As filed with the Securities and Exchange Commission on June 25, 2003
Registration No. 333-105678
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) STANDARD IDENTIFICATION NO.)
INDUSTRIAL
CLASSIFICATION
CODE NUMBER)
Capitol Bancorp Center
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 Proposed Maximum Proposed Maximum
Class Of Securities Being Amount To Be Offering Price Aggregate Offering Amount Of
Registered Registered (1) Per Share Price (2) Registration Fee(3)
- ----------------------------------------------------------------------------------------------------------------
Common stock (no par value) 198,038 N/A $4,637,060 $376
================================================================================================================
(1) Based on 245,500 shares of common stock, $6.00 par value, of Elkhart
Community Bank, which is the maximum number of shares of Elkhart common
stock (excluding shares held by Capitol) that may be issued and outstanding
immediately prior to the consummation of the exchange transaction, and
42,000 stock options of Elkhart Community Bank outstanding, multiplied by
the proposed fixed exchange ratio of .688829.
(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
$23.415 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 May 28, 2003), and the fixed exchange ratio of .688829
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.
PROXY STATEMENT/PROSPECTUS
PROPOSED PLAN OF SHARE EXCHANGE
The Board of Directors of Elkhart Community Bank has approved a Plan of
Share Exchange that contemplates the exchange of the shares of Elkhart common
stock held by all shareholders other than Capitol Bancorp Limited. Capitol
currently holds 50.9% of Elkhart's common stock. As a result of the exchange,
Elkhart will become a wholly-owned subsidiary of Capitol.
If the exchange is approved, each share of Elkhart 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 $14.407544, the per
share value of Elkhart common stock, by $20.916, the average closing prices of
Capitol's common stock for the month ended March 31, 2003. At March 31, 2003,
the book value per share of Elkhart common stock was $9.87, compared to share
value of Elkhart of $14.407544 based on the proposed exchange. If the share
exchange is approved, each shareholder of Elkhart would receive in the exchange
..688829 shares of Capitol common stock for each share of Elkhart common stock.
The share value of Elkhart has been determined and offered by Capitol solely
based on its arbitrary valuation for purposes of this proposed exchange.
Capitol has made similar share exchanges with minority shareholders of some
of its banks previously. It also has other similar share exchange proposals
pending currently. In these share exchange proposals, including the proposed
Elkhart share exchange, Capitol's proposal is based on some premium over the
book value of the bank's common stock. However, the share values for the bank's
common stock always are different and, as stated previously, Capitol's offer is
based on its arbitrary valuation solely for purposes of the proposed
exchange(s).
Capitol estimates that Capitol will issue approximately 169,108 shares of
Capitol common stock to Elkhart shareholders in the exchange, but could be more
if any of Elkhart's stock options are exercised prior to the exchange. Those
shares will represent less than 5% of the outstanding Capitol common stock after
the exchange. Capitol's common stock currently trades on the New York Stock
Exchange under the symbol "CBC".
Elkhart's Board of Directors has scheduled a meeting of Elkhart
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 13 FOR
A DESCRIPTION OF VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING THE EXCHANGE OF
YOUR ELKHART 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 _________, 2003, and is first
being mailed to shareholders of Elkhart on or about __________, 2003.
1
[This page intentionally left blank]
2
TABLE OF CONTENTS
ANSWERS TO FREQUENTLY ASKED QUESTIONS ..................................... 5
SUMMARY ................................................................... 8
Reasons for the Exchange ......................................... 8
The Annual Shareholders' Meeting ................................. 8
Recommendation to Shareholders ................................... 8
Votes Required ................................................... 9
Record Date; Voting Power ........................................ 9
What Shareholders will Receive in the Exchange ................... 9
Accounting Treatment ............................................. 9
Tax Consequences of the Exchange to Elkhart Shareholders ......... 10
Dissenters' Rights ............................................... 10
Opinion of Financial Advisor ..................................... 10
The Plan of Share Exchange ....................................... 10
Termination of the Exchange ...................................... 10
Your Rights as a Shareholder Will Change ......................... 10
SELECTED CONSOLIDATED FINANCIAL DATA ...................................... 11
RISK FACTORS .............................................................. 13
RECENT DEVELOPMENTS ....................................................... 18
COMPARATIVE HISTORICAL, PRO FORMA AND PRO FORMA EQUIVALENT
PER SHARE INFORMATION ................................................. 19
CAPITALIZATION ............................................................ 20
DIVIDENDS AND MARKET FOR COMMON STOCK ..................................... 22
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS ................. 23
INFORMATION ABOUT CAPITOL ................................................. 24
INFORMATION ABOUT ELKHART ................................................. 24
THE ELECTION OF DIRECTORS ................................................. 25
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION .............................. 26
THE EXCHANGE .............................................................. 29
General .......................................................... 29
Background of the Exchange ....................................... 29
Elkhart's Reasons for the Exchange ............................... 30
Capitol's Reasons for the Exchange ............................... 30
Terms of Exchange ................................................ 30
Elkhart Board Recommendation ..................................... 30
Accounting Treatment ............................................. 31
Pro Forma Data ................................................... 31
Material Federal Income Tax Consequences ......................... 31
Regulatory Matters ............................................... 33
Dissenters' Rights ............................................... 33
Federal Securities Laws Consequences; Stock Transfer Restrictions 34
3
TABLE OF CONTENTS - Continued
OPINION OF FINANCIAL ADVISOR .............................................. 35
THE CLOSING ............................................................... 38
Effective Time ................................................... 38
Shares Held by Capitol ........................................... 38
Procedures for Surrender of Certificates; Fractional Shares ...... 38
Fees and Expenses ................................................ 39
Stock Market Listing ............................................. 39
Amendment and Termination ........................................ 39
THE SHAREHOLDERS' MEETING ................................................. 40
Date, Time and Place ............................................. 40
Matters to be Considered at the Shareholders' Meeting ............ 40
Record Date; Stock Entitled to Vote; Quorum ...................... 40
Votes Required ................................................... 40
Share Ownership of Management .................................... 40
Voting of Proxies ................................................ 41
General Information .............................................. 41
Solicitation of Proxies; Expenses ................................ 41
COMPARISON OF SHAREHOLDER RIGHTS .......................................... 42
DESCRIPTION OF CAPITAL STOCK OF CAPITOL ................................... 43
Rights of Common Stock ........................................... 43
Shares Available for Issuance .................................... 43
Capitol's Preferred Securities ................................... 44
Anti-Takeover Provisions ......................................... 44
WHERE YOU CAN FIND MORE INFORMATION ....................................... 46
LEGAL MATTERS ............................................................. 47
EXPERTS ................................................................... 47
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 Elkhart Community Bank.. D-1
ANNEX E Financial and Other Information Regarding Capitol
Bancorp Ltd........................................... E-1
ANNEX F Excerpts of Indiana Code Regarding Dissenters' Rights... F-1
4
ANSWERS TO
FREQUENTLY ASKED QUESTIONS
Q: Why am I receiving these materials?
A: Elkhart's Board of Directors has approved the exchange of the 49.1% of
Elkhart's common stock not owned by Capitol for shares of common stock of
Capitol. The exchange requires the approval of Elkhart's shareholders.
Elkhart is sending you these materials to help you decide whether to
approve the exchange.
Q: What will I receive in the exchange?
A: You will receive shares of Capitol common stock, which are publicly traded
currently on the New York Stock Exchange under the symbol "CBC". If the
exchange is approved, you would receive .688829 shares of Capitol common
stock for each share of Elkhart common stock you own. Any fractional shares
will be paid in cash.
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 Elkhart 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 July 15, 2003; 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
Elkhart common stock (other than Capitol) must approve the Plan of Share
Exchange. If you do not vote your Elkhart shares, the effect will be a vote
against the Plan of Share Exchange.
Q: Should I send in my stock certificates at this time?
A: No. After the exchange is approved, Capitol or Capitol's stock transfer
agent will send Elkhart shareholders written instructions for exchanging
their stock certificates.
5
Q: When do you expect to complete the exchange?
A: As quickly as possible after July 24, 2003. Approval by Elkhart's
shareholders at the shareholders' meeting must be obtained first. It is
anticipated the exchange will be completed by August 31, 2003.
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
Capitol Bancorp Center
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 JULY 15, 2003.
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:
Elkhart Community Bank
303 South Third Street
Elkhart, Indiana 46516
(574) 295-9600
Attention: Steven L. Brown
President
or
Capitol Bancorp Limited
Capitol Bancorp Center
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 Limited is a bank holding company with headquarters located
at the Capitol Bancorp Center, 200 Washington Square North, Fourth Floor,
Lansing, Michigan 48933. Capitol's telephone number is (517) 487-6555.
Additionally, Capitol has its Western Region headquarters located at 2777 East
Camelback Road, Suite 375, Phoenix, Arizona 85016. Capitol's telephone number at
its Western Region headquarters is (602) 955-6100.
Capitol is a uniquely structured affiliation of community banks. It
currently has 29 wholly or majority-owned bank subsidiaries, including Elkhart
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.
Elkhart Community Bank is a commercial bank with its headquarters at 303
South Third Street, Elkhart, Indiana 46516. Elkhart's telephone number is (574)
295-9600.
Elkhart has been, since it commenced business, an affiliate and controlled
subsidiary of Capitol. Elkhart commenced the business of banking on September 9,
1999. Elkhart offers a full range of commercial banking services. For periods
from its inception to September 30, 2002, Elkhart was a majority-owned
subsidiary of Indiana Community Bancorp Limited. Indiana was previously a 52%
owned subsidiary of Capitol Bancorp Limited. Effective September 30, 2002,
Indiana became a wholly-owned subsidiary of Capitol as of the result of a share
exchange transaction and was merged into Capitol.
REASONS FOR THE EXCHANGE (PAGE 30)
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 SHAREHOLDERS' MEETING (PAGE 40)
The meeting of Elkhart shareholders will be held on July 24, 2003 at 11:15
a.m., local time, at Elkhart Community Bank at 303 South Third Street, Elkhart,
Indiana 46516. At the shareholders' meeting, you will elect Elkhart's Board of
Directors and be asked to approve the Plan of Share Exchange.
RECOMMENDATION TO SHAREHOLDERS (PAGE 30)
The Elkhart board believes that the exchange is fair to you and in the best
interests of both you and Elkhart and recommends that you vote FOR approval of
the share exchange.
8
VOTES REQUIRED (PAGE 40)
Approval of the Plan of Share Exchange requires the favorable vote of a
majority of the outstanding shares of Elkhart common stock excluding the shares
held by Capitol. This is more than the vote required by law, but Elkhart's board
has set the vote requirement to be sure the exchange is what you, the
shareholders of Elkhart, want. Capitol holds 50.9% of the outstanding shares of
Elkhart common stock. Elkhart's Board of Directors and officers hold 3.55% of
the outstanding shares of Elkhart common stock, or 7.23% of all shares not held
by Capitol. The majority of the Board of Directors have agreed to vote their
shares FOR approval of the Plan of Share Exchange.
RECORD DATE; VOTING POWER (PAGE 40)
Elkhart shareholders may vote at the shareholders' meeting if they owned
shares of common stock at the close of business on May 15, 2003. At the close of
business on March 31, 2003, 245,500 shares of Elkhart common stock were
outstanding (excluding shares held by Capitol). For each share of Elkhart 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 30)
In the exchange, each outstanding share of Elkhart 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 Elkhart would receive in the exchange
..688829 shares of Capitol common stock for each share of Elkhart common stock.
The exchange ratio is determined by dividing the Elkhart Share Value by the
Capitol Share Value, where:
ELKHART SHARE VALUE. The value of each share of Elkhart common
stock shall be $14.407544.
CAPITOL SHARE VALUE. The share value of each share of Capitol
common stock shall be $20.916, the average of the closing prices
of Capitol common stock for the month ended March 31, 2003, as
reported by the Nasdaq Stock Market, Inc.
The Elkhart Share Value of $14.407544 compares to the book value per
Elkhart share of $9.87 as of March 31, 2003. Based on the fixed exchange ratio,
and if the exchange is approved, each shareholder would receive .688829 shares
of Capitol common stock for each share of Elkhart common stock.
Each Elkhart shareholder (except Capitol) will receive shares of Capitol
common stock in exchange for his, her or their Elkhart common stock calculated
by multiplying the number of shares of Elkhart common stock held by the
shareholder by the exchange ratio. Any fractional shares will be paid in cash.
ACCOUNTING TREATMENT (PAGE 31)
Capitol's acquisition of the minority interest of Elkhart will be accounted
for under the purchase method of accounting. After the exchange, all of
Elkhart's results from operations will be included in Capitol's income
statement, as opposed to only a portion, which is currently reported.
9
TAX CONSEQUENCES OF THE EXCHANGE TO ELKHART SHAREHOLDERS (PAGE 31)
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, Elkhart shareholders generally will not recognize any gain or loss
for United States federal income tax purposes on the exchange of their Elkhart
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 Elkhart 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 33)
Under Indiana law, shareholders of Elkhart are entitled to dissent from and
obtain fair value for their shares in connection with the Plan of Share
Exchange.
OPINION OF FINANCIAL ADVISOR (PAGE 35)
Elkhart retained JMP Financial, Inc. as its financial advisor and agent in
connection with the exchange to render a financial fairness opinion to the
Elkhart shareholders.
In deciding to approve the exchange, the Elkhart 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
Elkhart common stock is fair from a financial point of view. The opinion is
attached as Annex B to this proxy statement/prospectus.
THE PLAN OF SHARE EXCHANGE (PAGE 29)
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 (PAGE 39)
Elkhart and Capitol can jointly agree to terminate the plan of exchange at
any time without completing the exchange.
Elkhart can terminate the exchange if a majority of Elkhart'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 (PAGE 42)
Your rights as a Elkhart shareholder are determined by Elkhart's banking
law and by Elkhart'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, 2002, which
is incorporated herein by reference. The consolidated financial data below for
the interim periods indicated has been derived from, and should be read in
conjunction with, Capitol's Quarterly Report on Form 10-Q for the period ended
March 31, 2003, which is incorporated herein by reference. See "Where You Can
Find More Information". The interim results include all adjustments of a normal
recurring nature that are, in the opinion of management, considered necessary
for a fair presentation. Interim results for the three months ended March 31,
2003 are not necessarily indicative of results which may be expected in future
periods, including the year ending December 31, 2003. 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 COMPARING FINANCIAL
PERFORMANCE AND PREDICTING CAPITOL'S FUTURE OPERATING RESULTS.
Capitol's consolidated balance sheets as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended December 31, 2002, 2001 and 2000 are
incorporated herein by reference. The selected financial data provided below as
of March 31, 2003 and for the three months ended March 31, 2003 and 2002 have
been derived from Capitol's consolidated financial statements which are
incorporated herein by reference. Selected balance sheet data as of March 31,
2002 and December 31, 2000, 1999 and 1998 and results of operations data for the
years ended December 31, 1999 and 1998 were derived from consolidated financial
statements which are not incorporated in this proxy statement/prospectus.
Under current accounting rules, entities which are more than 50% owned by
another are consolidated or combined for financial reporting purposes. This
means that all of the assets and liabilities of subsidiaries (including Elkhart)
are included in Capitol's consolidated balance sheet. Capitol's consolidated net
income, however, only includes its subsidiaries' (including Elkhart) net income
or net loss to the extent of its ownership percentage. This means that when a
newly formed bank incurs early start-up losses, Capitol will only reflect that
loss based on its ownership percentage. Conversely, when banks generate income,
Capitol will only reflect that income based on its ownership percentage.
CAPITOL BANCORP LIMITED
----------------------------------------------------------------------------------------
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE
MARCH 31 YEARS ENDED DECEMBER 31
------------------------------------ -------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED RESULTS OF OPERATIONS DATA:
Interest income $ 39,986 $ 37,255 $ 156,454 $ 153,797 $ 132,311 $ 93,602 $ 69,668
Interest expense 12,999 14,432 55,860 73,292 65,912 46,237 36,670
Net interest income 26,987 22,823 100,594 80,505 66,399 47,365 32,998
Provision for loan losses 1,890 2,090 12,676 8,167 7,216 4,710 3,523
Net interest income after provision
for loan losses 25,097 20,733 87,918 72,338 59,183 42,655 29,475
Noninterest income 4,529 2,798 14,982 9,585 6,137 4,714 3,558
Noninterest expense 21,156 18,793 77,151 64,136 52,846 40,257 26,325
Income before income tax expense,
minority interest and cumulative
effect of change in accounting
principle 8,470 4,738 25,749 17,787 12,474 7,112 6,708
Income tax expense 2,944 1,543 8,701 5,824 4,289 3,213 2,584
Income before minority interest and
cumulative effect of change in
accounting principle 5,526 3,195 17,048 11,963 8,185 3,899 4,124
Minority interest in net losses
(income) of consolidated
subsidiaries (213) (151) (395) (1,245) (150) 1,707 504
Income before cumulative effect
of change in accounting
principle 5,313 3,044 16,653 10,718 8,035 5,606 4,628
Cumulative effect of change in
accounting principle (1) (197)
Net income 5,313 3,044 16,653 10,718 8,035 5,409 4,628
11
CAPITOL BANCORP LIMITED
----------------------------------------------------------------------------------------
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE
MARCH 31 YEARS ENDED DECEMBER 31
------------------------------------ -------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
PER SHARE DATA:
Net income per common share:
Before cumulative effect of
change in accounting
principle (1):
Basic $ 0.45 $ 0.39 $ 1.64 $ 1.38 $ 1.14 $ 0.87 $ 0.74
Diluted 0.44 0.38 1.57 1.35 1.13 0.86 0.72
After cumulative effect of
change in accounting
principle (1):
Basic 0.45 0.39 1.64 1.38 1.14 0.84 0.74
Diluted 0.44 0.38 1.57 1.35 1.13 0.83 0.72
Cash dividends declared 0.12 0.10 0.44 0.40 0.36 0.36 0.33
Book value 14.01 11.88 13.72 10.24 9.18 8.08 7.77
Pro forma equivalent book value (2) 14.11 N/A TBD N/A N/A N/A N/A
Dividend payout ratio 26.67% 25.64% 26.83% 28.99% 31.58% 42.86% 43.63%
Weighted average number of
common shares outstanding 11,698 7,901 10,139 7,784 7,065 6,455 6,284
SELECTED BALANCE SHEET DATA:
Total assets $2,540,289 $2,174,334 $2,409,288 $2,044,006 $1,630,076 $1,305,987 $1,024,444
Investment securities 40,517 44,144 34,139 43,687 68,926 107,145 86,464
Portfolio loans 2,052,157 1,794,207 1,991,372 1,734,589 1,355,798 1,049,204 724,280
Allowance for loan losses (30,034) (24,744) (28,953) (23,238) (17,449) (12,639) (8,817)
Deposits 2,181,440 1,853,343 2,062,072 1,740,385 1,400,899 1,112,793 890,890
Debt obligations 84,348 89,361 93,398 89,911 58,150 47,400 23,600
Minority interests in
consolidated subsidiaries 31,808 40,320 28,016 70,673 62,575 54,593 27,576
Trust preferred securities 61,299 48,636 51,583 48,621 24,327 24,291 24,255
Stockholders' equity 164,471 126,364 160,037 80,172 70,404 54,668 49,292
PERFORMANCE RATIOS: (3)
Return on average equity 13.09% 14.80% 13.33% 15.22% 13.78% 10.66% 10.19%
Return on average assets 0.87% 0.58% 0.75% 0.58% 0.55% 0.47% 0.55%
Net interest margin (fully taxable
equivalent) 4.76% 4.69% 4.80% 4.60% 4.80% 4.44% 4.15%
Efficiency ratio (4) 67.13% 73.35% 66.75% 71.19% 72.85% 77.30% 70.63%
ASSET QUALITY:
Non-performing loans (5) $ 25,981 $ 22,304 $ 22,890 $ 17,238 $ 6,757 $ 4,124 $ 7,242
Allowance for loan losses to
non-performing loans 115.60% 110.94% 126.49% 134.81% 258.24% 306.47% 121.75%
Allowance for loan losses to
portfolio loans 1.46% 1.38% 1.45% 1.34% 1.29% 1.20% 1.22%
Non-performing loans to total
portfolio loans 1.27% 1.24% 1.15% 0.99% 0.50% 0.39% 1.00%
Net loan losses to average
portfolio loans 0.16% 0.13% 0.37% 0.15% 0.20% 0.10% 0.15%
CAPITAL RATIOS:
Average equity to average assets 6.64% 3.84% 5.59% 3.78% 4.26% 4.46% 5.36%
Tier 1 risk-based capital ratio 10.68% 10.74% 10.52% 10.54% 11.10% 10.78% 13.42%
Total risk-based capital ratio 12.12% 11.99% 11.77% 11.85% 12.35% 11.62% 14.60%
Leverage ratio 6.47% 5.81% 6.64% 3.92% 4.32% 4.35% 4.88%
- ----------
(1) Accounting change relates to new accounting standard which required
write-off of previously capitalized start-up costs as of January 1, 1999.
(2) Based on the exchange ratio of .688829 shares of Capitol for each share of
Elkhart. Excludes the pro forma effect of other share exchange transactions
or proposals of Capitol (see "Recent Developments").
(3) These ratios are annualized for the periods indicated.
(4) Efficiency ratio is computed by dividing noninterest expense by the sum of
net interest income and noninterest income.
(5) Nonperforming loans consist of loans on nonaccrual status and loans more
than 90 days delinquent.
12
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 ELKHART 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.
Elkhart is already a majority-owned and controlled subsidiary of Capitol.
By virtue of the existing relationship between Elkhart 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 Elkhart shares against any other share exchange proposals.
Capitol's proposal to value Elkhart shares at $14.407544 in the proposed share
exchange is based solely on its judgment in making such proposal. Accordingly,
the Elkhart Share Value and related exchange ratio have not been determined
absent the inherent conflicts of interest between Capitol and Elkhart. It is
unknown what exchange ratio or Elkhart Share Value, if any, that might be
negotiated between Elkhart 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.
13
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 BANK'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.
14
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 prior 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 in 2003. Capitol's loan losses in 2002 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.
15
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 remained relatively stable in 2002, with only one rate change from FRBOMC.
Through June 24, 2003 there have been no interest rate changes initiated by
FRBOMC. Future stability of interest rates 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.
16
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 March 31, 2003, Capitol had notes payable to an unaffiliated bank
outstanding in the amount of approximately $4 million. Under this credit
facility, borrowings of up to $25 million are permitted, subject to certain
conditions. Capitol is reliant upon its bank subsidiaries' earnings and
dividends to service this debt obligation which may be inadequate to service the
obligations. In the event of violation of the covenants relating to the credit
facility, or due to failure to make timely payments of interest and debt
principal, the lender may terminate the credit facility. In addition, upon such
occurrences, dividends on Capitol's common stock may be prohibited or Capitol
may be otherwise unable to make future dividends payments or obtain replacement
credit facilities.
Capitol also has several series of trust-preferred securities outstanding,
totaling about $61million, 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.
17
RECENT DEVELOPMENTS
In April 2003, Capitol announced the completion of an $11 million private
placement of its common stock to select institutional investors and the issuance
of approximately 550,000 shares of previously unissued common stock. Proceeds
from the offering have been used to reduce borrowings from an unaffiliated bank
and investment in short-term investments.
In addition to the proposed Elkhart share exchange, Capitol has proposed
share exchange transactions regarding Desert Community Bank ("Desert"), Black
Mountain Community Bank ("Black Mountain") and Red Rock Community Bank ("Red
Rock"), which are majority-owned subsidiaries of Capitol, subject to the
approval of their shareholders (other than Capitol). If the Desert share
exchange is approved, Capitol estimates issuing approximately 161,000 shares of
Capitol common stock. If Black Mountain's share exchange is approved, Capitol
estimates issuing approximately 172,000 shares of Capitol common stock. If the
Red Rock share exchange is approved, Capitol estimates issuing approximately
295,000 shares of Capitol common stock.
On May 15, 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND Equity. Management has
not completed its analysis of this very recently issued standard which becomes
effective for Capitol's financial statements for periods beginning July 1, 2003.
Based on management's preliminary analysis of this new standard, the primary
impact of it on Capitol's consolidated financial statements will be the
reclassification of trust-preferred securities as liabilities from their prior
mezzanine capital treatment, although those securities will continue to be
treated as qualifying capital for regulatory purposes.
Bank development efforts are currently under consideration at June 24, 2003
in the several states including pre-development exploratory discussions, lease
and employment negotiations and preparation of preliminary regulatory
applications for formation and/or acquisition of community banks.
In early May 2003, Capitol filed an application with the New York Stock
Exchange (NYSE) for the listing of its common stock. On June 24, 2003, Capitol's
common stock began trading on the NYSE under the symbol CBC and its listing on
the Nasdaq Stock Market was terminated.
18
COMPARATIVE HISTORICAL, PRO FORMA AND PRO FORMA EQUIVALENT
PER SHARE INFORMATION
The following table, which should be read in conjunction with the unaudited
pro forma condensed consolidated balance sheet, pro forma condensed statements
of operations and related notes to the pro forma financial statements, which
appear elsewhere herein, summarizes per share information:
As of and for the
Three Months Ended For the Year Ended
March 31, 2003 December 31, 2002
-------------- -----------------
Capitol common stock:
Net income per share:
Basic:
Historical $ 0.45 $ 1.64
Pro forma consolidated(1) 0.45 1.63
Diluted:
Historical 0.44 1.57
Pro forma consolidated(1) 0.44 1.56
Cash dividends per share:
Historical 0.12 0.44
Pro forma consolidated(2) 0.12 $ 0.44
Book value per share at March 31, 2003:
Historical 14.01
Pro forma consolidated(1) $14.11
Elkhart common stock:
Net income per share:
Basic:
Historical $ 0.24 $ 0.51
Pro forma equivalent(3) 0.31 1.12
Diluted:
Historical 0.24 0.51
Pro forma equivalent(3) 0.30 1.07
Cash dividends per share:
Historical -- --
Pro forma equivalent(3) 0.08 $ 0.30
Book value per share at March 31, 2003:
Historical 9.87
Pro forma equivalent(3) $ 9.72
1--Assumes completion of proposed Elkhart exchange and excludes the pro forma
effect of other pending share exchange transactions or proposals of
Capitol (see "Recent Developments").
2--The Capitol pro forma consolidated dividends per share represent historical
dividends per share.
3--The Elkhart pro forma equivalent per share amounts are calculated by
multiplying Capitol pro forma consolidated per share amounts by the exchange
ratio of .688829.
19
CAPITALIZATION
The table presented below shows Capitol's actual total capitalization as of
March 31, 2003 and the proposed exchange of Capitol's common stock for Elkhart's
common stock as described in this proxy statement/prospectus and pending share
exchanges regarding three other subsidiaries of Capitol (as described below).
AS OF MARCH 31, 2003
-----------------------------------------------
(dollars in thousands, except per share data)
AS ADJUSTED FOR
THE PROPOSED
ELKHART
EXCHANGE(4) AND
AS ADJUSTED FOR PENDING DESERT,
THE PROPOSED BLACK MOUNTAIN
ELKHART AND RED ROCK
ACTUAL EXCHANGE(4) EXCHANGES(5)
--------- --------- ---------
DEBT OBLIGATIONS ................................. $ 84,348 $ 84,348 $ 84,348
========= ========= =========
TRUST-PREFERRED SECURITIES ....................... $ 61,299 $ 61,299 $ 61,299
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES .. 31,808 29,384 20,115
STOCKHOLDERS' EQUITY(1):
Common stock, no par value; 25,000,000 shares
authorized; issued, and outstanding:
Actual - 11,737,860 shares .................. 134,211
As adjusted for the proposed Elkhart exchange
- 11,906,968 shares(4) .................... 137,748
As adjusted for the proposed Elkhart(4) and
pending Desert, Black Mountain
and Red Rock exchanges - 12,535,310
shares(5) ................................. 150,890
Retained earnings ............................. 30,228 30,228 30,228
Market value adjustment for available-for-sale
securities (net of tax effect) ............... 177 177 177
Less unallocated ESOP shares ................. (145) (145) (145)
--------- --------- ---------
Total stockholders' equity ................. $ 164,471 $ 168,008 $ 181,150
========= ========= =========
Book value per share of common stock ........... $ 14.01 $ 14.11 $ 14.45
========= ========= =========
TOTAL CAPITALIZATION(2) .......................... $ 196,279 $ 197,392 $ 201,265
========= ========= =========
TOTAL CAPITAL FUNDS(3) ........................... $ 257,578 $ 258,691 $ 262,564
========= ========= =========
CAPITAL RATIOS:
Stockholders' equity to total assets .......... 6.47% 6.61% 7.12%
Total capitalization to total assets .......... 7.28% 7.77% 7.91%
Total capital funds to total assets ........... 10.14% 10.18% 10.32%
Footnotes regarding the above presentation appear on the following page.
20
FOOTNOTES TO CAPITALIZATION TABLE
(1) Does not include approximately 2.4 million shares of common stock issuable
upon exercise of stock options.
(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 169,108 shares of Capitol common stock upon completion
of the proposed Elkhart exchange. See "Unaudited Pro Forma Consolidated
Financial Information."
(5) Assumes issuance of Capitol common stock upon completion of proposed
Elkhart share exchange. Also assumes issuance of approximately 628,000
shares of Capitol's common stock which may be issued upon completion of the
pending share exchange transactions regarding Desert Community Bank, Black
Mountain Community Bank and Red Rock Community Bank. The pending Desert,
Black Mountain and Red Rock share exchanges are subject to the approval of
those respective banks' shareholders other than Capitol.
[The remainder of this page intentionally left blank]
21
DIVIDENDS AND MARKET FOR COMMON STOCK
Capitol's common stock was listed on the Nasdaq National Market under the
symbol "CBCL" through June 23, 2003. On June 24, 2003, Capitol's common stock
began trading on the New York Stock Exchange (NYSE) under the symbol "CBC". 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 $25.950
on June 24, 2003.
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 ended December 31 23.780 15.130 0.12
2003
- ----
Quarter ended March 31 24.250 19.000 0.12
Quarter ended June 30 (through June 24) $27.880 $20.000 $ 0.12
As of March 17, 2003, there were 5,228 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 Elkhart's common stock. Any transfers have been made
privately and are not reported. Elkhart 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 March 31, 2003
- Annual Report to Shareholders for year ended December 31, 2002
- Annual Report on Form 10-K for year ended December 31, 2002
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 8, 2003
INFORMATION ABOUT ELKHART
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 March 31, 2003 and December 31, 2002 are
included in this proxy statement/prospectus as part of Annex D.
FINANCIAL STATEMENTS.
Unaudited interim condensed financial statements of Elkhart as of March 31,
2003 and for the three months ended March 31, 2003 and 2002 are included in this
proxy statement/prospectus as part of Annex D. Audited financial statements of
Elkhart as of and for the periods ended December 31, 2002, 2001 and 2000 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 Elkhart and all directors and officers as a group. Where applicable, the
table includes shares held by members of their immediate families.
Elkhart shares beneficially owned
--------------------------------------------------------
Percentage of all
Elkhart shares
Percentage of all excluding Elkhart
Name of Beneficial owner Number Elkhart Shares shares owned by Capitol
- ------------------------ ------ -------------- -----------------------
Entities and/or individuals owning 5% or
more of Elkhart's common stock:
Capitol Bancorp Limited 254,500 50.9% N/A
======= ===== =====
Peter Liegl 50,000 10.0% 20.4%
======= ===== =====
Elkhart's Directors and Officers:
Nancy Banks 540 0.11% 0.22%
R. Steven Bennett 600 0.12% 0.24%
Kenneth W. Brink 1,000 0.20% 0.41%
Steven L. Brown 900 0.18% 0.37%
Robert C. Carr 200 0.04% 0.08%
Andrew W. Frech 500 0.10% 0.20%
Curtis T. Hill, Jr 900 0.18% 0.37%
Richard J. Jensen 100 0.02% 0.04%
Richard L. Max, Sr 10,000 2.00% 4.07%
Myrl D. Nofziger 1,000 0.20% 0.41%
Brian J. Smith 1,000 0.20% 0.41%
Jack E. Welter 1,000 0.20% 0.41%
------- ----- -----
Total of Directors and Officers 17,740 3.55% 7.23%
======= ===== =====
Other than Capitol, no individual owns greater than 5% of the outstanding
shares of Elkhart.
24
THE ELECTION OF DIRECTORS
Elkhart's Certificate of Incorporation and By-Laws provide that the number
of Directors, as determined from time to time by the Board of Directors, shall
be no less than (5) and no more than (25). The Board of Directors has presently
fixed the number of Directors at twelve.
The Board of Directors has nominated the twelve (12) directors named below
for a one-year term. All nominees are willing to be elected and to serve in such
capacity for one year and until the election and qualification of their
successors. All of the nominees for election to the Board of Directors are
currently members of Elkhart'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 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 Elkhart's Directors
based on the date furnished by them:
NAME, PROFESSIONAL POSITIONS & POSITIONS HELD WITH ELKHART
- ----------------------------------------------------------
Nancy B. Banks, Community Volunteer; Director
R. Steven Bennett, President, Voyager Products Inc.; Director
Kenneth W. Brink, Treasurer, Hart Housing Group, Inc.; Director
Steven L. Brown, President, Elkhart Community Bank; Director
Robert C. Carr, Executive Vice President, Capitol Bancorp Limited; Director
Andrew W. Frech, Chairman & CEO, Ancon Construction Company, Inc.; Director
Curtis T. Hill, Jr., Attorney at Law, Elkhart Co. Pros. Attorney Officer;
Director
Richard J. Jensen, Retired; Director
Richard L. Max, Sr., President & General Manager, Heart City Enterprises House
of Herbs; Director
Myrl D. Nofziger, President, Hoogenboom Nofziger; Director
Brian J. Smith, CPA, President, The Heritage Group; Director
Jack E Welter, President, Elkhart Plastics, Inc.; Director
25
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Elkhart is already included in Capitol's consolidated financial statements.
Unaudited pro forma consolidated financial information follow, adjusted for the
proposed Elkhart exchange, which will be accounted for under the purchase method
of accounting (if consummated), as if it had occurred effective March 31, 2003
(shown on page 27) and at the beginning of 2002 (shown on page 28). The
accompanying notes to the unaudited pro forma consolidated financial statements
are an integral part of the unaudited pro forma financial information. The
unaudited pro forma results of operations for the period ended March 31, 2003
are not necessarily indicative of results for the year ending December 31, 2003
or any subsequent period thereafter. The unaudited pro forma results of
operations do not give effect to any potential cost savings or other synergies
that could result from the share exchange.
[The remainder of this page intentionally left blank]
26
Unaudited Pro Forma Condensed Consolidated Balance Sheet
Capitol Bancorp Ltd. And Subsidiaries
March 31, 2003
(in $1,000s, except share and per-share data) Pro Forma Pro Forma
Adjustments Amounts
Regarding After
Historical Proposed Proposed
Amounts Share Share
ASSETS As Reported Exchange Exchanges
------------ ------------ ------------
Cash and cash equivalents $ 323,945 $ 323,945
Loans held for resale 65,465 65,465
Investment securities 40,517 40,517
Portfolio loans 2,052,157 2,052,157
Less allowance for loan losses (30,034) (30,034)
------------ ------------
Net portfolio loans 2,022,123 2,022,123
Premises and equipment, net 20,565 20,565
Goodwill and other intangibles 24,606 $ 1,113 A 25,719
Other assets 43,068 43,068
------------ ------------ ------------
TOTAL ASSETS $ 2,540,289 $ 1,113 $ 2,541,402
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 2,181,440 $ 2,181,440
Debt obligations 84,348 84,348
Other liabilities 16,923 16,923
------------ ------------ ------------
Total liabilities 2,282,711 -- 2,282,711
Trust-preferred securities 61,299 61,299
Minority interests in consolidated subsidiaries 31,808 $ (2,424) B 29,384
Stockholders' equity:
Common stock 134,211 3,537 C 137,748
Retained earnings 30,228 30,228
Other, net 32 32
------------ ------------ ------------
Total stockholders' equity 164,471 3,537 168,008
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,540,289 $ 1,113 $ 2,541,402
============ ============ ============
Number of common shares issued and outstanding 11,737,860 169,108 11,906,968
============ ============ ============
Book value per Capitol share $ 14.01 $ 14.11
============ ============
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET:
A--Goodwill arising from proposed share exchange. Based on current estimates,
there are no material identifiable intangible assets regarding the proposed
share exchange. The net carrying values of the Bank's assets and
liabilities approximate fair value. No deposit core intangible asset has
been estimated due to the brief period of Bank's operation.
B--Elimination of minority interests associated with Bank's shareholders other
than Capitol.
C--Estimated net proceeds applicable to proposed share exchanges with Bank's
shareholders other than Capitol.
27
Unaudited Pro Forma Condensed Consolidated Statements of Operations
Capitol Bancorp Ltd. And Subsidiaries
(in $1,000s, except share and per-share data)
Three Months Ended March 31, 2003
-----------------------------------------------
Historical Pro Forma Pro Forma
Amounts Adjustments Amounts
------------ ------------ ------------
Interest income $ 39,986 $ 39,986
Interest expense 12,999 12,999
------------ ------------
Net interest income 26,987 26,987
Provision for loan losses 1,890 1,890
------------ ------------
Net interest income after provision for loan losses 25,097 25,097
Noninterest income 4,529 4,529
Noninterest expense 21,156 21,156
------------ ------------
Income before federal income taxes and
minority interest 8,470 8,470
Federal income taxes 2,944 2,944
------------ ------------
Income before minority interest 5,526 5,526
Minority interest in net income of
consolidated subsidiaries (213) $ 58 A (155)
------------ ------------ ------------
NET INCOME $ 5,313 $ 58 $ 5,371
============ ============ ============
NET INCOME PER SHARE:
Basic $ 0.45 $ 0.45
============ ============
Diluted $ 0.44 $ 0.44
============ ============
Average number of common shares outstanding
for purposes of computing basic net income per
share--denominator for basic net income per share 11,697,756 169,108 B 11,866,864
Effect of dilutive securities--stock options and warrants 438,359 438,359
------------ ------------ ------------
Average number of common shares and dilutive securities
for purposes of computing diluted net income per share--
denominator for diluted net income per share 12,136,115 169,108 12,305,223
============ ============ ============
Year Ended December 31, 2002
-----------------------------------------------
Historical Pro Forma Pro Forma
Amounts Adjustments Amounts
------------ ------------ ------------
Interest income $ 156,454 $ 156,454
Interest expense 55,860 55,860
------------ ------------
Net interest income 100,594 100,594
Provision for loan losses 12,676 12,676
------------ ------------
Net interest income after provision for loan losses 87,918 87,918
Noninterest income 14,982 14,982
Noninterest expense 77,151 77,151
------------ ------------
Income before federal income taxes and
minority interest 25,749 25,749
Federal income taxes 8,701 8,701
------------ ------------
Income before minority interest 17,048 17,048
Minority interest in net income of
consolidated subsidiaries (395) $ 126 A (269)
------------ ------------ ------------
NET INCOME $ 16,653 $ 126 $ 16,779
============ ============ ============
NET INCOME PER SHARE:
Basic $ 1.64 $ 1.63
============ ============
Diluted $ 1.57 $ 1.56
============ ============
Average number of common shares outstanding
for purposes of computing basic net income per
share--denominator for basic net income per share 10,139,000 169,108 B 10,308,108
Effect of dilutive securities--stock options and warrants 461,000 461,000
------------ ------------ ------------
Average number of common shares and dilutive securities
for purposes of computing diluted net income per share--
denominator for diluted net income per share 10,600,000 169,108 10,769,108
============ ============ ============
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS:
A--Amount represents improvement in operating results attributable to minority
interest due to proposed share exchange regarding Elkhart Community Bank.
B--Assumes issuance of 169,108 shares of Capitol common stock in the proposed
share exchange described in Note A above.
28
THE EXCHANGE
GENERAL
The Elkhart Board of Directors is using this proxy statement/prospectus to
solicit proxies from the holders of Elkhart common stock for use at the annual
shareholders' meeting.
At the annual shareholders' meeting to be held on July 24, 2003, Elkhart
common shareholders will be asked to approve the exchange. The Plan of Share
Exchange provides for Elkhart's minority shareholders to exchange the 49.1% of
the common stock of Elkhart not owned by Capitol for Capitol common stock. Upon
consummation of the exchange, Elkhart will become a wholly-owned subsidiary of
Capitol. In the exchange, Elkhart 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 Elkhart's
operations. Capitol, through its CEO, expressed a willingness to extend an offer
of an exchange around the Bank's 36th month of operation. These discussions,
between the bank's board, Capitol's CEO and other executive officers of Capitol,
occurred at various Elkhart board meetings during that period. The objectives of
the potential exchange would be to enable shareholders of Elkhart 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 Elkhart will continue to hold Elkhart
stock which has no market and is illiquid.
Elkhart's board of directors has not solicited or received any other
proposals for the potential exchange or sale of Elkhart's shares of common stock
which are not owned by Capitol. If other proposals were under consideration for
sale or exchange of Elkhart's shares to an entity other than Capitol, Capitol
would be permitted to vote its shares of Elkhart. By virtue of Capitol's
majority ownership of Elkhart, it is likely that Capitol would not vote its
shares of Elkhart in favor of any other proposals regarding a share exchange or
sale of the minority interest in Elkhart with another party. In addition,
Capitol currently has no intentions of selling its majority interest in Elkhart.
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 Elkhart's board of directors
consistent with its informal discussions with Elkhart's board during the past
three years. As in other share exchange transactions, Capitol based its proposal
at some premium over the book value of the bank's common stock. However,
Capitol's determination of the share value of Elkhart, for purposes of the
proposed exchange, is solely based on its arbitrary valuation as offered by
Capitol.
Consensus between Capitol and Elkhart's directors who are not employees or
officers of Capitol was reached in May 2003, to approve the proposed exchange
subject only to:
- obtaining an independent opinion that the proposed share exchange is
fair to Elkhart's shareholders from a financial point of view; and
- obtaining approval for the proposed exchange by a majority of
Elkhart's shares not already owned by Capitol.
In May 2003 the Elkhart 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.
29
ELKHART'S REASONS FOR THE EXCHANGE.
Elkhart's reasons for the exchange are that the shareholders of Elkhart
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 Elkhart shareholders will receive publicly traded shares,
providing them liquidity as opposed to the Elkhart common stock for
which there is no public market. Elkhart 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 Elkhart's profitability will increase. As noted
elsewhere in this proxy statement/prospectus, while Elkhart's assets are
reported as part of Capitol's assets for purposes of its consolidated financial
statements, Elkhart's income is attributed to Capitol only in the percentage
which Capitol owns of Elkhart common stock. Capitol desires to acquire the
remainder of Elkhart's common stock so that Capitol can include 100% of
Elkhart'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 49.1% of the
shares of Elkhart held by shareholders other than Capitol, each
share of Elkhart 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 Elkhart share value
by the Capitol share value. The Elkhart share value shall be
$14.407544 per share.
The share value of each share of Capitol common stock shall be
$20.916, the average of the closing prices of Capitol common
stock for the month ended March 31, 2003, as reported by the
Nasdaq Stock Market, Inc.
The exchange ratio is determined by dividing the Elkhart share value by the
Capitol share value. Each Elkhart shareholder (except Capitol) will receive
shares of Capitol common stock in exchange for his, her or their Elkhart common
stock calculated by multiplying the number of shares in Elkhart common stock
held by the shareholder by the exchange ratio. Any fractional shares will be
paid in cash.
ELKHART BOARD RECOMMENDATION
In determining whether to recommend the proposed share exchange to
Elkhart's shareholders, Elkhart's board considered the matters discussed in
"Elkhart's Reasons for the Exchange". In addition, Elkhart's board considered:
. no other exchange proposals would be offered either by Capitol or
unaffiliated parties;
. Capitol already has a majority ownership of Elkhart;
30
. there is no assurance Capitol would repeat or improve its share
exchange proposal at any time in the future;
. absent any potential alternatives other than rejecting Capitol's
proposal, which could result in Elkhart's minority shareholders having
no future opportunities to exchange, sell or otherwise dispose of
their Elkhart shares; and
. Elkhart's board obtained an opinion from its financial advisor that
the exchange would be fair to the shareholders of Elkhart from a
financial point of view.
THE ELKHART BOARD HAS DETERMINED THAT THE EXCHANGE IS FAIR TO AND IN THE
BEST INTERESTS OF THE ELKHART 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
Because Elkhart is already a controlled subsidiary of Capitol, it is
already included in Capitol's consolidated financial statements. Unaudited pro
forma consolidated financial information is presented in this document, adjusted
for the proposed Elkhart exchange, which will be accounted for under the
purchase method of accounting (if consummated), as if it had occurred effective
March 31, 2003 (shown on page 27) and at the beginning of 2002 (shown on page
28). The accompanying notes to the unaudited pro forma consolidated financial
statements are an integral part of the unaudited pro forma financial
information. The unaudited pro forma results of operations for the period ended
March 31, 2003 are not necessarily indicative of results for the year ending
December 31, 2003 or any subsequent period thereafter. The unaudited pro forma
results of operations do not give effect to any potential cost savings or other
synergies that could result from the share exchange.
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 Elkhart
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.
31
This discussion also assumes that shareholders hold their shares of Elkhart
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;
. Elkhart shareholders who received their Elkhart common stock through
the exercise of employee stock options or otherwise as compensation;
. Elkhart shareholders who are not U.S. persons; and
. Elkhart shareholders who hold Elkhart 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:
o the exchange will qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code;
o no gain or loss will be recognized by the shareholders of Elkhart who
exchange their Elkhart common stock solely for Capitol common stock
(except with respect to cash received instead of a fractional share of
Capitol common stock);
o the aggregate tax basis of the Capitol common stock received by
Elkhart shareholders who exchange all of their Elkhart common stock
for Capitol common stock in the exchange will be the same as the
aggregate tax basis of the Elkhart common stock surrendered in
exchange (reduced by any amount allocable to a fractional share of
Capitol common stock for which cash is received);
o the holding period of the Capitol common stock received will include
the holding period of shares of Elkhart common stock surrendered in
exchange; and
o a holder of Elkhart 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 Elkhart 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 Elkhart common stock exchanged for the
fractional share of Capitol common stock satisfies the long-term
holding period requirement.
32
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.
REGULATORY MATTERS
As a bank holding company, Capitol is subject to regulation by the Federal
Reserve Board. Federal Reserve Board rules require Capitol to obtain the Federal
Reserve Board's permission to acquire at least 51% of a subsidiary bank. The
rules of the Federal Reserve Board do not differentiate between ownership of 51%
and ownership of 100% of the stock of the subsidiary bank. Of course, Capitol
received permission to acquire 51% or more ownership of Elkhart prior to Elkhart
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., or the New York Stock Exchange, as the case may be
(see "Recent Developments"), 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 Elkhart common stock will
be publicly tradable upon consummation of the exchange. There will be no
restriction on the ability of a former Elkhart shareholder to sell in the open
market the Capitol common stock received (unless the Elkhart shareholder is also
an officer, director or affiliate of either Elkhart 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
By following the specific procedures set forth in IC 23-1-44-1 to IC
23-1-44-20 ("Code"), Elkhart shareholders have a statutory right to dissent from
the Plan of Share Exchange. If the Plan of Share Exchange is approved and
consummated, any Elkhart shareholder who properly perfects his dissenter's
rights will be entitled, upon consummation of the Plan of Share Exchange, to
receive an amount of cash equal to the fair market value of his shares of
Elkhart 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 dissenter's rights of appraisal, and such summary is qualified by
reference to applicable provisions of the Indiana Code, which are reproduced in
full Annex F to this Proxy Statement/Prospectus. A shareholder must complete
each step in the precise order prescribed by the Code to perfect his, her or its
dissenter's rights of appraisal.
Any holder of Elkhart common stock electing to exercise his, her or its
right of dissent (a "Dissenting Shareholder") shall file with Elkhart prior to
or at the shareholders meeting, a written notice of intent to demand payment for
shares if the exchange is effectuated. If the Plan of Share Exchange is approved
by the required vote and the Dissenting Shareholder has not voted in favor
thereof, the Dissenting Shareholder may make written demand on Elkhart for
payment of the fair value of the Dissenting Shareholder's shares. If the Plan of
Share Exchange is effected, Elkhart shall pay to the Dissenting Shareholder,
upon the determination of the fair value, and, in the case of shares represented
by certificates, the surrender of such certificates, the fair value thereof.
Within ten days after the Plan of Share Exchange is effected, Elkhart shall
give written notice thereof to each Dissenting Shareholder who has made demand
as provided in the Indiana Code and shall include in such written notice the
place where the demand for payment must be sent and where and when certificates
for shares must be deposited; supply a form for demanding payment; set a date by
which the demand must be received which is not less than thirty days nor more
than sixty days after delivery of the notice.
33
If the demand for payment remains unsettled, Elkhart shall commence a
proceeding within sixty days after receipt of the demand petitioning the court
to determine the fair value. If a petition is not filed within sixty days,
Elkhart shall pay to each dissenter the amount demanded. The assessment of the
cost of the proceedings will be assessed against Elkhart unless the court finds
the dissenters acted arbitrarily, vexatiously or not in good faith in demanding
payment.
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
Elkhart 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 Elkhart for those purposes generally include
individuals or entities that control, are controlled by, or are under common
control with, Elkhart, and would not include shareholders who are not officers,
directors or principal shareholders of Elkhart.
The affiliates of Elkhart 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 Elkhart have been publicly filed by
Capitol; or
(2) in violation of the Securities Act.
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34
OPINION OF FINANCIAL ADVISOR
Elkhart has retained JMP Financial, Inc. to provide a financial fairness
opinion in connection with the exchange. The Elkhart board selected JMP
Financial, Inc. to act as Elkhart'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 Elkhart 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. Elkhart shareholders are urged to, and should, read the opinion
carefully and in its entirety. The opinion is directed to the Elkhart 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 Elkhart 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 audited financial statements and unaudited financial
statements of Elkhart as set forth in Annex D;
. discussed the past and current operations and financial condition and
the prospects of Elkhart with senior executives of Elkhart;
. 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 Elkhart 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) CBCL SHARE MULTIPLES. In order to evaluate the value of CBCL share price,
JMP Financial, Inc. reviewed the price-to-book value and price-to-earnings
ratios ("Multiples") and performance data of publicly traded stocks of all
Michigan banks, all bank holding companies, Midwest banks of similar size
to CBCL ($1 billion to $5 billion in assets) and all publicly traded U.S.
banks. 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, or below, the Multiples of comparable
size banks and bank holding companies. The summary data for this analysis
is presented below and demonstrates that CBCL common stock price sells at
Multiples just below the aggregate averages of the various Comparable
Groups. Accordingly, there is a presumption that CBCL was fairly priced in
the securities market at the time of evaluation.
35
COMPARABLE GROUP COUNT P/BV P/E
$1b-$5b Assets in MW 40 182.5 15.1
$1b-$5b Assets Natl 85 189.6 14.9
All Natl 453 184.9 15.6
All MI 16 163.8 12.8
----- ----
Average 180.1 15.8
CBCL 171.2 14.6
P/BV AND P/E FIGURES COMPARABLE GROUPS ARE THE AVERAGE OF THE AVERAGE AND MEDIAN
FOR THE ENTIRE GROUP.
(2) CHANGE-OF-CONTROL MULTIPLES. JMP Financial, Inc. reviewed the pricing
ratios in those mergers and acquisitions of banks and bank holding
companies 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 157 percent to
296 percent, with both median and average premium to book values falling
between 229 percent and 231 percent. All of these transactions involved the
transfer of control to the acquiring institution.
(3) ELKHART SHARE MULTIPLES. JMP Financial, Inc. also consulted a private
database to construct several groups of banks and bank holding companies it
deemed to be similar to Elkhart, 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 Elkhart exchange. The
price-to-book value multiple to be paid to Elkhart is greater than that
paid to the average or median of the aggregate group of publicly traded
banks in neighboring states and throughout the country with assets less
than $250 million; greater than that of publicly traded banks with assets
less than $500 million in neighboring states and comparable to publicly
traded banks in the state of Indiana. The P/E Multiple to be paid to
Elkhart, approximately 28x 2002 earnings and 21x trailing twelve month
earnings, are greater than the averages and median paid of all the
Comparative Groups, except for banks with assets of less than $250 million
in Indiana and neighboring states. However, given the limited sample size
and outlying samples in that Group the comparison does not merit
significant attention.
COUNT P/BV P/E
All National 453 184.9 15.6
All Midwest 86 172.7 15.5
MW; <$500m assets 15 132.1 19.1
MW; <$250m assets 6 149.0 26.6
All Indiana 17 136.0 14.4
All National; < $250m assets 39 132.8 20.2
----- ----
Average 151.2 18.6
Elkhart 145.9 20.8
P/BV AND P/E FIGURES COMPARABLE GROUPS ARE THE AVERAGE OF THE AVERAGE AND MEDIAN
FOR THE ENTIRE GROUP.
36
(4) ILLIQUDITY. On an individual basis there are substantial differences
between the financial and market condition and performance of Elkhart
stock and most other institutions. In the aggregate, the most striking
difference between Elkhart and the various comparative groups was
liquidity. Most other commercial banks had significant positive
earnings records, as opposed to a history of growing, but low earnings
for Elkhart. It may be argued that Elkhart is still a maturing
institution and therefore direct comparisons of earnings performance
may be difficult. 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 2/5 of
one percent of their outstanding stock. In other words, these
institutions provided minority shareholders with reasonable liquidity.
Elkhart 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, ceteras paribus, the Multiples paid for
Elkhart should be lower than those of comparable institutions by that
margin.
(5) NOT AN "ACQUISITION" PREMIUM. The transaction at issue may be
characterized, at least casually, as an "acquisition". There is a
tendency to compare the acquisition Multiples paid to Elkhart in this
transaction to "acquisition" Multiples for other commercial banks as
reported in the media and private database. 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
acquisition stock. In this case, Elkhart is now and has been since it
commenced business, an affiliate and controlled subsidiary of Capitol.
CBCL was acquiring less than 50 percent of the Elkhart stock. Given
that the transaction thus represented purchase of a minority position,
direct comparison to change-of-control premiums, is misleading.
(6) A MINORITY SALE. In fact, the transaction bears more of a resemblance
to the sale of a minority block of stock then to a change-of-control
acquisition. The most dramatic difference, as discussed above, between
the exchange of minority shares and an acquisition of all of the stock
of an entire institution is the "change of control". In the latter
transaction, control of the acquired institution changes hands, for
which the acquiring institution may pay a significant premium. In the
present transaction, JMP Financial, Inc. noted that Capitol has had
control of Elkhart from the outset and would not be expected to pay a
"premium" for control, since it already owns control of Elkhart.
Accordingly, and especially in light of the fact that the aggregate
block to-be-acquired by CBCL from outsiders is only approximately 48
percent and comprised of numerous very small blocks, JMP Financial,
Inc. would expect that the premium over book value to be paid by CBCL
would be closer to the price paid in the sale of a minority block of
stock in a small publicly traded bank. In other words, one would
expect Elkhart shareholders to be paid Multiples much more similar to
those paid for minority shares in Comparative Group institutions then
the Multiples paid in change-of-control transactions.
(7) JMP Financial, Inc. therefore concluded that the exchange was fair to
the shareholders of Elkhart from a financial point of view.
The opinion and presentation of JMP Financial, Inc. to the Elkhart board
was one of many factors taken into consideration by Elkhart'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 Elkhart board with respect to
the exchange or of whether the Elkhart board would have been willing to agree to
a transaction with a different form or amount of consideration.
The Elkhart 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 Elkhart agreed to pay JMP Financial, Inc. a fee of $9,000 plus
out-of-pocket expenses. In addition, Elkhart has agreed to indemnify JMP
Financial, Inc. and its affiliates, against certain liabilities and expenses,
including certain liabilities under the federal securities laws.
JMP Financial, Inc. has also been engaged to provide financial advisory
services in connection with other pending share exchanges with other affiliates
of Capitol (see "Recent Developments"). JMP Financial, Inc. has been engaged to
provide financial advisory services in connection with previous share exchange
transactions with other affiliates of Capitol. In total, JMP Financial, Inc. has
issued fairness opinions on 12 transactions of similar structure with affiliates
of Capitol. In each opinion, JMP Financial, Inc. opined that those transactions
were fair from a financial point of view to the shareholders of those entities.
For those engagements, through June 17, 2003, JMP Financial, Inc. was paid a
total of $117,500. JMP Financial, Inc. has performed no services directly for
Capitol. Further, there are no agreements between Capitol or any of its
affiliates and JMP Financial, Inc. regarding future fairness opinions or other
financial advisory services. JMP Financial, Inc. is aware of no conflicts of
interest that JMP Financial, Inc. has at arriving at a fairness opinion.
37
THE CLOSING
EFFECTIVE TIME
The exchange will be effective at 5:00 p.m., Eastern Time, on July 31,
2003, and will be closed as soon as possible after the vote at the meeting of
Elkhart's shareholders. If the Plan of Share Exchange is approved, as of the
effective date, each outstanding share of Elkhart 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 Elkhart 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 Elkhart 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 Elkhart 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 Elkhart 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 Elkhart stock will represent only the right to receive the shares of
Capitol common stock into which shares of Elkhart 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 Elkhart 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 Elkhart 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.
Elkhart'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 Elkhart stock that is not registered in the
records of Elkhart has occurred, then, so long as the Elkhart 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 Elkhart 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.
38
FEES AND EXPENSES
Whether or not the exchange is completed, Capitol and Elkhart 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.
STOCK MARKET LISTING
Capitol will promptly prepare and submit a listing application with respect
to the maximum number of shares of Capitol common stock issuable to Elkhart
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. or the New York Stock Exchange, as the case may be (see "Recent
Developments").
AMENDMENT AND TERMINATION
Capitol and Elkhart may amend or terminate the exchange at any time before
or after shareholder approval of the Plan of Share Exchange. After shareholder
approval of the exchange, it may not be further amended without the approval of
the shareholders.
[The remainder of this page intentionally left blank]
39
THE SHAREHOLDERS' MEETING
DATE, TIME AND PLACE
The shareholders' meeting will be held on July 24, 2003 at Elkhart
Community Bank, 303 South Third Street, Elkhart, Indiana 46516 at 11:15 a.m.,
local time.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETING
At the shareholders' meeting, holders of Elkhart common stock will vote on
whether to approve the exchange. See "The Exchange". Shareholders will also vote
on the election of directors of Elkhart. See "Election of Directors".
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Holders of record of Elkhart common stock at the close of business on May
15, 2003, the record date for the shareholders' meeting, are entitled to receive
notice of and to vote at the shareholders' meeting. At March 31, 2003, 500,000
shares of Elkhart common stock were issued and outstanding and held by
approximately 177 holders of record. Capitol held 254,500 shares of Elkhart
common stock on that date and 245,500 were held by shareholders other than
Capitol.
A majority of the shares of the Elkhart 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 Elkhart common stock on the record date are each entitled
to one vote per share with respect to approval of the exchange at Elkhart's
shareholders' meeting.
Elkhart 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. Elkhart 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, Elkhart and Capitol have agreed that
approval of the exchange will require the affirmative vote of a majority of the
shares of Elkhart common stock outstanding on the record date, excluding the
50.9% of Elkhart'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 March 31, 2003, the directors and executive
officers of Elkhart and their affiliates were entitled to vote approximately
17,740 shares of Elkhart common stock. These shares represent approximately
3.55% of the outstanding shares of Elkhart common stock and 7.23% of Elkhart's
shares held by shareholders other than Capitol. The directors and executive
officers have agreed to vote their shares of Elkhart common stock in favor of
the exchange.
40
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 Elkhart stock will be
mailed by Capitol to former Elkhart 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 Elkhart, by a later-dated proxy signed and returned by mail or by attending
the shareholders' meeting and voting in person. Attendance at Elkhart'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:
Elkhart Community Bank
303 South Third Street
Elkhart, Indiana 46516
Attn: Steven L. Brown, President
If you require assistance in changing or revoking a proxy, you should
contact Steven Brown at the address above or at phone number (574) 295-9600.
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 Elkhart will pay the cost of solicitation of proxies. In
addition to solicitation by mail, the directors, officers and employees of
Elkhart may also solicit proxies from shareholders by telephone, telecopy,
telegram or in person.
41
COMPARISON OF SHAREHOLDER RIGHTS
As a result of the exchange, holders of shares of Elkhart 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 Indiana
Code, as well as to Elkhart'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 Elkhart and Capitol:
--------------------------------------------------------------------
Elkhart Capitol
- -----------------------------------------------------------------------------------------------------------------------
Authorized Capital Stock 1,000,000 25,000,000
- -----------------------------------------------------------------------------------------------------------------------
Preemptive Rights None None
- -----------------------------------------------------------------------------------------------------------------------
Quorum Requirements Majority Majority
- -----------------------------------------------------------------------------------------------------------------------
Special Meetings of Stockholders Called by CEO, majority of the Called by CEO, majority of the
Board or shareholders Board or shareholders
representing 10% 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 No No
- -----------------------------------------------------------------------------------------------------------------------
Number of Directors 3-25 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 the Board of Directors By majority of Directors
except as provided in the
articles of incorporation
- -----------------------------------------------------------------------------------------------------------------------
Appraisal/Dissenters' Rights Indiana law provides for
dissenters' rights No
- -----------------------------------------------------------------------------------------------------------------------
42
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 March 31, 2003, 11,737,860 shares of common stock were
outstanding. UMB Bank, n.a., serves as transfer agent and registrar for
Capitol's common stock.
Michigan law allows Capitol's board of directors to issue additional shares
of stock up to the total amount of common stock authorized without obtaining the
prior approval of the shareholders.
Capitol's board of directors has authorized the issuance of the shares of
common stock as described in this proxy statement/prospectus. All shares of
common stock offered will be, when issued, fully paid and nonassessable.
The following summary of the terms and provisions of the common stock does
not purport to be complete and is qualified in its entirety by reference to
Capitol's articles of incorporation, as amended, a copy of which is on file with
the SEC, and to the Michigan Business Corporation Act ("MBCA").
RIGHTS OF COMMON STOCK
All voting rights are vested in the holders of shares of common stock. Each
share of common stock is entitled to one vote. The shares of common stock do not
have cumulative voting rights, which means that a stockholder is entitled to
vote each of his or her shares once for each director to be elected at any
election of directors and may not cumulate shares in order to cast more than one
vote per share for any one director. The holders of the common stock do not have
any preemptive, conversion or redemption rights. Holders of common stock are
entitled to receive dividends if and when declared by Capitol's board of
directors out of funds legally available. Under Michigan law, dividends may be
legally declared or paid only if after the distribution the corporation can pay
its debts as they come due in the usual course of business and the corporation's
total assets equal or exceed the sum of its liabilities. In the event of
liquidation, the holders of common stock will be entitled, after payment of
amounts due to creditors and senior security holders, to share ratably in the
remaining assets.
SHARES AVAILABLE FOR ISSUANCE
The availability for issuance of a substantial number of shares of common
stock at the discretion of the board of directors provides Capitol with the
flexibility to take advantage of opportunities to issue additional stock in
order to obtain capital, as consideration for possible acquisitions and for
other purposes (including, without limitation, the issuance of additional shares
through stock splits and stock dividends in appropriate circumstances). There
are, at present, no plans, understandings, agreements or arrangements concerning
the issuance of additional shares of common stock, except as described in this
proxy statement/prospectus and for the shares of common stock reserved for
issuance under Capitol's stock option program.
Uncommitted authorized but unissued shares of common stock may be issued
from time to time to persons and in amounts the board of directors of Capitol
may determine and holders of the then outstanding shares of common stock may or
may not be given the opportunity to vote thereon, depending upon the nature of
those transactions, applicable law and the judgment of the board of directors of
Capitol regarding the submission of an issuance to or vote by Capitol's
shareholders. As noted, Capitol's shareholders have no preemptive rights to
subscribe to newly issued shares.
Moreover, it will be possible that additional shares of common stock would
be issued for the purpose of making an acquisition by an unwanted suitor of a
controlling interest in Capitol more difficult, time consuming or costly or
would otherwise discourage an attempt to acquire control of Capitol. Under such
circumstances, the availability of authorized and unissued shares of common
stock may make it more difficult for shareholders to obtain a premium for their
shares. Such authorized and unissued shares could be used to create voting or
other impediments or to frustrate a person seeking to obtain control of Capitol
by means of a merger, tender offer, proxy contest or other means. Such shares
could be privately placed with purchasers who might cooperate with the board of
directors of Capitol in opposing such an attempt by a third party to gain
control of Capitol. The issuance of new shares of common stock could also be
used to dilute ownership of a person or entity seeking to obtain control of
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.
43
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, through June 23, 2003, were traded on
the Nasdaq National Stock Market under the symbol "CBCLP"; after June 23, 2003,
such securities are listed on NYSE under the symbol "CBCPrA"). Capitol also has
additional trust-preferred securities which were private placed. Capitol has
guaranteed the preferred securities. The documents governing these securities,
including the indenture under which the debentures were issued, restrict
Capitol's right to pay a dividend on its common stock under certain
circumstances and give the holders of the preferred securities preference on
liquidation over the holders of Capitol's common stock. Specifically, Capitol
may not declare or pay a cash dividend on its common stock if (a) an event of
default has occurred as defined in the indenture, (b) Capitol is in default
under its guarantee, or (c) Capitol has exercised its right under the debentures
and the preferred securities to extend the interest payment period. In addition,
if any of these conditions have occurred and until they are cured, Capitol is
restricted from redeeming or purchasing any shares of its common stock except
under very limited circumstances. Capitol's obligation under the debentures, the
preferred securities and the guarantee approximates $61 million at an average
interest rate currently approximating 7% per annum, payable quarterly.
ANTI-TAKEOVER PROVISIONS
In addition to the utilization of authorized but unissued shares as
described above, the MBCA contains other provisions which could be utilized by
Capitol to impede efforts to acquire control of Capitol. Those provisions
include the following:
CONTROL SHARE ACQUISITIONS. The MBCA 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 Michigan corporations.
The act establishes procedures governing "control share acquisitions." A
control share acquisition is defined as an acquisition of shares by an acquirer
which, when combined with other shares held by that person or entity, would give
the acquirer voting power at or above any of the following thresholds: 20%,
33-1/3% or 50%. Under that act, an acquirer may not vote "control shares" unless
the corporation's disinterested shareholders vote to confer voting rights on the
control shares. The acquiring person, officers of the target corporation, and
directors of the target corporation who are also employees of the corporation
are precluded from voting on the issue of whether the control shares shall be
accorded voting rights. The act does not affect the voting rights of shares
owned by an acquiring person prior to the control share acquisition.
The act entitles corporations to redeem control shares from the acquiring
person under certain circumstances. In other cases, the act confers dissenters'
rights upon all of a corporation's shareholders except the acquiring person.
The act applies only to an "issuing public corporation." Capitol falls
within the statutory definition of an "issuing public corporation." The act
automatically applies to any "issuing public corporation" unless the corporation
"opts out" of the statute by so providing in its articles of incorporation or
bylaws. Capitol has not "opted out" of the provisions of the act.
FAIR PRICE ACT. Certain provisions of the MBCA establish a statutory scheme
similar to the supermajority and fair price provisions found in many corporate
charters. The act provides that a super majority vote of 90% of the shareholders
and no less than two-thirds of the votes of non-interested shareholders must
approve a "business combination." The act defines a "business combination" to
encompass any merger, consolidation, share exchange, sale of assets, stock
issue, liquidation, or reclassification of securities involving an "interested
shareholder" or certain "affiliates." An "interested shareholder" is generally
any person who owns 10% or more of the outstanding voting shares of the company.
An "affiliate" is a person who directly or indirectly controls, is controlled
by, or is under common control with a specified person.
44
As of March 31, 2003 Capitol's management beneficially owned (including
immediately exercisable stock options and warrants) control of approximately
28.89% 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.
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45
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 Elkhart 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 Elkhart 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
------------------ ------
o Quarterly Report on Form 10-Q Quarter ended March 31, 2003
o Proxy Statement on Schedule 14A Annual Meeting Held May 8, 2003
o Annual Report on Form 10-K Year ended December 31, 2002
o Registration Statement on Form 8-A Filed April 19, 1990
filed April 19, 1990
46
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 JULY 15, 2003 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 Elkhart, 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 Elkhart has been supplied by Elkhart.
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 Elkhart 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.
47
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ANNEX A
PLAN OF SHARE EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into effective May 22, 2003
between and among CAPITOL BANCORP LIMITED, a Michigan corporation ("Capitol")
and the SHAREHOLDERS of ELKHART COMMUNITY BANK ("Elkhart").
R E C I T A L S
A. Elkhart is an Indiana banking corporation which commenced the business
of banking September 9, 1999.
B. Capitol is the holder of 254,500 shares (50.9%) of the duly issued and
outstanding common stock of Elkhart ("Elkhart common stock").
C. Elkhart 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. Elkhart's Board of Directors has determined that it would be in the best
interest of Elkhart's stockholders to exchange their shares of stock in Elkhart
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 Elkhart common stock will
exchange his, her or their shares of Elkhart common stock for shares of Capitol
common stock according to an exchange ratio determined as follows:
ELKHART SHARE VALUE. The value of each share of Elkhart common
stock shall be $14.407544.
CAPITOL SHARE VALUE. The share value of each share of Capitol
common stock shall be $20.916, the average of the closing prices
of Capitol's common stock for the month ended March 31, 2003, as
reported by the Nasdaq Stock Market, Inc.
EXCHANGE RATIO. The exchange ratio will be determined by dividing
the Elkhart Share Value by the Capitol Share Value.
Each Elkhart shareholder (except Capitol) will receive shares of Capitol
common stock in exchange for his, her or their Elkhart common stock calculated
by multiplying the number of shares of Elkhart 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 Elkhart shall have approved and adopted
the Plan.
b. The Board of Directors of Capitol shall have approved and adopted
the Plan.
c. A majority of the common stock of Elkhart (exclusive of the
shares held by Capitol) shall have been voted to approve and
adopt the Plan at a meeting of the shareholders called for that
purpose.
d. The Securities and Exchange Commission shall have declared
effective the Registration Statement registering the shares of
stock of Capitol common stock to be issued in the exchange.
3. FAIRNESS OPINION. The Board of Directors of Elkhart 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 Elkhart.
4. TAX OPINION. Miller, Canfield, Paddock and Stone, PLC, shall have issued
its legal opinion that the share exchange will constitute a reorganization
within the means 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 Elkhart (except to the extent of cash received in lieu of fractional shares).
5. SURRENDER OF CERTIFICATES. Each shareholder of Elkhart common stock
shall surrender to Capitol his, her or their certificate(s) for shares of
Elkhart common stock. Capitol shall direct its transfer agent, UMB Bank, n.a.,
to issue certificate(s) of Capitol common stock to be issued in the exchange.
Certificate(s) of Capitol common stock shall be issued and registered in the
same name as the shares of Elkhart common stock surrendered in exchange
therefor, and shall thereafter be transferable in the same manner as otherwise
provided for Capitol common stock. Shareholders of Elkhart will not be paid
dividend payments, if any, paid by Capitol until such time as their certificates
have been exchanged. Any such withheld dividend payment will be paid upon
exchange of the certificate(s).
6. NEW ELKHART CERTIFICATE. Elkhart 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
June 25, 2003
Board of Directors
Elkhart Community Bank
303 South Third Street
Elkhart, Indiana 46516
Ladies and Gentlemen:
We have examined the proposed Plan of Share Exchange (the "Agreement")
dated May 22, 2003, to be entered into between Capitol Bancorp Limited, a
Michigan Corporation ("CBCL") and the shareholders (the "Shareholders") of
Elkhart Community Bank ("Elkhart"), an Indiana Corporation by which CBCL shall
acquire from the Shareholders their outstanding shares of Elkhart, 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 Elkhart's common stock, not already owned by CBCL, and issued and
outstanding as of July 31, 2003 (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:
o Audited consolidated financial statements of Elkhart and CBCL for the
years ended December 31, 2002, 2001 and 2000, as available;
o Unaudited financial statements of Elkhart for the period ended March
31, 2003;
o Certain unaudited internal financial information concerning the
capital ratios of Elkhart;
o Publicly available information concerning CBCL;
o Publicly available information with respect to certain other bank
holding companies, which we deemed, appropriate, including competitors
of CBCL and Elkhart;
o Publicly available information with respect to the nature and terms of
certain other transactions which we consider relevant;
o The Agreement;
o Reviewed certain historical market prices and trading volumes of
Elkhart's and CBCL's common stock to the extent reasonably available.
As to Elkhart, such review was limited to its initial offering of
common stock.
Page Two
Board of Directors
Elkhart Community Bank
June 25, 2003
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 Elkhart 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 Elkhart's loan loss reserves are
adequate in all material respects and that, in the aggregate, other conditions
at CBCL and Elkhart are satisfactory and this opinion is conditioned upon such
assumption. We have also assumed that there has been no material change in
Elkhart'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 Elkhart 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
Elkhart 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
June 25, 2003
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 Elkhart Community Bank ("Elkhart") dated as of May 22, 2003.
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 Elkhart 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 Elkhart, as summarized below, and upon such other
documents as we have deemed appropriate, including the information about Capitol
and Elkhart 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 Elkhart 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
Elkhart shareholder holds the shares of Elkhart 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)
Elkhart shareholders, if any, who received their Elkhart common stock through
the exercise of employee stock options or otherwise as compensation; (vi)
Elkhart shareholders who are not U.S. persons; and (vii) Elkhart shareholders
who hold Elkhart 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
June 25, 2003
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
Elkhart shareholders will be approximately equal to the fair market value of the
Elkhart common stock surrendered under the Plan.
2. Capitol has no plan or intention to liquidate Elkhart; to merge Elkhart
into another corporation; to cause Elkhart 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 Elkhart 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, Elkhart, and the shareholders of Elkhart 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
Elkhart for their common stock of Elkhart is voting common stock of Capitol.
Further, no liabilities of Elkhart or any Elkhart shareholder will be assumed by
Capitol, nor will any of the Elkhart 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 Elkhart common stock other than the Elkhart
common stock first acquired by Capitol upon the formation of Elkhart in
September of 1999.
7. Capitol will not make any cash payments, directly or indirectly, to
dissenting shareholders of Elkhart, nor will Capitol, directly or indirectly,
reimburse Elkhart for any payments made by Elkhart to dissenting shareholders.
8. Any cash payment made by Capitol to Elkhart 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. The total cash consideration that will
be paid under the Plan to the Elkhart shareholders instead of issuing fractional
shares of Capitol common stock will not exceed one percent of the total
consideration that will be issued under the Plan to the Elkhart shareholders in
exchange for their Elkhart common stock. The fractional share interests of each
Elkhart shareholder will be aggregated and no Elkhart shareholder will receive
cash in an amount greater to or greater than the value of one full share of
Capitol common stock.
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
June 25, 2003
Page 3
Our opinion is also predicated on the accuracy of the following
representations provided to us by Elkhart:
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 Elkhart 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
Elkhart shareholders will be approximately equal to the fair market value of the
Elkhart common stock surrendered under the Plan.
3. Elkhart has no plan or intention to issue additional shares of its stock
that would result in Capitol losing "control" of Elkhart within the meaning of
Section 368(c) of the Code.
4. Capitol, Elkhart, and the shareholders of Elkhart will pay their
respective expenses, if any, incurred in connection with the Plan.
5. Elkhart has only one class of stock authorized, being voting common
stock. At the time the Plan is executed, Elkhart 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 Elkhart.
6. Following the execution of the Plan, Elkhart will continue its historic
business or use a significant portion of its historic business assets in a
business.
7. Elkhart is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
8. Elkhart 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 Elkhart 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 Elkhart
who exchange their Elkhart 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
Elkhart shareholders who exchange all of their Elkhart common stock for Capitol
common stock in the exchange will be the same as the aggregate tax basis of the
Elkhart 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
June 25, 2003
Page 4
4) The holding period of the Capitol common stock received by a former
shareholder of Elkhart will include the holding period of shares of Elkhart
common stock surrendered in the exchange; and
5) A holder of Elkhart 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 Elkhart 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 Elkhart
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 ELKHART 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 three months
ended March 31, 2003 and 2002 (unaudited) ............................ D-5
Audited financial statements as of and for the years ended
December 31, 2002, 2001 and 2000 ..................................... D-11
D-1
Management's Discussion and Analysis of Financial Condition
and Results of Operations
ELKHART COMMUNITY BANK
PERIODS ENDED MARCH 31, 2003 AND 2002 AND DECEMBER 31, 2002, 2001 AND 2000
FINANCIAL CONDITION
Elkhart Community Bank is engaged in commercial banking activities from its sole
location in Elkhart, Indiana. From its inception in September 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 $48.3 million at March 31, 2003, a decrease from $53.2
million at December 31, 2002. The Bank's total assets approximated $35.9 million
at year-end 2001.
Total portfolio loans approximated $44.3 million at March 31, 2003, an increase
of approximately $1.0 million from the $43.3 million level at December 31, 2002.
At December 31, 2001, total portfolio loans approximated $31.5 million.
Portfolio loan growth since 1999 has been significant. Commercial loans
approximated 81% of total portfolio loans at March 31, 2003 consistent with the
Bank's emphasis on commercial lending activities.
The allowance for loan losses at March 31, 2003 approximated $664,000 or 1.50%
of total portfolio loans ($658,000 or 1.52% of total portfolio loans at December
31, 2002).
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.
There were no loan charge-offs for the three month 2003 period ($47,000 in the
corresponding 2002 period). Net loan charge-offs totaled $79,000 for the year
ended December 31, 2002, compared with $22,000 in 2001 (none in 2000 or 1999).
The Bank's growth has been funded primarily by deposits, most of which are
interest-bearing. Total deposits approximated $43 million at March 31, 2003, a
decrease of approximately $5.1 million from the $48.1 million level at December
31, 2002. A significant factor for this decrease was the maturation of a single
time deposit of about $5 million in January, 2003. Deposits increased
significantly in 2002 from the $31.2 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 $5.7 million at
March 31, 2003 or about 13.2% of total deposits, a decrease of approximately
$2.8 million from December 31, 2002. Noninterest-bearing deposits fluctuate
significantly from day to day, depending upon customer account activity.
Stockholders' equity approximated $4.9 million at March 31, 2003 or
approximately 10.2% of total assets. Capital adequacy is discussed elsewhere in
this narrative.
RESULTS OF OPERATIONS
The Bank's net income for the three months ended March 31, 2003 approximated
$118,000, compared with $29,000 in the corresponding 2002 period.
Net income for the year ended December 31, 2002 was $257,000 compared with
$14,000 in 2001. 2000 represented the Bank's first full calendar year of
operations, with a net loss of $229,000, compared to a net loss of $223,000 in
the 1999 period of about four months.
D-2
The principal source of operating revenues is interest income. Total interest
income for the three months ended March 31, 2003 approximated $735,000, compared
with $593,000 in the three month 2002 period. For the year ended December 31,
2002, total interest income approximated $2.7 million, compared with $2.4
million in 2001 and $1.5 million in 2000. Interest income has increased during
each of these periods because of growth in the Bank's loan portfolio, which has
more than offset lower yields on loans in a decreasing interest rate
environment.
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 $246,000 for the
three months ended March 31, 2003, compared with $218,000 for the three-month
2002 period. For the year ended December 31, 2002, total interest expense
approximated $950,000, compared with $1.2 million in 2001 and $753,000 in 2000.
Interest rates on deposits have decreased significantly since December 31, 2000,
which has offset growth in interest-bearing deposits. As a result, interest
expense was only marginally higher in the interim 2003 period compared to the
corresponding 2002 period, while for the year 2002, interest expense actually
decreased compared to 2001.
Net interest income approximated $489,000 for the three months ended March 31,
2003, compared with $375,000 for the 2002 corresponding period. Net interest
income for the year ended December 31, 2002, approximated $1.8 million,
significantly more than the $1.2 million in 2001 and $714,000 in 2000.
Provisions for loan losses were $6,000 and $78,000 for the three months ended
March 31, 2003 and 2002, respectively ($264,000 for the year ended December 31,
2002, $225,000 in 2001 and $222,000 in 2000). The lower provision in the interim
2003 period was related to lower loan growth as well as lower charge-offs
compared to the interim 2002 period. 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 $75,000 for the three months
ended March 31, 2003 ($33,000 in the corresponding period in 2002) and
approximated $229,000 for the year ended December 31, 2002, $123,000 in 2001 and
$66,000 in 2000.
Noninterest expense has increased significantly. Total noninterest expense
approximated $379,000 for the three months ended March 31, 2003, compared with
$285,000 for the corresponding 2002 period. For the year ended December 31,
2002, total noninterest expense approximated $1.3 million, compared with $1.1
million in 2001 and $899,000 in 2000.
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. Most of the deposit growth since inception has been deployed into
commercial loans, consistent with the Bank's emphasis on commercial lending
activities.
Cash and cash equivalents approximated $3.5 million at March 31, 2003, compared
with $9.2 million at December 31, 2002 and $3.9 million at December 31, 2001. 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 March 31, 2003 is adequate to fund
loan demand and to meet depositor needs.
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 Elkhart
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.
D-3
IMPACT OF NEW ACCOUNTING STANDARDS
There are certain new accounting standards either becoming effective or being
issued in 2003. They are discussed in Note B of the accompanying interim
financial statements.
(The remainder of this page intentionally left blank)
D-4
ELKHART COMMUNITY BANK
------
CONDENSED INTERIM FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
D-5
BALANCE SHEETS
ELKHART COMMUNITY BANK
March 31 December 31
2003 2002
------------ ------------
(unaudited)
ASSETS
Cash and due from banks $ 1,042,458 $ 1,559,902
Interest-bearing deposits with banks 29,656 29,178
Federal funds sold 2,400,000 7,600,000
------------ ------------
Cash and cash equivalents 3,472,114 9,189,080
Investment securities held for long-term
investment, carried at amortized cost which
approximates market value 205,550 191,100
Portfolio loans:
Commercial 35,717,971 34,377,979
Real estate mortgage 5,594,125 5,023,123
Installment 2,967,304 3,875,916
------------ ------------
Total portfolio loans 44,279,400 43,277,018
Less allowance for loan losses (664,000) (658,000)
------------ ------------
Net portfolio loans 43,615,400 42,619,018
Premises and equipment 561,851 571,397
Accrued interest income 186,289 199,752
Other assets 255,833 439,260
------------ ------------
TOTAL ASSETS $ 48,297,037 $ 53,209,607
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 5,663,683 $ 8,489,524
Interest-bearing 37,374,891 39,658,982
------------ ------------
Total deposits 43,038,574 48,148,506
Accrued interest on deposits and other liabilities 321,220 242,004
------------ ------------
Total liabilities 43,359,794 48,390,510
STOCKHOLDERS' EQUITY:
Common stock, par value $6.00 per share,
1,000,000 shares authorized;
500,000 shares issued and outstanding 3,000,000 3,000,000
Surplus 2,000,000 2,000,000
Retained-earnings deficit (62,757) (180,903)
------------ ------------
Total stockholders' equity 4,937,243 4,819,097
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 48,297,037 $ 53,209,607
============ ============
See notes to interim financial statements.
D-6
STATEMENTS OF OPERATIONS (UNAUDITED)
ELKHART COMMUNITY BANK
Three Months Ended
March 31
-----------------------
2003 2002
-------- --------
Interest income:
Portfolio loans (including fees) $723,609 $580,919
Federal funds sole 8,289 9,634
Interest-bearing deposits with banks 55
Other 3,045 2,040
-------- --------
Total interest income 734,998 592,593
Interest expense on deposits 245,552 217,845
-------- --------
Net interest income 489,446 374,748
Provision for loan losses 6,000 77,671
-------- --------
Net interest income after
provision for loan losses 483,446 297,077
Noninterest income:
Service charges on deposit accounts 13,283 10,234
Fees from origination of non-portfolio
residential mortgage loans 61,374 20,169
Other 715 3,023
-------- --------
Total noninterest income 75,372 33,426
Noninterest expense:
Salaries and employee benefits 185,927 133,044
Occupancy 16,897 12,570
Other 175,848 139,694
-------- --------
Total noninterest expense 378,672 285,308
-------- --------
Income before federal income taxes 180,146 45,195
Federal income taxes 62,000 16,000
-------- --------
NET INCOME $118,146 $ 29,195
======== ========
NET INCOME PER SHARE (basic and diluted) $ 0.24 $ 0.06
======== ========
See notes to interim financial statements.
D-7
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
ELKHART COMMUNITY BANK
Retained-
Common Earnings
Stock Surplus Deficit Total
---------- ---------- ---------- ----------
THREE MONTHS ENDED MARCH 31, 2002
Balances at January 1, 2002 $3,000,000 $2,000,000 $ (438,309) $4,561,691
Net income for the 2002 period 29,195 29,195
---------- ---------- ---------- ----------
BALANCES AT MARCH 31, 2002 $3,000,000 $2,000,000 $ (409,114) $4,590,886
========== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 2003
Balances at January 1, 2003 $3,000,000 $2,000,000 $ (180,903) $4,819,097
Net income for the 2003 period 118,146 118,146
---------- ---------- ---------- ----------
BALANCES AT MARCH 31, 2003 $3,000,000 $2,000,000 $ (62,757) $4,937,243
========== ========== ========== ==========
See notes to interim financial statements.
D-8
STATEMENTS OF CASH FLOWS (UNAUDITED)
ELKHART COMMUNITY BANK
Three Months Ended
March 31
----------------------------
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income for the period $ 118,146 $ 29,195
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,000 77,671
Depreciation of premises and equipment 13,718 18,460
Decrease (increase) in accrued interest income and other assets 196,890 (1,046)
Increase in accrued interest on deposits and
other liabilities 79,216 9,144
----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 413,970 133,424
INVESTING ACTIVITIES
Purchases of investment securities held for long-term
investment (14,450)
Net increase in portfolio loans (1,002,382) (2,098,166)
Purchases of premises and equipment (4,172) (1,233)
----------- -----------
NET CASH USED BY INVESTING
ACTIVITIES (1,021,004) (2,099,399)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts (3,467,359) 948,441
Net decrease in certificates of deposit (1,642,573) (351,952)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (5,109,932) 596,489
----------- -----------
DECREASE IN CASH AND CASH
EQUIVALENTS (5,716,966) (1,369,486)
Cash and cash equivalents at beginning of period 9,189,080 3,862,396
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 3,472,114 $ 2,492,910
=========== ===========
See notes to interim financial statements.
D-9
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
ELKHART COMMUNITY BANK
NOTE A--BASIS OF PRESENTATION
The accompanying condensed financial statements of Elkhart Community Bank
have been prepared in accordance with accounting principles generally accepted
in the United States of America 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 accounting principles generally accepted in the United States of
America.
The statements do, however, include all adjustments of a normal recurring
nature which Elkhart considers necessary for a fair presentation of the interim
periods.
The results of operations for the three-month period ended March 31, 2003
are not necessarily indicative of the results to be expected for the year ending
December 31, 2003.
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, establishes an alternative fair value method of
accounting for stock options whereby compensation expense would be recognized
based on the computed fair value of the options on the grant date. By not
electing this alternative, certain pro forma disclosures of the expense
recognition provisions of Statement No. 123 are required, which are as follows:
2003 2002
----------- -----------
Net income:
As reported $ 118,146 $ 29,195
Less pro forma compensation
expense regarding fair value
of stock option awards, net
of income tax effect (9,103) (8,703)
----------- -----------
Pro forma 109,043 20,492
Net income per share:
Basic:
As reported 0.24 0.06
Pro forma 0.22 0.04
Diluted:
As reported 0.24 0.06
Pro forma $ 0.22 $ 0.04
NOTE B--NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) recently issued Statement
No. 149, AMENDMENT OF STATEMENT NO. 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. This new standard, which clarifies the accounting for derivative
instruments including certain derivative instruments embedded in other
contracts, hedging activities under Statement No. 133 and aligns current
accounting with other FASB projects, intends to create more consistent
accounting treatment to derivative instruments and hedging activities. It is
effective for contracts entered into after June 30, 2003 and is not expected to
have a material impact on the Bank's financial position or results of operation,
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 the Bank's financial statements.
D-10
ELKHART COMMUNITY BANK
------
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
D-11
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Elkhart Community Bank
We have audited the accompanying balance sheets of Elkhart Community Bank as of
December 31, 2002 and 2001, and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2002, 2001
and 2000. 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 Elkhart Community Bank as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years ended December 31, 2002, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2003
D-12
BALANCE SHEETS
ELKHART COMMUNITY BANK
December 31
---------------------------
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 1,559,902 $ 1,362,396
Interest-bearing deposits with banks 29,178
Federal funds sold 7,600,000 2,500,000
------------ ------------
Cash and cash equivalents 9,189,080 3,862,396
Investment securities held for long-term
investment, carried at amortized cost which
approximates market value--Note B 191,100 136,000
Portfolio loans--Note C:
Commercial 34,377,979 26,428,281
Real estate mortgage 5,023,123 1,112,667
Installment 3,875,916 3,950,731
------------ ------------
Total portfolio loans 43,277,018 31,491,679
Less allowance for loan losses (658,000) (473,000)
------------ ------------
Net portfolio loans 42,619,018 31,018,679
Premises and equipment--Note E 571,397 511,094
Accrued interest income 199,752 180,772
Other assets 439,260 230,002
------------ ------------
TOTAL ASSETS $ 53,209,607 $ 35,938,943
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 8,489,524 $ 3,632,216
Interest-bearing--Note F 39,658,982 27,544,108
------------ ------------
Total deposits 48,148,506 31,176,324
Accrued interest on deposits and other liabilities 242,004 200,928
------------ ------------
Total liabilities 48,390,510 31,377,252
STOCKHOLDERS' EQUITY--Notes G and L:
Common stock, par value $6.00 per share,
1,000,000 shares authorized;
500,000 shares issued and outstanding 3,000,000 3,000,000
Surplus 2,000,000 2,000,000
Retained-earnings deficit (180,903) (438,309)
------------ ------------
Total stockholders' equity 4,819,097 4,561,691
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 53,209,607 $ 35,938,943
============ ============
See notes to financial statements.
D-13
STATEMENTS OF OPERATIONS
ELKHART COMMUNITY BANK
Year Ended December 31
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Interest income:
Portfolio loans (including fees) $ 2,631,866 $ 2,184,037 $ 1,086,878
Federal funds sold 47,876 148,473 336,401
Interest-bearing deposits with banks 17,389 35,126
Other 25,126 8,152 8,575
----------- ----------- -----------
Total interest income 2,704,868 2,358,051 1,466,980
Interest expense:
Interest expense on deposits 949,453 1,165,551 752,706
Other 218
----------- ----------- -----------
Total interest expense 949,671 1,165,991 752,706
Net interest Income 1,755,197 1,192,500 714,274
Provision for loan losses--Note C 263,545 225,193 222,000
----------- ----------- -----------
Net interest income after provision
for loan losses 1,491,652 967,307 492,274
Noninterest income:
Service charges on deposit accounts 72,646 26,705 5,990
Fees from origination of non-portfolio
residential mortgage loans 130,361 82,065 52,956
Other 26,319 13,968 7,209
----------- ----------- -----------
Total noninterest income 229,326 122,738 66,155
Noninterest expense:
Salaries and employee benefits 605,651 495,830 410,675
Occupancy 56,064 38,882 37,163
Equipment rent, depreciation and maintenance 89,129 95,008 89,516
Other 575,728 435,532 361,789
----------- ----------- -----------
Total noninterest expense 1,326,572 1,065,252 899,143
----------- ----------- -----------
Income (loss) before federal income taxes (benefit) 394,406 24,793 (340,714)
Federal income taxes (benefit)--Note I 137,000 11,000 (112,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 257,406 $ 13,793 $ (228,714)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE (basic and diluted) $ 0.51 $ 0.03 $ (0.46)
=========== =========== ===========
See notes to financial statements
D-14
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ELKHART COMMUNITY BANK
Retained-
Common Earnings
Stock Surplus Deficit Total
----------- ----------- ----------- -----------
Balances at January 1, 2000 $ 3,000,000 $ 2,000,000 $ (223,388) $ 4,776,612
Net loss for 2000 (228,714) (228,714)
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2000 3,000,000 2,000,000 (452,102) 4,547,898
Net income for 2001 13,793 13,793
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2001 3,000,000 2,000,000 (438,309) 4,561,691
Net income for 2002 257,406 257,406
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 2002 $ 3,000,000 $ 2,000,000 $ (180,903) $ 4,819,097
=========== =========== =========== ===========
See notes to financial statements.
D-15
STATEMENTS OF CASH FLOWS
ELKHART COMMUNITY BANK
Year Ended December 31
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) for the period $ 257,406 $ 13,793 $ (228,714)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for loan losses 263,545 225,193 222,000
Depreciation of premises and equipment 70,109 73,413 72,015
Deferred income taxes 13,000 11,000 (112,000)
Increase in accrued interest income and other assets (241,238) (70,996) (57,031)
Increase (decrease) in accrued interest on deposits
and other liabilities 41,076 (140,180) 321,222
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 403,898 112,223 217,492
INVESTING ACTIVITIES
Proceeds from sales of investment securities
held for long-term investment 14,000
Purchases of investment securities held for long-term
investment (55,100)
Net increase in portfolio loans (11,863,884) (13,545,603) (13,926,523)
Purchases of premises and equipment (130,412) (4,537) (48,073)
------------ ------------ ------------
NET CASH USED BY INVESTING
ACTIVITIES (12,049,396) (13,550,140) (13,960,596)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 7,563,989 7,653,111 2,283,350
Net increase in certificates of deposit 9,408,193 4,153,140 11,084,878
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 16,972,182 11,806,251 13,368,228
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,326,684 (1,631,666) (374,876)
Cash and cash equivalents at beginning of year 3,862,396 5,494,062 5,868,938
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 9,189,080 $ 3,862,396 $ 5,494,062
============ ============ ============
See notes to financial statements
D-16
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION: Elkhart Community Bank (the
"Bank") is a full-service commercial bank located in Elkhart, Indiana. The Bank
commenced operations in September 1999. The Bank is 51% owned by Capitol Bancorp
Limited, a bank development company headquartered in Phoenix, Arizona and
Lansing, Michigan.
The Bank provides a full range of banking services to individuals, businesses
and other customers located in its community. A variety of deposit products are
offered, including checking, savings, money market, individual retirement
accounts and certificates of deposit. The principal market for the Bank's
financial services is the community in which it is located and the areas
immediately surrounding that community.
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks (interest-bearing and noninterest-bearing) and federal
funds sold. Generally, federal funds transactions are entered into for a one-day
period.
INVESTMENT SECURITIES: Investment securities available for sale (none at
December 31, 2002 and 2001) are carried at market value with unrealized gains
and losses reported as a separate component of stockholders' equity, net of tax
effect (accumulated other comprehensive income). All other investment securities
are classified as held for long-term investment and are carried at amortized
cost, which approximates market value. Investments are classified at the date of
purchase based on management's analysis of liquidity and other factors. The
adjusted cost of specific securities sold is used to compute realized gains or
losses. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
D-17
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Consistent with the Bank's emphasis on business lending, there are
concentrations of credit in loans secured by commercial real estate, equipment
and other business assets. The maximum potential credit risk to the Bank,
without regard to underlying collateral and guarantees, is the total of loans
and loan commitments outstanding. Management reduces the Bank's exposure to
losses from credit risk by requiring collateral and/or guarantees for loans
granted and by monitoring concentrations of credit, in addition to recording
provisions for loan losses and maintaining an allowance for loan losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated losses inherent in the portfolio at the balance
sheet date. Management's determination of the adequacy of the allowance is based
on evaluation of the portfolio (including potential impairment of individual
loans and concentrations of credit), past loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of portfolio
loans generally approximate the direct costs of successful loan originations.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
OTHER REAL ESTATE: Other real estate (included as a component of other assets,
$150,000 at December 31, 2002 and none in 2001) 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 (net of estimated selling cost) at the date acquired and are
periodically reviewed for subsequent impairment.
D-18
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
STOCK-BASED COMPENSATION: No stock-based compensation expense is recorded upon
granting of stock options because such stock options are accounted for under the
provisions of Accounting Principles Board (APB) Opinion 25 (and related
interpretations) and are granted at an exercise price equal to the market price
of common stock at grant date.
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, establishes an alternative fair value method of accounting for
stock options whereby compensation expense would be recognized based on the
computed fair value of the options on the grant date. By not electing this
alternative, certain pro forma disclosures of the expense recognition provisions
of Statement No. 123 are required, which are as follows:
2002 2001 2000
----------- ----------- -----------
Fair value assumptions:
Risk-free interest rate 4.5% 5.0% 7.0%
Dividend yield -- -- --
Stock price volatility .46 .39 .83
Expected option life 7 years -- --
Aggregate estimated fair value of
options granted $ 12,000 -- --
Net income (loss):
As reported 257,406 $ 13,793 $ (228,714)
Less pro forma compensation
expense regarding fair value
of stock option awards, net
of income tax effect (36,412) (34,810) (34,810)
----------- ----------- -----------
Pro forma 220,994 (21,017) (263,524)
Net income (loss) per share:
Basic:
As reported 0.51 0.03 (0.46)
Pro forma 0.44 (0.04) (0.53)
Diluted:
As reported 0.51 0.03 (0.46)
Pro forma $ 0.44 $ (0.04) $ (0.53)
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: 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.
D-19
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based on the
weighted average number of common shares outstanding (500,000 shares). Diluted
net income (loss) per share includes the dilutive effect of stock options (see
Note G).
COMPREHENSIVE INCOME (LOSS): 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 had no elements of comprehensive
income (loss) other than net income (loss).
NEW ACCOUNTING STANDARDS: Financial Accounting Standards Board (FASB) Statement
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, requires that goodwill no longer
be amortized and charged against earnings, but instead be reviewed for
impairment. Amortization of goodwill ceased upon adoption of the Statement. 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, 2002, the Bank had no recorded goodwill.
The FASB has also recently issued Statements No. 143 (ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS), No. 144 (ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS), 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) and No. 146 (ACCOUNTING
FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES). These new standards have
varying effective dates in 2002 and 2003 and, based on management's analysis,
are not expected to have a material effect 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. It had no material effect on the Bank's financial statements, upon
implementation.
Statement No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, provides alternative methods of transition for a voluntary change to
the fair-value based method of accounting for stock-based employee compensation
and it amends the prior disclosure requirements of Statement No. 123 to require
more prominent and frequent disclosures about the effects of stock-based
compensation. As permitted, the Bank has retained its prior method of accounting
for stock-based employee compensation.
D-20
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES AND INDEBTEDNESS OF OTHERS,
expands disclosures about obligations under certain guarantees and, in addition,
requires recording a liability for the fair value of the obligations undertaken
in issuing the guarantee, applicable to guarantees issued or modified after
December 31, 2002. This new guidance had no material impact on the Bank's
financial position or results of operations, upon implementation.
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.
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Bank's financial statements.
NOTE B--INVESTMENT SECURITIES
Investment securities consisted of Federal Reserve Bank stock at December 31,
2002 and 2001, which has been pledged to secure public and trust deposits and
for other purposes as required by law. Such investment is restricted and may
only be resold to or redeemed by the issuer.
NOTE C--LOANS
Transactions in the allowance for loan losses are summarized below:
2002 2001 2000
--------- --------- ---------
Balance at January 1 $ 473,000 $ 270,000 $ 48,000
Provision charged to operations 263,545 225,193 222,000
Loans charged off (deduction) (78,545) (22,193) --
Recoveries -- -- --
--------- --------- ---------
Balance at December 31 $ 658,000 $ 473,000 $ 270,000
========= ========= =========
D-21
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE C--LOANS--CONTINUED
Impaired loans (i.e., loans for which there is a reasonable probability that
borrowers would be unable to repay all principal and interest due under the
contractual terms of the loan documents) were not material. Nonperforming loans
(i.e., loans which are 90 days or more past due and loans on nonaccrual status)
as of December 31, 2002 and 2001 are summarized below:
2002 2001
-------- --------
Nonaccrual loans:
Commercial $245,000 $ --
Real estate -- --
Installment -- 222,000
-------- --------
Total nonaccrual loans 245,000 222,000
Past due (>90 days) loans:
Commercial -- --
Real estate -- --
Installment -- --
-------- --------
Total past due loans -0- -0-
-------- --------
Total nonperforming loans $245,000 $222,000
======== ========
If nonperforming loans had performed in accordance with their contractual terms
during the year, additional interest income of $13,000 would have been recorded
in 2002 ($8,000 in 2001 and none in 2000). Interest income recognized on loans
in nonaccrual status in 2002 operations approximated $7,000 ($8,000 in 2001 and
2000). At December 31, 2002, there were no material amounts of loans which were
restructured or otherwise renegotiated as a concession to troubled borrowers.
D-22
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
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, 2002 December 31, 2001
----------------------- ----------------------
Percentage Percentage
of Total of Total
Portfolio Portfolio
Amount Loans Amount Loans
-------- -------- -------- --------
Commercial $565,800 1.31% $397,320 1.26%
Real estate mortgage 42,000 0.10 14,190 0.04
Installment 50,200 0.11 61,490 0.20
-------- -------- -------- --------
Total allowance for loan losses $658,000 1.52% $473,000 1.50%
======== ======== ======== ========
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, 2002 and 2001, total loans to these
persons approximated $3.1 million and $1.6 million, respectively. During 2002,
$2.2 of new loans were made to these persons and repayments totaled $693,000.
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 Capitol
Bancorp Limited. Amounts paid for such services approximated $268,000, $248,000
and $192,000 in 2002, 2001 and 2000, respectively.
D-23
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE E--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
2002 2001
--------- ---------
Land, buildings and improvements $ 472,670 $ 437,538
Equipment and furniture 331,787 236,507
--------- ---------
804,457 674,045
Less accumulated depreciation (233,060) (162,951)
--------- ---------
$ 571,397 $ 511,094
========= =========
NOTE F--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated $18.7
million and $11.2 million as of December 31, 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of time deposits of $100,000 or
more were as follows:
2003 $ 9,827,000
2004 7,579,000
2005 454,000
2006 585,000
2007 225,000
-----------
Total $18,670,000
===========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE G--STOCK OPTIONS
At December 31, 2002, 42,000 stock options were outstanding which expire in
2009, of which 40,000 were granted in 1999 and 2,000 were granted in 2002 and
26,400 were currently exercisable. 40,000 stock options were outstanding at
December 31, 2001 and 2000 of which 18,000 and 10,000 were currently
exercisable, respectively. Each option vests ratably over a five-year period and
enables the holder to purchase one share of the Bank's common stock at $10.00
per share.
D-24
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE H--EMPLOYEE BENEFIT PLANS
Subject to eligibility requirements, the Bank's employees participate in the
employee benefit plans of Capitol Bancorp Limited. Amounts charged to expense by
the Bank for these defined contribution plans approximated $18,000 in 2002 and
2001 and $7,000 in 2000.
NOTE I--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
2002 2001 2000
--------- --------- ----------
Current $ 124,000 $ -0- $ -0-
Deferred 13,000 11,000 (112,000)
--------- --------- ----------
$ 137,000 $ 11,000 $ (112,000)
========= ========= ==========
Federal income taxes of $160,000 were paid during 2002 (none in 2001 and 2000).
Net deferred income tax assets consisted of the following at December 31:
2002 2001
--------- ---------
Allowance for loan losses $ 208,000 $ 145,000
Net operating loss carryforward -0- 42,000
Other, net (6,000) 28,000
--------- ---------
$ 202,000 $ 215,000
========= =========
D-25
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE J--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments at December
31 were as follows (in thousands):
2002 2001
---------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Financial Assets:
Cash and cash equivalents $ 9,189 $ 9,189 $ 3,862 $ 3,862
Investment securities held for long-term
investment 191 191 136 136
Portfolio loans:
Fixed rate 23,617 23,697 18,683 18,703
Variable rate 19,660 19,947 12,809 12,851
-------- -------- -------- --------
Total portfolio loans 43,277 43,644 31,492 31,554
Less allowance for loan losses (658) (658) (473) (473)
-------- -------- -------- --------
Net portfolio loans 42,619 42,986 31,019 31,081
Financial Liabilities:
Deposits:
Noninterest-bearing 8,490 8,490 3,632 3,632
Interest-bearing:
Demand accounts 12,414 12,411 9,707 9,705
Time certificates of deposit less
than $100,000 8,575 8,517 6,607 6,559
Time certificates of deposit
$100,000 or more 18,670 18,727 11,230 11,327
-------- -------- -------- --------
Total interest-bearing deposits 39,659 39,655 27,544 27,591
-------- -------- -------- --------
Total deposits 48,149 48,145 31,176 31,223
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-26
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE K--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 ($209,000 and $80,000 at
December 31, 2002 and 2001, respectively). Other loan commitments outstanding
consist of unused lines of credit and approved, but unfunded, specific loan
commitments ($9.2 million and $8.9 million at December 31, 2002 and 2001,
respectively).
These loan commitments (stand-by letters of credit and unfunded loans) generally
expire within one year and are reviewed periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the Bank's normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
Deposits at the Bank are insured up to the maximum amount covered by FDIC
insurance.
NOTE 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.
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.
D-27
NOTES TO FINANCIAL STATEMENTS
ELKHART COMMUNITY BANK
DECEMBER 31, 2002
NOTE L--CAPITAL REQUIREMENTS--CONTINUED
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, 2002, the bank had been in operation for more
than three years.
As of December 31, 2002, 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, 2002, 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, 2002 and 2001 are summarized below (amounts in thousands):
2002 2001
---- ----
Tier 1 capital to average total assets:
Minimum required amount >=$1,940 >=$2,843
Actual amount $4,819 $4,358
Ratio 9.94% 12.26%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1) >=$1,752 >=$1,205
Actual amount $4,819 $4,358
Ratio 11.00% 14.47%
Combined Tier 1 and Tier 2 capital to risk-weighted assets:
Minimum required amount(2) >=$3,504 >=$2,409
Amount required to meet "Well-Capitalized" category(3) >=$4,380 >=$3,011
Actual amount $5,368 $4,736
Ratio 12.26% 15.73%
(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-28
ANNEX E
FINANCIAL AND OTHER INFORMATION REGARDING
CAPITOL BANCORP LIMITED
The following items accompany this Proxy Statement/Prospectus as mailed to the
shareholders of Elkhart Community Bank:
- Report on Form 10-Q for period ended March 31, 2003
- Annual report to shareholders for year ended December 31, 2002
- Annual report on Form 10-K for year ended December 31, 2002
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 8, 2003
[This page intentionally left blank]
ANNEX F
EXCERPTS OF INDIANA CODE
REGARDING DISSENTERS' RIGHTS
IC 23-1-44-1 "CORPORATION" DEFINED
Sec. 1. As used in this chapter, "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.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-2 "DISSENTER" DEFINED
Sec. 2. As used in this chapter, "dissenter" means a shareholder who is entitled
to dissent from corporate action under section 8 of this chapter and who
exercises that right when and in the manner required by sections 10 through 18
of this chapter.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-3 "FAIR VALUE" DEFINED
Sec. 3. As used in this chapter, "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 would be
inequitable.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-4 "INTEREST" DEFINED
Sec. 4. As used in this chapter, "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 all the circumstances.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-5 "RECORD SHAREHOLDER" DEFINED
Sec. 5. As used in this chapter, "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 that treatment as a record shareholder is provided
under a recognition procedure or a disclosure procedure established under IC
23-1-30-4.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-6 "BENEFICIAL SHAREHOLDER" DEFINED
Sec. 6. As used in this chapter, "beneficial shareholder" means the person who
is a beneficial owner of shares held by a nominee as the record shareholder.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-7 "SHAREHOLDER" DEFINED
Sec. 7. As used in this chapter, "shareholder" means the record shareholder or
the beneficial shareholder.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-8 RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
Sec. 8. (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:
(A) shareholder approval is required for the merger by IC
23-1-40-3 or the articles of incorporation; and
(B) the shareholder is entitled to vote on the merger.
F-1
(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 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
(1) year after the date of sale.
(4) The approval of a control share acquisition under IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, 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) This section does not apply to the holders of shares of any class or
series if, on the date fixed to determine the shareholders entitled to receive
notice of and vote at the meeting of shareholders at which the merger, plan of
share exchange, or sale or exchange of property is to be acted on, the shares of
that class or series were:
(1) registered on a United States securities exchange registered under
the Exchange Act (as defined in IC 23-1-43-9); or
(2) traded on the National Association of Securities Dealers, Inc.
Automated Quotations System Over-the-Counter Markets _ National Market Issues or
a similar market.
(c) A shareholder:
(1) who is entitled to dissent and obtain payment for the
shareholder's shares under this chapter; or
(2) who would be so entitled to dissent and obtain payment but for the
provisions of subsection
(b); may not challenge the corporate action creating (or that, but for the
provisions of subsection (b), would have created) the shareholder's entitlement.
AS ADDED BY P.L.149-1986, SEC.28. AMENDED BY P.L.107-1987, SEC.19.
IC 23-1-44-9 DISSENTERS' RIGHTS OF BENEFICIAL SHAREHOLDER
Sec. 9. (a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one (1) person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
shareholder dissents and the 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 shareholder's behalf only if:
(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; and
(2) the beneficial shareholder does so with respect to all the
beneficial shareholder's shares or those shares over which the beneficial
shareholder has power to direct the vote.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-10 PROPOSED ACTION CREATING DISSENTERS' RIGHTS; NOTICE
Sec. 10. (a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is submitted to a vote at a shareholders' meeting, the
meeting notice must state that shareholders are or may be entitled to assert
dissenters' rights under this chapter.
(b) If corporate action creating dissenters' rights under section 8 of this
chapter 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 send them the dissenters' notice described in section 12 of this
chapter.
AS ADDED BY P.L.149-1986, SEC.28. AMENDED BY P.L.107-1987, SEC.20.
IC 23-1-44-11 PROPOSED ACTION CREATING DISSENTERS' RIGHTS; ASSERTION OF
DISSENTERS' RIGHTS
Sec. 11. (a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights:
(1) must 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; and
(2) must not vote the shareholder's shares in favor of the proposed
action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
AS ADDED BY P.L.149-1986, SEC.28.
F-2
IC 23-1-44-12 DISSENTERS' NOTICE; CONTENTS
Sec. 12. (a) If proposed corporate action creating dissenters' rights under
section 8 of this chapter is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of section 11 of this chapter.
(b) The dissenters' notice must be sent no later than ten (10) days after
approval by the shareholders, or if corporate action is taken without approval
by the shareholders, then ten (10) days after the corporate action was taken.
The dissenters' notice must:
(1) state where the payment demand must be sent and where and when
certificates for certificated shares must 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 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 may not be fewer than thirty (30) nor more than sixty (60)
days after the date the subsection (a) notice is delivered; and
(5) be accompanied by a copy of this chapter.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-13 DEMAND FOR PAYMENT AND DEPOSIT OF SHARES BY SHAREHOLDER
Sec. 13. (a) A shareholder sent a dissenters' notice described in IC 23-1-42-11
or in section 12 of this chapter must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenter's notice under section 12(b)(3) of this
chapter, and deposit the shareholder's certificates in accordance with the terms
of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
shares under subsection (a) retains all other rights of a shareholder until
these rights are cancelled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter and is considered, for purposes of this article, to have voted the
shareholder's shares in favor of the proposed corporate action.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-14 UNCERTIFICATED SHARES; RESTRICTION ON TRANSFER; DISSENTERS' RIGHTS
Sec. 14. (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 released under section 16 of this
chapter.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate action.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-15 PAYMENT TO DISSENTER
Sec. 15. (a) Except as provided in section 17 of this chapter, as soon as the
proposed corporate action is taken, or, if the transaction did not need
shareholder approval and has been completed, upon receipt of a payment demand,
the corporation shall pay each dissenter who complied with section 13 of this
chapter the amount the corporation estimates to be the fair value of the
dissenter's shares.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) 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; and (3) a statement of the dissenter's right to demand payment under
section 18 of this chapter.
AS ADDED BY P.L.149-1986, SEC.28. AMENDED BY P.L.107-1987, SEC.21.
F-3
IC 23-1-44-16 FAILURE TO TAKE ACTION; RETURN OF CERTIFICATES; NEW ACTION BY
CORPORATION
Sec. 16. (a) If the corporation does not take the proposed action within sixty
(60) 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 must send a new
dissenters' notice under section 12 of this chapter and repeat the payment
demand procedure.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-17 WITHHOLDING PAYMENT BY CORPORATION; CORPORATION'S ESTIMATE OF FAIR
VALUE; AFTER-ACQUIRED SHARES
Sec. 17. (a) A corporation may elect to withhold payment required by section 15
of this chapter 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), after taking the proposed corporate action, it shall estimate
the fair value of the shares and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares and a statement of the dissenter's right to demand payment
under section 18 of this chapter.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-18 DISSENTERS' ESTIMATE OF FAIR VALUE; DEMAND FOR PAYMENT; WAIVER
Sec. 18. (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 demand
payment of the dissenter's estimate (less any payment under section 15 of this
chapter), or reject the corporation's offer under section 17 of this chapter and
demand payment of the fair value of the dissenter's shares, if:
(1) the dissenter believes that the amount paid under section 15
of this chapter or offered under section 17 of this chapter is less than the
fair value of the dissenter's shares;
(2) the corporation fails to make payment under section 15 of this
chapter within sixty (60) days after the date set for demanding payment; or
(3) the corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) 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) within thirty (30) days after the corporation made
or offered payment for the dissenter's shares.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-19 COURT PROCEEDING TO DETERMINE FAIR VALUE; JUDICIAL APPRAISAL
Sec. 19. (a) If a demand for payment under IC 23-1-42-11 or under section 18 of
this chapter remains unsettled, the corporation shall commence a proceeding
within sixty (60) days after receiving the payment demand and petition the court
to determine the fair value of the shares. If the corporation does not commence
the proceeding within the sixty (60) day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit or
superior court of the county where a corporation's principal office (or, if none
in Indiana, its registered office) is located. If the corporation is a foreign
corporation without a registered office in Indiana, it shall commence the
proceeding in the county in Indiana where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign 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 must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
F-4
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) for the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(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 17 of this chapter.
AS ADDED BY P.L.149-1986, SEC.28.
IC 23-1-44-20 COSTS; FEES; ATTORNEY'S FEES
Sec. 20. (a) The court in an appraisal proceeding commenced under section 19 of
this chapter shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against such parties and in such amounts as the
court finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sections 10 through 18 of this chapter; or
(2) 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 counsel 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 counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
AS ADDED BY P.L.149-1986, SEC.28.
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F-5
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561 - 571 of the Michigan Business Corporation Act ("MBCA"), grant
the Registrant broad powers to indemnify any person in connection with legal
proceedings brought against him by reason of his present or past status as an
officer or director of the Registrant, provided that the person acted in good
faith and in a manner he reasonably believed to be in (when acting in an
official capacity) or not opposed to (when acting in all other circumstances)
the best interests of the Registrant, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
MBCA also gives the Registrant powers to indemnify any such person against
reasonable expenses in connection with any action by or in the right of the
Registrant, provided the person acted in good faith and in a manner he
reasonably believed to be in (when acting in an official capacity) or not
opposed to (when acting in all other circumstances) the best interests of the
Registrant, except that no indemnification may be made if such person is
adjudged to be liable to the Registrant, or in connection with any proceeding
charging improper personal benefit to the director whether or not involving
action in the director's official capacity, in which the director was held
liable on the basis that the personal benefit was improperly received by the
director. In addition, to the extent that any such person is successful in the
defense of any such legal proceeding, the Registrant is required by the MBCA to
indemnify him against expenses, including attorneys' fees, that are actually and
reasonably incurred by him in connection therewith.
The Registrant's Articles of Incorporation contain provisions entitling
directors and executive officers of the Registrant to indemnification against
certain liabilities and expenses to the full extent permitted by Michigan law.
Under an insurance policy maintained by the Registrant, the directors and
officers of the Registrant are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits or
proceedings, which may be brought against them by reason of being or having been
such directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
Reference is made to the Exhibit Index at Page II-7 of the
Registration Statement.
(b) All Financial Statements Schedules are omitted in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002
because they are not applicable or the required information is shown
in the consolidated financial statements or notes thereto that are
incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
II-1
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) under the Securities Act, if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this
registration statement or any material change to such
information in this Registration Statement; provided,
however, that the undertakings set forth in paragraphs
(1)(i) and (ii) above do not apply if the information
required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by
the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act")
that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) The undersigned Registrant hereby undertakes, that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(C) The undersigned Registrant hereby undertakes:
(1) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of
the applicable form.
II-2
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(D) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(E) The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, 13
of this Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the
request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Lansing,
Michigan on June 25, 2003.
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 on Form S-4 has been signed by the following
persons in the capacities indicated on June 25, 2003.
II-4
Signature Title
- --------- -----
/s/ JOSEPH D. REID Chairman of the Board and
- ------------------------------- Chief Executive Officer,
JOSEPH D. REID Director (Principal Executive
Officer)
/s/ LEE W. HENDRICKSON Executive Vice President and
- ------------------------------- Chief Financial Officer (Principal
LEE W. HENDRICKSON Financial and Accounting Officer)
/s/ ROBERT C. CARR* Executive Vice President, Treasurer, Director
- -------------------------------
ROBERT C. CARR
/s/ DAVID O'LEARY* Secretary, Director
- -------------------------------
DAVID O'LEARY
Director
- -------------------------------
LOUIS G. ALLEN
/s/ PAUL R. BALLARD* Director
- -------------------------------
PAUL R. BALLARD
/s/ DAVID L. BECKER* Director
- -------------------------------
DAVID L. BECKER
/s/ DOUGLAS E. CRIST* Director
- -------------------------------
DOUGLAS E. CRIST
/s/ MICHAEL J. DEVINE* Director
- -------------------------------
MICHAEL J. DEVINE
/s/ JAMES C. EPOLITO* Director
- -------------------------------
JAMES C. EPOLITO
/s/ GARY A. FALKENBERG* Director
- -------------------------------
GARY A. FALKENBERG
Director
- -------------------------------
JOEL I. FERGUSON
II-5
Signature Title
- --------- -----
/s/ KATHLEEN A. GASKIN* Director
- -------------------------------
KATHLEEN A. GASKIN
/s/ H. NICHOLAS GENOVA* Director
- -------------------------------
H. NICHOLAS GENOVA
/s/ MICHAEL F. HANNLEY* Director
- -------------------------------
MICHAEL F. HANNLEY
/s/ LEWIS D. JOHNS* Director
- -------------------------------
LEWIS D. JOHNS
/s/ MICHAEL L. KASTEN* Director
- -------------------------------
MICHAEL L. KASTEN
/s/ JOHN S. LEWIS* President, Western Regions, Director
- -------------------------------
JOHN S. LEWIS
/s/ HUMBERTO S. LOPEZ* Director
- -------------------------------
HUMBERTO S. LOPEZ
/s/ LEONARD MAAS* Director
- -------------------------------
LEONARD MAAS
/s/ LYLE W. MILLER* Director
- -------------------------------
LYLE W. MILLER
/s/ KATHRYN L. MUNRO* Director
- -------------------------------
KATHRYN L. MUNRO
/s/ CRISTIN REID ENGLISH* Chief Administrative Officer, 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*
99 Form of proxy for the Annual Meeting of Shareholders of Elkhart
Community Bank.
* Previously filed.
II-7