As filed with the Securities and Exchange Commission on December 14, 2000
Registration No. 333-50122
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)
Michigan 6711 38-2761672
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Joseph D. Reid
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
(517) 487-6555
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Cristin Reid English John Sharp
General Counsel Securities Counsel
Capitol Bancorp Limited Strobl Cunningham Caretti & Sharp PC
200 Washington Square North, Fourth Floor 300 East Long Lake Road, Suite 200
Lansing, MI 48933 Bloomfield Hills, MI 48304
(517) 487-6555 (248) 540-2300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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<PAGE>
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
<TABLE>
<CAPTION>
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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 (2) Price (2) Registration Fee
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<S> <C> <C> <C> <C>
Common stock (no par value) 417,532 $10.50 $4,384,086 $1,202
=====================================================================================================
</TABLE>
(1) Based on 124,400 shares of common stock, $6.50 par value, of Muskegon
Commerce Bank, which is the maximum number of shares of Muskegon common
stock (excluding shares held by Capitol) that may be outstanding
immediately prior to the consummation of the exchange transaction. Also
based on 181,300 shares of common stock, $6.50 par value, of Kent Commerce
Bank, which is the maximum number of shares of Kent common stock (excluding
shares held by Capitol) that may be outstanding immediately prior to the
consummation of the exchange transaction. Based also on an assumed exchange
ratio of 1.574910 and 1.222355 shares of Capitol common stock for each
share of Muskegon and Kent common stock, respectively.
(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
$10.50 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 November 14, 2000), and the maximum number of shares of
Capitol common stock that may be issued in the consummation of the exchange
transactions contemplated.
<PAGE>
PROPOSED PLANS OF SHARE EXCHANGE
The Boards of Directors of Muskegon Commerce Bank and Kent Commerce Bank
have each approved a Plan of Share Exchange that contemplates the exchange of
the shares of Muskegon and Kent common stock held by all shareholders other than
Capitol Bancorp Ltd. Capitol currently holds 51% of Muskegon's and Kent's common
stock. As a result of the exchanges, Muskegon and Kent would each become a
wholly-owned subsidiary of Capitol.
If the exchanges are approved, each share of Muskegon and Kent common stock
will be converted into the right to receive Capitol common stock according to an
exchange ratio. The exchange ratio is calculated by dividing one and one-half
times the adjusted pro forma net book value per share of Muskegon and Kent
common stock as of December 31, 2000, by the average price at closing of Capitol
common stock on each trading day in the 30 day calendar period ending on
December 31, 2000. If the exchange ratio was calculated based on the information
currently available, each shareholder of Muskegon and Kent would receive in the
exchange 1.603716 and 1.222355 shares of Capitol common stock, respectively, for
each share of Muskegon and Kent common stock. This is based on an assumed
average trading price of Capitol common stock of $11.858 per share. The actual
exchange ratio will be based on information as of December 31, 2000, and will
probably be different.
Capitol estimates that Capitol will issue approximately 199,502 and 221,613
shares of Capitol common stock to Muskegon and Kent shareholders, respectively,
in the exchanges. Those shares will represent less than 1.5 percent of the
outstanding Capitol common stock after the exchange. Capitol's common stock
trades on the Nasdaq National Market System under the symbol "CBCL."
The Boards of Directors have each scheduled a special meeting of Muskegon
and Kent shareholders to vote on the Plan of Share Exchange. The attached proxy
statement/prospectus includes detailed information about the time, date and
place of the special shareholders meetings.
While this is a combined Proxy Statement/Prospectus, the shareholder
meetings and the votes taken at them are each independent of the other. The
result of each vote of the shareholders has no bearing on the other. In other
words, if the shareholders of one of the banks approve the Plan of Share
Exchange, the Plan will be put into effect as to that bank regardless of whether
the shareholders of the other bank approve the Plan of Share Exchange or not.
This document gives you detailed information about the meeting and the
proposed exchange. You are encouraged to read this document carefully. IN
PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION FOR A DESCRIPTION OF
VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING THE EXCHANGE OF YOUR MUSKEGON
AND/OR KENT COMMON STOCK FOR CAPITOL'S COMMON STOCK.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE SECURITIES TO BE ISSUED UNDER THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED
IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
This proxy statement/prospectus is dated December 14, 2000, and is first
being mailed to shareholders of Muskegon and Kent on or about December 14, 2000.
<PAGE>
TABLE OF CONTENTS
SUMMARY.................................................................. 7
Reasons for the Exchange. ............................................. 7
The Special Shareholders Meetings...................................... 7
Recommendation to Shareholders......................................... 7
Votes Required......................................................... 7
Record Date; Voting Power.............................................. 7
What Shareholders will Receive in the Exchange......................... 8
Accounting Treatment................................................... 9
Tax Consequences of the Exchange to Muskegon and Kent Shareholders..... 9
Dissenters' Rights..................................................... 9
Opinion of Financial Advisor........................................... 9
The Plan of Share Exchange............................................. 9
Termination of the Exchange............................................ 9
Your Rights as a Shareholder Will Change............................... 9
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 10
RISK FACTORS............................................................. 12
RECENT DEVELOPMENTS...................................................... 16
CAPITALIZATION........................................................... 16
DIVIDENDS AND MARKET FOR COMMON STOCK.................................... 17
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............... 18
INFORMATION ABOUT CAPITOL................................................ 19
INFORMATION ABOUT MUSKEGON............................................... 19
INFORMATION ABOUT KENT................................................... 20
THE EXCHANGE............................................................. 21
General................................................................ 21
Background of the Exchange............................................. 21
Muskegon's and Kent's Reasons for the Exchange......................... 22
Capitol's Reasons for the Exchange..................................... 22
Terms of Exchange...................................................... 22
Muskegon and Kent Board Recommendation................................. 23
Accounting Treatment................................................... 23
Pro Forma Data......................................................... 23
Material Federal Income Tax Consequences............................... 23
Regulatory Matters..................................................... 25
Dissenters' Rights..................................................... 25
Federal Securities Laws Consequences; Stock Transfer Restrictions...... 25
OPINION OF FINANCIAL ADVISOR............................................. 26
2
<PAGE>
THE SPECIAL SHAREHOLDERS MEETINGS........................................ 30
Date, Time and Place................................................... 30
Matters to be Considered at the Special Shareholders Meetings.......... 30
Record Date; Stock Entitled to Vote; Quorum............................ 30
Votes Required......................................................... 28
Share Ownership of Management.......................................... 29
THE CLOSING.............................................................. 30
Effective Time......................................................... 30
Shares Held by Capitol................................................. 30
Procedures for Surrender of Certificates; Fractional Shares............ 30
Fees and Expenses...................................................... 31
Nasdaq Stock Market Listing............................................ 31
Amendment and Termination.............................................. 31
VOTING OF PROXIES........................................................ 32
General Information.................................................... 32
Solicitation of Proxies; Expenses...................................... 32
COMPARISON OF SHAREHOLDER RIGHTS......................................... 33
DESCRIPTION OF CAPITAL STOCK OF CAPITOL.................................. 35
Rights of Common Stock................................................. 35
Shares Available for Issuance.......................................... 35
Capitol's Preferred Securities......................................... 36
Anti-Takeover Provisions............................................... 36
WHERE YOU CAN FIND MORE INFORMATION...................................... 37
LEGAL MATTERS............................................................ 38
EXPERTS.................................................................. 38
LIST OF ANNEXES
ANNEX A Plan of Share Exchange......................................... A-1
ANNEX B Opinion of Financial Advisor................................... B-1
ANNEX C Tax Opinion of Strobl Cunningham Caretti & Sharp, P.C.......... C-1
ANNEX D-1 Financial Information Regarding Muskegon Commerce Bank......... D1-1
ANNEX D-2 Financial Information Regarding Kent Commerce Bank............. D2-1
ANNEX E Financial and Other Information Regarding Capitol Bancorp Ltd.. E-1
3
<PAGE>
ANSWERS TO
FREQUENTLY ASKED QUESTIONS
Q: Why am I receiving these materials?
A: Muskegon's and Kent's Boards of Directors have each approved the exchange
of the 49% of their bank's common stock not owned by Capitol for shares of
common stock of Capitol. Each of the proposed exchanges requires the
separate approval of the respective bank's shareholders. Muskegon and Kent
are sending you these materials to help you decide whether to approve the
exchange.
Q: What will I receive in the exchange?
A: You will receive shares of Capitol common stock, which are publicly traded
on the National Market System of the Nasdaq Stock Market, Inc. under the
symbol "CBCL." If the exchange is approved, an exchange ratio will be
calculated based on the actual results of operations of Muskegon or Kent,
as the case may be and actual average closing prices of Capitol's common
stock during the 30 day period ending December 31, 2000, as described in
the Plan of Share Exchange. If the exchange ratio were calculated based on
currently available information, Muskegon's shareholders would receive
1.603716 shares of Capitol common stock for each share of Muskegon common
stock they own, based on an assumed average trading price of Capitol common
stock of $11.858 per share. If the exchange ratio were calculated based on
currently available information, Kent's shareholders would receive 1.222355
shares of Capitol common stock for each share of Kent common stock they
own, based on an assumed average trading price of Capitol common stock of
$11.858 per share. The actual exchange ratio will be different because it
will be based on information as of December 31, 2000.
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 Muskegon or Kent special shareholders
meetings, as the case may be, and vote in person. Indicating your vote now
will not prevent you from later canceling or revoking your proxy right up
to the day of the special shareholders meeting and will ensure that your
shares are voted if you later find you cannot attend the special
shareholders meeting.
Q: What do I do if I want to change my vote?
A: You may change your vote:
* by sending a written notice to the President of Muskegon or Kent (as
applicable) prior to the special shareholders meetings stating that
you would like to revoke your proxy;
* by signing a later-dated proxy card and returning it by mail prior to
the special shareholders meetings, no later than December 22, 2000;
or
* by attending the special shareholders meetings and voting in person.
4
<PAGE>
Q: What vote is required to approve the exchange?
A: In order to complete the exchange, holders of a majority of the shares of
Muskegon and Kent common stock (other than Capitol) must approve their
respective Plan of Share Exchange. If you do not vote your shares, the
effect will be a vote against the Plan of Share Exchange.
Q: Why will the exchange ratios for Muskegon and Kent differ?
A: Because the exchange ratios will be calculated based on Muskegon's and
Kent's adjusted pro forma book value of their respective common stock,
which are and will be different, the exchange ratio will differ.
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 Muskegon and/or Kent shareholders written instructions for
exchanging their stock certificates.
Q: When do you expect to complete the exchange?
A: As quickly as possible after January 31, 2001. Approval by Muskegon's and
Kent's shareholders at the special shareholders meetings must be obtained
first. It is anticipated the exchange will be completed by March 15, 2001.
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 been delivered
with this document. Certain exhibits are not included in those documents;
however, Capitol will provide you with copies of those exhibits, without
charge, upon written or oral request to:
Capitol Bancorp Ltd.
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
Attention: General Counsel
Telephone Number: (517) 487-6555
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
SPECIAL STOCKHOLDERS MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN
DECEMBER 22, 2000.
For more information on the matters incorporated by reference in this
document, see "Where You Can Find More Information".
5
<PAGE>
WHO CAN ANSWER YOUR QUESTIONS?
If you have additional questions, you should contact:
Muskegon Commerce Bank
255 Seminole Road
Muskegon, Michigan 49444
(231) 737-4431
Attention: Robert McCarthy
President and Chief Executive Officer
or
Kent Commerce Bank
4050 Lake Drive SE
Grand Rapids, Michigan 49546
(616) 974-0200
Attention: David Veen
President and Chief Executive Officer
or
Capitol Bancorp Ltd.
200 Washington Square North, Fourth Floor
Lansing, Michigan 48533
(517) 487-6555
Attention: Cristin Reid English
General Counsel
If you would like additional copies of this
proxy statement/prospectus you should contact:
Capitol Bancorp Ltd. at the above address and phone number
6
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. TO UNDERSTAND THE PROPOSED EXCHANGE FULLY AND THE CONSEQUENCES
TO YOU, YOU SHOULD READ CAREFULLY THE ENTIRE PROXY STATEMENT/PROSPECTUS AND THE
DOCUMENTS REFERRED TO IN THIS DOCUMENT. SEE "WHERE YOU CAN FIND MORE
INFORMATION".
Capitol Bancorp Ltd. is a bank holding company with headquarters located at
200 Washington Square North, Fourth Floor, Lansing, Michigan 48533. Capitol's
telephone number is (517) 487-6555.
Capitol is a uniquely structured affiliation of community banks. It
currently has 25 wholly or majority-owned bank subsidiaries, including Muskegon
Commerce Bank and Kent Commerce Bank. Each bank is viewed by management as being
a separate business from the perspective of monitoring performance and
allocation of financial resources. Capitol uses a unique strategy of bank
ownership and development through a tiered structure.
Capitol's operating strategy is to provide transactional, processing and
administrative support and mentoring to aid in the effective growth and
development of its banks. It provides access to support services and management
with significant experience in community banking. These administrative and
operational support services do not require a direct interface with the bank
customer and therefore can be consolidated more efficiently without affecting
the bank customer relationship. Subsidiary banks have full decision-making
authority in structuring and approving loans and in the delivery and pricing of
other banking services.
Muskegon Commerce Bank is a commercial bank with its headquarters at 255
Seminole Road, Muskegon, Michigan 49444. Muskegon's telephone number is (231)
737-4431. Kent Commerce Bank is a commercial bank with its headquarters at 4050
Lake Drive SE, Grand Rapids, Michigan 49546. Kent's telephone number is (616)
974-0200.
Muskegon and Kent are now and have been, since they commenced business, 51%
owned subsidiaries of Capitol. Muskegon commenced the business of banking on
December 3, 1997. Kent commenced the business of banking on January 12, 1998.
Both Muskegon and Kent offer a full range of commercial banking services.
REASONS FOR THE EXCHANGE (PAGE 26)
It is believed that the exchange will provide you with greater liquidity
and flexibility because Capitol's common stock is publicly traded. The exchange
will also provide you with greater diversification, since Capitol is active in
more than one geographic area and across a broader customer base.
THE SPECIAL SHAREHOLDERS MEETINGS (PAGE 33)
The special meeting of Muskegon shareholders will be held on December 29,
2000 at 9:00 a.m., local time, at Muskegon Commerce Bank at 255 Seminole Road,
Muskegon, Michigan 49444. At the special shareholders meeting, Muskegon's
shareholders will be asked to approve the Plan of Share Exchange.
The special meeting of Kent shareholders will be held on December 29, 2000
at 9:00 a.m., local time, at Kent Commerce Bank at 4050 Lake Drive SE, Grand
Rapids, Michigan 49546. At the special shareholders meeting, Kent's shareholders
will be asked to approve the Plan of Share Exchange.
RECOMMENDATION TO SHAREHOLDERS (PAGE 27)
A majority of the Muskegon and Kent board members and officers believe that
the proposed exchanges are fair to you and in the best interests of both you and
Muskegon and Kent and recommends that you vote FOR approval of the share
exchange.
7
<PAGE>
VOTES REQUIRED (PAGE 33)
Approval of the Plan of Share Exchange requires the separate favorable vote
of a majority of the outstanding shares of Muskegon and Kent common stock
excluding the shares held by Capitol. This is more than the vote required by
law, but Muskegon's and Kent's boards have set the vote requirement to be sure
the exchange is what you, the shareholders of Muskegon and/or Kent, as the case
may be, want. Capitol holds 51% of the outstanding shares of Muskegon and Kent
common stock. The respective bank's officers and directors hold 9.94% and 15.9%
of the outstanding shares of Muskegon and Kent common stock, or 20.33% and
32.45%, respectively, of all shares not held by Capitol. A majority of the
respective bank's Board of Directors have agreed to vote their shares of
Muskegon and Kent FOR approval of the Plan of Share Exchange.
RECORD DATE; VOTING POWER (PAGE 33)
Muskegon and Kent shareholders may vote at the special shareholders meeting
if they owned shares of common stock at the close of business on December 1,
2000. At the close of business on September 30, 2000, approximately 124,400 and
181,300 shares of Muskegon and Kent common stock were outstanding, respectively,
(excluding shares held by Capitol). For each share of Muskegon or Kent common
stock that you owned as of the close of business on December 1, 2000, you will
have one vote in the vote of common shareholders at the applicable special
shareholders meeting on the proposal to approve the Plan of Share Exchange.
WHAT SHAREHOLDERS WILL RECEIVE IN THE EXCHANGE (PAGE 26)
In the exchanges, each outstanding share of Muskegon and Kent common stock,
as the case may be, will be automatically converted into the right to receive
Capitol common stock, according to an "exchange ratio". If the exchange ratio
was calculated based on the information currently available, each shareholder of
Muskegon would receive in the exchange 1.603716 shares of Capitol common stock
for each share of Muskegon common stock. If the exchange ratio was calculated
based on the information currently available, each shareholder of Kent would
receive in the exchange 1.222355 shares of Capitol common stock for each share
of Kent common stock. This assumes an average trading price for Capitol common
stock of $11.858 per share. The actual exchange ratio will be based on
information as of December 31, 2000, and will be different. The exchange ratio
will be determined by dividing the Bank Share Value by the Capitol Share Value,
where:
BANK SHARE VALUE. The share value of each share of Bank common stock
shall be determined by multiplying 1.5 times the adjusted pro forma
net book value per share of Bank common stock as of the close of
business on December 31, 2000. The adjusted pro forma net book value
per share of Bank common stock as of the close of business on December
31, 2000 shall be calculated by (1) adding stockholders' equity as
reflected in the Bank's internally prepared financial statements as of
December 31, 2000; (2) subtracting from that amount the principal
amounts of Capitol's capital contributions to Bank during the period
from commencement of business to December 31, 2000 (aggregating
$1,757,000 as to Muskegon and $760,000 as to Kent through September
30, 2000) for which Capitol did not receive shares of the Bank's
common stock and also subtracting an interest factor to impute to
Capitol an appropriate return on its capital contributions equivalent
to Capitol's interest cost through December 31, 2000; and (3) dividing
the remainder reached by the number of shares of the Bank's common
stock outstanding as of the close of business on December 31, 2000.
CAPITOL SHARE VALUE. The share value of each share of Capitol common
stock will be the average of the closing prices of Capitol common
stock for each trading day in the 30 calendar day period ending on
December 31, 2000, as reported by the NASDAQ Stock Market, Inc.
Each Bank shareholder (except Capitol) will receive shares of Capitol
common stock in exchange for his, her or their Muskegon and/or Kent common
stock, as the case may be, calculated by multiplying the number of shares of
Bank common stock held by the shareholder by the exchange ratio. Any fractional
shares will be paid in cash.
8
<PAGE>
ACCOUNTING TREATMENT (PAGE 27)
Capitol's acquisition of the minority interests of Muskegon and Kent will
be accounted for under the purchase method of accounting. After the exchange,
100% of Muskegon's and Kent's results from operations will be included in
Capitol's income statement, as opposed to 51% as is currently reported, less
amortization of goodwill resulting from the exchange.
TAX CONSEQUENCES OF THE EXCHANGE TO MUSKEGON AND KENT SHAREHOLDERS (PAGE 27)
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, Muskegon or Kent shareholders generally will not recognize any gain
or loss for United States federal income tax purposes on the exchange of their
Bank shares for shares of Capitol's common stock in the exchange, except for any
gain or loss recognized in connection with the receipt of cash instead of a
fractional share of Capitol's common stock. Tax counsel's opinion is attached as
Annex C to this proxy statement/prospectus.
Tax matters are very complicated, and the tax consequences of the exchange
to each Muskegon and Kent 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 30)
Michigan law provides that if the consideration in a share exchange is
shares listed on a national securities exchange or held of record by 2,000 or
more persons, the holders of the stock to be exchanged are not entitled to
dissenters' rights. Since Capitol's common stock is listed in a national
securities exchange, there are no dissenters' rights.
OPINION OF FINANCIAL ADVISOR (PAGE 31)
Muskegon and Kent each retained JMP Financial, Inc. as its financial
advisor and agent in connection with the exchange to render a financial fairness
opinion to the respective Muskegon and Kent shareholders.
In deciding to approve the exchange, the boards of directors of Muskegon
and Kent 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 Muskegon and Kent 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
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
Muskegon, Kent and Capitol can jointly agree to terminate the plan of
exchange at any time without completing the exchange.
Muskegon or Kent can terminate the exchange if a majority of their
shareholders (other than Capitol) fail to approve the exchange at the special
shareholders meeting; or a governmental authority prohibits the exchange.
YOUR RIGHTS AS A SHAREHOLDER WILL CHANGE
Your rights as a Muskegon or Kent shareholder are determined by Michigan's
banking law and by Muskegon's and Kent'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".
9
<PAGE>
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, 1999, which
is attached as part of Annex E to this proxy statement/prospectus. The unaudited
consolidated financial data below for the interim periods indicated has been
derived from, and should be read in conjunction with, Capitol's Quarterly Report
on Form 10-Q for the period ended September 30, 2000, which is attached as part
of Annex E in this proxy statement/prospectus. See "Where You Can Find More
Information". Interim results for the nine months ended September 30, 2000 are
not necessarily indicative of results which may be expected in future periods,
including the year ending December 31, 2000. BECAUSE OF THE NUMBER OF BANKS
ADDED IN 1997, 1998, 1999 AND 2000, AND BECAUSE OF THE DIFFERING OWNERSHIP
PERCENTAGE OF BANKS INCLUDED IN THE CONSOLIDATED AMOUNTS, HISTORICAL OPERATING
RESULTS ARE OF LIMITED RELEVANCE IN EVALUATING HISTORICAL PERFORMANCE AND
PREDICTING CAPITOL'S FUTURE OPERATING RESULTS.
Results of operations data and selected balance sheet data as of and for
the years ended December 31, 1999, 1998, 1997, 1996 and 1995 were derived from
audited consolidated financial statements which are not presented in this proxy
statement/prospectus. Capitol's audited consolidated financial statements as of
and for the years ended December 31, 1999 and 1998 and related statements of
operations for the years ended December 31, 1999, 1998 and 1997 are attached as
part of Annex E in this proxy statement/prospectus. The selected data provided
below as of and for the nine months ended September 30, 2000 and 1999 have been
derived from Capitol's unaudited consolidated financial statements which are
attached as part of Annex E in this proxy statement/prospectus.
Under current accounting rules, entities which are more than 50% owned by
another are consolidated or combined for financial reporting purposes. This
means that all of the banks' assets (including Muskegon's and Kent's) are
included in Capitol's consolidated balance sheet, regardless of whether Capitol
owns 51% or 100%. Capitol's net income, however, will only include its
subsidiaries' (including Muskegon and Kent) 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.
<TABLE>
<CAPTION>
As of and for the
Nine Months Ended
September 30 As of and for the
(Unaudited) Years Ended December 31
----------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS DATA:
Interest income $ 95,481 $ 66,970 $ 93,602 $ 69,668 $ 49,549 $ 36,479 $ 29,914
Interest expense 47,169 33,251 46,237 36,670 24,852 17,800 15,079
Net interest income 48,312 33,719 47,365 32,998 24,697 18,679 14,835
Provision for loan losses 4,996 2,931 4,710 3,523 2,049 1,196 839
Net interest income after
provision for loan losses 43,316 30,788 42,655 29,475 22,648 17,483 13,996
Noninterest income 4,374 3,135 4,714 3,558 2,157 1,705 1,272
Noninterest expense 38,888 27,884 40,257 26,325 16,721 12,307 10,460
Income before income tax expense
and cumulative effect of change
in accounting priniple 8,769 6,628 8,819 7,212 8,445 6,881 4,808
Income tax expense 3,041 2,450 3,213 2,584 2,888 2,245 1,735
Income before cumulative effect of
change in accounting principle 5,728 4,178 5,606 4,628 5,557 4,636 3,073
Cumulative effect of change in
accounting principle (1) (197) (197)
Net income 5,728 3,981 5,409 4,628 5,557 4,636 3,073
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Nine Months Ended
September 30 As of and for the
(Unaudited) Years Ended December 31
----------------------- --------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Earnings per common share(5):
Before cumulative effect
of accounting change:
Basic $ 0.81 $ 0.66 $ 0.87 $ 0.74 $ 0.91 $ 0.85 $ 0.63
Diluted 0.80 0.66 0.86 0.72 0.88 0.82 0.62
After cumulative effect
of accounting change:
Basic 0.81 0.63 0.84 0.74 0.91 0.85 0.63
Diluted 0.80 0.63 0.83 0.72 0.88 0.82 0.62
Cash dividends declared(5) 0.27 0.27 0.36 0.33 0.30 0.25 0.19
Book value(5) 8.81 7.98 8.08 7.77 7.22 7.43 7.58
Tangible book value per share(5) 8.13 7.45 7.54 7.35 6.87 6.99 6.95
Dividend payout ratio 33.33% 43.02% 42.86% 43.63% 32.95% 29.05% 30.37%
Weighted average number of
common shares outstanding(5) 7,029 6,358 6,455 6,284 6,130 5,477 4,841
SELECTED BALANCE SHEET DATA:
Total assets $1,568,423 $1,224,686 $1,305,987 $1,024,444 $ 690,556 $ 492,263 $ 384,070
Investment securities 77,520 102,044 107,145 86,464 64,470 48,725 36,329
Portfolio loans 1,298,002 952,774 1,049,204 724,280 502,755 357,623 283,471
Allowance for loan losses (16,415) (11,529) (12,639) (8,817) (6,229) (4,578) (3,687)
Deposits 1,350,208 1,040,461 1,112,793 890,890 604,407 436,166 340,287
Debt obligations 53,075 46,000 47,400 23,600 6,500 8,712
Trust preferred securities 24,318 24,282 24,291 24,255 24,126
Stockholders' equity 63,210 54,014 54,668 49,292 45,032 40,159 30,865
PERFORMANCE RATIOS:(2)
Return on average equity 13.27% 10.70% 10.66% 10.19% 13.28% 12.01% 10.55%
Return on average assets 0.53% 0.48% 0.47% 0.55% 0.96% 1.08% 0.87%
Net interest margin (fully
taxable equivalent) 4.79% 4.36% 4.44% 4.15% 4.54% 4.62% 4.46%
Efficiency ratio(3) 73.87% 75.66% 77.30% 70.63% 60.92% 60.38% 64.94%
ASSET QUALITY:
Non-performing loans(4) $ 6,611 $ 5,250 $ 4,124 $ 7,242 $ 4,011 $ 2,699 $ 1,341
Allowance for loan losses
to non-performing loans 248.30% 219.60% 306.47% 121.75% 155.30% 169.62% 274.94%
Allowance for loan losses
to portfolio loans 1.26% 1.21% 1.20% 1.22% 1.24% 1.28% 1.30%
Non-performing loans to total
portfolio loans 0.42% 0.55% 0.39% 1.00% 0.80% 0.75% 0.47%
Net loan losses to average
portfolio loans 0.10% 0.03% 0.10% 0.15% 0.09% 0.10% 0.14%
CAPITAL RATIOS:
Average equity to average assets 4.02% 4.51% 4.46% 5.36% 7.22% 8.97% 8.24%
Tier 1 risk-based capital ratio 11.26% 11.26% 10.78% 13.42% 14.26% 11.91% 9.80%
Total risk-based capital ratio 12.51% 12.28% 11.62% 14.60% 16.61% 12.88% 10.91%
Leverage ratio 4.03% 4.41% 4.35% 4.88% 6.65% 8.16% 7.16%
</TABLE>
----------
(1) Accounting change relates to new accounting standard which requires
write-off of previously capitalized start-up costs as of January 1, 1999.
(2) These ratios are annualized for the periods indicated.
(3) Efficiency ratio is computed by dividing noninterest expense by the sum of
net interest income and noninterest income.
(4) Nonperforming loans consist of loans on nonaccrual status and loans more
than 90 days delinquent.
(5) As restated to reflect Capitol's 1998 6-for-5 stock split as if it occurred
at the beginning of the periods presented.
11
<PAGE>
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 MUSKEGON OR KENT COMMON STOCK FOR
CAPITOL'S COMMON STOCK.
THIS PROXY STATEMENT/PROSPECTUS ALSO CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO
CAPITOL'S FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE
STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "BELIEVES," "EXPECTS,"
"MAY," "WILL," "SHOULD," "SEEKS," "PRO FORMA," "ANTICIPATES," AND SIMILAR
EXPRESSIONS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THESE STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES INCLUDE
THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
NEWLY FORMED BANKS ARE LIKELY TO INCUR SIGNIFICANT OPERATING LOSSES.
As of September 30, 2000, five of Capitol's bank subsidiaries are less than
one year old. Newly formed banks are expected to incur operating losses in their
early periods of operation because of an inability to generate sufficient net
interest income to cover operating costs. Newly formed banks may never become
profitable. An accounting rule change effective January 1, 1999 requires
immediate write-off, rather than capitalization, of start-up costs and, as a
result, future newly formed banks are expected to report larger early period
operating losses. Those operating losses can be significant and can occur for
longer periods than planned depending upon the ability to control operating
expenses and generate net interest income, which could affect the availability
of earnings retained to support future growth.
CAPITOL MAY BE UNABLE TO EFFECTIVELY MANAGE ITS GROWTH.
Capitol has rapidly and significantly expanded its operations and
anticipates that further expansion will be required to realize its growth
strategy. Capitol's rapid growth has placed significant demands on its
management and other resources which, given its expected future growth rate, are
likely to continue. To manage future growth, Capitol will need to attract, hire
and retain highly skilled and motivated officers and employees and improve
existing systems and/or implement new systems for:
- transaction processing;
- operational and financial management; and
- training, integrating and managing Capitol's growing employee base.
FAVORABLE ENVIRONMENT FOR FORMATION OF NEW BANKS COULD CHANGE ADVERSELY.
Capitol's growth strategy includes the formation of additional new banks.
Thus far, Capitol has experienced favorable business conditions for the
formation of its small, community and customer-focused banks. Those favorable
conditions could change suddenly or over an extended period of time. A change in
the availability of financial capital, human resources or general economic
conditions could eliminate or severely limit expansion opportunities. To the
extent Capitol is unable to effectively attract personnel and deploy its capital
in new or existing banks, this could adversely affect future asset growth,
earnings and the value of Capitol's common stock.
12
<PAGE>
CAPITOL'S BANKS ARE SMALL, HAVE LIMITATIONS ON THE SIZE OF LOANS THEY CAN MAKE
AND HAVE MINIMAL MARKET SHARE.
Capitol endeavors to capitalize its newly formed banks with the lowest
dollar amount permitted by regulatory agencies. As a result, the legal lending
limits of Capitol's banks severely constrain the size of loans that those banks
can make. In addition, many of the banks' competitors have significantly larger
capitalization and, hence, an ability to make significantly larger loans.
Capitol's banks are intended to be small in size. They each generally
operate from single locations. They are very small relative to the dynamic
markets in which they operate. Each of those markets has a variety of large and
small competitors that have resources far beyond those of Capitol's banks. While
it is the intention of Capitol's banks to operate as niche players within their
geographic markets, their continued existence is dependent upon being able to
attract and retain loan customers in those large markets that are dominated by
substantially larger regulated and unregulated financial institutions.
CAPITOL IS DEPENDENT UPON THE CONTRIBUTIONS OF ITS KEY MANAGEMENT PERSONNEL.
Capitol's future success depends, in large part, upon the continuing
contributions of its key management personnel, including bank presidents and
other senior officers. In particular, Capitol is dependent upon the continuing
services of Joseph D. Reid, Capitol's Chairman, President and Chief Executive
Officer. The loss of services of one or more key employees at Capitol or its
subsidiaries could have a material adverse effect on Capitol. Capitol can
provide no assurance that it will be able to retain any of its key officers and
employees or attract and retain qualified personnel in the future.
Joseph D. Reid has an employment agreement which expires on December 31,
2002. The agreement automatically extends for one year unless Mr. Reid or
Capitol gives written notice 45 days prior to December 31 of each year. Certain
members of Capitol's senior management also have employment agreements with
Capitol.
IF CAPITOL CANNOT RECRUIT ADDITIONAL HIGHLY QUALIFIED PERSONNEL, CAPITOL'S
BUSINESS MAY BE ADVERSELY IMPACTED.
Capitol's strategy is also dependent upon its continuing ability to attract
and retain other highly qualified personnel. Competition for such employees
among financial institutions is intense. Availability of personnel with
appropriate community banking experience varies. If Capitol does not succeed in
attracting new employees or retaining and motivating current and future
employees, Capitol's business could suffer significantly.
CAPITOL AND ITS BANKS OPERATE IN AN ENVIRONMENT HIGHLY REGULATED BY STATE AND
FEDERAL GOVERNMENT; CHANGES IN FEDERAL AND STATE BANKING LAWS AND REGULATIONS
COULD HAVE A NEGATIVE IMPACT ON CAPITOL'S BUSINESS.
As a bank holding company, Capitol is regulated primarily by the Federal
Reserve Board. Capitol's current bank affiliates are regulated primarily by the
state banking regulators and the FDIC and, in the case of one national bank, the
Office of the Comptroller of the Currency (OCC).
Federal and the various state laws and regulations govern numerous aspects
of the banks' operations, including;
- adequate capital and financial condition,
- permissible types and amounts of extensions of credit and investments,
- permissible nonbanking activities, and
- restrictions on dividend payments.
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,
13
<PAGE>
Capitol may be required, among other things, to change its asset valuations or
the amounts of required loan loss allowances or to restrict its operations.
Those actions would result from the regulators' judgments based on information
available to them at the time of their examination.
The banks' operations are required to follow a wide variety of state and
federal consumer protection and similar statutes and regulations. Federal and
state regulatory restrictions limit the manner in which Capitol and its banks
may conduct business and obtain financing. Those laws and regulations can and do
change significantly from time to time, and any such change could adversely
affect Capitol.
REGULATORY ACTION COULD SEVERELY LIMIT FUTURE EXPANSION PLANS.
To carry out some of its expansion plans, Capitol is required to obtain
permission from the Federal Reserve Board. Applications for the formation of new
banks are submitted to the state and federal bank regulatory agencies for their
approval.
While Capitol's recent experience with the regulatory application process
has been favorable, the future climate for regulatory approval is impossible to
predict. Regulatory agencies could prohibit or otherwise significantly restrict
the expansion plans of Capitol, its current bank subsidiaries and future new
start-up banks.
THE BANKS' ALLOWANCES FOR LOAN LOSSES MAY PROVE INADEQUATE TO ABSORB ACTUAL LOAN
LOSSES.
Capitol believes that its consolidated allowance for loan losses is
maintained at a level adequate to absorb any inherent losses in the loan
portfolios of its banks. Management's estimates are used to determine the
allowance that is considered adequate to absorb losses in the loan portfolios of
Capitol's banks. Management's estimates are based on historical loan loss
experience, specific problem loans, value of underlying collateral and other
relevant factors. These estimates are subjective and their accuracy depends on
the outcome of future events. Actual losses may differ from current estimates.
Depending on changes in economic, operating and other conditions, including
changes in interest rates, that are generally beyond Capitol's control, actual
loan losses could increase significantly. As a result, such losses could exceed
current allowance estimates. No assurance can be provided that the allowance
will be sufficient to cover actual future loan losses should such losses be
realized.
Because some of Capitol's banks were formed more recently, they do not have
seasoned loan portfolios, and it is likely that the ratio of the allowance for
loan losses to total loans will need to be increased in future periods as the
loan portfolios become more mature. If it becomes necessary to increase the
ratio of the allowance for loan losses to total loans, such increases would be
accomplished through higher provisions for loan losses, which will adversely
impact net income or will increase operating losses.
In addition, bank regulatory agencies, as an integral part of their
supervisory functions, periodically review the adequacy of the allowance for
loan losses. Regulatory agencies may require Capitol or its banks to increase
their provision for loan losses or to recognize further loan charge-offs based
upon judgments different from those of management. Any increase in the allowance
required by regulatory agencies could have a negative impact on Capitol's
operating results.
CAPITOL'S COMMERCIAL LOAN CONCENTRATION INCREASES THE RISK OF DEFAULTS BY
BORROWERS.
Capitol's banks make various types of loans, including commercial,
consumer, residential mortgage and construction loans. Capitol's strategy
emphasizes lending to small businesses and other commercial enterprises. Loans
to small and medium-sized businesses are generally riskier than single-family
mortgage loans. Typically, the success of a small or medium-sized business
depends on the management talents and efforts of one or two persons or a small
group of persons, and the death, disability or resignation of one or more of
these persons could have a material adverse impact on the business. In addition,
14
<PAGE>
small and medium-sized businesses frequently have smaller market shares than
their competition, may be more vulnerable to economic downturns, often need
substantial additional capital to expand or compete and may experience
substantial variations in operating results, any of which may impair a
borrower's ability to repay a loan. Substantial credit losses could result,
which could cause you to lose your entire investment in the common stock.
CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT CAPITOL'S BUSINESS.
CHANGES IN NET INTEREST INCOME. Capitol's profitability is significantly
dependent on net interest income. Net interest income is the difference between
interest income on interest-earning assets, such as loans, and interest expense
on interest-bearing liabilities, such as deposits. Therefore, any change in
general market interest rates, whether as a result of changes in monetary
policies of the Federal Reserve Board or otherwise, can have a significant
effect on net interest income. Capitol's assets and liabilities may react
differently to changes in overall market rates or conditions because there may
be mismatches between the repricing or maturity characteristic of assets and
liabilities. As a result, changes in interest rates can affect net interest
income in either a positive or negative way.
CHANGES IN THE YIELD CURVE. Changes in the difference between short and
long-term interest rates, commonly known as the yield curve, may also harm
Capitol's business. For example, short-term deposits may be used to fund
longer-term loans. When differences between short-term and long-term interest
rates shrink or disappear, the spread between rates paid on deposits and
received on loans could narrow significantly, decreasing net interest income.
CAPITOL'S INVESTMENT IN SUN IS ILLIQUID AND MAY REQUIRE ADDITIONAL INVESTMENT BY
CAPITOL.
Capitol currently owns a significant and controlling interest in the common
stock of Sun Community Bancorp Limited, a bank development subsidiary
headquartered in Phoenix, Arizona. Sun completed its initial public offering
(IPO) in July 1999 and its common stock is listed on the Nasdaq National Market.
Capitol's investment in Sun is likely to remain illiquid because:
* Capitol is currently encouraged by the Federal Reserve Board to maintain a
controlling investment in Sun's common stock; and
* Market conditions may limit the ability for Capitol to sell any large
blocks of Sun's common stock.
In addition, Capitol might be required by regulatory agencies, such as the
Federal Reserve Board, to increase its investment in Sun by investing additional
capital to meet unexpected needs at Sun or at one or more of its subsidiaries.
EXISTING SUBSIDIARIES OF CAPITOL MAY NEED ADDITIONAL FUNDS TO AID IN THEIR
GROWTH OR TO MEET OTHER ANTICIPATED NEEDS WHICH COULD REDUCE CAPITOL'S FUNDS
AVAILABLE FOR NEW BANK DEVELOPMENT OR OTHER CORPORATE PURPOSES.
Capitol's affiliated banks are generally capitalized at the minimum amount
permitted by regulatory agencies. Future growth of existing banks may require
additional capital infusions or other investment by Capitol to maintain
compliance with regulatory capital requirements or to meet growth opportunities.
Such capital infusions could reduce funds available for development of new
banks, or other corporate purposes.
POSSIBLE VOLATILITY OF STOCK PRICE.
The market price of Capitol's common stock may fluctuate in response to
numerous factors, including variations in the annual or quarterly financial
results of Capitol, or its competitors, changes by financial research analysts
in their estimates of the earnings of Capitol or its competitors or the failure
of Capitol or its competitors to meet such estimates, conditions in the economy
in general or the banking industry in particular, or unfavorable 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.
15
<PAGE>
RECENT DEVELOPMENTS
Applications are currently pending for additional banks in the states of
Arizona and California.
Additional expansion through the development of new banks in the states of
Indiana, Nevada, California and others, is currently under consideration by
Capitol or its subsidiary bank development entities.
CAPITALIZATION
The table presented below shows Capitol's actual total capitalization as of
September 30, 2000, and as adjusted to reflect the exchange of Capitol's common
stock for Muskegon's and Kent's common stock as described in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
As of September 30, 2000
-------------------------------------
As Adjusted for
the Proposed
Muskegon and
Actual Kent Exchanges(3)
------ -----------------
(dollars in thousands, except per share data)
<S> <C> <C>
DEBT OBLIGATIONS:
Notes payable to unaffiliated bank $ 14,925 $ 14,925
Other 38,150 38,150
--------- ---------
Total debt obligations 53,075 53,075
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S
SUBORDINATED DEBENTURES 24,318 24,318
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 63,860 60,642
STOCKHOLDERS' EQUITY(1):
Common stock, no par value; 25,000,000 shares authorized;
issued, and outstanding:
Actual - 7,171,893 shares
As adjusted for the proposed Muskegon and Kent exchanges
7,593,008 shares 60,998 65,991
Retained earnings 4,909 4,909
Market value adjustment for available-for-sale securities (556) (556)
Less unallocated ESOP shares and note receivable from sale
of common stock (2,141) (2,141)
--------- ---------
Total stockholders' equity $ 63,210 $ 68,203
========= =========
TOTAL CAPITALIZATION $ 204,463 $ 206,238
========= =========
Book value per share of common stock $ 8.81 $ 8.98
========= =========
CAPITAL RATIOS:
Stockholders' equity to total assets 4.03% 4.34%
Total capital funds to total assets(2) 9.65% 9.75%
</TABLE>
----------
(1) Does not include 1,205,487 shares of common stock issuable upon exercise of
stock options. See "Management--Stock Option Program."
(2) Total capital funds includes guaranteed preferred beneficial interests in
Capitol's subordinated debentures, minority interest in consolidated
subsidiaries and stockholders' equity.
(3) Assumes issuance of 199,502 and 221,613 shares of Capitol common stock upon
completion of proposed Muskegon and Kent exchanges, respectively.
16
<PAGE>
DIVIDENDS AND MARKET FOR COMMON STOCK
Capitol's common stock is listed on the Nasdaq National Market under the
symbol "CBCL." The following table shows the high and low sale prices per share
of common stock as reported on the Nasdaq National Market and cash dividends
paid for the periods indicated. The table reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
Cash
Dividends
1999 High Low Paid
---- --------- --------- ---------
1st Quarter $ 21.750 $ 18.000 $ 0.090
2nd Quarter 20.000 16.875 0.090
3rd Quarter 18.250 10.875 0.090
4th Quarter 14.625 9.625 0.090
2000
----
1st Quarter 16.938 8.063 0.090
2nd Quarter 13.875 10.750 0.090
3rd Quarter 12.375 9.625 0.090
4th Quarter (through December 11, 2000) 13.375 9.750 0.090
As of November 14, 2000, there were a total of approximately 2,750
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 either Muskegon's or Kent's common stock. Any
transfers have been made privately and are not reported. Muskegon or Kent have
never paid a dividend on its common stock.
17
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes forward-looking statements.
Capitol has based these forward-looking statements on its current expectations
and projections about future events. These forward-looking statements may be
impacted by risks, uncertainties and assumptions. Examples of some of the risks,
uncertainties or assumptions that may impact the forward-looking statements are:
- the results of management's efforts to implement Capitol's business
strategy including planned expansion into new markets in Arizona,
Nevada, New Mexico, Indiana, California and elsewhere;
- adverse changes in the banks' loan portfolios and the resulting credit
risk-related losses and expenses;
- adverse changes in the economy of the banks' market areas that could
increase credit-related losses and expenses;
- adverse changes in real estate market conditions that could also
negatively affect credit risk;
- the possibility of increased competition for financial services in
Capitol's markets;
- fluctuations in interest rates and market prices, which could
negatively affect net interest margins, asset valuations and expense
expectations;
- year 2000 (Y2K) computer, embedded chip and related data processing
issues; and
- other factors described in "Risk Factors".
18
<PAGE>
INFORMATION ABOUT CAPITOL
This proxy statement/prospectus is accompanied by a copy of the following
documents as indicated in Annex E:
- Report on Form 10-Q for period ended September 30, 2000
- Report on Form 10-Q for period ended June 30, 2000
- Report on Form 10-Q for period ended March 31, 2000
- Annual Report to Shareholders for year ended December 31, 1999
- Annual Report on Form 10-K for year ended December 31, 1999
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 4, 2000.
INFORMATION ABOUT MUSKEGON
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Management's discussion and analysis of financial condition and results of
operations for the periods ended September 30, 2000 and December 31, 1999 are
included in this proxy statement/prospectus as part of Annex D.
FINANCIAL STATEMENTS.
Unaudited interim condensed financial statements of Muskegon as of
September 30, 2000 and for the nine months ended September 30, 2000 and 1999 are
included in this proxy statement/prospectus as part of Annex D. Audited
financial statements of Muskegon as of December 31, 1999 and for the years ended
December 31, 1999 and 1998 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 Muskegon and all directors and officers as a group. Where applicable, the
table includes shares held by members of their immediate families.
Muskegon shares beneficially owned
---------------------------------------
Percentage of
Percentage all Muskegon
of all shares excluding
Muskegon Muskegon shares
Name of Beneficial owner Number shares owned by Capitol
------------------------ ------- ------- ----------------
Capitol Bancorp Ltd. 130,146 51.13% N/A
======= ======= =======
Directors and Officers:
Paul R. Ballard 100 0.04% 0.08%
William C. Cooper 500 0.20% 0.40%
Thomas F. DeVoursney 2,000 0.79% 1.61%
Robert D. Jewell 100 0.04% 0.08%
Charles E. Johnson II 5,000 1.96% 4.02%
Christopher L. Kelly 3,000 1.18% 2.41%
Daniel Kuznar 5,000 1.96% 4.02%
Robert J. McCarthy 2,591 1.02% 2.08%
James S. Tyler 5,000 1.96% 4.02%
Bruce A. May 2,000 0.79% 1.61%
------- ------- -------
Total of Officers and Directors 25,291 9.94% 20.33%
======= ======= =======
Other than the directors and officers of Muskegon, no individual owns 5% or
more of the outstanding shares of Muskegon, exclusive of the shares owned by
Capitol.
19
<PAGE>
INFORMATION ABOUT KENT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Management's discussion and analysis of financial condition and results of
operations for the periods ended September 30, 2000 and December 31, 1999 are
included in this proxy statement/prospectus as part of Annex E.
FINANCIAL STATEMENTS.
Unaudited interim condensed financial statements of Kent as of September
30, 2000 and for the nine months ended September 30, 2000 and 1999 are included
in this proxy statement/prospectus as part of Annex E. Audited financial
statements of Kent as of December 31, 1999 and for the years ended December 31,
1999 and 1998 are included in this proxy statement/prospectus as part of Annex
E.
VOTING SECURITIES AND PRINCIPAL HOLDERS.
The following table shows the share holdings of each director and officer
of Kent and all directors and officers as a group. Where applicable, the table
includes shares held by members of their immediate families.
Kent shares beneficially owned
---------------------------------------
Percentage of
Percentage all Kent shares
of all excluding Kent
Kent shares owned by
Name of Beneficial owner Number shares Capitol
------------------------ ------- ------- ----------------
Capitol Bancorp Ltd. 188,700 51.00% N/A
======= ======= =======
Directors and Officers:
James M. Badaluco 1,500 0.41% 0.83%
Paul R. Ballard 100 0.03% 0.06%
Paul S. Buiten 13,580 3.67% 7.49%
Julius Duthler 9,000 2.43% 4.96%
Kevin J. Einfeld 8,818 2.38% 4.86%
Grant J. Gruel 5,000 1.35% 2.76%
Gary D. Hensch 2,500 0.68% 1.38%
Harold A. Marks 300 0.08% 0.17%
Calvin D. Meeusen 9,000 2.43% 4.96%
John H. Pleune 2,500 0.68% 1.38%
Mary L. Ursul 1,363 0.37% 0.75%
David E. Veen 500 0.14% 0.28%
Michael C. Walton 1,662 0.45% 0.92%
M. Martine Kaluske 3,000 0.81% 1.65%
------- ------- -------
Total of Officers and Directors 58,823 15.90% 32.45%
======= ======= =======
Other than the directors and officers of Kent, no individual owns 5% or
more of the outstanding shares of Kent, exclusive of the shares owned by
Capitol.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Because Muskegon and Kent are already majority-owned subsidiaries of
Capitol, they are already included in Capitol's consolidated financial
statements. Consummation of the exchange is not expected to have a material
impact on the consolidated financial position or consolidated results of
operation of Capitol. Accordingly, pro forma consolidated financial information
illustrating the exchange and Capitol's purchase of the minority interests of
Muskegon and Kent are not required to be presented in this prospectus.
20
<PAGE>
THE EXCHANGE
GENERAL
The Muskegon and Kent Boards of Directors are using this proxy
statement/prospectus to solicit proxies from the holders of Muskegon and Kent
common stock for use at their respective special shareholders meetings.
At the special shareholders meetings to be held on December 31, 2000,
Muskegon and Kent common shareholders will be asked to approve the exchange. The
Plan of Share Exchange provides for Muskegon's and Kent's minority shareholders
to exchange the 49% of the common stock of Muskegon and Kent not owned by
Capitol for Capitol common stock. Upon consummation of the exchange, Muskegon
and Kent will each become wholly-owned subsidiaries of Capitol. In the exchange,
Muskegon and Kent shareholders will receive shares of Capitol's common stock.
While this is a combined Proxy Statement/Prospectus, the shareholder
meetings and the votes taken at them are each independent of the other. The
result of each vote of the shareholders has no bearing on the other. In other
words, if the shareholders of one of the banks approve the Plan of Share
Exchange, the Plan will be put into effect as to that bank regardless of whether
the shareholders of the other bank approve the Plan of Share Exchange or not.
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 Muskegon's and
Kent's operations. Capitol expressed a willingness to extend an offer of an
exchange when Muskegon and Kent neared their 36th month of operations (that is,
around December 31, 2000). These discussions occurred at various Muskegon and
Kent board meetings during that period. The objectives of the potential exchange
would be to enable shareholders of Muskegon and Kent 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 Muskegon and Kent would continue to hold Muskegon and
Kent bank stock which has no market and is illiquid.
Muskegon's and Kent's board of directors have not solicited or received any
other proposals for the potential exchange or sale of the respective banks'
shares of common stock which are not owned by Capitol. If other proposals were
under consideration for sale or exchange of Muskegon's or Kent's shares to an
entity other than Capitol, Capitol would be permitted to vote its shares of
Muskegon and Kent. By virtue of Capitol's majority ownership of Muskegon and
Kent, it is likely that Capitol would not vote its shares of Muskegon and Kent
in favor of any other proposals regarding a share exchange or sale of the
minority interest in Muskegon and Kent with another party. In addition, Capitol
currently has no intentions of selling its majority interest in Muskegon and
Kent. Hence, the only proposal under consideration is Capitol's proposal.
Capitol based its proposal on its prior transactions whereby it has
acquired the minority interest in banks it controls. In those prior
transactions, Capitol has offered the minority shareholders an opportunity to
exchange their bank shares for Capitol common stock at an exchange ratio based
on 150% of adjusted book value of the bank's shares on or about the 36th month
of the bank's operations. Although Capitol is under no contractual obligation to
make such an offer to acquire the minority interests in any of its present bank
subsidiaries, it has made this proposal to Muskegon's and Kent's boards of
directors consistent with its informal discussions with Muskegon's and Kent's
board during these periods.
Consensus between Capitol and Muskegon's and Kent's directors who are not
employees or officers of Capitol was reached in October 2000 to approve the
proposed exchange subject only to:
- obtaining an independent opinion that the proposed share exchange is
fair to Muskegon's and Kent's shareholders from a financial point of
view; and
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- obtaining approval for the proposed exchange by a majority of
Muskegon's and Kent's shares not already owned by Capitol.
In October 2000, the Muskegon and Kent boards approved the Plan of Share
Exchange and each agreed to call a special shareholder meeting for a shareholder
vote to approve the Plan of Share Exchange.
MUSKEGON'S AND KENT'S REASONS FOR THE EXCHANGE.
Muskegon's and Kent's reasons for the exchange are that their shareholders
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 banks' shareholders will receive publicly traded shares, providing
them liquidity as opposed to the Muskegon and Kent common stock for
which there is no public market. Muskegon and Kent 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.
* Muskegon's and Kent's shareholders will receive stock upon which
historically there has been a dividend paid. See "Dividends and Market
for Common Stock." The fact that Capitol has paid dividends for the
past five years is not a guaranty that dividends will continue to be
paid. Capitol's Board of Directors will declare and pay dividends as
and when it appears to Capitol's board that dividends are appropriate.
CAPITOL'S REASONS FOR THE EXCHANGE
Capitol believes that profitability of Muskegon and Kent will continue to
increase. As noted elsewhere in this proxy statement/prospectus, while the
respective bank's assets are reported as part of Capitol's assets for purposes
of its consolidated financial statements, the respective bank's income is
attributed to Capitol only in the percentage which Capitol owns of Muskegon and
Kent common stock. Capitol desires to acquire the remainder of Muskegon's and
Kent's common stock so that Capitol can include 100% of the respective bank's
income in Capitol's consolidated income statement.
TERMS OF THE EXCHANGE
Terms of the exchange are set forth in the Plan of Share Exchange. The Plan
of Share Exchange is included an Annex A to this proxy statement/prospectus. You
should review the Plan of Share Exchange in its entirety.
The terms of the exchange can be summarized as follows:
Upon separate approval of the exchange by a majority of the 49% of the
shares of Muskegon and/or Kent held by shareholders other than Capitol,
each share of Muskegon and/or Kent common stock will be exchanged for
shares of Capitol common stock according to an exchange ratio. The exchange
ratio will be determined by dividing the respective Muskegon and Kent share
value by the Capitol share value. The Muskegon and Kent share value is one
and one-half times the adjusted pro forma net value per share of their
respective common stock as of December 31, 2000. The adjusted pro forma net
book value per share of Muskegon and Kent common stock as of December 31,
2000 will be calculated by (1) using stockholders' equity as reflected in
their respective internally prepared financial statements as of December
31, 2000; (2) subtracting from that sum the principal amounts of Capitol's
capital contributions to Muskegon and Kent during the period from their
inception to December 31, 2000 (aggregating $1,757,000 as to Muskegon and
$760,000 as to Kent through September 30, 2000) for which Capitol did not
receive shares of the bank's common stock, and also subtracting an interest
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factor to compute the approximate interest cost to Capitol of the capital
contributions made to Muskegon and Kent during that period; and (3)
dividing the remainder reached by the number of shares of the respective
bank's common stock outstanding as of December 31, 2000.
Capitol's share value will be determined by averaging the closing
prices of Capitol common stock for each trading day during the 30 calendar
day period ending December 31, 2000, as reported by the Nasdaq Stock
Market, Inc.
Once the Muskegon and Kent share value and Capitol share value are
determined, the exchange ratio will be determined by dividing the
respective Muskegon and Kent share value by the Capitol share value. Each
Muskegon and Kent shareholder, as the case may be, (except Capitol) will
receive shares of Capitol common stock in exchange for his, her or their
Muskegon or Kent common stock calculated by multiplying the number of
shares in the bank's common stock held by the shareholder by the exchange
ratio. Any fractional shares will be paid in cash.
MUSKEGON AND KENT BOARD RECOMMENDATION
THE MUSKEGON AND KENT BOARDS HAVE DETERMINED THAT THE EXCHANGE IS FAIR TO
AND IN THE BEST INTERESTS OF THEIR SHAREHOLDERS, HAVE APPROVED THE RESPECTIVE
PLAN OF SHARE EXCHANGE AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE PLAN OF SHARE EXCHANGE.
ACCOUNTING TREATMENT
Capitol expects the exchanges to be treated as the acquisition of a
minority interest using the purchase method of accounting.
PRO FORMA DATA
In light of the respective total assets and net income of Capitol, Muskegon
and Kent and since Muskegon and Kent have, since their inception, always been
consolidated subsidiaries of Capitol, pro forma financial statements are not
included in this proxy statement/prospectus. The pro forma effect of the
exchange is deemed to be immaterial.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The income tax discussion below represents the opinion of Strobl Cunningham
Caretti & Sharp, P.C., tax counsel to Capitol, on the material federal income
tax consequences of the exchange. This discussion is not a comprehensive
description of all of the tax consequences that may be relevant to you. For
example, counsel did not address tax consequences that arise from rules that
apply generally to all taxpayers or to some classes of taxpayers or tax
consequences that are generally assumed to be known by investors. This
discussion is based upon the Internal Revenue Code, the regulations of the U.S.
Treasury Department and court and administrative rulings and decisions in effect
on the date of this proxy statement/prospectus. These laws may change, possibly
retroactively, and any change could affect the continuing validity of this
discussion.
This discussion also is based upon certain representations made by
Muskegon, Kent and Capitol. You should read carefully the full text of the tax
opinion of Strobl Cunningham Caretti & Sharp, P.C. The opinion is included in
this proxy statement/prospectus as Annex C. This discussion also assumes that
the exchange will be effected pursuant to applicable state law and otherwise
completed according to the terms of the Plan of Share Exchange. You should not
rely upon this discussion if any of these factual assumptions or representations
is, or later becomes, inaccurate.
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This discussion also assumes that shareholders hold their shares of
Muskegon and Kent 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;
* Muskegon and Kent shareholders who received their respective bank
common stock through the exercise of employee stock options or
otherwise as compensation;
* Muskegon and Kent shareholders who are not U.S. persons; and
* Muskegon and Kent shareholders who hold the bank's 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
Strobl Cunningham Caretti & Sharp, P.C., tax counsel to Capitol, that:
* the exchanges will qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code;
* no gain or loss will be recognized by the shareholders of Muskegon
and/or Kent who exchange their respective bank common stock solely for
Capitol common stock (except with respect to cash received instead of
a fractional share of Capitol common stock);
* the aggregate tax basis of the Capitol common stock received by
Muskegon or Kent shareholders who exchange all of their respective
bank common stock for Capitol common stock in the exchange will be the
same as the aggregate tax basis of the Muskegon and Kent common stock
surrendered in exchange (reduced by any amount allocable to a
fractional share of Capitol common stock for which cash is received);
* the holding period of the Capitol common stock received will include
the holding period of shares of Muskegon and Kent common stock
surrendered in exchange; and
* a holder of Muskegon or Kent common stock who receives cash instead of
a fractional share of Capitol common stock will, in general, recognize
capital gain or loss equal to the difference between the cash amount
received and the portion of the holder's tax basis in shares of the
respective bank's 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 respective bank's
common stock exchanged for the fractional share of Capitol common
stock is more than the long-term holding period.
The tax opinion of Strobl Cunningham Caretti & Sharp, P.C. is not binding
upon the Internal Revenue Service or the courts.
TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES OF THE EXCHANGE
TO YOU WILL DEPEND ON YOUR PARTICULAR SITUATION. YOU ARE ENCOURAGED TO CONSULT
YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE,
INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY OF FEDERAL,
STATE, LOCAL AND FOREIGN TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGE IN THE
TAX LAWS.
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REGULATORY MATTERS
Muskegon and Kent are subject to regulation by the Michigan Financial
Institutions Bureau and the FDIC. The Financial Institutions Bureau has been
advised by Capitol of the proposed share exchange. The FDIC is not required to
give permission or otherwise review the exchange prior to consummation.
As a bank holding company, Capitol is subject to regulation by the Federal
Reserve Board. Federal Reserve Board rules require Capitol to obtain the Federal
Reserve Board's permission to acquire at least 51% of a subsidiary bank. The
rules of the Federal Reserve Board do not differentiate between ownership of 51%
and ownership of 100% of the stock of the subsidiary bank. Of course, Capitol
received permission to acquire 51% or more ownership of Muskegon and Kent prior
to the respective banks' 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 exchanges that the shares of Capitol stock to be
issued pursuant to the Plan of Share Exchange be approved for listing on the
Nasdaq Stock Market, Inc., subject to official notice of issuance. An
application will be filed to list Capitol's shares. Accordingly, the shares of
Capitol common stock to be issued in exchange for the Muskegon and/or Kent
common stock will be publicly tradable upon consummation of the exchange. There
will be no restriction on the ability of a former Muskegon and/or Kent
shareholder to sell in the open market the Capitol common stock received (unless
the Muskegon and/or Kent shareholder is also an officer, director or affiliate
of either Muskegon, Kent or Capitol, in which case Rule 144 and Rule 145 issued
by the SEC do impose certain restrictions on sale of Capitol common stock).
DISSENTERS' RIGHTS
Michigan law provides that where the consideration to be received in a
share exchange is common stock which is publicly tradable on a national
securities exchange, or held of record by 2,000 or more persons, dissenters'
rights are not available. Capitol's common stock is tradable on the National
Market System of the Nasdaq Stock Market, Inc. and, accordingly, qualifies as
stock traded on a national securities exchange. Therefore, no dissenters' rights
will be available in the exchange.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
This proxy statement/prospectus does not cover any resales of the Capitol
common stock you will receive in the exchange, and no person is authorized to
make any use of this proxy statement/prospectus in connection with any such
resale.
All shares of Capitol common stock you will receive in the exchange will be
freely transferable, except that if you are deemed to be an "affiliate" of
Muskegon or Kent under the Securities Act of 1933 at the time of the special
shareholders meeting, you may resell those shares only in transactions permitted
by Rule 145 under the Securities Act or as otherwise permitted under the
Securities Act. Persons who may be affiliates of Muskegon or Kent for those
purposes generally include individuals or entities that control, are controlled
by, or are under common control with, Muskegon or Kent, and would not include
shareholders who are not officers, directors or principal shareholders of
Muskegon or Kent.
The affiliates of Muskegon or Kent 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, Muskegon and Kent have been publicly
filed by Capitol; or
(2) in violation of the Securities Act.
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OPINION OF FINANCIAL ADVISOR
Muskegon and Kent have retained JMP Financial, Inc. to provide a financial
fairness opinion in connection with the exchange. The boards selected JMP
Financial, Inc. to act as their bank'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 opinions, the consideration to be received pursuant to the
exchange by the holders of Muskegon and/or Kent common stock is fair from a
financial point of view.
The full text of the written opinions of JMP Financial, Inc. are attached
as Annex B to this proxy statement/prospectus and sets forth, among other
things, the assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by JMP Financial, Inc. in
rendering its opinion. Muskegon and Kent shareholders are urged to, and should,
read the opinion carefully and in its entirety. The opinion is directed to the
boards of Muskegon and Kent and addresses only the fairness from a financial
point of view of the consideration received pursuant to the exchange as of the
date of the respective opinions. It does not address any other aspect of the
exchanges and does not constitute a recommendation to any holder of Muskegon or
Kent common stock as to how to vote at the respective special shareholders
meetings. The summary of the opinions of JMP Financial, Inc. set forth in this
document is qualified in its entirety by reference to the full text of the
opinions.
In connection with rendering its opinion, JMP Financial, Inc. among other
things:
* reviewed certain internal financial statements and other financial and
operating data concerning Muskegon and Kent prepared by the management
of the respective banks;
* discussed the past and current operations and financial condition and
the prospects of Muskegon and Kent with senior executives of the
respective banks;
* 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 Muskegon, Kent and Capitol and
the prices and trading activity of Capitol common stock with that of
certain other comparable publicly traded companies and their
securities;
* reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
* reviewed the Plan of Share Exchange; and
* performed such other analyses and considered such other factors as JMP
Financial, Inc. deemed appropriate.
In rendering its opinion, JMP Financial, Inc. performed the following
analyses:
(1) JMP Financial, Inc., reviewed the performance of a sample of publicly
traded stocks of Michigan banks and bank holding companies. No bank or
bank holding company was identical to Muskegon, Kent or Capitol. JMP
Financial, Inc., did, however, note that the Muskegon and Kent share
value and the Capitol share value were generally within the range of
the share values of comparable size banks and bank holding companies.
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(2) JMP Financial, Inc., also consulted a private database to construct a
group of banks and bank holding companies it deemed to be similar to
either Muskegon, Kent or Capitol, considering, but not limiting its
analysis to, such factors as size, financial condition and
performance, geography and market performance. Once again, although no
bank or bank holding company was identical to Muskegon, Kent or
Capitol, JMP Financial, Inc., noted that the estimated share value of
Capitol was within the range of trading prices of institutions of a
similar size and in a similar market or markets.
(3) JMP Financial, Inc., reviewed the pricing ratios in those mergers and
acquisitions of banks and bank holding companies pending or completed
during the past twelve months for which public information was
available. JMP Financial, Inc., found that the premium to book value
ratios offered to selling shareholders generally ranged from 140
percent to 328 percent, with both median and average premium to book
values falling between 182 percent and 208 percent. All of these
transactions involved the transfer of control to the acquiring
institution. JMP also reviewed the trading prices and histories of
small publicly traded banks it deemed comparable to Muskegon and Kent
to determine the approximate fair market value of small minority
positions in those institutions and found that price-to-book value
ratios ranged from 63 percent to 336 percent with averages and medians
ranging from 115 to 120 percent. The banks which JMP Financial, Inc.,
reviewed and which it defined as "small publicly traded banks" are all
listed on the Nasdaq National Market System and average a weekly
trading volume of about one-third to one-half of one percent of their
outstanding stock. Among the significant differences between these
small publicly traded banks and Muskegon and Kent is that the Muskegon
and Kent stock is illiquid. A number of historical studies and
valuation practices estimate liquidity discounts in a range from 10 to
30 percent. The transaction at issue is somewhere between the sale of
all of the stock of an entire financial institution and the sale of a
minority block of stock in a community bank; however, JMP Financial,
Inc., believes the exchange bears more characteristics of the latter
than the former. The most dramatic difference, in the view of JMP
Financial, Inc., between the exchange and an acquisition of all of the
stock of an entire institution is the "change of control" by which the
acquiring institution acquires all of the outstanding stock of the
acquired institution. In such transactions, control of the acquired
institution changes hands, for which the acquiring institution may pay
a significant premium. In the present transaction, JMP Financial,
Inc., noted that Capitol has had control of Muskegon and Kent from the
outset and would not be expected to pay a "premium" for control, since
it already owns control of Muskegon and Kent. JMP Financial, Inc.,
would expect that the premium over book value would be closer to the
price paid in the sale of a minority block of stock in a small
publicly traded bank, which in fact is the case. JMP Financial, Inc.
therefore concluded that the exchanges are fair to the respective
shareholders of Muskegon and Kent from a financial point of view.
The opinion and presentation of JMP Financial, Inc. to the boards of
Muskegon and Kent was one of many factors taken into consideration by the
respective boards in making their separate decisions to approve the exchange.
The analyses as described above should not be viewed as determinative of the
opinion of those boards with respect to the exchange or of whether they would
have been willing to agree to a transaction with a different form or amount of
consideration.
The Muskegon and Kent boards retained JMP Financial, Inc. based upon its
qualifications, experience and expertise. JMP Financial, Inc. is a recognized
investment banking and advisory firm which has special expertise in the
valuation of banks.
Under the terms of its engagement, JMP Financial, Inc. provided financial
advisory services and a financial fairness opinion in connection with the
exchange, and Muskegon and Kent each agreed to pay JMP Financial a fee of $8,000
plus out-of-pocket expenses. In addition, Muskegon and Kent have agreed to
indemnify JMP Financial, Inc. and its affiliates, against certain liabilities
and expenses, including certain liabilities under the federal securities laws.
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THE SPECIAL SHAREHOLDERS' MEETINGS
DATE, TIME AND PLACE
The special shareholders meeting of Muskegon will be held on December 29,
2000 at Muskegon Commerce Bank, 255 Seminole Road, Muskegon, Michigan 49444 at
9:00 a.m., local time. The special shareholders meeting of Kent will be held on
December 29, 2000 at Kent Commerce Bank, 4050 Lake Drive SE, Grand Rapids,
Michigan 49546 at 9:00 a.m., local time.
MATTERS TO BE CONSIDERED AT THE SPECIAL SHAREHOLDERS MEETINGS
At the respective special shareholders meetings, holders of Muskegon and
Kent common stock will vote on whether to approve their respective exchange. See
"The Exchange".
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Holders of record of Muskegon common stock at the close of business on
December 1, 2000, the record date for their respective special shareholders
meeting, are entitled to receive notice of and to vote at the special
shareholders meeting. At September 30, 1999, 254,546 shares of Muskegon common
stock were issued and outstanding and held by approximately 104 holders of
record. Capitol held 130,146 shares of Muskegon common stock on that date and
124,400 were held by shareholders other than Capitol.
Holders of record of Kent common stock at the close of business on December
1, 2000, the record date for their respective special shareholders meeting, are
entitled to receive notice of and to vote at the special shareholders meeting.
At September 30, 1999, 370,000 of Kent common stock were issued and outstanding
and held by approximately 117 holders of record. Capitol held 188,700 shares of
Kent common stock on that date and 181,300 were held by shareholders other than
Capitol.
A majority of the shares of the Muskegon and Kent common stock (excluding
shares held by Capitol) entitled to vote on the record date must be represented
in person or by proxy at the special shareholders meetings in order for a quorum
to be present for purposes of transacting business at the meeting. In the event
that a quorum of common stock is not represented at the special shareholders
meetings, it is expected that the meeting will be adjourned or postponed to
solicit additional proxies. Holders of record of Muskegon and Kent common stock
on the record date are each entitled to one vote per share with respect to
approval of the exchange at their respective special shareholders meeting.
Muskegon and Kent do not expect any other matters to come before the
special shareholders meetings. However, if any other matters are properly
presented at the special meetings for consideration, the persons named in the
enclosed form of proxy, and acting thereunder, will have discretion to vote or
not vote on those matters in accordance with their best judgment, unless
authorization to use that discretion is withheld. If a proposal to adjourn the
special meetings is properly presented, however, the persons named in the
enclosed form of proxy will not have discretion to vote in favor of the
adjournment proposal any shares which have been voted against the proposal(s) to
be presented at the special meeting. Muskegon and Kent are not aware of any
matters expected to be presented at the special meetings other than as described
in the notice of special meetings.
VOTES REQUIRED
Although approval of two-thirds of the shares entitled to vote is all that
is required by law, Muskegon and Capitol have agreed that approval of the
exchange as to Muskegon will require the affirmative vote of a majority of the
shares of Muskegon common stock outstanding on the record date, excluding the
51% of Muskegon's shares held by Capitol. Similarly, Kent and Capitol have
agreed that approval of the exchange as to Kent will require the affirmative
vote of a majority of Kent common stock outstanding on the record date,
excluding the 51% of Kent's shares held by Capitol. Thus, the exchanges will
each require over 80% approval, since Capitol will vote for the exchanges.
Abstentions and broker non-votes will have the same effect as a vote against the
proposal to approve the exchange.
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SHARE OWNERSHIP OF MANAGEMENT
As of the close of business on September 30, 2000, the directors and
executive officers of Muskegon and their affiliates were entitled to vote
approximately 25,291 shares of Muskegon common stock. These shares represent
approximately 9.94% of the outstanding shares of Muskegon common stock and
20.33% of Muskegon's shares held by shareholders other than Capitol. The
directors and executive officers have agreed to vote their shares of Muskegon
common stock in favor of the exchange.
As of the close of business on September 30, 2000, the directors and
executive officers of Kent and their affiliates were entitled to vote
approximately 58,823 shares of Kent common stock. These shares represent
approximately 15.90% of the outstanding shares of Kent common stock and 32.45%
of Kent's shares held by shareholders other than Capitol. The directors and
executive officers have agreed to vote their shares of Kent common stock in
favor of the exchange.
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THE CLOSING
EFFECTIVE TIME
The exchanges will be effective at 5:00 p.m., Eastern Time, on December 31,
2000, and will be closed as soon as possible after the vote at the separate
special meetings of Muskegon's and Kent's shareholders. If the exchanges are
approved, as of the effective date, each outstanding share of Muskegon and Kent
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 Muskegon and Kent common stock owned by Capitol since their
inception will be unaffected by the exchanges. 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 Muskegon or Kent 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 Muskegon or Kent shares
in accordance with the instructions in the letter of transmittal, you will be
entitled to receive stock certificates representing shares of Capitol's common
stock into which those Muskegon or Kent 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 Muskegon or Kent stock will represent only the right to receive the
shares of Capitol's common stock into which shares of Muskegon or Kent stock
were converted in the exchange, and the right to receive cash in lieu of
fractional shares of Capitol's common stock as described below.
Until your Muskegon or Kent 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 Muskegon or Kent 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.
Muskegon's and Kent'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 Muskegon or Kent stock that is not
registered in the records of Muskegon or Kent has occurred, then, so long as the
Muskegon or Kent stock certificates are accompanied by all documents required to
evidence and effect the transfer, as set forth in the transmittal letter and
accompanying instructions, a certificate representing the proper number of
shares of Capitol common stock will be issued to a person other than the person
in whose name the certificate so surrendered is registered, together with a cash
payment in lieu of fractional shares, if any, and payment of dividends or
distributions, if any.
No fractional share of Capitol's common stock will be issued upon surrender
of certificates previously representing Muskegon or Kent 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.
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FEES AND EXPENSES
Whether or not the exchange is completed, Capitol, Muskegon and Kent will
each pay its own costs and expenses incurred in connection with the exchange,
including the costs of (a) the filing fees in connection with Capitol's Form S-4
registration statement and this proxy statement/prospectus, (b) the filing fees
in connection with any filing, permits or approvals obtained under applicable
state securities and "blue sky" laws, (c) the expenses in connection with
printing and mailing of the Capitol Form S-4 registration statement and this
proxy statement/prospectus, and (d) all other expenses.
NASDAQ STOCK MARKET LISTING
Capitol will promptly prepare and submit to the Nasdaq Stock Market, Inc. a
listing application with respect to the maximum number of shares of Capitol
common stock issuable to Muskegon and Kent shareholders in the exchange, and
Capitol must use reasonable best efforts to obtain approval for the listing of
Capitol common shares on the Nasdaq Stock Market, Inc.
AMENDMENT AND TERMINATION
Capitol, Muskegon and Kent 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 exchanges, it may not be further amended without the
approval of the shareholders.
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<PAGE>
VOTING OF PROXIES
SUBMITTING PROXIES
You may vote by attending the respective special shareholders meeting and
voting your shares in person at the meeting, or by completing the enclosed proxy
card, signing and dating it and mailing it in the enclosed postage pre-paid
envelope. If you sign a written proxy card and return it without instructions,
your shares will be voted FOR the exchange at the respective special
shareholders meeting.
If your shares are held in the name of a trustee, bank, broker or other
record holder, you must either direct the record holder of your shares as to how
to vote your shares or obtain a proxy from the record holder to vote at the
respective special shareholders meeting.
Shareholders who submit proxy cards should not send in any stock
certificates with their proxy cards. A transmittal form with instructions for
the surrender of certificates representing shares of Muskegon and/or Kent stock
will be mailed by Capitol to former Muskegon and/or Kent 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 respective special shareholders meeting.
Proxies may be revoked by written notice, including by telegram or telecopy, to
the president of Muskegon or Kent, as applicable, by a later-dated proxy signed
and returned by mail or by attending the special shareholders meeting and voting
in person. Attendance at respective special shareholders meeting will not in and
of itself constitute a revocation of a proxy. Any written notice of a revocation
of a proxy must be sent so as to be delivered before the taking of the vote at
the respective special shareholders meeting to:
Muskegon Commerce Bank Kent Commerce Bank
255 Seminole Road 4050 Lake Drive SE
Muskegon, Michigan 49444 Grand Rapids, Michigan 49546
Attention: Robert McCarthy, President Attention: David Veen, President
If you require assistance in changing or revoking a Muskegon proxy, you
should contact Robert McCarthy at the address above or at phone number (231)
737-4431. If you require assistance in changing or revoking a Kent proxy, you
should contact David Veen at the address above or at phone number (616)
974-0200.
GENERAL INFORMATION
Brokers who hold shares in street name for customers who are the beneficial
owners of those shares are prohibited from giving a proxy to vote on non-routine
matters, such as the proposal to be voted on at the special shareholders
meeting, unless they receive specific instructions from the customer. These
so-called broker non-votes will have the same effect as a vote against the
exchange.
Abstentions may be specified on all proposals. If you submit a proxy with
an abstention, you will be treated as present at the special shareholders
meeting for purposes of determining the presence or absence of a quorum for the
transaction of all business. An abstention will have the same effect as a vote
against the exchange.
SOLICITATION OF PROXIES; EXPENSES
Capitol, Muskegon or Kent will pay the cost of solicitation of proxies. In
addition to solicitation by mail, the directors, officers and employees of
Muskegon or Kent may also solicit proxies from their respective shareholders by
telephone, telecopy, telegram or in person.
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COMPARISON OF SHAREHOLDER RIGHTS
As a result of the exchange, holders of shares of Muskegon and/or Kent
common stock will become holders of shares of Capitol common stock. The
following chart summarizes the material differences between the rights of
Muskegon and/or Kent shareholders (left column), and the rights of shareholders
of Capitol (right column). This summary is not intended to be complete and is
qualified by reference to the Michigan Banking Code and the Michigan Business
Corporation Act, as well as to Muskegon's and Kent's respective articles of
incorporation and by-laws (copies of which may be obtained from Muskegon or
Kent, as applicable) and Capitol's articles of incorporation and by-laws,
(copies of which are on file with the SEC).
<TABLE>
<CAPTION>
Muskegon and/or Kent: Capitol:
--------------------- --------
<S> <C> <C>
GOVERNING LAW: Michigan Banking Code Public Act 276 of Michigan Business Corporation Act Public Act
1999 284 of 1972
ASSESSABILITY OF SHARES: Shareholders may be assessed to restore Shares of common stock are non-assessable and
the capital of their respective bank up shareholders have no liability in excess of
to its stated capital in the event of their initial investment. MCLA 450.1317
losses. MCLA 487.13807
AUTHORIZED BUT Under the Banking Code, banks can only Capitol has authorized but unissued shares,
UNISSUED SHARES: have authorized but unissued shares to which may be issued by the Board of Directors
be issued in exchange for securities in the Board's discretion and without a
with respect to which conversion shareholder vote. MCLA 450.1202
privileges exist, with approval of the
Banking Commissioner. MCLA 487.13801
DIVIDENDS: Bank shareholders may share in dividends Capitol common stockholders may share in
as and when declared by the respective dividends as and when declared by the Board
bank's Board of Directors (although none of Directors (see "Dividends and Market for
have been to date). The Board of Common Stock"); dividends may be paid out of
Directors may only declare dividends out any funds available unless the payment of the
of net profits from operations and must dividend renders the business corporation
have a surplus equal to 20% of the insolvent. MCLA 450.1345
respective bank's stated capital on hand
after the declaration and payment of any
dividend. MCLA 487.13806
AMENDMENT TO ARTICLES Needs approval of the Banking Approval of a majority of the shareholders.
OF INCORPORATION: Commissioner and approval of a majority MCLA 450.1611
of the shareholders to amend the
articles. MCLA 487.13203
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Muskegon and/or Kent: Capitol:
--------------------- --------
<S> <C> <C>
ISSUANCE OF NEW SHARES: Approval of the Banking Commissioner and Capitol's Board of Directors may issue new
a two-thirds vote of the shareholders of shares without a vote of the shareholders
their respective bank. MCLA 487.13804 under Michigan law up to the authorized but
unissued shares; any additional shares in
excess of the authorized but unissued shares
would require approval of a majority of the
shareholders. MCLA 450.1611
VOTE ON DIRECTORS: Muskegon has 12 Directors who are elected Capitol has 16 directors who are elected
annually for one-year terms. Kent has 14 annually to one year terms. There is no
Directors who are elected annually for cumulative voting.
one-year terms. There is no cumulative
voting.
BUSINESS COMBINATIONS: A consolidation of either bank with any A business combination involving Capitol
other banking institution would require would require the approval of a majority of
the approval of the Banking Commissioner the outstanding shareholders. MCLA 450.1703A;
and the approval of a two-thirds vote of the Michigan Business Corporation Act has
the respective bank's shareholders. MCLA certain anti-takeover provisions as described
487.13701 in "Description of the Capital Stock of
Capitol" which are not included in the
Michigan Banking Code.
INDEMNIFICATION OF The Michigan Banking Code provides for the Indemnification of directors and officers is
DIRECTORS AND OFFICERS: indemnification of directors and officers. provided for under the Michigan Business
See MCLA 13904-.13910. Corporation Act in substantially similar
language to that in the Michigan Banking
Code. See MCLA 450.1561-.1567.
LIMITATION OF LIABILITY: The Michigan Banking Code permits banking The Michigan Business Corporation Act allows
corporations to limit the liability of corporations to limit the liabilities of the
directors and officers. MCLA 487.13504. directors and officers in substantially
Muskegon and Kent have adopted a provision similar language to the Michigan Banking
in its Articles of Incorporation which Code. MCLA 450.1209. Capitol has adopted a
limits the liability of directors and provision in its Articles of Incorporation
officers to the greatest extent permitted which limits directors and officers liability
by law. to the greatest extent permitted by law.
</TABLE>
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<PAGE>
DESCRIPTION OF THE CAPITAL STOCK OF CAPITOL
Capitol's Articles of Incorporation, as amended to date, authorize the
issuance of up to 25,000,000 shares of common stock, without par value.
Capitol's articles of incorporation do not authorize the issuance of any other
class of stock. As of September 30, 2000, 7,171,893 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
35
<PAGE>
could be privately placed with purchasers who might cooperate with the board of
directors of Capitol in opposing such an attempt by a third party to gain
control of Capitol. The issuance of new shares of common stock could also be
used to dilute ownership of a person or entity seeking to obtain control of
Capitol. Although Capitol does not currently contemplate taking that action,
shares of Company common stock could be issued for the purposes and effects
described above, and the board of directors reserves its rights (if consistent
with its fiduciary responsibilities) to issue shares for such purposes.
CAPITOL'S PREFERRED SECURITIES
Capitol has issued debentures to Capitol Trust I, a Delaware business trust
subsidiary of Capitol. Capitol Trust I purchased the debentures with the
proceeds of preferred securities (which are traded on the NASDAQ National Stock
Market under the symbol "CBCLP"). Capitol has guaranteed the preferred
securities. The documents governing these securities, including the indenture
under which the debentures were issued, restrict Capitol's right to pay a
dividend on its common stock under certain circumstances and give the holders of
the preferred securities preference on liquidation over the holders of Capitol's
common stock. Specifically, Capitol may not declare or pay a cash dividend on
its common stock if (a) an event of default has occurred as defined in the
indenture, (b) Capitol is in default under its guarantee, or (c) Capitol has
exercised its right under the debentures and the preferred securities to extend
the interest payment period. In addition, if any of these conditions have
occurred and until they are cured, Capitol is restricted from redeeming or
purchasing any shares of its common stock except under very limited
circumstances. Capitol's obligation under the debentures, the preferred
securities and the guarantee is $25.3 million and the interest rate is 8.5% per
annum, payable quarterly.
ANTI-TAKEOVER PROVISIONS
In addition to the utilization of authorized but unissued shares as
described above, the MBCA contains other provisions which could be utilized by
Capitol to impede efforts to acquire control of Capitol. Those provisions
include the following:
CONTROL SHARE ACT. The MBCA contains provisions intended to protect
shareholders and prohibit or discourage certain types of hostile takeover
activities. These provisions regulate the acquisition of "control shares" of
large public Michigan corporations.
The act establishes procedures governing "control share acquisitions." A
control share acquisition is defined as an acquisition of shares by an acquirer
which, when combined with other shares held by that person or entity, would give
the acquirer voting power at or above any of the following thresholds: 20%,
33-1/3% or 50%. Under that act, an acquirer may not vote "control shares" unless
the corporation's disinterested shareholders vote to confer voting rights on the
control shares. The acquiring person, officers of the target corporation, and
directors of the target corporation who are also employees of the corporation
are precluded from voting on the issue of whether the control shares shall be
accorded voting rights. The act does not affect the voting rights of shares
owned by an acquiring person prior to the control share acquisition.
The act entitles corporations to redeem control shares from the acquiring
person under certain circumstances. In other cases, the act confers dissenters'
rights upon all of a corporation's shareholders except the acquiring person.
The act applies only to an "issuing public corporation." Capitol falls
within the statutory definition of an "issuing public corporation." The act
automatically applies to any "issuing public corporation" unless the corporation
"opts out" of the statute by so providing in its articles of incorporation or
bylaws. Capitol has not "opted out" of the provisions of the act.
FAIR PRICE ACT. Certain provisions of the MBCA establish a statutory scheme
similar to the supermajority and fair price provisions found in many corporate
charters. The act provides that a super majority vote of 90% of the shareholders
and no less than two-thirds of the votes of non-interested shareholders must
approve a "business combination." The act defines a "business combination" to
encompass any merger, consolidation, share exchange, sale of assets, stock
36
<PAGE>
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.
As of February 24, 2000 Capitol's management beneficially owned (including
immediately exercisable stock options) control of approximately 30.21% 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.
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 Muskegon and/or Kent shareholders
in the exchanges. 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 Muskegon and Kent for their respective special meetings. As allowed
by SEC rules, this proxy statement/prospectus does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement.
In addition, Capitol 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:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office Citicorp Center
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
</TABLE>
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.
37
<PAGE>
In addition, all subsequent documents filed with the SEC by Capitol
pursuant Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 after the date of this proxy statement/ prospectus shall be deemed to be
incorporated by reference into this proxy statement/prospectus and to be a part
hereof from the date of filing such documents. Any statement contained in this
proxy statement/prospectus or in a document incorporated or deemed to be
incorporated by reference in this prospectus or another such document shall be
deemed to be modified or superseded for purposes of this proxy
statement/prospectus to the extent that a statement contained in this proxy
statement/prospectus or another such document or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein
modified or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified superseded, to constitute a part of
this proxy statement/prospectus.
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY DECEMBER 20, 2000
TO RECEIVE THEM BEFORE THE SPECIAL SHAREHOLDERS MEETINGS. 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 Muskegon, Kent, Capitol or the exchanges, 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 Muskegon and Kent has been supplied by the
respective banks.
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of Capitol
common stock offered by this proxy statement/prospectus and certain federal
income tax matters relating to the exchange will be passed upon for Capitol by
Strobl Cunningham Caretti & Sharp, P.C.
EXPERTS
The consolidated financial statements of Capitol attached to this proxy
statement/prospectus included in Capitol's annual report to shareholders and its
report on Form 10-K for the fiscal year ended December 31, 1999, have been
audited by BDO Seidman, LLP, independent certified public accountants, as stated
in their report, which is attached as part of Annex E, and are included in
reliance upon such report given upon their authority as experts in accounting
and auditing.
The separate financial statements of Muskegon and Kent attached to this
proxy statement/prospectus as Annex D for the fiscal years ended December 31,
1999 and 1998 have been audited by BDO Seidman, LLP, independent certified
public accountants, as stated in their reports, which are attached as part of
Annex D, and are included in reliance upon such report given upon their
authority as experts in accounting and auditing.
38
<PAGE>
ANNEX A-1
PLAN OF SHARE EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into effective December 31,
2000 between and among CAPITOL BANCORP LTD., a Michigan corporation ("Capitol")
and the SHAREHOLDERS of MUSKEGON COMMERCE BANK ("Bank").
RECITALS
A. Bank is a Michigan banking corporation which commenced the business of
banking December 5, 1997.
B. Capitol is now and has been since Bank commenced the business of banking
the holder of fifty-one (51%) percent of the duly issued and outstanding common
stock of Bank ("Bank common stock").
C. Bank 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. Bank's Board of Directors has determined that it would be in the best
interest of Muskegon's stockholders to exchange their shares of stock in Bank
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 Bank common stock will
exchange his, her or their shares of Bank common stock for shares of Capitol
common stock according to an exchange ratio determined as follows:
BANK SHARE VALUE. The share value of each share of Bank common
stock shall be determined by multiplying 1.5 times the adjusted
pro forma net book value per share of Bank common stock as of the
close of business on December 31,, 2000. The adjusted pro forma
net book value per share of Bank common stock as of the close of
business on December 31, 2000 shall be calculated by (1) using
the amount of stockholders' equity as reflected in Bank's
internally prepared financial statements as of December 31, 2000;
(2) subtracting from that amount the principal amounts of
Capitol's capital contributions to Bank during the period from
its inception to December, 2000 (aggregating $1,757,000 through
September 30, 2000) for which Capitol did not receive shares of
Bank's common stock and also subtracting an interest factor to
impute to Capitol an appropriate return on its capital
contributions equivalent to Capitol's interest cost through
December 31, 2000; and (3) dividing the remainder reached by the
number of shares of Bank's common stock outstanding as of the
close of business on December 31, 2000.
CAPITOL SHARE VALUE. The share value of each share of Capitol
common stock will be the average of the closing prices of Capitol
common stock for each of the trading days in the thirty (30)
calendar day period prior to and ending on December 31, 2000, as
reported by the NASDAQ Stock Market, Inc.
EXCHANGE RATIO. The exchange ratio will be determined by dividing
the Bank's Share Value by the Capitol Share Value.
<PAGE>
Each Bank shareholder (except Capitol) will receive shares of
Capitol common stock in exchange for his, her or their Bank common stock
calculated by multiplying the number of shares of Bank 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 Bank shall have approved and
adopted the Plan.
b. The Board of Directors of Capitol (acting through its
Executive Committee or otherwise, Capitol's Board having
already approved the exchange in principle) shall have
approved and adopted the Plan.
c. A majority of the common stock of Bank (exclusive of the
shares held by Capitol) shall have been voted to approve and
adopt the Plan at a special meeting of the shareholders
called for that purpose.
d. The Securities and Exchange Commission shall have declared
effective the Registration Statement registering the shares
of stock of Capitol's common stock to be issued in the
exchange.
e. The Financial Institutions Bureau of the State of Michigan
shall not have issued any objection to the Plan (a letter
indicating the Financial Institutions Bureau does not object
has already been received).
3. FAIRNESS OPINION. The Board of Directors of Bank 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 Bank.
4. TAX OPINION. Strobl Cunningham Caretti & Sharp, P.C. shall have
issued its legal opinion that the share exchange constitutes a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended, and that the exchange shall not be a taxable event to the shareholders
of Bank (except to the extent of the cash received in lieu of fractional
shares).
5. SURRENDER OF CERTIFICATES. Each shareholder of Bank common stock
shall surrender to Capitol his, her or their certificate(s) for shares of Bank
common stock within thirty (30) days after the effective date of this Plan.
Capitol shall direct its transfer agent, UMB Bank, n.a., to issue certificate(s)
of Capitol common stock to be issued in the exchange. Certificate(s) of Capitol
common stock shall be issued and registered in the same name as the shares of
Bank common stock surrendered in exchange therefor, and shall thereafter be
transferable in the same manner as otherwise provided for Capitol common stock.
In the event any shareholder of Bank common stock fails to surrender his, her or
their certificate(s) within thirty (30) days of the effective date of this Plan,
such certificate(s) shall nonetheless be canceled and deemed surrendered, and
certificate(s) for Capitol common stock shall be issued and registered in the
name of the person who is the registered holder on the books of Bank on the
effective date of this Plan, and the Bank certificate(s) shall thereafter be
null and void and of no force or effect whatever.
6. NEW BANK CERTIFICATE. Bank shall issue its certificate registering
in the name of Capitol all shares of stock now registered to shareholders other
than Capitol.
<PAGE>
ANNEX A-2
PLAN OF SHARE EXCHANGE
THIS PLAN OF SHARE EXCHANGE ("Plan") is entered into effective December 31,
2000 between and among CAPITOL BANCORP LTD., a Michigan corporation ("Capitol")
and the SHAREHOLDERS of KENT COMMERCE BANK ("Bank").
RECITALS
A. Bank is a Michigan banking corporation which commenced the business of
banking January 12, 1998.
B. Capitol is now and has been since Bank commenced the business of banking
the holder of fifty-one (51%) percent of the duly issued and outstanding common
stock of Bank ("Bank common stock").
C. Bank 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. Bank's Board of Directors has determined that it would be in the best
interest of Kent's stockholders to exchange their shares of stock in Bank 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 Bank common stock will
exchange his, her or their shares of Bank common stock for shares of Capitol
common stock according to an exchange ratio determined as follows:
BANK SHARE VALUE. The share value of each share of Bank common
stock shall be determined by multiplying 1.5 times the adjusted
pro forma net book value per share of Bank common stock as of the
close of business on December 31,, 2000. The adjusted pro forma
net book value per share of Bank common stock as of the close of
business on December 31, 2000 shall be calculated by (1) using
the amount of stockholders' equity as reflected in Bank's
internally prepared financial statements as of December 31, 2000;
(2) subtracting from that amount the principal amounts of
Capitol's capital contributions to Bank during the period from
its inception to December, 2000 (aggregating $760,000 through
September 30, 2000) for which Capitol did not receive shares of
Bank's common stock and also subtracting an interest factor to
impute to Capitol an appropriate return on its capital
contributions equivalent to Capitol's interest cost through
December 31, 2000; and (3) dividing the remainder reached by the
number of shares of Bank's common stock outstanding as of the
close of business on December 31, 2000.
CAPITOL SHARE VALUE. The share value of each share of Capitol
common stock will be the average of the closing prices of Capitol
common stock for each of the trading days in the thirty (30)
calendar day period prior to and ending on December 31, 2000, as
reported by the NASDAQ Stock Market, Inc.
EXCHANGE RATIO. The exchange ratio will be determined by dividing
the Bank's Share Value by the Capitol Share Value.
<PAGE>
Each Bank shareholder (except Capitol) will receive shares of
Capitol common stock in exchange for his, her or their Bank common stock
calculated by multiplying the number of shares of Bank 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 Bank shall have approved and
adopted the Plan.
b. The Board of Directors of Capitol (acting through its
Executive Committee or otherwise, Capitol's Board having
already approved the exchange in principle) shall have
approved and adopted the Plan.
c. A majority of the common stock of Bank (exclusive of the
shares held by Capitol) shall have been voted to approve and
adopt the Plan at a special meeting of the shareholders
called for that purpose.
d. The Securities and Exchange Commission shall have declared
effective the Registration Statement registering the shares
of stock of Capitol's common stock to be issued in the
exchange.
e. The Financial Institutions Bureau of the State of Michigan
shall not have issued any objection to the Plan (a letter
indicating the Financial Institutions Bureau does not object
has already been received).
3. FAIRNESS OPINION. The Board of Directors of Bank 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 Bank.
4. TAX OPINION. Strobl Cunningham Caretti & Sharp, P.C. shall have
issued its legal opinion that the share exchange constitutes a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended, and that the exchange shall not be a taxable event to the shareholders
of Bank (except to the extent of the cash received in lieu of fractional
shares).
5. SURRENDER OF CERTIFICATES. Each shareholder of Bank common stock
shall surrender to Capitol his, her or their certificate(s) for shares of Bank
common stock within thirty (30) days after the effective date of this Plan.
Capitol shall direct its transfer agent, UMB Bank, n.a., to issue certificate(s)
of Capitol common stock to be issued in the exchange. Certificate(s) of Capitol
common stock shall be issued and registered in the same name as the shares of
Bank common stock surrendered in exchange therefor, and shall thereafter be
transferable in the same manner as otherwise provided for Capitol common stock.
In the event any shareholder of Bank common stock fails to surrender his, her or
their certificate(s) within thirty (30) days of the effective date of this Plan,
such certificate(s) shall nonetheless be canceled and deemed surrendered, and
certificate(s) for Capitol common stock shall be issued and registered in the
name of the person who is the registered holder on the books of Bank on the
effective date of this Plan, and the Bank certificate(s) shall thereafter be
null and void and of no force or effect whatever.
6. NEW BANK CERTIFICATE. Bank shall issue its certificate registering
in the name of Capitol all shares of stock now registered to shareholders other
than Capitol.
<PAGE>
ANNEX B-1
JMP FINANCIAL, INC.
753 GRAND MARAIS
GROSSE POINTE PARK, MI 48230
TEL/FAX (313) 824-1711
December 12, 2000
Board of Directors
Muskegon Commerce Bank
255 Seminole Street
Muskegon, Michigan 49444
Gentlemen:
We have examined the proposed Plan of Share Exchange (the "Agreement")
dated December 31, 2000, to be entered into between Capitol Bancorp Ltd., a
Michigan Corporation ("CBCL") and the shareholders (the "Shareholders") of
Muskegon Commerce Bank ("Muskegon"), a Michigan Corporation by which CBCL shall
acquire from the Shareholders their outstanding shares of Muskegon, 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 Muskegon's common stock, not already owned by CBCL and issued and
outstanding as of December 31, 2000 (the "Effective Date") shall be exchanged,
pursuant to the Exchange Ratio specified in the Agreement, into shares of CBCL.
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange.
JMP Financial, Inc. ("JMP"), as a regular part of its investment banking
business, is engaged in the valuation of the securities of commercial and
savings banks as well as the holding companies of commercial and savings banks
in connection with mergers, acquisition, and divestitures, and for other
purposes.
In connection with this engagement and rendering this opinion, we reviewed
materials deemed necessary and appropriate by us under the circumstances,
including;
* Audited financial statements of Muskegon and CBCL for the years ended
December 31, 1999 and 1998, as available;
* Unaudited financial statements of Muskegon for the periods ended September
30, 2000 and 1999;
* Certain unaudited internal financial information concerning the capital
ratios of Muskegon;
* Publicly available information concerning CBCL;
<PAGE>
Page Two
Muskegon Commerce Bank Board of Directors
December 12, 2000
* Publicly available information with respect to certain other bank holding
companies, which we deemed, appropriate, including competitors of CBCL and
Muskegon.
* Publicly available information with respect to the nature and terms of
certain other transactions which we consider relevant;
* The Agreement;
* Reviewed certain historical market prices and trading volumes of Muskegon's
and CBCL's common stock to the extent reasonably available.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of all of the financial statements and other
information reviewed by us for the purposes of the opinion expressed herein. We
have not made an independent evaluation or appraisal of the assets and
liabilities of Muskegon or CBCL or any of its subsidiaries and we have not been
furnished with any such evaluation or appraisal. Additionally, we are not
experts in the evaluation of reserves for loan losses, and we have not reviewed
any individual credit files. For purposes of this opinion, we have assumed that
CBCL's and Muskegon's loan loss reserves are adequate in all material respects
and that, in the aggregate, other conditions at CBCL and Muskegon are
satisfactory and this opinion is conditioned upon such assumption. We have also
assumed that there has been no material change in Muskegon'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 Muskegon and
CBCL, respectively. This opinion is necessarily based on economic, market and
other conditions in effect on, and the information made available to us as of,
the date hereof. It should be understood that subsequent developments may effect
the opinion and that JMP does not have any litigation to update, revise or
reaffirm it.
The opinion expressed herein is being rendered to the Board of Directors of
Muskegon 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,
John Palffy
President
JMP Financial, Inc.
<PAGE>
ANNEX B-2
JMP FINANCIAL, INC.
753 GRAND MARAIS
GROSSE POINTE PARK, MI 48230
TEL/FAX (313) 824-1711
December 12, 2000
Board of Directors
Kent Commerce Bank
4050 Lake Drive SE
Grand Rapids, Michigan 49546
Gentlemen:
We have examined the proposed Plan of Share Exchange (the "Agreement")
dated December 31, 2000, to be entered into between Capitol Bancorp Ltd., a
Michigan Corporation ("CBCL") and the shareholders (the "Shareholders") of Kent
Commerce Bank ("Kent"), a Michigan Corporation by which CBCL shall acquire from
the Shareholders their outstanding shares of Kent, 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 Kent's common stock, not already owned by CBCL and issued and
outstanding as of December 31, 2000 (the "Effective Date") shall be exchanged,
pursuant to the Exchange Ratio specified in the Agreement, into shares of CBCL
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange.
JMP Financial, Inc. ("JMP"), as a regular part of its investment banking
business, is engaged in the valuation of the securities of commercial and
savings banks as well as the holding companies of commercial and savings banks
in connection with mergers, acquisition, and divestitures, and for other
purposes.
In connection with this engagement and rendering this opinion, we reviewed
materials deemed necessary and appropriate by us under the circumstances,
including;
* Audited financial statements of Kent and CBCL for the years ended December
31, 1999 and 1998, as available;
* Unaudited financial statements of Kent for the periods ended September 30,
2000 and 1999;
* Certain unaudited internal financial information concerning the capital
ratios of Kent;
* Publicly available information concerning CBCL;
<PAGE>
Page Two
Kent Commerce Bank Board of Directors
December 12, 2000
* Publicly available information with respect to certain other bank holding
companies, which we deemed, appropriate, including competitors of CBCL and
Kent.
* Publicly available information with respect to the nature and terms of
certain other transactions which we consider relevant;
* The Agreement;
* Reviewed certain historical market prices and trading volumes of Kent's and
CBCL's common stock to the extent reasonably available.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of all of the financial statements and other
information reviewed by us for the purposes of the opinion expressed herein. We
have not made an independent evaluation or appraisal of the assets and
liabilities of Kent or CBCL or any of its subsidiaries and we have not been
furnished with any such evaluation or appraisal. Additionally, we are not
experts in the evaluation of reserves for loan losses, and we have not reviewed
any individual credit files. For purposes of this opinion, we have assumed that
CBCL's and Kent's loan loss reserves are adequate in all material respects and
that, in the aggregate, other conditions at CBCL and Kent are satisfactory and
this opinion is conditioned upon such assumption. We have also assumed that
there has been no material change in Kent'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 Kent and CBCL, respectively.
This opinion is necessarily based on economic, market and other conditions in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may effect the opinion and
that JMP does not have any litigation to update, revise or reaffirm it.
The opinion expressed herein is being rendered to the Board of Directors of
Kent 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,
John Palffy
President
JMP Financial, Inc.
<PAGE>
ANNEX C
[Letterhead of Strobl Cunningham Caretti & Sharp, P.C.]
December 5, 2000
Capitol Bancorp Ltd.
200 Washington Sq. N., Fourth Floor
Lansing, MI 48933
Re: Muskegon Commerce Bank and Kent Commerce Bank
Plan of Share Exchange(s)
Tax Considerations
Ladies and Gentlemen:
We have acted as special counsel in connection with the Plan of Share
Exchange between Capitol Bancorp Ltd. ("Capitol") and the shareholders of
Muskegon Commerce Bank ("Muskegon") and Kent Commerce Bank ("Kent").
Capitol will file with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act"), a registration statement on
Form S-4 (the "Registration Statement"), with respect to the common shares of
Capitol to be issued to holders of shares of common stock of Muskegon and/or
Kent in connection with the Plan of Share Exchange. In addition, Capitol has
prepared, and we have reviewed, a Proxy Statement/Prospectus which is contained
in and made a part of the Registration Statement (the "Proxy Statement"), and
the Appendices thereto, including the respective Plan of Share Exchange and this
letter. In rendering our opinion, we have relied upon the facts stated in the
Proxy Statement and upon such other documents as we have deemed appropriate,
including the information about Capitol, Muskegon and Kent included or
incorporated by reference in the Proxy Statement.
We have assumed that (i) all parties to the Plan of Share Exchange, and to
any other documents reviewed by us, have acted, and will act, in accordance with
the terms of the Plan of Share Exchange, (ii) all facts, information, statements
and representations qualified by the knowledge and/or belief of Capitol,
Muskegon and/or Kent will be complete and accurate as of the effective time as
though not so qualified, (iii) the Plan of Share Exchange will be consummated at
the effective date pursuant to the terms and conditions set forth in the Plan of
Share Exchange without the waiver or modification of any such terms and
conditions, and (iv) the Plan of Share Exchange is authorized by and will be
effected pursuant to applicable state law.
<PAGE>
Based upon and subject to the foregoing, and to the qualifications,
limitations, representations and assumptions contained in the portion of the
Proxy Statement captioned "Material Federal Income Tax Consequences," we are of
the opinion that:
* the exchange will qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code;
* no gain or loss will be recognized by the shareholders of Muskegon or
Kent who exchange their respective Muskegon or Kent common stock
solely for Capitol common stock (except with respect to cash received
instead of a fractional share of Capitol common stock);
* the aggregate tax basis of the Capitol common stock received by
Muskegon or Kent shareholders who exchange all of their respective
Muskegon or Kent common stock for Capitol common stock in the exchange
will be the same as the aggregate tax basis of common stock
surrendered in exchange (reduced by any amount allocable to a
fractional share of Capitol common stock for which cash is received);
* the holding period of the Capitol common stock received will include
the holding period of shares of Muskegon or Kent common stock
surrendered in exchange; and
* a holder of Muskegon or Kent common stock who receives cash instead of
a fractional share of Capitol common stock will, in general, recognize
capital gain or loss equal to the difference between the cash amount
received and the portion of the holder's tax basis in shares of the
respective Muskegon or Kent 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
common stock exchanged for the fractional share of Capitol common
stock is more than the long-term holding period.
No opinion is expressed on any matters other than those specifically
stated. This opinion is furnished to you for use in connection with the
Registration Statement and may not be used for any other purpose without our
prior express written consent. We hereby consent to the inclusion of this
opinion as an appendix to the Proxy Statement and to the use of our name in that
portion of the Proxy Statement captioned "Material Federal Income Tax
Consequences." In giving such consent, we do not thereby admit that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Sincerely,
/s/ STROBL CUNNINGHAM CARETTI & SHARP, P.C.
<PAGE>
ANNEX D-1
FINANCIAL INFORMATION REGARDING MUSKEGON COMMERCE BANK
Management's discussion and analysis of financial
condition and results of operations.......................................D1-1
Condensed interim financial statements as of and for the
periods ended September 30, 2000 and 1999 (unaudited).....................D1-5
Audited financial statements as of and for the years
ended December 31, 1999 and 1998.........................................D1-11
<PAGE>
MUSKEGON COMMERCE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PERIODS ENDED SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
FINANCIAL CONDITION
Muskegon Commerce Bank is engaged in commercial banking activities from its sole
location in Muskegon, Michigan. From its inception in December 1997, 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 $59.3 million at September 30, 2000, compared with
$47.4 million at December 31, 1999. The Bank's total assets approximated $28.6
million at year-end 1998.
Total portfolio loans approximated $53.1 million at September 30, 2000, an
increase of approximately $11.3 million from the $41.8 million level at December
31, 1999. At December 31, 1998, total portfolio loans approximated $24.5
million. Portfolio loan growth during these periods has been significant and is
consistent with the Bank's overall balance sheet growth during these periods.
Commercial loans approximated 73% of total portfolio loans at September 30, 2000
consistent with the Bank's emphasis on commercial lending activities.
Installment loans approximated 24% of total portfolio loans at September 30,
2000.
The allowance for loan losses at September 30, 2000 approximated $572,000 or
1.08% of total portfolio loans, compared to an allowance ratio of 1.00% at
December 31, 1999 and 1998.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the loan portfolio at the
balance sheet date. Management's determination of the adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors. The allowance for loan losses is based upon
management's estimate of potential loan losses incurred at the respective
balance sheet dates.
Since the Bank's inception, there have been minimal loan charge-offs through
September 30, 2000.
The Bank's growth has been funded primarily by deposits, most of which are
interest-bearing. Total deposits approximated $53.7 million at September 30,
2000, an increase of approximately $10.3 million from the $43.4 million level at
December 31, 1999. Deposits also increased significantly in 1999 from the $26.0
million level at the beginning of the year.
D1-1
<PAGE>
The Bank emphasizes obtaining noninterest-bearing deposits as a means to reduce
its cost of funds. Noninterest-bearing deposits approximated $4.8 million at
September 30, 2000 or about 8.9% of total deposits, an increase of approximately
$832,000 from December 31, 1999. Noninterest-bearing deposits fluctuate
significantly from day to day, depending upon customer account activity.
Stockholders' equity approximated $4.8 million at September 30, 2000 or
approximately 8.2% of total assets. Capital adequacy is discussed elsewhere in
this narrative.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 2000 approximated $476,000,
compared with net income of $74,000 in the nine month 1999 period.
1998 represented the Bank's first full calendar year of operations, with a net
loss of $191,000, compared to a net loss of $25,000 in the Bank's brief period
of operations in 1997. Net income approximated $189,000 for the year ended
December 31, 1999.
During these most recent periods, the Bank's profitability has been the result
of its loan and deposit portfolios reaching a sufficient size to generate an
adequate margin to cover operating expenses and produce profits.
The principal source of operating revenues is interest income. Total interest
income for the nine months ended September 30, 2000 approximated $3.6 million,
compared with $2.2 million in the first nine months of 1999. For the year ended
December 31, 1999, total interest income approximated $3.2 million, compared
with $1.5 million in 1998.
Interest expense on deposits has also increased significantly during these
periods, consistent with the growth in the interest-bearing deposits. Total
interest expense approximated $1.9 million for the nine months ended September
30, 2000, compared with $1.1 million for the first nine months of 1999. For the
year ended December 31, 1999, total interest expense approximated $1.6 million,
compared with $819,000 in 1998.
Net interest income approximated $1.7 million for the nine months ended
September 30, 2000, compared with $1.1 million for the 1999 corresponding
period. Net interest income for the year ended December 31, 1999 approximated
$1.5 million, significantly more than the $640,000 in 1998.
Provisions for loan losses ($155,600 for the nine months ended September 30,
2000, $180,000 for the year ended December 31, 1999 and $228,000 for the period
ended December 31, 1998) have been based primarily upon amounts necessary to
increase the allowance for loan losses to the regulatorily-imposed ratio
requirement of not less than 1% of total portfolio loans outstanding.
D1-2
<PAGE>
Noninterest income has also increased significantly during the Bank's period of
existence. Total noninterest income approximated $255,000 for the nine months
ended September 30, 2000 ($199,000 in the corresponding period in 1999) and
approximated $282,000 for the year ended December 31, 1999 and $205,000 in 1998.
Noninterest expenses have increased significantly during the period of the
Bank's existence. Total noninterest expense approximated $1.1 million for the
nine months ended September 30, 2000, compared with $1.0 million for the
corresponding 1999 period. For the year ended December 31, 1999, total
noninterest expense approximated $1.4 million, compared with $903,000 in 1998.
The principal component of noninterest expense is salaries and employee benefits
which has increased during these periods based upon the increased staffing
required to serve customers and to facilitate growth.
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination activities is
deposits. Growth in deposits and loans was previously discussed in this
narrative. As stated previously, most of the deposit growth has been deployed
into commercial loans, consistent with the Bank's emphasis on commercial lending
activities.
Cash and cash equivalents approximated $4.3 million at September 30, 2000,
compared with $3.6 million at December 31, 1999 and $2.4 million at December 31,
1998. As liquidity levels vary continuously based upon customer activities,
amounts of cash and cash equivalents can vary widely at any given point in time.
Management believes the Bank's liquidity position at September 30, 2000 is
adequate to fund loan demand and to meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity is the
Bank's portfolio of marketable investment securities. Liquidity requirements
have not historically necessitated the sale of investments in order to meet
liquidity needs. The Bank also has not engaged in active trading of its
investments and has no intention of doing so in the foreseeable future. At
September 30, 2000 and December 31, 1999, the Bank had approximately $982,000
and $972,000, respectively, of investment securities classified as available for
sale which can be utilized to meet various liquidity needs as they arise.
The Bank has secured lines of credit with the Federal Home Loan Bank of
Indianapolis. Availability on this credit facility approximated $492,000 at
September 30, 2000.
D1-3
<PAGE>
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 Muskegon
Commerce Bank, as a young bank, it is subject to a more restrictive requirement
than is applicable to most banks inasmuch as the Bank must maintain a
capital-to-asset ratio of not less than 8% for its early years of operation.
Since inception, the Bank's asset growth has been significant. In order to
maintain compliance with the above-mentioned ratio requirement, Capitol Bancorp
Ltd., the Bank's 51% majority owner, has made capital infusions amounting to
$1,757,000 through September 30, 2000. Those capital infusions have been
accounted for as an increase in the Bank's surplus account, specifically
earmarked as supplemental capital infusions from the Bank's parent. Such capital
infusions, however, have not been treated as a change in the parent's ownership
percentage of the Bank.
IMPACT OF NEW ACCOUNTING STANDARDS
FASB Statement No. 133, "Accounting For Derivative Instruments and Hedging
Activities", requires all derivatives to be recognized in financial statements
and to be measured at fair value. Gains and losses resulting from changes in
fair value would be included in income, or in comprehensive income, depending on
whether the instrument qualifies for hedge accounting and the type of hedging
instrument involved. This new standard will become effective in 2001 and,
because the Bank has typically not entered into derivative contracts either to
hedge existing risks or for speculative purposes, is not expected to have a
material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Bank's financial statements.
D1-4
<PAGE>
MUSKEGON COMMERCE BANK
----------
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
D1-5
<PAGE>
BALANCE SHEETS
MUSKEGON COMMERCE BANK
September 30 December 31
2000 1999
------------ ------------
ASSETS (unaudited)
Cash and due from banks $ 2,426,645 $ 2,009,728
Federal funds sold 1,850,000 1,550,000
------------ ------------
Cash and cash equivalents 4,276,645 3,559,728
Investment securities:
Available for sale, carried at market value 982,031 972,343
Held for long-term investment, carried at
amortized cost which approximates market value 127,300 --
------------ ------------
Total investment securities 1,109,331 972,343
Portfolio loans:
Commercial 38,902,065 30,462,458
Real estate mortgage 1,498,994 1,283,182
Installment 12,658,943 10,101,965
------------ ------------
Total portfolio loans 53,060,002 41,847,605
Less allowance for loan losses (572,000) (419,000)
------------ ------------
Net portfolio loans 52,488,002 41,428,605
Premises and equipment 995,470 1,067,746
Accrued interest income 329,640 262,321
Other assets 124,190 114,503
------------ ------------
TOTAL ASSETS $ 59,323,278 $ 47,405,246
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 4,758,186 $ 3,926,439
Interest-bearing 48,969,472 39,454,612
------------ ------------
Total deposits 53,727,658 43,381,051
Short-term borrowings 500,000
Accrued interest on deposits
and other liabilities 258,379 169,868
------------ ------------
Total liabilities 54,486,037 43,550,919
STOCKHOLDERS' EQUITY:
Common stock, $6.50 par value,
254,546 shares authorized,
issued and outstanding 1,654,549 1,654,549
Surplus 2,745,457 2,245,457
Retained earnings (deficit) 448,680 (27,231)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) (11,445) (18,448)
------------ ------------
Total stockholders' equity 4,837,241 3,854,327
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 59,323,278 $ 47,405,246
============ ============
See notes to interim financial statements.
D1-6
<PAGE>
STATEMENTS OF OPERATIONS (UNAUDITED)
MUSKEGON COMMERCE BANK
Nine Months Ended
September 30
--------------------------
2000 1999
---------- ----------
Interest income:
Portfolio loans (including fees) $3,525,884 $2,071,450
Taxable investment securities 44,978 23,834
Federal funds sold 67,540 89,668
Interest-bearing deposits with banks and other 8,858 --
---------- ----------
Total interest income 3,647,260 2,184,952
Interest expense:
Demand deposits 279,748 197,123
Savings deposits 13,671 11,374
Time deposits 1,605,457 920,388
Other 1,905 560
---------- ----------
Total interest expense 1,900,781 1,129,445
---------- ----------
Net interest income 1,746,479 1,055,507
Provision for loan losses 155,600 137,887
---------- ----------
Net interest income after
provision for loan losses 1,590,879 917,620
Noninterest income:
Service charges on deposit accounts 72,076 52,065
Trust income 1,816 --
Fees from origination of non-portfolio
residential mortgage loans 167,284 135,183
Other 14,026 12,092
---------- ----------
Total noninterest income 255,202 199,340
Noninterest expense:
Salaries and employee benefits 493,915 420,474
Occupancy 54,612 53,325
Equipment rent, depreciation and maintenance 94,124 67,849
Deposit insurance premiums 6,709 1,466
Other 471,810 459,317
---------- ----------
Total noninterest expense 1,121,170 1,002,431
---------- ----------
Income before federal income taxes 724,911 114,529
Federal income taxes 249,000 41,000
---------- ----------
NET INCOME $ 475,911 $ 73,529
========== ==========
NET INCOME PER SHARE $ 1.87 $ 0.29
========== ==========
See notes to interim financial statements.
D1-7
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
MUSKEGON COMMERCE BANK
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Earnings Comprehensive
Stock Surplus (Deficit) Income Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1999:
Balances at January 1, 1999 $ 1,654,549 $ 988,457 $ (216,263) $ (2,651) $ 2,424,092
Supplemental capital infusions from
Capitol Bancorp Ltd. 1,247,000 1,247,000
Components of comprehensive income:
Net income for the period 73,529 73,529
Market value adjustment for investment
securities available for sale (net of
tax effect) (8,974) (8,974)
-----------
Comprehensive income for the period 64,555
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1999 $ 1,654,549 $ 2,235,457 $ (142,734) $ (11,625) $ 3,735,647
=========== =========== =========== =========== ===========
Nine Months Ended September 30, 2000:
Balances at January 1, 2000 $ 1,654,549 $ 2,245,457 $ (27,231) $ (18,448) $ 3,854,327
Supplemental capital infusions from
Capitol Bancorp Ltd. 500,000 500,000
Components of comprehensive income:
Net income for the period 475,911 475,911
Market value adjustment for investment
securities available for sale (net of
tax effect) 7,003 7,003
-----------
Comprehensive income for period 482,914
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 2000 $ 1,654,549 $ 2,745,457 $ 448,680 $ (11,445) $ 4,837,241
=========== =========== =========== =========== ===========
</TABLE>
See notes to interim financial statements.
D1-8
<PAGE>
STATEMENTS OF CASH FLOWS (UNAUDITED)
MUSKEGON COMMERCE BANK
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income for the period $ 475,911 $ 73,529
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 155,600 137,887
Depreciation of premises and equipment 86,137 77,821
Net amortization (accretion) of investment security discounts 922 (4)
Increase in accrued interest income and other assets (80,613) (31,652)
Increase in accrued interest on deposits and other liabilities 88,511 105,414
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 726,468 362,995
INVESTING ACTIVITIES
Purchases of investment securities available for sale (127,300) (501,406)
Net increase in portfolio loans (11,214,997) (13,382,146)
Purchases of premises and equipment (13,861) (68,115)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (11,356,158) (13,951,667)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 1,960,669 4,496,763
Net increase in certificates of deposit 8,385,938 9,254,000
Net proceeds from short-term borrowings 500,000
Supplemental capital infusions from majority stockholder 500,000 1,247,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,346,607 14,997,763
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 716,917 1,409,091
Cash and cash equivalents at beginning of period 3,559,728 2,423,337
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,276,645 $ 3,832,428
============ ============
</TABLE>
See notes to interim financial statements.
D1-9
<PAGE>
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
MUSKEGON COMMERCE BANK
NOTE A--BASIS OF PRESENTATION
The accompanying condensed financial statements of Muskegon Commerce Bank
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
The statements do, however, include all adjustments of a normal recurring
nature which Muskegon considers necessary for a fair presentation of the interim
periods.
The results of operations for the nine-month period ended September 30,
2000 are not necessarily indicative of the results to be expected for the year
ending December 31, 2000.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based on the
weighted average number of common shares outstanding (254,546 shares).
NOTE B--IMPLEMENTATION OF NEW ACCOUNTING STANDARD
AICPA Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, requires start-up, preopening and organizational costs to be charged
to expense when incurred. The initial application of this statement, which
became effective January 1, 1999, also requires the write-off of any such costs
previously capitalized. Implementation of this new statement had no effect on
the 1999 financial statements of Muskegon Commerce Bank.
NOTE C--PROSPECTIVE IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, requires all derivatives to be recognized in financial statements
and to be measured at fair value. Gains and losses resulting from changes in
fair value would be included in income or in comprehensive income, depending on
whether the instrument qualifies for hedge accounting and the type of hedging
instrument involved. This new standard will become effective in 2001 and,
because Muskegon Commerce Bank has not typically entered into derivative
contracts either to hedge existing risks or for speculative purposes, is not
expected to have a material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Muskegon Commerce Bank's financial statements.
D1-10
<PAGE>
MUSKEGON COMMERCE BANK
----------
FINANCIAL STATEMENTS
PERIODS ENDED DECEMBER 31, 1999, 1998 AND 1997
D1-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Muskegon Commerce Bank
We have audited the accompanying balance sheets of Muskegon Commerce Bank as of
December 31, 1999 and 1998, and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998 and the period from December 3, 1997 (date of inception) to December 31,
1997. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Muskegon Commerce Bank as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999 and 1998 and the period from December 3,
1997 (date of inception) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2000
D1-12
<PAGE>
BALANCE SHEETS
MUSKEGON COMMERCE BANK
December 31
-----------------------------
1999 1998
------------ ------------
ASSETS
Cash and due from banks $ 2,009,728 $ 423,337
Federal funds sold 1,550,000 2,000,000
------------ ------------
Cash and cash equivalents 3,559,728 2,423,337
Investment securities available for sale,
carried at market value--Note B 972,343 495,000
Portfolio loans--Note C:
Commercial 30,462,458 18,150,071
Real estate mortgage 1,283,182 776,730
Installment 10,101,965 5,564,633
------------ ------------
Total portfolio loans 41,847,605 24,491,434
Less allowance for loan losses (419,000) (245,000)
------------ ------------
Net portfolio loans 41,428,605 24,246,434
Premises and equipment--Note D 1,067,746 1,079,427
Accrued interest income 262,321 142,210
Other assets 114,503 165,820
------------ ------------
TOTAL ASSETS $ 47,405,246 $ 28,552,228
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 3,926,439 $ 2,369,469
Interest-bearing--Note G 39,454,612 23,652,995
------------ ------------
Total deposits 43,381,051 26,022,464
Accrued interest on deposits
and other liabilities 169,868 105,672
------------ ------------
Total liabilities 43,550,919 26,128,136
STOCKHOLDERS' EQUITY--Note K:
Common stock, par value $6.50 per
share, 254,546 shares authorized,
issued and outstanding 1,654,549 1,654,549
Surplus 2,245,457 988,457
Retained-earnings deficit (27,231) (216,263)
Market value adjustment (net of tax
effect) for investment securities
available for sale (accumulated
other comprehensive income) (18,448) (2,651)
------------ ------------
Total stockholders' equity 3,854,327 2,424,092
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,405,246 $ 28,552,228
============ ============
See notes to financial statements.
D1-13
<PAGE>
STATEMENTS OF OPERATIONS
MUSKEGON COMMERCE BANK
<TABLE>
<CAPTION>
Year Ended December 31 Period Ended
------------------------- December 31
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Portfolio loans (including fees) $ 3,004,778 $ 1,231,210 $ 19,086
Taxable investment securities 38,812 4,224
Federal funds sold 109,945 223,738 9,712
----------- ----------- -----------
Total interest income 3,153,535 1,459,172 28,798
Interest expense:
Demand deposits 302,357 138,692 64
Savings deposits 16,330 7,784 5
Time deposits 1,293,297 672,080 6,263
Other 650 240
----------- ----------- -----------
Total interest expense 1,612,634 818,796 6,332
----------- ----------- -----------
Net interest income 1,540,901 640,376 22,466
Provision for loan losses--Note C 179,754 228,000 17,000
----------- ----------- -----------
Net interest income after
provision for loan losses 1,361,147 412,376 5,466
Noninterest income:
Service charges on deposit accounts 75,263 28,405
Fees from origination of non-portfolio
residential mortgage loans 184,863 206,945
Other 21,443 (30,352) 1,197
----------- ----------- -----------
Total noninterest income 281,569 204,998 1,197
Noninterest expense:
Salaries and employee benefits 579,909 370,473 16,955
Occupancy 73,542 43,326
Equipment rent, depreciation and maintenance 136,037 62,450 1,138
Deposit insurance premium 3,296 1,074
Other 575,900 425,920 27,964
----------- ----------- -----------
Total noninterest expense 1,368,684 903,243 46,057
----------- ----------- -----------
Income (loss) before federal income taxes 274,032 (285,869) (39,394)
Federal income taxes (benefit)--Note E 85,000 (95,000) (14,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 189,032 $ (190,869) $ (25,394)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE $ 0.74 $ (0.75) $ (0.10)
=========== =========== ===========
</TABLE>
See notes to financial statements.
D1-14
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
MUSKEGON COMMERCE BANK
<TABLE>
<CAPTION>
Accumulated
Retained- Other
Common Earnings Comprehensive
Stock Surplus Deficit Income Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 3, 1997, beginning of period $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of 254,546 shares of common stock for
cash consideration of $11.00 per share in
conjunction with formation of Bank 1,654,549 988,457 2,643,006
Net loss for 1997 (25,394) (25,394)
---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1997 1,654,549 988,457 (25,394) -0- 2,617,612
Components of comprehensive income (loss):
Net loss for 1998 (190,869) (190,869)
Market value adjustment (net of tax effect) for
investment securities available for sale (2,651) (2,651)
----------
Total comprehensive loss for 1998 (193,520)
---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1998 1,654,549 988,457 (216,263) (2,651) 2,424,092
Supplemental capital infusions from
Capitol Bancorp Ltd.
Components of comprehensive income: 1,257,000 1,257,000
Net income for 1999 189,032 189,032
Market value adjustment (net of tax effect) for
investment securities available for sale (15,797) (15,797)
----------
Total comprehensive income for 1999 173,235
---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1999 $1,654,549 $2,245,457 $ (27,231) $ (18,448) $3,854,327
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
D1-15
<PAGE>
STATEMENTS OF CASH FLOWS
MUSKEGON COMMERCE BANK
<TABLE>
<CAPTION>
Year Ended December 31 Period Ended
---------------------------- December 31
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period $ 189,032 $ (190,869) $ (25,394)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Provision for loan losses 179,754 228,000 17,000
Depreciation of premises and equipment 105,452 56,667
Net amortization (accretion) of investment security discounts 128 (32)
Deferred income taxes 37,000 (95,000) (14,000)
Loss on sale of premises and equipment 36,287
Increase in accrued interest income and other assets (97,657) (152,299) (45,366)
Increase in accrued interest on deposits and other liabilities 64,196 78,260 27,412
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 477,905 (38,986) (40,348)
INVESTING ACTIVITIES
Purchases of investment securities available for sale (501,406) (498,984)
Net increase in portfolio loans (17,361,925) (22,881,670) (1,609,764)
Purchases of premises and equipment (93,770) (995,505) (176,876)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (17,957,101) (24,376,159) (1,786,640)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 5,137,362 10,082,328 181,311
Net increase in certificates of deposit 12,221,225 10,700,203 5,058,622
Net proceeds from issuance of common stock 2,643,006
Supplemental capital infusions from majority stockholder 1,257,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,615,587 20,782,531 7,882,939
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,136,391 (3,632,614) 6,055,951
Cash and cash equivalents at beginning of period 2,423,337 6,055,951 -0-
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,559,728 $ 2,423,337 $ 6,055,951
============ ============ ============
</TABLE>
See notes to financial statements.
D1-16
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION: Muskegon Commerce Bank (the
"Bank") is a full-service commercial bank located in Muskegon, Michigan. The
Bank commenced operations in December 1997. The Bank is 51% owned by Capitol
Bancorp Ltd., a bank holding company headquartered in Lansing, Michigan.
The Bank provides a full range of banking services to individuals, businesses
and other customers located in its community. A variety of deposit products are
offered, including checking, savings, money market, individual retirement
accounts and certificates of deposit. The principal market for the Bank's
financial services is the community in which it is located and the areas
immediately surrounding that community.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
INVESTMENT SECURITIES: Investment securities "available for sale" (generally
most debt securities investments of the Bank), are carried at market value with
unrealized gains and losses reported as a separate component of stockholders'
equity, net of tax effect (accumulated other comprehensive income). All other
investment securities are classified as held for long-term investment (none at
December 31, 1999 and 1998) and are carried at amortized cost which approximates
market value. Investments are classified based on management's analysis of
liquidity and other factors. The adjusted cost of specific securities sold is
used to compute realized gains or losses. Premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Substantially all portfolio loans are made to borrowers in the
Bank's geographic area. Consistent with the Bank's emphasis on business lending,
there are concentrations of credit in loans secured by commercial real estate,
equipment and other business assets. The maximum potential credit risk to the
Bank, without regard to underlying collateral and guarantees, is the total of
loans and loan commitments outstanding. Management reduces the Bank's exposure
to losses from credit risk by requiring collateral and/or guarantees for loans
granted and by monitoring concentrations of credit, in addition to recording
provisions for loan losses and maintaining an allowance for loan losses.
D1-17
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated losses in the portfolio at the balance sheet
date. Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including potential impairment of individual loans
and concentrations of credit), past loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of loans
approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
OTHER REAL ESTATE: Other real estate (included as a component of other assets,
none at December 31, 1999 and 1998) comprises properties acquired through a
foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These
properties held for sale are carried at the lower of cost or estimated fair
value at the date acquired and are periodically reviewed for subsequent
impairment.
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Bank is not included in the
balance sheet because it is not an asset of the Bank. Trust fee income is
recorded on the accrual method.
FEDERAL INCOME TAXES: Deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted tax rates applicable
to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
income taxes of a change in tax laws or rates is recognized in income in the
period that includes the enactment date.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based on the
weighted average number of common shares outstanding (254,546 shares).
D1-18
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--Continued
DECEMBER 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income and certain
other items which are charged or credited to stockholders' equity. For the
periods presented, the Bank's only element of comprehensive income other than
net income was the net change in the market value adjustment for investment
securities available for sale. Accordingly, the elements and total of
comprehensive income are shown within the statement of changes in stockholders'
equity presented herein.
NOTE B--INVESTMENT SECURITIES
Investment securities at December 31, 1999 and 1998 were comprised solely of
United States government agency securities with an amortized cost of $1,000,294
and $499,016, estimated market value of $972,343 and $495,000 (and a gross
unrealized loss of $27,951 and $4,016), respectively. Investment securities held
at December 31, 1999 mature in 2003; investment securities held at December 31,
1998 matured in 1999.
There were no gross realized gains and losses from sales and maturities of
investment securities available for sale during the periods presented.
NOTE C--LOANS
Transactions in the allowance for loan losses are summarized below:
1999 1998 1997
--------- --------- ---------
Balance at beginning of period $ 245,000 $ 17,000 $ -0-
Provision charged to operations 179,754 228,000 17,000
Loans charged off (deduction) (5,754) -- --
Recoveries -- -- --
--------- --------- ---------
$ 419,000 $ 245,000 $ 17,000
========= ========= =========
At December 31, 1999 and 1998, impaired loans (i.e., loans for which there is a
reasonable probability that borrowers would be unable to repay all principal and
interest due under the contractual terms of the loan documents) were not
material.
NOTE D--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
1999 1998
----------- -----------
Banking premises and improvements $ 838,159 $ 795,511
Equipment and furniture 388,111 336,989
----------- -----------
1,226,270 1,132,500
Less accumulated depreciation (158,524) (53,073)
----------- -----------
$ 1,067,746 $ 1,079,427
=========== ===========
D1-19
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE E--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
1999 1998 1997
-------- -------- --------
Current $ 48,000 $ -- $ --
Deferred 37,000 (95,000) (14,000)
-------- -------- --------
$ 85,000 $(95,000) $(14,000)
======== ======== ========
Federal income taxes paid during 1999 were $60,000 (none in 1998 and 1997).
Net deferred income tax assets consisted of the following at December 31:
1999 1998
--------- ---------
Net operating loss carryforward $ 50,000
Allowance for loan losses $ 103,000 75,000
Depreciation and amortization (30,000) (17,000)
Market value adjustment for investment
securities available for sale 10,000
Other, net (1,000) 1,000
--------- ---------
$ 82,000 $ 109,000
========= =========
NOTE F--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Bank makes loans to officers and
directors of the Bank including their immediate families and companies in which
they are principal owners. At December 31, 1999 and 1998, total loans to these
persons approximated $1,141,000 and $813,000, respectively. During 1999,
$657,000 of new loans were made to these persons and repayments totaled
$329,000. 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 depositors of the Bank. Such deposits are similarly made at the
Bank's normal terms as to interest rate, term and deposit insurance.
The Bank purchases certain data processing and management services from Capitol
Bancorp Ltd. Amounts paid for such services approximated $321,000, $252,000 and
$21,000 in 1999, 1998 and 1997, respectively.
D1-20
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated
$10,940,000 and $5,369,000 as of December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of time deposits of $100,000 or
more were as follows:
2000 $ 7,713,166
2001 300,000
2002 1,738,834
2003 1,188,000
-----------
Total $10,940,000
===========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE H--EMPLOYEE BENEFIT PLANS
Subject to eligibility requirements, the Bank's employees participate in the
employee benefit plans of Capitol Bancorp Ltd. Amounts charged to expense by the
Bank for these defined contribution plans approximated $17,200 in 1999 and
$5,800 in 1998 (none in 1997).
D1-21
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE I--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments at December
31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 3,560 $ 3,560 $ 2,423 $ 2,423
Investment securities available for sale 972 972 495 495
Portfolio loans:
Fixed rate 32,288 32,340 16,852 16,872
Variable rate 9,560 9,565 7,639 7,632
-------- -------- -------- --------
Total portfolio loans 41,848 41,905 24,491 24,504
Less allowance for loan losses (419) (419) (245) (245)
-------- -------- -------- --------
Net portfolio loans 41,429 41,486 24,246 24,259
Financial Liabilities:
Deposits:
Noninterest-bearing 3,926 3,926 2,369 2,369
Interest-bearing:
Demand accounts 11,475 11,544 7,895 8,110
Time certificates of deposit less
than $100,000 17,040 16,955 10,389 10,331
Time certificates of deposit
$100,000 or more 10,940 11,124 5,369 5,427
-------- -------- -------- --------
Total interest-bearing deposits 39,455 39,623 23,653 23,868
-------- -------- -------- --------
Total deposits 43,381 43,549 26,022 26,237
</TABLE>
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.
D1-22
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE J--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of Bank customers. Such loan commitments include
stand-by letters of credit, lines of credit, and various commitments for other
commercial, consumer and mortgage loans. Stand-by letters of credit, when
issued, commit the Bank to make payments on behalf of customers when certain
specified future events occur and are used infrequently ($64,000 and $14,000
outstanding at December 31, 1999 and 1998, respectively). Other loan commitments
outstanding consist of unused lines of credit and approved, but unfunded,
specific loan commitments ($8,298,000 and $5,631,000 at December 31, 1999 and
1998, respectively).
These loan commitments (stand-by letters of credit and unfunded loans) generally
expire within one year and are reviewed periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the Bank's normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
Deposits at the Bank are insured up to the maximum amount covered by FDIC
insurance.
NOTE K--CAPITAL REQUIREMENTS
The Bank is subject to certain capital requirements. Federal financial
institution regulatory agencies have established certain risk-based capital
guidelines for banks. Those guidelines require all banks to maintain certain
minimum ratios and related amounts based on "Tier 1" and "Tier 2" capital and
"risk weighted assets" as defined and periodically prescribed by the respective
regulatory agencies. Failure to meet these capital requirements can result in
severe regulatory enforcement action or other adverse consequences for a
depository institution, and, accordingly, could have a material impact on the
Bank's financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by regulatory agencies about
components, risk weighting, and other factors.
As of December 31, 1999, 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, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
D1-23
<PAGE>
MUSKEGON COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE K--CAPITAL REQUIREMENTS--CONTINUED
The Bank's various amounts of regulatory capital and related ratios as of
December 31, 1999 and 1998 are summarized below (amounts in thousands):
1999 1998
------- -------
Tier 1 capital to total assets:
Actual amount $ 3,789 $ 2,318
Ratio 8.01% 8.15%
Minimum required amount (8%) >= $ 3,786 >= $ 2,275
Tier 1 capital to risk-weighted assets:
Actual amount $ 3,789 $ 2,318
Ratio 9.07% 9.37%
Minimum required amount (4%) >= $ 1,671 >= $ 990
Combined Tier 1 and Tier 2 capital to
risk-weighted assets:
Actual amount $ 4,208 $ 2,563
Ratio 10.07% 10.36%
Minimum required amount (8%) >= $ 3,343 >= $ 1,980
Amount required to meet
"Well-Capitalized" category (10%) >= $ 4,178 >= $ 2,475
As a condition of charter approval, the Bank is required to maintain a Tier 1
capital to assets ratio of not less than 8% and an allowance for loan losses of
not less than 1% of portfolio loans for its first three years of operations.
D1-24
<PAGE>
ANNEX D-2
FINANCIAL INFORMATION REGARDING KENT COMMERCE BANK
Management's discussion and analysis of financial
condition and results of operations.......................................D2-1
Condensed interim financial statements as of and for the
periods ended September 30, 2000 and 1999 (unaudited).....................D2-5
Audited financial statements as of and for the years
ended December 31, 1999 and 1998.........................................D1-11
<PAGE>
KENT COMMERCE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PERIODS ENDED SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
FINANCIAL CONDITION
Kent Commerce Bank is engaged in commercial banking activities from its sole
location in Grand Rapids, Michigan. From its inception in January 1998, the Bank
provides a full array of banking services, principally loans and deposits, to
entrepreneurs, professionals and other high net worth individuals in its
community.
Total assets approximated $42.1 million at September 30, 2000, compared with
$38.9 million at December 31, 1999. The Bank's total assets approximated $31.6
million at year-end 1998.
Total portfolio loans approximated $39.8 million at September 30, 2000, an
increase of approximately $3.4 million from the $36.4 million level at December
31, 1999. At December 31, 1998, total portfolio loans approximated $22.9
million. Portfolio loan growth during these periods has been significant and is
consistent with the Bank's overall balance sheet growth during these periods.
Commercial loans approximated 91.8% of total portfolio loans at September 30,
2000 consistent with the Bank's emphasis on commercial lending activities. Real
estate mortgage loans approximated 7.1% of total portfolio loans at September
30, 2000.
The allowance for loan losses at September 30, 2000 approximated $435,000 or
1.09% of total portfolio loans, compared to an allowance ratio of 1.00% at
December 31, 1999 and 1998.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses inherent in the loan portfolio at the
balance sheet date. Management's determination of the adequacy of the allowance
is based on evaluation of the portfolio (including volume, amount and
composition, potential impairment of individual loans and concentrations of
credit), past loss experience, current economic conditions, loan commitments
outstanding and other factors. The allowance for loan losses is based upon
management's estimate of potential loan losses incurred at the respective
balance sheet dates.
Since the Bank's inception, there have been minimal loan charge-offs through
September 30, 2000.
The Bank's growth has been funded primarily by deposits, most of which are
interest-bearing. Total deposits approximated $36.8 million at September 30,
2000, an increase of approximately $1.6 million from the $35.2 million level at
December 31, 1999. Deposits also increased significantly in 1999 from the $28.0
million level at the beginning of the year.
D2-1
<PAGE>
The Bank emphasizes obtaining noninterest-bearing deposits as a means to reduce
its cost of funds. Noninterest-bearing deposits approximated $3.3 million at
September 30, 2000 or about 8.9% of total deposits, an increase of approximately
$310,000 from December 31, 1999. Noninterest-bearing deposits fluctuate
significantly from day to day, depending upon customer account activity.
Stockholders' equity approximated $4.3 million at September 30, 2000 or
approximately 10.1% of total assets. Capital adequacy is discussed elsewhere in
this narrative.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 2000 approximated $80,000,
compared with a net loss of $59,000 in the nine month 1999 period.
1999 represented the Bank's first full calendar year of operations, with a net
loss of $61,000, compared to a net loss of $415,000 in 1998.
During these most recent periods, the Bank's profitability has been the result
of its loan and deposit portfolios reaching a sufficient size to generate an
adequate margin to cover operating expenses and produce profits.
The principal source of operating revenues is interest income. Total interest
income for the nine months ended September 30, 2000 approximated $2.8 million,
compared with $2.0 million in the first nine months of 1999. For the year ended
December 31, 1999, total interest income approximated $2.8 million, compared
with $1.4 million in 1998.
Interest expense on deposits has also increased significantly during these
periods, consistent with the growth in the interest-bearing deposits. Total
interest expense approximated $1.6 million for the nine months ended September
30, 2000, compared with $1.2 million for the first nine months of 1999. For the
year ended December 31, 1999, total interest expense approximated $1.6 million,
compared with $733,000 in 1998.
Net interest income approximated $1.2 million for the nine months ended
September 30, 2000, compared with $886,000 for the 1999 corresponding period.
Net interest income for the year ended December 31, 1999 approximated $1.2
million, significantly more than the $633,000 in 1998.
Provisions for loan losses ($76,000 for the nine months ended September 30,
2000, $122,000 for the year ended December 31, 1999 and $261,000 for the period
ended December 31, 1998) have been based primarily upon amounts necessary to
increase the allowance for loan losses to the regulatorily-imposed ratio
requirement of not less than 1% of total portfolio loans outstanding.
D2-2
<PAGE>
Noninterest income has also increased significantly during the Bank's period of
existence. Total noninterest income approximated $147,000 for the nine months
ended September 30, 2000 ($123,000 in the corresponding period in 1999) and
approximated $166,000 for the year ended December 31, 1999 and $76,000 in 1998.
Noninterest expenses have increased significantly during the period of the
Bank's existence. Total noninterest expense approximated $1.1 million for the
nine months ended September 30, 2000, compared with $1.0 million for the
corresponding 1999 period. For the year ended December 31, 1999, total
noninterest expense approximated $1.4 million, compared with $1.1 million in
1998.
The principal component of noninterest expense is salaries and employee benefits
which has increased during these periods based upon the increased staffing
required to serve customers and to facilitate growth.
LIQUIDITY AND CAPITAL RESOURCES
The principal funding source for asset growth and loan origination activities is
deposits. Growth in deposits and loans was previously discussed in this
narrative. As stated previously, most of the deposit growth has been deployed
into commercial loans, consistent with the Bank's emphasis on commercial lending
activities.
Cash and cash equivalents approximated $909,000 at September 30, 2000, compared
with $1.1 million at December 31, 1999 and $7.2 million at December 31, 1998. As
liquidity levels vary continuously based upon customer activities, amounts of
cash and cash equivalents can vary widely at any given point in time. Management
believes the Bank's liquidity position at September 30, 2000 is adequate to fund
loan demand and to meet depositor needs.
In addition to cash and cash equivalents, a source of long-term liquidity is the
Bank's portfolio of marketable investment securities. Liquidity requirements
have not historically necessitated the sale of investments in order to meet
liquidity needs. The Bank also has not engaged in active trading of its
investments and has no intention of doing so in the foreseeable future. At
September 30, 2000 and December 31, 1999, the Bank had approximately $968,000
and $952,000, respectively, of investment securities classified as available for
sale which can be utilized to meet various liquidity needs as they arise.
The Bank has secured lines of credit with the Federal Home Loan Bank of
Indianapolis. Availability on this credit facility approximated $330,000 at
September 30, 2000.
D2-3
<PAGE>
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 Kent Commerce
Bank, as a young bank, it is subject to a more restrictive requirement than is
applicable to most banks inasmuch as the Bank must maintain a capital-to-asset
ratio of not less than 8% for its early years of operation.
Since inception, the Bank's asset growth has been significant. In order to
maintain compliance with the above-mentioned ratio requirement, Capitol Bancorp
Ltd., the Bank's 51% majority owner, has made capital infusions amounting to
$760,000 through September 30, 2000. Those capital infusions have been accounted
for as an increase in the Bank's surplus account, specifically earmarked as
supplemental capital infusions from the Bank's parent. Such capital infusions,
however, have not been treated as a change in the parent's ownership percentage
of the Bank.
IMPACT OF NEW ACCOUNTING STANDARDS
FASB Statement No. 133, "Accounting For Derivative Instruments and Hedging
Activities", requires all derivatives to be recognized in financial statements
and to be measured at fair value. Gains and losses resulting from changes in
fair value would be included in income, or in comprehensive income, depending on
whether the instrument qualifies for hedge accounting and the type of hedging
instrument involved. This new standard will become effective in 2001 and,
because the Bank has typically not entered into derivative contracts either to
hedge existing risks or for speculative purposes, is not expected to have a
material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Bank's financial statements.
D2-4
<PAGE>
KENT COMMERCE BANK
----------
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
D2-5
<PAGE>
BALANCE SHEETS
KENT COMMERCE BANK
September 30 December 31
2000 1999
------------ ------------
ASSETS (unaudited)
Cash and due from banks $ 901,459 $ 1,081,649
Interest-bearing deposits with banks 7,752
------------ ------------
Cash and cash equivalents 909,211 1,081,649
Investment securities
Available for sale, carried at market value 967,902 951,562
Held for long-term investment, carried at
amortized cost which approximates market value 41,500 --
------------ ------------
Total investment securities 1,009,402 951,562
Portfolio loans:
Commercial 36,556,015 32,872,555
Real estate mortgage 2,839,837 3,053,279
Installment 443,705 503,628
------------ ------------
Total portfolio loans 39,839,557 36,429,462
Less allowance for loan losses (435,000) (365,000)
------------ ------------
Net portfolio loans 39,404,557 36,064,462
Premises and equipment 226,680 279,639
Accrued interest income 254,120 182,741
Other assets 300,529 305,247
------------ ------------
TOTAL ASSETS $ 42,104,499 $ 38,865,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 3,283,311 $ 2,973,107
Interest-bearing 33,509,252 32,223,397
------------ ------------
Total deposits 36,792,563 35,196,504
Short-term borrowings 850,000 --
Accrued interest on deposits
and other liabilities 206,306 143,484
------------ ------------
Total liabilities 37,848,869 35,339,988
STOCKHOLDERS' EQUITY:
Common stock, $6.50 par value,
370,000 shares authorized,
issued and outstanding 2,405,000 2,405,000
Surplus 2,268,000 1,628,000
Retained-earnings deficit (396,503) (476,113)
Market value adjustment (net of tax effect)
for investment securities available for
sale (accumulated other comprehensive income) (20,867) (31,575)
------------ ------------
Total stockholders' equity 4,255,630 3,525,312
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 42,104,499 $ 38,865,300
============ ============
See notes to interim financial statements.
D2-6
<PAGE>
STATEMENTS OF OPERATIONS (UNAUDITED)
KENT COMMERCE BANK
Nine Months Ended
September 30
2000 1999
----------- -----------
Interest income:
Portfolio loans (including fees) $ 2,707,825 $ 1,854,291
Taxable investment securities 40,617 40,617
Federal funds sold 24,965 149,927
Interest-bearing deposits with banks and other 1,385 --
----------- -----------
Total interest income 2,774,792 2,044,835
Interest expense:
Demand deposits 167,991 102,574
Savings deposits 23,994 20,712
Time deposits 1,381,527 1,035,999
Other 12,648
----------- -----------
Total interest expense 1,586,160 1,159,285
----------- -----------
Net interest income 1,188,632 885,550
Provision for loan losses 75,511 74,000
----------- -----------
Net interest income after provision for
loan losses 1,113,121 811,550
Noninterest income:
Service charges on deposit accounts 8,086 3,997
Trust income 4,558 --
Fees from origination of non-portfolio
residential mortgage loans 102,017 113,884
Other 32,758 4,932
----------- -----------
Total noninterest income 147,419 122,813
Noninterest expense:
Salaries and employee benefits
Occupancy 523,645 455,543
Equipment rent, depreciation and maintenance 84,938 83,202
Deposit insurance premiums 95,119 68,402
Other 5,664 1,442
Total noninterest expense 427,564 413,068
----------- -----------
Income (loss) before federal income taxes 1,136,930 1,021,657
----------- -----------
Federal income taxes (credit) 123,610 (87,294)
44,000 (28,000)
----------- -----------
NET INCOME (LOSS) $ 79,610 $ (59,294)
=========== ===========
NET INCOME (LOSS) PER SHARE $ 0.22 $ (0.16)
=========== ===========
See notes to interim financial statements.
D2-7
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
KENT COMMERCE BANK
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Earnings Comprehensive
Stock Surplus (Deficit) Income Total
---------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
Balances at January 1, 1999 $2,405,000 $1,508,000 $(414,624) $ (8,784) $ 3,489,592
Components of comprehensive income:
Net loss for the period (59,294) (59,294)
Market value adjustment for investment
securities available for sale (net of tax
effect) (16,474)
-----------
Comprehensive income for the period (16,474) (75,768)
---------- ---------- --------- -------- -----------
BALANCES AT SEPTEMBER 30, 1999 $2,405,000 $1,508,000 $(473,918) $(25,258) $ 3,413,824
========== ========== ========= ======== ===========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Balances at January 1, 2000 $2,405,000 $1,628,000 $(476,113) $(31,575) $ 3,525,312
Supplemental capital infusions from Capitol
Bancorp Ltd. 640,000 640,000
Components of comprehensive income:
Net income for the period 79,610 79,610
Market value adjustment for investment
securities available for sale (net of tax
effect) 10,708 10,708
-----------
Comprehensive income for period 90,318
---------- ---------- --------- -------- -----------
BALANCES AT SEPTEMBER 30, 2000 $2,405,000 $2,268,000 $(396,503) $(20,867) $ 4,255,630
========== ========== ========= ======== ===========
</TABLE>
See notes to interim financial statements.
D2-8
<PAGE>
STATEMENTS OF CASH FLOWS (UNAUDITED)
KENT COMMERCE BANK
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the period $ 79,610 $ (59,294)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for loan losses 75,511 74,000
Depreciation of premises and equipment 68,882 62,420
Net accretion of investment security discounts (117) (117)
Increase in accrued interest income and other assets (72,176) (97,876)
Increase in accrued interest on deposits and other
liabilities 62,822 38,266
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 214,532 17,399
----------- -----------
INVESTING ACTIVITIES
Purchases of investment securities (41,500) --
Net increase in portfolio loans (3,415,606) (8,246,393)
Purchases of premises and equipment (15,923) (39,934)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (3,473,029) (8,286,327)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 142,751 495,841
Net increase in certificates of deposit 1,453 308 6,617,171
Net proceeds from short-term borrowings 850,000 --
Supplemental capital infusions from majority
stockholder 640,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,086,059 7,113,012
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (172,438) (1,155,916)
Cash and cash equivalents at beginning of period 1,081,649 7,230,853
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 909,211 $ 6,074,937
=========== ===========
</TABLE>
See notes to interim financial statements.
D2-9
<PAGE>
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
KENT COMMERCE BANK
NOTE A--BASIS OF PRESENTATION
The accompanying condensed financial statements of Kent Commerce Bank have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles.
The statements do, however, include all adjustments of a normal recurring
nature which Kent considers necessary for a fair presentation of the interim
periods.
The results of operations for the nine-month period ended September 30,
2000 are not necessarily indicative of the results to be expected for the year
ending December 31, 2000.
NET INCOME (LOSS) PER SHARE: Net loss per share is based on the weighted
average number of common shares outstanding (370,000 shares).
NOTE B--IMPLEMENTATION OF NEW ACCOUNTING STANDARD
AICPA Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES, requires start-up, preopening and organizational costs to be charged
to expense when incurred. The initial application of this statement, which
became effective January 1, 1999, also requires the write-off of any such costs
previously capitalized. Implementation of this new statement had no effect on
the 1999 financial statements of Kent Commerce Bank.
NOTE C--PROSPECTIVE IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
FASB Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, requires all derivatives to be recognized in financial statements
and to be measured at fair value. Gains and losses resulting from changes in
fair value would be included in income or in comprehensive income, depending on
whether the instrument qualifies for hedge accounting and the type of hedging
instrument involved. This new standard will become effective in 2001 and,
because Kent Commerce Bank has not typically entered into derivative contracts
either to hedge existing risks or for speculative purposes, is not expected to
have a material effect on its financial statements.
A variety of proposed or otherwise potential accounting standards are
currently under study by standard-setting organizations and various regulatory
agencies. Because of the tentative and preliminary nature of these proposed
standards, management has not determined whether implementation of such proposed
standards would be material to Kent Commerce Bank's financial statements.
D2-10
<PAGE>
KENT COMMERCE BANK
----------
FINANCIAL STATEMENTS
PERIODS ENDED DECEMBER 31, 1999 AND 1998
D2-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Kent Commerce Bank
We have audited the accompanying balance sheets of Kent Commerce Bank as of
December 31, 1999 and 1998, and the related statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 1999 and the
period from January 12, 1998 (date of inception) to December 31, 1998. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kent Commerce Bank as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the year ended December 31, 1999 and the period from January 12, 1998 (date
of inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
January 31, 2000
D2-12
<PAGE>
BALANCE SHEETS
KENT COMMERCE BANK
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,081,649 $ 1,430,853
Federal funds sold 5,800,000
------------ ------------
Cash and cash equivalents 1,081,649 7,230,853
Investment securities available for sale,
carried at market value--Note B 951,562 985,936
Portfolio loans--Note C:
Commercial 32,872,555 20,742,025
Real estate mortgage 3,053,279 1,954,264
Installment 503,628 234,161
------------ ------------
Total portfolio loans 36,429,462 22,930,450
Less allowance for loan losses (365,000) (250,000)
------------ ------------
Net portfolio loans 36,064,462 22,680,450
Premises and equipment--Note D 279,639 312,437
Accrued interest income 182,741 106,702
Other assets 305,247 271,115
------------ ------------
TOTAL ASSETS $ 38,865,300 $ 31,587,493
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 2,973,107 $ 2,160,273
Interest-bearing--Note G 32,223,397 25,867,423
------------ ------------
Total deposits 35,196,504 28,027,696
Accrued interest on deposits and other liabilities 143,484 70,205
------------ ------------
Total liabilities 35,339,988 28,097,901
STOCKHOLDERS' EQUITY--Note K:
Common stock, par value $6.50 per share, 370,000
shares authorized, issued and outstanding 2,405,000 2,405,000
Surplus 1,628,000 1,508,000
Retained-earnings deficit (476,113) (414,624)
Market value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive income) (31,575) (8,784)
------------ ------------
Total stockholders' equity 3,525,312 3,489,592
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,865,300 $ 31,587,493
============ ============
</TABLE>
See notes to financial statements.
D2-13
<PAGE>
STATEMENTS OF OPERATIONS
KENT COMMERCE BANK
Year Ended December 31,
--------------------------
1999 1998
----------- -----------
Interest income:
Portfolio loans (including fees) $ 2,584,724 $ 1,142,855
Taxable investment securities 54,156 9,322
Federal funds sold 196,246 214,525
----------- -----------
Total interest income 2,835,126 1,366,702
Interest expense:
Demand deposits 151,643 80,638
Savings deposits 30,278 13,653
Time deposits 1,417,132 639,130
Other 17
----------- -----------
Total interest expense 1,599,070 733,421
----------- -----------
Net interest income 1,236,056 633,281
Provision for loan losses--Note C 122,261 260,779
----------- -----------
Net interest income after
provision for loan losses 1,113,795 372,502
Noninterest income:
Service charges on deposit accounts 5,328 2,474
Fees from origination of non-portfolio
residential mortgage loans 152,568 71,408
Other 8,525 2,016
----------- -----------
Total noninterest income 166,421 75,898
Noninterest expense:
Salaries and employee benefits 614,295 489,346
Occupancy 113,720 94,236
Equipment rent, depreciation and maintenance 136,110 81,227
Deposit insurance premiums 3,244 807
Other 517,336 409,408
----------- -----------
Total noninterest expense 1,384,705 1,075,024
----------- -----------
Loss before federal income taxes (104,489) (626,624)
Federal income taxes (benefit)--Note E (43,000) (212,000)
----------- -----------
NET LOSS $ (61,489) $ (414,624)
=========== ===========
NET LOSS PER SHARE $ (0.17) $ (1.12)
=========== ===========
See notes to financial statements.
D2-14
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
KENT COMMERCE BANK
<TABLE>
<CAPTION>
Retained- Accumulated
Common Earnings Other
Stock Surplus Deficit Income Total
----- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C>
Balances at January 12, 1998, beginning of period $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of 370,000 shares of common stock for
cash consideration of $11.00 per share in
conjunction with formation of Bank 2,405,000 1,508,000 3,913,000
Components of comprehensive income (loss):
Net loss for 1998 (414,624) (414,624)
Market value adjustment (net of tax effect) for
investment securities available for sale (8,784) (8,784)
----------
Total comprehensive loss for 1998 (423,408)
---------- ---------- --------- -------- ----------
BALANCES AT DECEMBER 31, 1998 2,405,000 1,508,000 (414,624) (8,784) 3,489,592
Supplemental capital infusions from Capitol
Bancorp Ltd. 120,000 120,000
Components of comprehensive income (loss):
Net loss for 1999 (61,489) (61,489)
Market value adjustment (net of tax effect) for
investment securities available for sale (22,791) (22,791)
----------
Total comprehensive loss for 1999 (84,280)
---------- ---------- --------- -------- ----------
BALANCES AT DECEMBER 31, 1999 $2,405,000 $1,628,000 $(476,113) $(31,575) $3,525,312
========== ========== ========= ======== ==========
</TABLE>
See notes to financial statements.
D2-15
<PAGE>
STATEMENTS OF CASH FLOWS
KENT COMMERCE BANK
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss for the period $ (61,489) $ (414,624)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for loan losses 122,261 260,779
Depreciation of premises and equipment 84,453 63,761
Net accretion of investment security discounts (156) (26)
Deferred income taxes (43,000) (212,000)
Increase in accrued interest income and other assets (55,432) (161,292)
Increase in accrued interest on deposits and
other liabilities 73,279 70,205
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 119,916 (393,197)
INVESTING ACTIVITIES
Purchases of investment securities available for sale (999,219)
Net increase in portfolio loans (13,506,273) (22,941,229)
Purchases of premises and equipment (51,655) (376,198)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (13,557,928) (24,316,646)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts 2,294,202 6,431,492
and savings accounts 4,874,606 21,596,204
Net increase in certificates of deposit 3,913,000
Net proceeds from issuance of common stock 120,000
------------ ------------
Supplemental capital infusions from majority shareholder 7,288,808 31,940,696
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,149,204) 7,230,853
Cash and cash equivalents at beginning of period 7,230,853 -0-
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,081,649 $ 7,230,853
============ ============
</TABLE>
See notes to financial statements
D2-16
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION: Kent Commerce Bank (the "Bank")
is a full-service commercial bank located in Grand Rapids, Michigan. The Bank
commenced operations in January 1998. Financial information set forth herein
encompasses the period from commencement of operations through December 31,
1998. The Bank is 51% owned by Capitol Bancorp Ltd., a bank holding company
headquartered in Lansing, Michigan.
The Bank provides a full range of banking services to individuals, businesses
and other customers located in its community. A variety of deposit products are
offered, including checking, savings, money market, individual retirement
accounts and certificates of deposit. The principal market for the Bank's
financial services is the community in which it is located and the areas
immediately surrounding that community.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
transactions are entered into for a one-day period.
INVESTMENT SECURITIES: Investment securities "available for sale" (generally
most debt securities investments of the Bank) are carried at market value with
unrealized gains and losses reported as a separate component of stockholders'
equity, net of tax effect (accumulated other comprehensive income). All other
investment securities are classified as held for long-term investment (none at
December 31, 1999 and 1998) and are carried at amortized cost which approximates
market value. Investments are classified as available for sale at the date of
purchase based on management's analysis of liquidity and other factors. The
adjusted cost of specific securities sold is used to compute realized gains or
losses. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
LOANS, CREDIT RISK AND ALLOWANCE FOR LOAN LOSSES: Portfolio loans are carried at
their principal balance based on management's intent and ability to hold such
loans for the foreseeable future until maturity or repayment.
Credit risk arises from making loans and loan commitments in the ordinary course
of business. Substantially all portfolio loans are made to borrowers in the
Bank's geographic area. Consistent with the Bank's emphasis on business lending,
there are concentrations of credit in loans secured by commercial real estate,
equipment and other business assets. The maximum potential credit risk to the
Bank, without regard to underlying collateral and guarantees, is the total of
loans and loan commitments outstanding. Management reduces the Bank's exposure
to losses from credit risk by requiring collateral and/or guarantees for loans
granted and by monitoring concentrations of credit, in addition to recording
provisions for loan losses and maintaining an allowance for loan losses.
D2-17
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated losses in the portfolio at the balance sheet
date. Management's determination of the adequacy of the allowance is based on
evaluation of the portfolio (including potential impairment of individual loans
and concentrations of credit), past loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, loan
commitments outstanding and other factors. The allowance is increased by
provisions charged to operations and reduced by net charge-offs.
INTEREST AND FEES ON LOANS: Interest income on loans is recognized based upon
the principal balance of loans outstanding. Fees from origination of loans
approximate related costs incurred.
The accrual of interest is generally discontinued when a loan becomes 90 days
past due as to interest. When interest accruals are discontinued, interest
previously accrued (but unpaid) is reversed. Management may elect to continue
the accrual of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest and the loan is
in process of collection.
PREMISES AND EQUIPMENT: Premises and equipment are stated on the basis of cost.
Depreciation is computed principally by the straight-line method based upon
estimated useful lives of the respective assets. Leasehold improvements are
generally depreciated over the respective lease term.
OTHER REAL ESTATE: Other real estate (included as a component of other assets,
none at December 31, 1999 and 1998) comprises properties acquired through a
foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These
properties held for sale are carried at the lower of cost or estimated fair
value at the date acquired and are periodically reviewed for subsequent
impairment.
TRUST ASSETS AND RELATED INCOME: Customer property, other than funds on deposit,
held in a fiduciary or agency capacity by the Bank is not included in the
balance sheet because it is not an asset of the Bank. Trust fee income is
recorded on the accrual method.
FEDERAL INCOME TAXES: Deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted tax rates applicable
to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
income taxes of a change in tax laws or rates is recognized in income in the
period that includes the enactment date.
NET INCOME (LOSS) PER SHARE: Net loss per share is based on the weighted average
number of common shares outstanding (370,000 shares).
D2-18
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
COMPREHENSIVE INCOME: Comprehensive income is the sum of net income and certain
other items which are charged or credited to stockholders' equity. For the
periods presented, the Bank's only element of comprehensive income other than
net income was the net change in the market value adjustment for investment
securities available for sale. Accordingly, the elements and total of
comprehensive income are shown within the statement of changes in stockholders'
equity presented herein.
NOTE B--INVESTMENT SECURITIES
Investment securities available for sale consisted of United States government
agency securities with an amortized cost of $999,401 and $999,245 at December
31, 1999 and 1998, respectively.
At December 31, 1999, no securities were pledged to secure public and trust
deposits and for other purposes as required by law.
Gross unrealized losses of investment securities available for sale were $47,839
and $13,309 at December 31, 1999 and 1998, respectively. There were no gross
realized gains and losses from sales and maturities of investment securities
available for sale during the periods presented.
All investment securities at December 31, 1999 and 1998 had scheduled maturities
of more than one year through five years.
NOTE C--LOANS
Transactions in the allowance for loan losses are summarized below:
1999 1998
--------- ---------
Balance at beginning of period $ 250,000 $ -0-
Provision charged to operations 122,261 260,779
Loans charged off (deduction) (7,261) (10,779)
Recoveries -- --
--------- ---------
Balance at December 31 $ 365,000 $ 250,000
========= =========
At December 31, 1999 and 1998, 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.
D2-19
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE D--PREMISES AND EQUIPMENT
Major classes of premises and equipment consisted of the following at December
31:
1999 1998
--------- ---------
Leasehold improvements $ 40,314 $ 40,314
Equipment and furniture 387,539 335,884
--------- ---------
427,853 376,198
Less accumulated depreciation (148,214) (63,761)
--------- ---------
$ 279,639 $ 312,437
========= =========
The Bank rents office space under an operating lease. Rent expense under this
lease agreement approximated $73,000 in 1999 and 1998. Future minimum rental
payments under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1999 aggregate $580,000 due
as follows: $73,000 each in the years 2000 through 2004 and $215,000 thereafter.
NOTE E--INCOME TAXES
Federal income taxes (benefit) consist of the following components:
1999 1998
--------- ---------
Current $ -0- $ -0-
--------- ---------
Deferred (43,000) (212,000)
--------- ---------
$ (43,000) $(212,000)
========= =========
No federal income taxes were paid during 1999 and 1998.
Net deferred income tax assets consisted of the following:
December 31
----------------------
1999 1998
--------- ---------
Net operating loss carryforward $ 177,000 $ 119,000
Allowance for loan losses 96,000 89,000
Market value adjustment for investment
securities available for sale 16,000 5,000
Other, net (18,000) (4,000)
--------- ---------
Net deferred tax assets $ 271,000 $ 217,000
========= =========
The Bank had a net operating loss carryforward which may reduce income taxes
payable in future periods. Such carryforward approximated $521,000 at December
31, 1999, and expires at varying dates through 2019.
D2-20
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE F--RELATED PARTIES TRANSACTIONS
In the ordinary course of business, the Bank makes loans to officers and
directors of the Bank including their immediate families and companies in which
they are principal owners. At December 31, 1999 and 1998, total loans to these
persons approximated $1,235,000 and $1,694,000, respectively. During 1999,
$632,000 of new loans were made to these persons and repayments totaled
$1,091,000. 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 Ltd. Amounts paid for such services approximated $285,000 and $252,000
for the periods ended December 31, 1999 and 1998.
NOTE G--DEPOSITS
The aggregate amount of time deposits of $100,000 or more approximated
$13,387,000 and $10,575,000 as of December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of time deposits of $100,000 or
more were as follows:
2000 $12,361,929
2001 803,862
2002 221,209
-----------
Total $13,387,000
===========
Interest paid approximates amounts charged to operations on an accrual basis for
the periods presented.
NOTE H--EMPLOYEE BENEFIT PLANS
Subject to eligibility requirements, the Bank's employees participate in the
employee benefit plans of Capitol Bancorp Ltd. Amounts charged to expense by the
Bank for these defined contribution plans approximated $19,200 and $6,100 in
1999 and 1998, respectively.
D2-21
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE I--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values and estimated fair values of financial instruments at December
31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 1,082 $ 1,082 $ 7,231 $ 7,231
Investment securities available for sale 952 952 986 986
Portfolio loans:
Fixed rate 27,777 27,911 18,390 18,465
Variable rate 8,652 8,654 4,540 4,539
-------- -------- -------- --------
Total portfolio loans 36,429 36,565 22,930 23,004
Less allowance for loan losses (365) (365) (250) (250)
-------- -------- -------- --------
Net portfolio loans 36,064 36,200 22,680 22,754
Financial Liabilities:
Deposits:
Noninterest-bearing 2,973 2,973 2,160 2,160
Interest-bearing:
Demand accounts 5,753 5,605 4,272 4,342
Time certificates of deposit less
than $100,000 13,084 12,836 11,021 10,976
Time certificates of deposit
$100,000 or more 13,387 13,495 10,575 10,601
-------- -------- -------- --------
Total interest-bearing deposits 32,224 31,936 25,868 25,919
-------- -------- -------- --------
Total deposits 35,197 34,909 28,028 28,079
</TABLE>
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.
D2-22
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE J--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, various loan commitments are made to
accommodate the financial needs of Bank customers. Such loan commitments include
stand-by letters of credit, lines of credit, and various commitments for other
commercial, consumer and mortgage loans. Stand-by letters of credit, when
issued, commit the Bank to make payments on behalf of customers when certain
specified future events occur and are used infrequently (none outstanding at
December 31, 1999 and 1998). Other loan commitments outstanding consist of
unused lines of credit and approved, but unfunded, specific loan commitments
($11,367,000 and $7,843,000 at December 31, 1999 and 1998, respectively).
These loan commitments (stand-by letters of credit and unfunded loans) generally
expire within one year and are reviewed periodically for continuance or renewal.
All loan commitments have credit risk essentially the same as that involved in
routinely making loans to customers and are made subject to the Bank's normal
credit policies. In making these loan commitments, collateral and/or personal
guarantees of the borrowers are generally obtained based on management's credit
assessment. Such loan commitments are also included in management's evaluation
of the adequacy of the allowance for loan losses.
Deposits at the Bank are insured up to the maximum amount covered by FDIC
insurance.
NOTE K--CAPITAL REQUIREMENTS
The Bank is subject to certain capital requirements. Federal financial
institution regulatory agencies have established certain risk-based capital
guidelines for banks. Those guidelines require all banks to maintain certain
minimum ratios and related amounts based on "Tier 1" and "Tier 2" capital and
"risk-weighted assets" as defined and periodically prescribed by the respective
regulatory agencies. Failure to meet these capital requirements can result in
severe regulatory enforcement action or other adverse consequences for a
depository institution, and, accordingly, could have a material impact on the
Bank's financial statements.
Under the regulatory capital adequacy guidelines and related framework for
prompt corrective action, the specific capital requirements involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. The capital amounts and classifications
are also subject to qualitative judgments by regulatory agencies about
components, risk weighting and other factors.
As of December 31, 1999, 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, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
D2-23
<PAGE>
KENT COMMERCE BANK
NOTES TO FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE K--CAPITAL REQUIREMENTS--CONTINUED
The Bank's various amounts of regulatory capital and related ratios as of
December 31 are summarized below (amounts in thousands):
1999 1998
------- -------
Tier 1 capital to total assets:
Actual amount $ 3,302 $ 3,286
Ratio 8.55% 10.47%
Minimum required amount (8%) >= $ 3,089 >= $ 2,510
Tier 1 capital to risk-weighted assets:
Actual amount $ 3,302 $ 3,286
Ratio 9.01% 13.72%
Minimum required amount (4%) >= $ 1,465 >= $ 958
Combined Tier 1 and Tier 2 capital to
risk-weighted assets:
Actual amount $ 3,667 $ 3,536
Ratio 10.01% 14.77%
Minimum required amount (8%) >= $ 2,930 >= $ 1,916
Amount required to meet "Well-Capitalized"
category (10%) >= $ 3,663 >= $ 2,395
As a condition of charter approval, the Bank is required to maintain a ratio of
Tier 1 capital to total assets of not less than 8% and an allowance for loan
losses of not less than 1% of portfolio loans for the first three years of
operations.
D2-24
<PAGE>
ANNEX E
FINANCIAL AND OTHER INFORMATION REGARDING CAPITOL BANCORP LTD.
The following items accompany this Proxy Statement/Prospectus as mailed to the
shareholders of Muskegon Commerce Bank and Kent Commerce Bank:
- Report on Form 10-Q for period ended September 30, 2000
- Report on Form 10-Q for period ended June 30, 2000
- Report on Form 10-Q for period ended March 31, 2000
- Annual report to shareholders for year ended December 31,1999
- Annual report on Form 10-K for year ended December 31, 1999
- Proxy statement for Capitol's Annual Meeting of Shareholders held on
May 4, 2000
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561-571 of the Michigan Business Corporation Act, as amended (the
"MBCA"), grant the Registrant broad powers to indemnify any person in connection
with legal proceedings brought against him by reason of his present or past
status as an officer or director of the Registrant, provided that the person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The MBCA also gives the Registrant broad powers to indemnify any
such person against expenses and reasonable settlement payments in connection
with any action by or in the right of the Registrant, provided the person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, except that no indemnification may be made
if such person is adjudged to be liable to the Registrant unless and only to the
extent the court in which such action was brought determines upon application
that, despite such adjudication, but in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for reasonable
expenses as the court deems proper. In addition, to the extent that any such
person is successful in the defense of any such legal proceeding, the Registrant
is required by the MBCA to indemnify him against expenses, including attorneys'
fees, that are actually and reasonably incurred by him in connection therewith.
The Registrant's Articles of Incorporation contain provisions entitling
directors and executive officers of the Registrant to indemnification against
certain liabilities and expenses to the full extent permitted by Michigan law.
Under an insurance policy maintained by the Registrant, the directors and
officers of the Registrant are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits or
proceedings, which may be brought against them by reason of being or having been
such directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
Reference is made to the Exhibit Index at Page II-7 of the
Registration Statement.
(b) Financial Statement Schedules included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999 is
incorporated herein by reference.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto that are incorporated herein by reference.
ITEM 22. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 (the "Securities Act");
II-1
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement
(or) the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in this
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not
exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) under the
Securities Act, if, in the aggregate, the changes in
volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this
registration statement or any material change to such
information in this Registration Statement; provided,
however, that the undertakings set forth in paragraphs
(1)(i) and (ii) above do not apply if the information
required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by
the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act")
that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(B) The undersigned Registrant hereby undertakes, that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(C) The undersigned Registrant hereby undertakes:
(1) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of
the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective,
II-2
<PAGE>
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Lansing,
Michigan on December 14, 2000.
CAPITOL BANCORP LTD.
By: /s/ JOSEPH D. REID
-----------------------
JOSEPH D. REID
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities indicated on December 14, 2000.
Signature Title
--------- -----
/s/ JOSEPH D. REID Chairman of the Board, President
--------------------------- and Chief Executive Officer,
JOSEPH D. REID Director (Principal Executive Officer)
/s/ LEE W. HENDRICKSON Chief Financial Officer (Principal
--------------------------- Financial and Accounting Officer)
LEE W. HENDRICKSON
/s/ ROBERT C. CARR * Executive Vice President, Treasurer, Director
---------------------------
ROBERT C. CARR
/s/ DAVID O'LEARY * Secretary, Director
---------------------------
DAVID O'LEARY
/s/ LOUIS G. ALLEN * Director
---------------------------
LOUIS G. ALLEN
/s/ PAUL R. BALLARD * Director
---------------------------
PAUL R. BALLARD
/s/ DAVID L. BECKER * Director
---------------------------
DAVID L. BECKER
II-4
<PAGE>
Signature Title
--------- -----
/s/ DOUGLAS E. CRIST Director
---------------------------
DOUGLAS E. CRIST
Director
---------------------------
JAMES C. EPOLITO
/s/ GARY A. FALKENBERG * Director
---------------------------
GARY A. FALKENBERG
Director
---------------------------
JOEL I. FERGUSON
/s/ KATHLEEN A. GASKIN * Director
---------------------------
KATHLEEN A. GASKIN
/s/ H. NICHOLAS GENOVA * Director
---------------------------
H. NICHOLAS GENOVA
/s/ L. DOUGLAS JOHNS * Director
---------------------------
L. DOUGLAS JOHNS
/s/ MICHAEL E. KASTEN * Director
---------------------------
MICHAEL L. KASTEN
/s/ LEONARD MAAS * Director
---------------------------
LEONARD MAAS
/s/ LYLE W. MILLER * Director
---------------------------
LYLE W. MILLER
* By: /s/ JOSEPH D. REID
-----------------------
JOSEPH D. REID
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Plan of Share Exchange (included in the Proxy
Statement/Prospectus as Annex A).
5* Opinion of Strobl Cunningham Caretti & Sharp, P.C. as to the
validity of the shares.
8 Tax Opinion of Strobl Cunningham Caretti & Sharp, P.C.
(included in the Proxy Statement/Prospectus as Annex C).
23.1a, b and c Consent of BDO Seidman, LLP.
23.2* Consent of Strobl Cunningham Caretti & Sharp, P.C. (included
in Exhibit 5).
23.3 Consent of Strobl Cunningham Caretti & Sharp, P.C. (included
in Exhibit 8).
23.4 Consent of JMP Financial, Inc.
24* Power of Attorney (included on the signature page of the
Registration Statement).
99a Form of proxy for the Special Meetings of Shareholders of
Muskegon Commerce Bank.
99b Form of proxy for the Special Meetings of Shareholders of
Kent Commerce Bank.
----------
* Previously filed.
(b) Financial Statement Schedules included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999 are incorporated herein by
reference.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
the notes thereto that are incorporated herein by reference.
