimous Yes, if unanimous
Inspection of Voting List of Stockholders Inspector may be appointed by Inspector may be appointed by
the Board, by the person the Board, by the person
presiding at shareholders' presiding at shareholders'
meeting or by the request of a meeting or by the request of a
shareholder shareholder
Classification of the Board of Directors No No
Election of the Board of Directors Annually by shareholders Annually by shareholders
Cumulative Voting Yes No
Number of Directors 5-25 5-25
Removal of Directors By a majority of the By a majority of the
outstanding shares of stock outstanding shares of stock
Vacancies on the Board of Directors May be filled by a majority of May be filled by a majority of
the Board of Directors the Board of Directors
Liability of Directors Eliminated to the fullest Eliminated to the fullest
extent provided by law extent provided by law
Indemnification of Directors, Officers,
Employees or Agents Yes Yes
Amendments to Articles of Incorporation By a majority of the By a majority of the
outstanding shares outstanding shares
Amendments to Bylaws By majority of directors By majority of directors
Appraisal/Dissenters' Rights Arizona law provides for
appraisal rights No
40
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 September 30, 2002, 11,181,368 shares of common stock were
outstanding. UMB Bank, n.a., serves as transfer agent and registrar for
Capitol's common stock.
Arizona 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 [Arizona Revised Statutes ("A.R.S.")].
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 have
cumulative voting rights, which means that a stockholder is entitled to cumulate
their votes by multiplying the number of votes they are entitled to cast by the
number of directors for whom they are entitled to vote, and to cast the product
for a single candidate or distribute the same amongst several candidates. 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
Arizona 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
Capitol. Although Capitol does not currently contemplate taking that action,
shares of Capitol 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.
41
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 A.R.S. contains other provisions which could be utilized by
Capitol to impede efforts to acquire control of Capitol. Those provisions
include the following:
CONTROL SHARE ACQUISITIONS. The A.R.S. contains an article 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 Arizona corporations.
The Arizona article 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 the article, 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 are precluded
from voting on the issue of whether the control shares shall be accorded voting
rights. The article does not affect the voting rights of shares owned by an
acquiring person prior to the control share acquisition.
The article entitles corporations to redeem control shares from the
acquiring person under certain circumstances.
The article applies only to an "issuing public corporation." Capitol falls
within the statutory definition of an "issuing public corporation." The article
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 article.
FAIR PRICE ACT. Certain provisions of the A.R.S. 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.
42
As of October 31, 2002 Capitol's management beneficially owned (including
immediately exercisable stock options and warrants) control of approximately
30.26% 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.
43
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 East Valley 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 East Valley 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 September 30, 2002
* 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
44
In addition, all subsequent documents filed with the SEC by Capitol
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 after the date of this proxy statement/ prospectus shall be deemed to be
incorporated by reference into this proxy statement/prospectus and to be a part
hereof from the date of filing such documents. Any statement contained in this
proxy statement/prospectus or in a document incorporated or deemed to be
incorporated by reference in this prospectus or another such document shall be
deemed to be modified or superseded for purposes of this proxy
statement/prospectus to the extent that a statement contained in this proxy
statement/prospectus or another such document or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modified or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified superseded, to constitute a part of
this proxy statement/prospectus.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY DECEMBER 2, 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 East Valley, 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 East Valley has been supplied by East Valley.
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 East Valley 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.
45
[This page intentionally left blank]
46
ANNEX A
PLAN OF SHARE EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into effective August 19,
2002 between and among CAPITOL BANCORP LIMITED, a Michigan corporation
("Capitol") and the SHAREHOLDERS of EAST VALLEY COMMUNITY BANK ("East Valley").
R E C I T A L S
A. East Valley is an Arizona banking corporation which commenced the
business of banking June 30, 1999.
B. Capitol is the holder of 256,423 shares (85.47%) of the duly issued and
outstanding common stock of East Valley ("East Valley common stock").
C. East Valley 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. East Valley's Board of Directors has determined that it would be in the
best interest of East Valley's stockholders to exchange their shares of stock in
East Valley 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 East Valley common stock
will exchange his, her or their shares of East Valley common stock for shares of
Capitol common stock according to an exchange ratio determined as follows:
EAST VALLEY SHARE VALUE. The value of each share of East Valley common
stock shall be $19.00.
CAPITOL SHARE VALUE. The share 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
East Valley Share Value by the Capitol Share Value.
Each East Valley shareholder (except Capitol) will receive shares of
Capitol common stock in exchange for his, her or their East Valley common stock
calculated by multiplying the number of shares of East Valley 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 East Valley 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 East Valley (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 Arizona State Banking Department shall not have issued
any objection to the Plan.
3. FAIRNESS OPINION. The Board of Directors of East Valley 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 East
Valley.
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 East Valley (except to the extent of the cash received in lieu of fractional
shares).
5. SURRENDER OF CERTIFICATES. Each shareholder of East Valley common
stock shall surrender to Capitol his, her or their certificate(s) for shares of
East Valley 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 East Valley 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 East Valley
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 East Valley on the effective date of this
Plan, and the East Valley certificate(s) shall thereafter be null and void and
of no force or effect whatever.
6. NEW EAST VALLEY CERTIFICATE. East Valley 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
November 14, 2002
Board of Directors
East Valley Community Bank
1940 North Alma School Road
Chandler, AZ 85224
Ladies and Gentlemen:
We have examined the proposed Plan of Share Exchange (the "Agreement")
dated August 19, 2002, to be entered into between Capitol Bancorp Limited, a
Michigan Corporation ("CBCL") and the shareholders (the "Shareholders") of East
Valley Community Bank ("East Valley"), an Arizona Corporation by which CBCL
shall acquire from the Shareholders their outstanding shares of East Valley, 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 East Valley's common stock, not already owned by CBCL, and issued
and outstanding as of December 31, 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 consolidated financial statements of East Valley and CBCL for
the years ended December 31, 2001, 2000 and 1999, as available;
* Unaudited financial statements of East Valley for the period ended
September 30, 2002;
* Certain unaudited internal financial information concerning the
capital ratios of East Valley;
* 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 East Valley;
* 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 East
Valley's and CBCL's common stock to the extent reasonably available.
As to East Valley, such review was limited to its initial offering of
common stock.
Page Two
Board of Directors
East Valley Community Bank
November 14, 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 East Valley or CBCL or any of its subsidiaries and we have not
been furnished with any such evaluation or appraisal, except as referenced
above. 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 East Valley's loan loss reserves
are adequate in all material respects and that, in the aggregate, other
conditions at CBCL and East Valley are satisfactory and this opinion is
conditioned upon such assumption. We have also assumed that there has been no
material change in East Valley'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 East Valley 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 affect 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
East Valley 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
November 14, 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 East Valley Community Bank ("East Valley") dated as of
August 19, 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 East Valley 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 East Valley, as summarized below, and upon such
other documents as we have deemed appropriate, including the information about
Capitol and East Valley 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 East Valley 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 East
Valley shareholder holds the shares of East Valley 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)
East Valley shareholders, if any, who received their East Valley common stock
through the exercise of employee stock options or otherwise as compensation;
(vi) East Valley shareholders who are not U.S. persons; and (vii) East Valley
shareholders who hold East Valley 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
November 14, 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
East Valley shareholders will be approximately equal to the fair market value of
the East Valley common stock surrendered under the Plan.
2. Capitol has no plan or intention to liquidate East Valley; to merge East
Valley into another corporation; to cause East Valley 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 East Valley
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, East Valley, and the shareholders of East Valley 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 East
Valley for their common stock of East Valley is voting common stock of Capitol.
Further, no liabilities of East Valley or any East Valley shareholder will be
assumed by Capitol, nor will any of the East Valley 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 East Valley common stock other than the East
Valley common stock first acquired by Capitol upon the formation of East Valley
in June of 1999.
7. Capitol will not make any cash payments, directly or indirectly, to
dissenting shareholders of East Valley, nor will Capitol, directly or
indirectly, reimburse East Valley for any payments made by East Valley to
dissenting shareholders.
8. Any cash payment made by Capitol to East Valley 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
November 14, 2002
Page 3
Our opinion is also predicated on the accuracy of the following
representations provided to us by East Valley:
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 East Valley 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
East Valley shareholders will be approximately equal to the fair market value of
the East Valley common stock surrendered under the Plan.
3. East Valley has no plan or intention to issue additional shares of its
stock that would result in Capitol losing "control" of East Valley within the
meaning of Section 368(c) of the Code.
4. Capitol, East Valley, and the shareholders of East Valley will pay their
respective expenses, if any, incurred in connection with the Plan.
5. At the time the Plan is executed, East Valley 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 East Valley.
6. Following the execution of the Plan, East Valley will continue its
historic business or use a significant portion of its historic business assets
in a business.
7. East Valley is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
8. East Valley 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 East Valley 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 East
Valley who exchange their East Valley 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
East Valley shareholders who exchange all of their East Valley common stock for
Capitol common stock in the exchange will be the same as the aggregate tax basis
of the East Valley 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
November 14, 2002
Page 4
4) The holding period of the Capitol common stock received by a former
shareholder of East Valley will include the holding period of shares of East
Valley common stock surrendered in the exchange; and
5) A holder of East Valley 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 East Valley 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 East
Valley 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 EAST VALLEY COMMUNITY BANK
Management's discussion and analysis of financial condition
and results of operations............................................... D-2
Condensed interim financial statements as of and for the nine months
ended September 30, 2002 and 2001 (unaudited)........................... D-5
Audited financial statements as of and for the periods ended
December 31, 2001, 2000 and 1999........................................ D-11
D-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EAST VALLEY COMMUNITY BANK
PERIODS ENDED SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
FINANCIAL CONDITION
East Valley Community Bank is engaged in commercial banking activities from its
sole location in Chandler, Arizona. From its inception in June 1999, 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 $35.5 million at September 30, 2002, a slight decrease
from $39.6 million at December 31, 2001. The Bank's total assets approximated
$34.4 million at year-end 2000.
Total portfolio loans approximated $26.8 million at September 30, 2002, a
decrease of approximately $600,000 from the $27.4 million level at December 31,
2001. At December 31, 2000, total portfolio loans approximated $25.9 million.
Portfolio loan growth since 1999 has been significant. Commercial loans
approximated 98% of total portfolio loans at September 30, 2002 consistent with
the Bank's emphasis on commercial lending activities.
The allowance for loan losses at September 30, 2002 approximated $389,000 or
1.45% of total portfolio loans, a decrease over the year-end 2001 ratio of
1.54%.
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.
Net loan charge-offs totaled $226,000 for the nine-month 2002 period. There were
no loans charged-off in 2001, 2000 or 1999.
The Bank's growth has been funded primarily by deposits, most of which are
interest-bearing. Total deposits approximated $30.9 million at September 30,
2002, a decrease of approximately $4.8 million from the $35.7 million level at
December 31, 2001. Deposits increased significantly in 2001 from the $31.3
million level at the beginning of the year.
The Bank emphasizes obtaining noninterest-bearing deposits as a means to reduce
its cost of funds. Noninterest-bearing deposits approximated $4.6 million at
September 30, 2002 or about 15% of total deposits, a decrease of approximately
$1.8 million from December 31, 2001. Noninterest-bearing deposits fluctuate
significantly from day to day, depending upon customer account activity.
Stockholders' equity approximated $3.5 million at September 30, 2002 or
approximately 10.0% of total assets. Capital adequacy is discussed elsewhere in
this narrative.
D-2
RESULTS OF OPERATIONS
The Bank's net loss for the nine months ended September 30, 2002 approximated
$275,000, compared with $35,000 in the corresponding 2001 period. The larger
interim 2002 net loss was primarily the result of lower net interest income for
the period, a higher provision for loan losses and increased noninterest
expense.
Net income for the Bank in 2001 was $18,000. 2000 represented the Bank's first
full calendar year of operations, with a net loss of $532,000, compared to a net
loss of $673,000 in the 1999 period of about six months.
The principal source of operating revenues is interest income. Total interest
income for the nine months ended September 30, 2002 approximated $1.9 million,
compared with $2.5 million in the nine-month 2001 period. The interim 2002
decrease in net interest income relates primarily to lower interest rates and
the differing timing of interest rate changes on interest-earning assets versus
interest-bearing liabilities. For the year ended December 31, 2001, total
interest income approximated $3.2 million, compared with $1.8 million in 2000
and $257,000 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 $881,000 for the
nine months ended September 30, 2002, compared with $1.3 million for the
nine-month 2001 period. For the year ended December 31, 2001, total interest
expense approximated $1.6 million, compared with $854,000 in 2000 and $86,000 in
1999.
Net interest income approximated $1.0 million for the nine months ended
September 30, 2002, compared with $1.2 million for the 2001 corresponding
period. Net interest income for the year ended December 31, 2001 approximated
$1.6 million, significantly more than the $901,000 in 2000 and $171,000 in 1999.
Provisions for loan losses were $192,000 and $66,000 for the nine months ended
September 30, 2002 and 2001, respectively ($66,000 for the year ended December
31, 2001, $313,000 in 2000 and $44,000 in 1999). Increases in the provision for
loan losses in 2000 related primarily to loan growth; in the interim 2002 period
such increase resulted from changes in asset quality and loan charge-offs. The
provision for loan losses is based upon amounts necessary to maintain the
allowance for loan losses based on management's analysis of allowance
requirements discussed previously.
Noninterest income has increased consistently during the Bank's period of
existence. Total noninterest income approximated $133,000 for the nine months
ended September 30, 2002 ($44,000 in the corresponding period in 2001) and
approximated $66,000 for the year ended December 31, 2001, $21,000 in 2000 and
$3,000 in 1999.
Noninterest expenses have increased significantly during the period of the
Bank's existence. Total noninterest expense approximated $1.4 million for the
nine months ended September 30, 2002, compared with $1.2 million for the
corresponding 2001 period. For the year ended December 31, 2001, total
noninterest expense approximated $1.5 million, compared with $1.4 million in
2000 and $1.1 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 $2.2 million at September 30, 2002,
compared with $5.5 million at December 31, 2001 and $3.2 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 September 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. It also has not engaged in active trading of its investments
and has no intention of doing so in the foreseeable future. At September 30,
2002 and December 31, 2001, the Bank had approximately $113,000 and $163,000,
respectively, of investment securities classified as available for sale which
can be utilized to meet various liquidity needs as they arise.
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 East Valley
Community Bank, as a young bank, it is subject to a more restrictive requirement
than is applicable to most banks inasmuch as the Bank must maintain a
capital-to-asset ratio of not less than 8% for its first three years of
operation. In the opinion of management, the Bank meets or exceeds regulatory
capital requirements to which it is subject.
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 September 30, 2002 and
December 31, 2001, the Bank had no recorded goodwill.
Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, becomes
effective January 1, 2003. Management has not completed its analysis of this new
standard; however, implementation of this new standard is not expected to have a
material impact on the Bank's financial statements.
Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, became effective on January 1, 2002. This
new standard did not have a material impact on the Bank's financial statements.
Statement No. 145, which updates, clarifies and simplifies certain existing
accounting pronouncements (rescission of Statements No. 4, 44 and 64, amendment
of Statement No. 13 and technical corrections) beginning at various dates in
2002/2003 is not expected to have a material effect on the Bank's financial
statements.
Statement No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, becomes effective January 1, 2003. Management has not completed its
analysis of this new standard; however, it is not expected to have a material
impact on the Bank's financial statements, upon implementation.
Statement No.147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, amends prior
standards relating to some acquisitions of financial institutions, requiring
such transactions to be accounted for in accordance with Statements No. 141 and
142 and is generally effective October 1, 2002. Management has not completed its
analysis of this new standard; however, it is not expected to have a material
effect on the Bank's financial statements, upon implementation.
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 East Valley's consolidated financial statements.
D-4
EAST VALLEY COMMUNITY BANK
------
CONDENSED INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
D-5
BALANCE SHEETS
EAST VALLEY COMMUNITY BANK
September 30 December 31
2002 2001
------------ ------------
(unaudited)
ASSETS
Cash and due from banks $ 680,696 $ 966,842
Interest-bearing deposits with banks 1,554,325 1,503,434
Federal funds sold 3,000,000
------------ ------------
Cash and cash equivalents 2,235,021 5,470,276
Loans held for resale 5,724,542 6,181,359
Investment securities:
Available for sale, carried at market value 112,771 162,780
Held for long-term investment, carried at
amortized cost which approximates
market value 86,600
------------ ------------
Total investment securities 199,371 162,780
Portfolio loans:
Commercial 26,125,567 26,644,584
Real estate mortgage 210,650 218,514
Installment 461,038 539,262
------------ ------------
Total portfolio loans 26,797,255 27,402,360
Less allowance for loan losses (389,000) (423,000)
------------ ------------
Net portfolio loans 26,408,255 26,979,360
Premises and equipment 539,627 589,008
Accrued interest income 130,717 141,427
Other assets 252,213 66,328
------------ ------------
TOTAL ASSETS $ 35,489,746 $ 39,590,538
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 4,586,517 $ 6,408,328
Interest-bearing 26,269,301 29,287,196
------------ ------------
Total deposits 30,855,818 35,695,524
Federal funds purchased 1,000,000
Accrued interest on deposits and other liabilities 93,139 79,935
------------ ------------
Total liabilities 31,948,957 35,775,459
STOCKHOLDERS' EQUITY:
Common stock, par value $5.00 per share,
500,000 shares authorized;
300,000 shares issued and outstanding 1,500,000 1,500,000
Surplus 3,500,000 3,500,000
Retained-earnings deficit (1,462,192) (1,187,283)
Market value adjustment (net of tax effect) for
investment securities available for sale 2,981 2,362
------------ ------------
Total stockholders' equity 3,540,789 3,815,079
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 35,489,746 $ 39,590,538
============ ============
See notes to interim financial statements.
D-6
STATEMENTS OF OPERATIONS (UNAUDITED)
EAST VALLEY COMMUNITY BANK
Nine Months Ended
September 30
--------------------------
2002 2001
----------- -----------
Interest income:
Portfolio loans (including fees) $ 1,634,585 $ 2,074,013
Loans held for resale 208,600 310,892
Taxable investment securities 6,255 9,800
Interest-bearing deposits with banks 5,799 6,164
Federal funds sold and other 72,759 63,942
----------- -----------
Total interest income 1,927,998 2,464,811
Interest expense:
Demand deposits 106,543 227,600
Savings deposits 4,028 1,477
Time deposits 769,776 1,047,860
Other 628 2,032
----------- -----------
Total interest expense 880,975 1,278,969
----------- -----------
Net interest income 1,047,023 1,185,842
Provision for loan losses 192,456 66,000
----------- -----------
Net interest income after
provision for loan losses 854,567 1,119,842
Noninterest income:
Service charges on deposit accounts 78,315 40,576
Other 54,193 3,279
----------- -----------
Total noninterest income 132,508 43,855
Noninterest expense:
Salaries and employee benefits 601,115 499,542
Occupancy 162,386 164,757
Other 638,483 551,780
----------- -----------
Total noninterest expense 1,401,984 1,216,079
----------- -----------
Loss before federal income taxes (414,909) (52,382)
Federal income taxes (benefit) (140,000) (17,000)
----------- -----------
NET LOSS $ (274,909) $ (35,382)
=========== ===========
NET LOSS PER SHARE (basic and diluted) $ (0.92) $ (0.12)
=========== ===========
See notes to interim financial statements.
D-7
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
EAST VALLEY COMMUNITY BANK
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Surplus Deficit Income Total
----------- ----------- ----------- ----------- -----------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Balances at January 1, 2001 $ 1,500,000 $ 2,700,000 $(1,205,177) $ -0- $ 2,994,823
Supplemental capital infusions from parent
company 300,000 300,000
Components of comprehensive loss:
Net loss for the period (35,382) (35,382)
Market value adjustment for investment
securities available for sale (net of tax effect) 3,271 3,271
-----------
Comprehensive loss for the period (32,111)
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 2001 $ 1,500,000 $ 3,000,000 $(1,240,559) $ 3,271 $ 3,262,712
=========== =========== =========== =========== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2002
Balances at January 1, 2002 $ 1,500,000 $ 3,500,000 $(1,187,283) $ 2,362 $ 3,815,079
Components of comprehensive loss:
Net loss for the period (274,909) (274,909)
Market value adjustment for investment
securities available for sale (net of tax effect) 619 619
-----------
Comprehensive loss for the period (274,290)
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 2002 $ 1,500,000 $ 3,500,000 $(1,462,192) $ 2,981 $ 3,540,789
=========== =========== =========== =========== ===========
See notes to interim financial statements.
D-8
STATEMENTS OF CASH FLOWS (UNAUDITED)
EAST VALLEY COMMUNITY BANK
Nine Months Ended
September 30
--------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net loss for the period $ (274,909) $ (35,382)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for loan losses 192,456 66,000
Depreciation of premises and equipment 103,525 102,949
Net amortization of investment security premiums 627 168
Net decrease (increase) in loans held for resale 456,817 (1,629,093)
Decrease (increase) in accrued interest income and
other assets (175,175) 628,137
Increase (decrease) in accrued interest on deposits and
other liabilities 12,883 40,661
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 316,224 (826,560)
INVESTING ACTIVITIES
Proceeds from maturities of investment securities
available for sale 50,322 29,633
Purchases of investment securities held for long-term
investment (86,600)
Net decrease (increase) in portfolio loans 378,649 (1,125,087)
Purchases of premises and equipment (54,144) (895)
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 288,227 (1,096,349)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (3,520,293) 1,647,496
Net increase (decrease) in certificates of deposit (1,319,413) 2,553,200
Short-term borrowings 1,000,000
Supplemental capital infusions from majority shareholder 300,000
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (3,839,706) 4,500,696
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,235,255) 2,577,787
Cash and cash equivalents at beginning of period 5,470,276 3,238,263
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 2,235,021 $ 5,816,050
=========== ===========
See notes to interim financial statements.
D-9
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
EAST VALLEY COMMUNITY BANK
NOTE A--BASIS OF PRESENTATION
The accompanying condensed financial statements of East Valley Community
Bank have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature which East Valley considers necessary for a fair presentation of the
interim periods.
The results of operations for the nine-month period ended September 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
September 30, 2002, the Bank had no recorded goodwill.
Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, becomes
effective January 1, 2003. Management has not completed its analysis of this new
standard; however, implementation of this new standard is not expected to have a
material impact on the Bank's financial statements.
Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, became effective on January 1, 2002.
This new standard did not have a material impact on the Bank's financial
statements.
Statement No. 145, which updates, clarifies and simplifies certain existing
accounting pronouncements (rescission of Statements No. 4, 44 and 64, amendment
of Statement No. 13 and technical corrections) beginning at various dates in
2002/2003 is not expected to have a material effect on the Bank's financial
statements.
Statement No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, becomes effective January 1, 2003. Management has not completed its
analysis of this new standard; however, it is not expected to have a material
impact on the Bank's financial statements, upon implementation.
Statement No.147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, amends
prior standards relating to some acquisitions of financial institutions,
requiring such transactions to be accounted for in accordance with Statements
No. 141 and 142 and is generally effective October 1, 2002. Management has not
completed its analysis of this new standard; however, it is not expected to have
a material effect on the Bank's financial statements, upon implementation.
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 East Valley's consolidated financial statements.
D-10
EAST VALLEY COMMUNITY BANK
FINANCIAL STATEMENTS
PERIODS ENDED DECEMBER 31, 2001, 2000 AND 1999
D-11
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
East Valley Community Bank
We have audited the accompanying balance sheets of East Valley Community Bank as
of December 31, 2001 and 2000, and the related statements of operations, changes
in stockholders' equity and cash flows for the years ended December 31, 2001 and
2000 and the period from June 1, 1999 (date of inception) to December 31, 1999.
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 East Valley Community Bank as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years ended December 31, 2001 and 2000 and the period from June 1,
1999 (date of inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Los Angeles, California
January 31, 2002
D-12
BALANCE SHEETS
EAST VALLEY COMMUNITY BANK
December 31
----------------------------
2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 966,842 $ 1,038,173
Interest-bearing deposits with banks 1,503,434
Federal funds sold 3,000,000 2,200,090
------------ ------------
Cash and cash equivalents 5,470,276 3,238,263
Loans held for resale 6,181,359 3,789,695
Investment securities available for sale, carried
at market value--Note B 162,780 201,652
Portfolio loans--Note C:
Commercial 26,644,584 25,383,967
Real estate mortgage 218,514 23,919
Installment 539,262 529,287
------------ ------------
Total portfolio loans 27,402,360 25,937,173
Less allowance for loan losses (423,000) (357,000)
------------ ------------
Net portfolio loans 26,979,360 25,580,173
Premises and equipment--Note E 589,008 723,169
Accrued interest income 141,427 148,682
Other assets 66,328 709,869
------------ ------------
TOTAL ASSETS $ 39,590,538 $ 34,391,503
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 6,408,328 $ 3,811,239
Interest-bearing--Note G 29,287,196 27,512,806
------------ ------------
Total deposits 35,695,524 31,324,045
Accrued interest on deposits and other liabilities 79,935 72,635
------------ ------------
Total liabilities 35,775,459 31,396,680
STOCKHOLDERS' EQUITY--Notes K and L:
Common stock, par value $5.00 per share,
500,000 shares authorized;
300,000 shares issued and outstanding 1,500,000 1,500,000
Surplus 3,500,000 2,700,000
Retained-earnings deficit (1,187,283) (1,205,177)
Market value adjustment (net of tax effect) for
investment securities available for sale 2,362
------------ ------------
Total stockholders' equity 3,815,079 2,994,823
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 39,590,538 $ 34,391,503
============ ============
See notes to financial statements
D-13
STATEMENTS OF OPERATIONS
EAST VALLEY COMMUNITY BANK
Year Ended December 31 Period Ended
------------------------- December 31
2001 2000 1999
----------- ----------- -----------
Interest income:
Portfolio loans (including fees) $ 2,680,759 $ 1,481,732 $ 166,710
Loans held for resale 419,261 115,487
Taxable investment securities 11,469 5,347 56,976
Federal funds sold 70,929 141,189 5,298
Other 12,308 11,433 28,070
----------- ----------- -----------
Total interest income 3,194,726 1,755,188 257,054
Interest expense:
Deposits 1,636,548 852,581 86,405
Other 2,032 1,225
----------- ----------- -----------
Total interest expense 1,638,580 853,806 86,405
----------- ----------- -----------
Net interest income 1,556,146 901,382 170,649
Provision for loan losses--Note C 66,000 313,000 44,000
----------- ----------- -----------
Net interest income after provision
for loan losses 1,490,146 588,382 126,649
Noninterest income:
Service charges on deposit accounts 59,942 16,919 1,755
Other 5,732 4,265 964
----------- ----------- -----------
Total noninterest income 65,674 21,184 2,719
Noninterest expense:
Salaries and employee benefits 690,906 612,195 347,702
Occupancy 224,243 180,001 84,109
Equipment rent, depreciation and maintenance 126,409 112,034 48,113
Other 484,368 511,557 668,400
----------- ----------- -----------
Total noninterest expense 1,525,926 1,415,787 1,148,324
----------- ----------- -----------
Income (loss) before federal income taxes 29,894 (806,221) (1,018,956)
Federal income taxes (benefit)--Note F 12,000 (274,000) (346,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 17,894 $ (532,221) $ (672,956)
=========== =========== ===========
NET INCOME (LOSS) PER
SHARE (basic and diluted) $ 0.06 $ (1.77) $ (2.24)
=========== =========== ===========
See notes to financial statements
D-14
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
EAST VALLEY COMMUNITY BANK
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Surplus Deficit Income Total
----------- ----------- ----------- ----------- -----------
Balances at June 1, 1999, beginning of $ -0- $ -0- $ -0- $ -0- $ -0-
period
Issuance of 300,000 shares of common stock
for cash consideration of $14.00 per share in
conjunction with formation of Bank 1,500,000 2,700,000 4,200,000
Components of comprehensive income (loss):
Net loss for 1999 period (672,956) (672,956)
Market value adjustment for investment
securities available for sale (net of
income tax effect) 958 958
-----------
Comprehensive loss for 1999 (671,998)
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1999 1,500,000 2,700,000 (672,956) 958 3,528,002
Components of comprehensive income (loss):
Net loss for 2000 (532,221) (532,221)
Market value adjustment for investment
securities available for sale (net of
income tax effect) (958) (958)
-----------
Comprehensive loss for 2000 (533,179)
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2000 1,500,000 2,700,000 (1,205,177) -0- 2,994,823
Supplemental capital infusions from Sun
Community Bancorp Limited 800,000 800,000
Components of comprehensive income:
Net income for 2001 17,894 17,894
Market value adjustment for investment
securities available for sale (net of
income tax effect 2,362 2,362
-----------
Comprehensive income for 2001 20,256
----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2001 $ 1,500,000 $ 3,500,000 $(1,187,283) $ 2,362 $ 3,815,079
=========== =========== =========== =========== ===========
See notes to financial statements.
D-15
STATEMENTS OF CASH FLOWS
EAST VALLEY COMMUNITY BANK
Year Ended December 31 Period Ended
---------------------------- December 31
2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) for the period $ 17,894 $ (532,221) $ (672,956)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Provision for loan losses 66,000 313,000 44,000
Depreciation of premises and equipment 137,235 138,025 46,755
Net amortization (accretion) of investment
security premiums 353 (2,072) (4,052)
Deferred income taxes 620,000 (274,000) (346,000)
Originations and purchases of loans held for resale (89,931,332) (34,253,137)
Proceeds from sales of loans held for resale 87,539,668 30,463,442
Decrease (increase) in accrued interest income and
other assets 29,580 (158,352) (75,727)
Increase (decrease) in accrued interest on deposits
and other liabilities 7,300 (44,983) 117,618
------------ ------------ ------------
NET CASH USED BY OPERATING
ACTIVITIES (1,513,302) (4,350,298) (890,362)
INVESTING ACTIVITIES
Proceeds from sale of investment securities
available for sale 2,000,000
Proceeds from calls and maturities of investment
securities available for sale 42,097
Purchases of investment securities available for sale (200,000) (2,000,000)
Net increase in portfolio loans (1,465,187) (21,602,668) (4,334,505)
Purchases of premises and equipment (3,074) (9,813) (898,136)
------------ ------------ ------------
NET CASH USED BY INVESTING
ACTIVITIES (1,426,164) (19,812,481) (7,232,641)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 980,510 8,673,531 4,086,108
Net increase in certificates of deposit 3,390,969 15,539,526 3,024,880
Net proceeds from issuance of common stock 4,200,000
Supplemental capital infusions from majority
shareholder 800,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,171,479 24,213,057 11,310,988
------------ ------------ ------------
INCREASE IN CASH AND CASH
EQUIVALENTS 2,232,013 50,278 3,187,985
Cash and cash equivalents at beginning of period 3,238,263 3,187,985 -0-
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,470,276 $ 3,238,263 $ 3,187,985
============ ============ ============
See notes to financial statements.
D-16
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION: East Valley Community Bank (the
"Bank") is a full-service commercial bank located in Chandler, Arizona. The Bank
commenced operations in June 1999. The Bank is 85% owned by Sun Community
Bancorp Limited, a bank development company headquartered in Phoenix, Arizona.
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.
LOANS HELD FOR RESALE: Loans held for resale represent residential real estate
mortgage loans held for sale into the secondary market. Loans held for resale
are stated at the aggregate lower of cost or market.
INVESTMENT SECURITIES: Investment securities available for sale 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 (none at December 31, 2001 and 2000)
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.
D-17
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. 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 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.
D-18
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
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, Sun Community Bancorp Limited. 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: Basic net income (loss) per share is based on the
weighted average number of common shares outstanding (300,000 shares). Diluted
net income (loss) per share includes the dilutive effect of stock options
outstanding (see Note K).
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income (loss) and
certain other items which are charged or credited to stockholders' equity. For
the periods presented, the Bank's only element of comprehensive income other
than net income (loss) was the net change in the market value adjustment for
investment securities available for sale. Accordingly, the elements and total of
comprehensive income are shown within the statement of changes in stockholders'
equity presented herein.
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.
D-19
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
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 available for sale consisted of a United States government
agency security at December 31, 2001 and 2000, which is scheduled to mature in
2030 and had an amortized cost of $159,203 and $151,239, respectively.
Gross unrealized gains on such investment securities approximated $3,600 at
December 31, 2001 (none at December 31, 2000). Gross realized gains and losses
from sales and calls of investment securities were insignificant for each of the
periods presented.
D-20
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE C--LOANS
Transactions in the allowance for loan losses are summarized below:
2001 2000 1999
-------- -------- --------
Balance at January 1 $357,000 $ 44,000 $ --
Provision charged to operations 66,000 313,000 44,000
Loans charged off (deduction) -- -- --
Recoveries -- -- --
-------- -------- --------
Balance at December 31 $423,000 $357,000 $ 44,000
======== ======== ========
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)
as of December 31, 2001 (none in 2000) are summarized below:
Nonaccrual loans:
Commercial $432,000
Real estate --
Installment --
--------
Total nonaccrual loans 432,000
Past due (>90 days) loans:
Commercial --
Real estate --
Installment --
--------
Total past due loans -0-
--------
Total nonperforming loans $432,000
========
If nonperforming loans had performed in accordance with their contractual terms
during the year, additional interest income of approximately $15,000 would have
been recorded in 2001 (none in 2000 and 1999). Interest income recognized on
loans in nonaccrual status in 2001 operations approximated $33,000 (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.
D-21
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE C--LOANS--CONTINUED
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 $410,310 1.49% $349,860 1.35%
Real estate mortgage 4,230 0.02 -- --
Installment 8,460 0.03 7,140 0.03
-------- ----- -------- -----
Total allowance for loan losses $423,000 1.54% $357,000 1.38%
======== ===== ======== =====
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 $746,000 and $693,000, respectively. During 2001, $314,000
of new loans were made to these persons and repayments totaled $261,000. 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 Sun
Community Bancorp Limited. Amounts paid for such services aggregated $368,000,
$276,000 and $96,000 in 2001, 2000 and 1999, respectively.
D-22
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE E--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
2001 2000
--------- ---------
Leasehold improvements $ 471,075 $ 468,063
Equipment and furniture 439,948 439,886
--------- ---------
911,023 907,949
Less accumulated depreciation (322,015) (184,780)
--------- ---------
$ 589,008 $ 723,169
========= =========
The Bank rents office space under an operating lease. Rent expense under this
lease agreement approximated $94,000 in 2001 and 2000 and $48,000 in 1999.
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 $ 94,000
2003 94,000
2004 94,000
2005 94,000
2006 94,000
2007 and thereafter 269,000
---------
Total $ 739,000
=========
NOTE F--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
2001 2000 1999
--------- --------- ---------
Current $(608,000) $ -- $ --
Deferred 620,000 (274,000) (346,000)
--------- --------- ---------
$ 12,000 $(274,000) $(346,000)
========= ========= =========
D-23
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE F--INCOME TAXES--CONTINUED
Net deferred income tax assets (liabilities) consisted of the following at
December 31:
2001 2000
--------- ---------
Allowance for loan losses $ (5,000) $ (27,000)
Net operating loss carryforward 639,000
Market value adjustment for investment
securities available for sale (1,000)
Other, net 5,000 8,000
--------- ---------
$ (1,000) $ 620,000
========= =========
Federal income taxes paid to the parent during 2001 approximated $45,000 (none
in 2000 and 1999). The Bank received income tax related remittances of $797,000
in 2001 from its parent, representing the parent's utilization of the Bank's net
operating losses in its consolidated income tax returns.
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $18.1
million and $14.8 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 $ 12,447,000
2003 3,388,000
2004 1,046,000
2005 1,000,000
2006 200,000
------------
Total $ 18,081,000
============
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE H--EMPLOYEE RETIREMENT PLAN
Subject to eligibility requirements, the Bank's employees participate in a
multi-employer employee 401(k) retirement plan. Employer contributions charged
to expense for this plan approximated $14,000 and $11,000 in 2001 and 2000,
respectively (none in 1999).
D-24
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
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 $ 5,470 $ 5,470 $ 3,238 $ 3,238
Loans held for resale 6,181 6,181 3,790 3,790
Investment securities available for sale 163 163 202 202
Portfolio loans:
Fixed rate 23,454 23,454 19,688 20,088
Variable rate 3,948 3,974 6,249 6,220
-------- -------- -------- --------
Total portfolio loans 27,402 27,428 25,937 26,308
Less allowance for loan losses (423) (423) (357) (357)
-------- -------- -------- --------
Net portfolio loans 26,979 27,005 25,580 25,951
Financial Liabilities:
Deposits:
Noninterest-bearing 6,408 6,408 3,811 3,811
Interest-bearing:
Demand accounts 7,332 7,333 8,949 8,945
Time certificates of deposit less
than $100,000 3,874 3,873 3,744 3,784
Time certificates of deposit
$100,000 or more 18,081 18,150 14,820 15,027
-------- -------- -------- --------
Total interest-bearing deposits 29,287 29,356 27,513 27,756
-------- -------- -------- --------
Total deposits 35,695 35,764 31,324 31,567
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.
D-25
NOTES TO FINANCIAL STATEMENTS
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
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 ($250,000 and $125,000
at December 31, 2001 and 2000, respectively). Other loan commitments outstanding
consist of unused lines of credit and approved, but unfunded, specific loan
commitments ($3.9 million and $5.3 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.
The Bank is required to maintain an average reserve balance in the form of cash
on hand and balances due from the Federal Reserve Bank and certain correspondent
banks. The amount of reserve balance required as of December 31, 2001 was
$25,000.
Deposits at the Bank are insured up to the maximum amount covered by FDIC
insurance.
NOTE K--STOCK OPTIONS
At December 31, 2001, 48,000 stock options were outstanding which expire
principally in 2007. Each option enables the holder to purchase one share of the
Bank's common stock at $14.00 per share.
NOTE L--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
EAST VALLEY COMMUNITY BANK
DECEMBER 31, 2001
NOTE L--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, 2001 and 2000 are summarized below (amounts in thousands):
2001 2000
------------ ------------
Tier 1 capital to average total assets:
Minimum required amount >= $ 2,965 >= $ 2,228
Actual amount $ 3,813 $ 2,433
Ratio 10.29% 8.74%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >= $ 1,355 >= $ 1,067
Actual amount $ 3,813 $ 2,433
Ratio 11.25% 9.12%
Combined Tier 1 and Tier 2 capital to risk-weighted assets:
Minimum required amount(2) >= $ 2,711 >= $ 2,134
Amount required to meet "Well-Capitalized" category(3) $ 3,388 $ 2,667
Actual amount $ 4,236 $ 2,790
Ratio 12.50% 10.46%
(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.
D-27
[This page intentionally left blank]
ANNEX E
FINANCIAL AND OTHER INFORMATION REGARDING
CAPITOL BANCORP LIMITED
The following items accompany this Proxy Statement/Prospectus as mailed to the
shareholders of East Valley Community Bank:
- Report on Form 10-Q for period ended September 30, 2002
- 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
[This page intentionally left blank]
ANNEX F
EXCERPTS OF ARIZONA REVISED STATUTES
(SECTIONS 10-1301 THROUGH 10-1331)
REGARDING DISSENTERS' RIGHTS
10-1301. DEFINITIONS
In this article, unless the context otherwise requires:
1. "Beneficial shareholder" means the person who is a beneficial owner of shares
held in a voting trust or by a nominee as the record shareholder.
2. "Corporation" means the issuer of the shares held by a dissenter before the
corporate action or the surviving or acquiring corporation by merger or share
exchange of that issuer.
3. "Dissenter" means a shareholder who is entitled to dissent from corporate
action under section 10-1302 and who exercises that right when and in the manner
required by article 2 of this chapter.
4. "Fair value" with respect to a dissenter's shares means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion is inequitable.
5. "Interest" means interest from the effective date of the corporate action
until the date of payment at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under the circumstances.
6. "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a corporation.
7. "Shareholder" means the record shareholder or the beneficial shareholder.
10-1302. RIGHT TO DISSENT
A. A shareholder is entitled to dissent from and obtain payment of the fair
value of the shareholder's shares in the event of any of the following corporate
actions:
1. Consummation of a plan of merger to which the corporation is a party if
either:
(a) Shareholder approval is required for the merger by section 10-1103 or the
articles of incorporation and if the shareholder is entitled to vote on the
merger.
(b) The corporation is a subsidiary that is merged with its parent under section
10-1104.
2. Consummation of a plan of share exchange to which the corporation is a party
as the corporation whose shares will be acquired, if the shareholder is entitled
to vote on the plan.
3. Consummation of a sale or exchange of all or substantially all of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to a court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale.
4. An amendment of the articles of incorporation that materially and adversely
affects rights in respect of a dissenter's shares because it either:
(a) Alters or abolishes a preferential right of the shares.
(b) Creates, alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of the
shares.
(c) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities.
(d) Excludes or limits the right of the shares to vote on any matter or to
cumulate votes other than a limitation by dilution through issuance of shares or
other securities with similar voting rights.
(e) Reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
section 10-604.
5. Any corporate action taken pursuant to a shareholder vote to the extent the
articles of incorporation, the bylaws or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares under
this chapter may not challenge the corporate action creating the shareholder's
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. This section does not apply to the holders of shares of any class or series
if the shares of the class or series are redeemable securities issued by a
registered investment company as defined pursuant to the investment company act
of 1940 (15 United States Code section 80a-1 through 80a-64).
D. Unless the articles of incorporation of the corporation provide otherwise,
this section does not apply to the holders of shares of a class or series if the
shares of the class or series were registered on a national securities exchange,
were listed on the national market systems of the national association of
securities dealers automated quotation system or were held of record by at least
two thousand shareholders on the date fixed to determine the shareholders
entitled to vote on the proposed corporate action.
10-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
A. A record shareholder may assert dissenters' rights as to fewer than all of
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and notifies the corporation in writing of the name and address of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a partial dissenter under this subsection are determined as if the
shares as to which the record shareholder dissents and the record shareholder's
other shares were registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held on
the beneficial shareholder's behalf only if both:
1. The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights.
2. The beneficial shareholder does so with respect to all shares of which the
beneficial shareholder is the beneficial shareholder or over which the
beneficial shareholder has power to direct the vote.
10-1320. NOTICE OF DISSENTERS' RIGHTS
A. If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and shall be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under section 10-1302 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and shall send them the dissenters' notice described in section 10-1322.
10-1321. NOTICE OF INTENT TO DEMAND PAYMENT
A. If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights shall both:
1. Deliver to the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
proposed action is effectuated.
2. Not vote the shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of this
section is not entitled to payment for the shares under this article.
10-1322. DISSENTERS' NOTICE
A. If proposed corporate action creating dissenters' rights under section
10-1302 is authorized at a shareholders' meeting, the corporation shall deliver
a written dissenters' notice to all shareholders who satisfied the requirements
of section 10-1321.
B. The dissenters' notice shall be sent no later than ten days after the
corporate action is taken and shall:
1. State where the payment demand must be sent and where and when certificates
for certificated shares shall be deposited.
2. Inform holders of uncertificated shares to what extent transfer of the shares
will be restricted after the payment demand is received.
3. Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and that requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date.
4. Set a date by which the corporation must receive the payment demand, which
date shall be at least thirty but not more than sixty days after the date the
notice provided by subsection A of this section is delivered.
5. Be accompanied by a copy of this article.
10-1323. DUTY TO DEMAND PAYMENT
A. A shareholder sent a dissenters' notice described in section 10-1322 shall
demand payment, certify whether the shareholder acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice
pursuant to section 10-1322, subsection B, paragraph 3 and deposit the
shareholder's certificates in accordance with the terms of the notice.
B. A shareholder who demands payment and deposits the shareholder's certificates
under subsection A of this section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
C. A shareholder who does not demand payment or does not deposit the
shareholder's certificates if required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
article.
10-1324. SHARE RESTRICTIONS
A. The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions are released under section 10-1326.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
10-1325. PAYMENT
A. Except as provided in section 10-1327, as soon as the proposed corporate
action is taken, or if such action is taken without a shareholder vote, on
receipt of a payment demand, the corporation shall pay each dissenter who
complied with section 10-1323 the amount the corporation estimates to be the
fair value of the dissenter's shares plus accrued interest.
B. The payment shall be accompanied by all of the following:
1. The corporation's balance sheet as of the end of a fiscal year ending not
more than sixteen months before the date of payment, an income statement for
that year, a statement of changes in shareholders' equity for that year and the
latest available interim financial statements, if any.
2. A statement of the corporation's estimate of the fair value of the shares.
3. An explanation of how the interest was calculated.
4. A statement of the dissenter's right to demand payment under section 10-1328.
5. A copy of this article.
10-1326. FAILURE TO TAKE ACTION
A. If the corporation does not take the proposed action within sixty days after
the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
B. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under section 10-1322 and shall repeat the payment demand
procedure.
10-1327. AFTER-ACQUIRED SHARES
A. A corporation may elect to withhold payment required by section 10-1325 from
a dissenter unless the dissenter was the beneficial owner of the shares before
the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
B. To the extent the corporation elects to withhold payment under subsection A
of this section, after taking the proposed corporate action, it shall estimate
the fair value of the shares plus accrued interest and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of his demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated and a
statement of the dissenters' right to demand payment under section 10-1328.
10-1328. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
A. A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest due
and either demand payment of the dissenter's estimate, less any payment under
section 10- 1325, or reject the corporation's offer under section 10-1327 and
demand payment of the fair value of the dissenter's shares and interest due, if
either:
1. The dissenter believes that the amount paid under section 10-1325 or offered
under section 10-1327 is less than the fair value of the dissenter's shares or
that the interest due is incorrectly calculated.
2. The corporation fails to make payment under section 10-1325 within sixty days
after the date set for demanding payment.
3. The corporation, having failed to take the proposed action, does not return
the deposited certificates or does not release the transfer restrictions imposed
on uncertificated shares within sixty days after the date set for demanding
payment.
B. A dissenter waives the right to demand payment under this section unless the
dissenter notifies the corporation of the dissenter's demand in writing under
subsection A of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
10-1330. COURT ACTION
A. If a demand for payment under section 10-1328 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and shall petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
B. The corporation shall commence the proceeding in the court in the county
where a corporation's principal office or, if none in this state, its known
place of business is located. If the corporation is a foreign corporation
without a known place of business in this state, it shall commence the
proceeding in the county in this state where the known place of business of the
domestic corporation was located.
C. The corporation shall make all dissenters, whether or not residents of this
state, whose demands remain unsettled parties to the proceeding as in an action
against their shares, and all parties shall be served with a copy of the
petition. Nonresidents may be served by certified mail or by publication as
provided by law or by the Arizona rules of civil procedure.
D. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. There is no right to
trial by jury in any proceeding brought under this section. The court may
appoint a master to have the powers and authorities as are conferred on masters
by law, by the Arizona rules of civil procedure or by the order of appointment.
The master's report is subject to exceptions to be heard before the court, both
on the law and the facts. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.
E. Each dissenter made a party to the proceeding is entitled to judgment either:
1. For the amount, if any, by which the court finds the fair value of his shares
plus interest exceeds the amount paid by the corporation.
2. For the fair value plus accrued interest of the dissenter's after-acquired
shares for which the corporation elected to withhold payment under section
10-1327.
10-1331. COURT COSTS AND ATTORNEY FEES
A. The court in an appraisal proceeding commenced under section 10-1330 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of any master appointed by the court. The court shall assess the costs
against the corporation, except that the court shall assess costs against all or
some of the dissenters to the extent the court finds that the fair value does
not materially exceed the amount offered by the corporation pursuant to sections
10-1325 and 10-1327 or that the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment under section 10-1328.
B. The court may also assess the fees and expenses of attorneys and experts for
the respective parties in amounts the court finds equitable either:
1. Against the corporation and in favor of any or all dissenters if the court
finds that the corporation did not substantially comply with the requirements of
article 2 of this chapter.
2. Against the dissenter and in favor of the corporation if the court finds that
the fair value does not materially exceed the amount offered by the corporation
pursuant to sections 10-1325 and 10-1327.
3. Against either the corporation or a dissenter in favor of any other party if
the court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously or not in good faith with respect to the rights
provided by this chapter.
C. If the court finds that the services of an attorney for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the corporation, the court may
award to these attorneys reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
[The remainder of this page intentionally left blank]
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 10-850 - 10-858 of the Arizona Revised Statutes ("A.R.S."), grant
the Registrant broad powers to indemnify any person in connection with legal
proceedings brought against him by reason of his present or past status as an
officer or director of the Registrant, provided that the person acted in good
faith and in a manner he reasonably believed to be in (when acting in an
official capacity) or not opposed to (when acting in all other circumstances)
the best interests of the Registrant, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
A.R.S. also gives the Registrant powers to indemnify any such person against
reasonable expenses in connection with any action by or in the right of the
Registrant, provided the person acted in good faith and in a manner he
reasonably believed to be in (when acting in an official capacity) or not
opposed to (when acting in all other circumstances) the best interests of the
Registrant, except that no indemnification may be made if such person is
adjudged to be liable to the Registrant, or in connection with any proceeding
charging improper personal benefit to the director whether or not involving
action in the director's official capacity, in which the director was held
liable on the basis that the personal benefit was improperly received by the
director. In addition, to the extent that any such person is successful in the
defense of any such legal proceeding, the Registrant is required by the A.R.S.
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 Arizona 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 are
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:
II-1
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) under the Securities Act, if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this
registration statement or any material change to such
information in this Registration Statement; provided,
however, that the undertakings set forth in paragraphs
(1)(i) and (ii) above do not apply if the information
required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by
the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act")
that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) The undersigned Registrant hereby undertakes, that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(C) The undersigned Registrant hereby undertakes:
(1) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of
the applicable form.
II-2
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(D) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(E) The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, 13
of this Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the
request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Lansing, Michigan
on November 15, 2002.
CAPITOL BANCORP LIMITED
By: /s/ JOSEPH D. REID
------------------------------------
JOSEPH D. REID
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities indicated on November 15, 2002.
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
II-4
Signature Title
- --------- -----
/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
/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
II-5
Signature Title
- --------- -----
/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
*By: /s/ JOSEPH D. REID
-----------------------------
JOSEPH D. REID
Attorney-in-fact
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 East
Valley Community Bank.
II-7