-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MyTcyrdYTn9RiVbWmwkrNDfiRdezJ9FsqATgoWizeVB7+sIuh0QXokog4lNEMpWa /SHkVKKr/NME9uw83Zu2bw== 0000950124-99-005034.txt : 19990903 0000950124-99-005034.hdr.sgml : 19990903 ACCESSION NUMBER: 0000950124-99-005034 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19990902 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITOL BANCORP LTD CENTRAL INDEX KEY: 0000840264 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 382761672 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-84009 FILM NUMBER: 99705060 BUSINESS ADDRESS: STREET 1: ONE BUSINESS & TRADE CNTR STREET 2: 200 WASHINGTON SQ N CITY: LANSING STATE: MI ZIP: 48933 BUSINESS PHONE: 5174876555 MAIL ADDRESS: STREET 1: ONE BUSINESS & TRADE CENTER STREET 2: 200 WASHINGTON SQUARE NORTH CITY: LANSING STATE: MI ZIP: 48933 S-3/A 1 FORM S-3 1 As filed with the Securities and Exchange Commission on September 2, 1999 Registration No. 333-84009 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CAPITOL BANCORP LTD. (NAME OF REGISTRANT IN ITS CHARTER) ------------------------- MICHIGAN 38-2761672 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 WASHINGTON SQUARE NORTH, 4TH 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, 4TH FLOOR LANSING, MICHIGAN 48933 (517) 487-6555 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------- COPIES TO: JOHN SHARP DONALD L. JOHNSON STROBL CUNNINGHAM CARETTI & SHARP, P.C. VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP 300 E. LONG LAKE ROAD, SUITE 200 333 BRIDGE STREET, N.W., SUITE 1700 BLOOMFIELD HILLS, MI 48304 GRAND RAPIDS, MI 49504 (248) 540-2300 (616) 336-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is post-effective amendment filed pursuant to Rule 462(c) 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 delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------- CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE(3) - ---------------------------------------------------------------------------------------------------------------------- Common Stock (no par value)...... 1,955,000 $17.50 $34,212,500 $10,071 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRATION SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. (1) Includes 255,000 shares which may be sold by the Company to cover over-allotments. (2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457 of the Securities Act of 1933. (3) Filing fee previously paid. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to completion dated September 2, 1999 PROSPECTUS 1,700,000 SHARES CAPITOL BANCORP LTD. COMMON STOCK CAPITOL BANCORP LIMITED LOGO Capitol Bancorp Ltd. is offering 1,700,000 shares of common stock. Capitol's common stock is traded on the Nasdaq National Market under the symbol "CBCL." The last reported sale price for the common stock on August 31, 1999 was $13.125 per share. INVESTING IN COMMON STOCK INVOLVES RISKS, WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 10. ------------------------
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- PER SHARE TOTAL - ---------------------------------------------------------------------------------------------------------- Public offering price.......................... $ $ - ---------------------------------------------------------------------------------------------------------- Underwriting discount.......................... $ $ - ---------------------------------------------------------------------------------------------------------- Proceeds to Capitol Bancorp Ltd., before expenses..................................... $ $ - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
Capitol has granted the underwriters a 30-day option to purchase up to 255,000 additional shares of its common stock on the same terms and conditions as above to cover over-allotments, if any. - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- Capitol expects that the shares of common stock will be ready for delivery in Chicago, Illinois on or about , 1999. ------------------------ KEEFE, BRUYETTE & WOODS, INC. RAYMOND JAMES & ASSOCIATES, INC. U.S. BANCORP PIPER JAFFRAY ------------------------ The date of this prospectus is September , 1999 3 LOGO MICHIGAN BANKS LOCATION 1. Capitol National Bank Lansing 2. Portage Commerce Bank Portage 3. Ann Arbor Commerce Bank Ann Arbor 4. Oakland Commerce Bank Farmington Hills 5. Paragon Bank & Trust Holland 6. Grand Haven Bank Grand Haven 7. Macomb Community Bank Clinton Township 8. Brighton Commerce Bank Brighton 9. Muskegon Commerce Bank Muskegon 10. Kent Commerce Bank Grand Rapids 11. Detroit Commerce Bank Detroit ARIZONA BANKS 12. Bank of Tucson Tucson 13. Valley First Community Bank Scottsdale 14. Camelback Community Bank Phoenix 15. Southern Arizona Community Bank Tucson 16. Mesa Bank Mesa 17. Sunrise Bank of Arizona Phoenix 18. East Valley Community Bank Chandler NEVADA BANKS 19. Desert Community Bank Las Vegas 20. Red Rock Community Bank (in formation) Las Vegas INDIANA BANK 21. Elkhart Community Bank (in formation) Elkhart
As of September 2, 1999 4 TABLE OF CONTENTS
PAGE ---- Cautionary Statement Regarding Forward-Looking Information............................................... 3 Prospectus Summary.......................................... 4 Selected Consolidated Financial Data........................ 8 Risk Factors................................................ 10 Recent Developments......................................... 15 Use of Proceeds............................................. 16 Capitalization.............................................. 17 Dividends and Market For Common Stock....................... 18 Business.................................................... 19 Management.................................................. 27 Supervision and Regulation.................................. 31 Description of Capital Stock................................ 38 Underwriting................................................ 41 Legal Matters............................................... 43 Experts..................................................... 43 Incorporation of Certain Documents By Reference............. 43 Where You Can Find More Information......................... 44
------------------------- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This 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 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; -- changes in regulatory requirements of federal and state agencies applicable to bank holding companies and Capitol's present and future banking subsidiaries; -- year 2000 (Y2K) computer, embedded chip and related data processing issues; and -- other factors discussed in "Risk Factors." Capitol undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. 3 5 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. Because this is a summary, it may not contain all of the information that is important to you. To understand the offering fully, you should read the entire prospectus before making a decision to invest in Capitol's common stock. Unless stated otherwise, all share, per share and financial information in this prospectus assumes no exercise of the underwriters' option to purchase additional shares of common stock from Capitol. ABOUT CAPITOL BANCORP LTD. Capitol Bancorp Ltd. is a $1.1 billion multi-bank holding company headquartered in Lansing, Michigan. Capitol is engaged in the business of bank development and community banking. Organized as a Michigan corporation in 1985, Capitol became a bank holding company in May 1988 when it completed a share exchange with the shareholders of Capitol National Bank, a bank which was formed by the same group of organizers in 1982. Capitol believes it follows a unique approach to developing and managing community banks. It emphasizes local decision making at the bank level with significant community ownership and individual boards of directors for each bank, drawn from the community. Its customer focused approach to banking is founded on the operating philosophy of local leadership and decision-making authority in all aspects of making loans and providing deposit services. Capitol currently has eleven bank subsidiaries which span the most populous section of Michigan's lower peninsula, including its eastern and western shores. Of those eleven banks, nine were started as new banks and two were acquisitions from unaffiliated entities. Capitol has expanded into the southwestern portion of the United States through its 51%-owned subsidiary, Sun Community Bancorp Limited. Sun currently has seven banking subsidiaries, all of which are located in Arizona. Although viewed by regulators as a bank holding company, Capitol describes itself as a bank development company. Bank development includes managing Capitol's bank subsidiaries and the formation of new banks and bank holding companies. CAPITOL'S COMMUNITY BANKING PHILOSOPHY Capitol's business is community banking with emphasis on the bank customer relationship. Capitol's banks are each small, generally single location facilities. Each bank has a president. The bank president's office is adjacent to the bank lobby and is readily accessible to customers. Each bank makes its own credit decisions. Each bank has its own board of directors, drawn mainly from leaders within the local business community. Each bank initially has local investors. Each bank is focused on the customer, offering the following: - the bank president serves customers, - the bank's decision-makers are on site, and - the bank makes house calls (courier service or other on-site delivery). Capitol's banks seek the profitable customer relationships which are often displaced through mergers, mass marketing and an impersonal approach to treating customers. Each of Capitol's banks is focused on commercial banking activities. They emphasize commercial loans, but offer a complete array of credit facilities to customers. The banks also offer a wide range of deposit products with emphasis on business checking and time accounts. CAPITOL'S OPERATING STRATEGY Capitol is a uniquely structured affiliation of community banks. 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. 4 6 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. Capitol's banks comprise a blend of seasoned, maturing and start-up banks. The following table lists each of the subsidiary banks, their formation dates, and assets as of June 30, 1999:
TOTAL ASSETS YEAR FORMED AT AFFILIATE LOCATION OR ACQUIRED JUNE 30, 1999 --------- -------- ----------- ------------- (IN THOUSANDS) Capitol National Bank................... Lansing, Michigan 1982 $ 125,891 Ann Arbor Commerce Bank................. Ann Arbor, Michigan 1990 197,846 Portage Commerce Bank................... Portage, Michigan 1990 111,131 Oakland Commerce Bank................... Farmington Hills, Michigan 1992 98,720 Paragon Bank & Trust.................... Holland, Michigan 1994 82,929 Grand Haven Bank........................ Grand Haven, Michigan 1995 71,781 Macomb Community Bank................... Clinton Township, Michigan 1996 82,919 Brighton Commerce Bank.................. Brighton, Michigan 1997 50,006 Muskegon Commerce Bank.................. Muskegon, Michigan 1997 37,300 Detroit Commerce Bank................... Detroit, Michigan 1998 23,103 Kent Commerce Bank...................... Grand Rapids, Michigan 1998 35,880 Sun Community Bancorp Limited:.......... Phoenix, Arizona 1997 Bank of Tucson........................ Tucson, Arizona 1996 76,731 Valley First Community Bank........... Scottsdale, Arizona 1997 36,984 Camelback Community Bank.............. Phoenix, Arizona 1998 26,414 Mesa Bank............................. Mesa, Arizona 1998 17,669 Southern Arizona Community Bank....... Tucson, Arizona 1998 19,373 Sunrise Bank of Arizona............... Phoenix, Arizona 1998 15,033 East Valley Community Bank............ Chandler, Arizona 1999 4,406 Nevada Community Bancorp Limited...... Las Vegas, Nevada 1999 10,000 Indiana Community Bancorp Limited....... Elkhart, Indiana 1999 5,027 Intercompany eliminations and other, net................................... (14,978) ---------- Total $1,114,165 ==========
CAPITOL'S BANK DEVELOPMENT STRATEGY Capitol's strategy is to establish an attractive community banking franchise through bank development. The foundation of Capitol's strategy is that small banks in large markets can thrive through their focus on serving the customer. This strategy is focused on identification of dynamic, typically populous communities where ongoing consolidation of the banking industry creates opportunities for formation of small, customer-focused banks. These banks will be focused on serving their customer in a comprehensive relationship and on a profitable basis, rather than achieving significant market share. As part of its bank development efforts, Capitol mentors its banks through the most crucial and early formative periods. This is done by recruiting management and directors from the local community and providing experience and guidance in the formation process. As a consequence of its strategy and the effects of industry consolidation, Capitol has succeeded in attracting community investors to its new banks and local directors who compliment management in achieving development of customer relationships. 5 7 When forming a new bank, Capitol purchases a majority interest, but does not seek 100% ownership. Each new bank commences a community stock offering prior to opening. Typically, up to 49% of the bank's stock will be sold in the local community and involve more than 100 local investors. Capitol views this joint ownership to be a shared vision. It is a vision that the community has a need for a new bank, one that is focused on the customer. It is shared because of the joint investment of community investors and Capitol. Capitol views the concept of shared vision to also encompass other relationships, particularly with bank customers and employees. CAPITOL'S MANAGEMENT Capitol's management team and bank presidents have significant banking experience. Capitol's Chairman, President and Chief Executive Officer, Joseph D. Reid, has more than 15 years of experience in starting new banks and managing bank development. Thus far, he has started 18 community banks and three bank development companies. Sun recently hired John S. Lewis as its president to oversee the growth of Sun's banks and Sun's back-room and administrative support services to its bank subsidiaries. He has over 22 years of bank management experience in the Southwestern United States. CAPITOL'S RELATIONSHIP WITH SUN Capitol owns 51% of Sun's common stock. Sun operates autonomously from Capitol. Sun recently completed an initial public offering and its common stock is traded under the symbol "SCBL" on the Nasdaq National Market. Capitol's Chairman, President and Chief Executive Officer, Joseph D. Reid, is also Chairman and Chief Executive Officer of Sun. In addition to Mr. Reid, two other executive officers of Capitol are also executive officers of Sun. Lee W. Hendrickson is Executive Vice President and Chief Financial Officer of Capitol and Sun. Cristin Reid English is Vice President and General Counsel of Capitol and Sun. Except for those three executive officers who have shared responsibility for Capitol and Sun, Capitol's and Sun's management are separate and have little overlap. Messrs. Reid and Hendrickson and Ms. English are compensated by Capitol and Sun by separate salaries from each company. These individuals allocate their time to Capitol and Sun depending upon current projects and other responsibilities. This allocation of time and effort varies from time to time depending on need. Mr. Hendrickson and Ms. English also allocate their time and effort under the direction of Mr. Reid. There are no contractual provisions directing how time will be allocated between Capitol and Sun. CAPITOL'S ADDRESS AND TELEPHONE NUMBER Capitol's principal executive offices are located at One Business and Trade Center, 200 Washington Square North, Lansing, Michigan 48933. Capitol's telephone number is (517) 487-6555. 6 8 THE OFFERING Common stock offered by Capitol....................... 1,700,000 shares(1) Common stock to be outstanding after the offering............... 8,044,886 shares(1)(2) Use of Proceeds............... Capitol intends to use substantially all of the net proceeds to retire existing debt under its credit facilities with an unaffiliated bank. Any remaining net proceeds will be used to fund future growth or for other corporate purposes. Nasdaq National Market Symbol........................ "CBCL" - ------------------------- (1) Capitol has granted the underwriters a 30-day option to purchase up to an additional 255,000 shares of common stock. See "Underwriting." (2) Does not include 617,714 shares of common stock issuable upon exercise of stock options. Also does not include 300,000 additional stock options issuable pursuant to Capitol's stock option program upon completion of this offering (assuming the underwriters exercise their option to purchase 255,000 additional shares of common stock). See "Management--Stock Option Program." 7 9 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, 1998, which is incorporated by reference in this 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 June 30, 1999, which is incorporated by reference in this prospectus. See "Where You Can Find More Information" and "Incorporation of Certain Documents by Reference." Interim results for the six months ended June 30, 1999 are not necessarily indicative of results which may be expected in future periods, including the year ending December 31, 1999. BECAUSE OF THE NUMBER OF BANKS ADDED IN 1997 AND 1998, 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, 1998, 1997, 1996, 1995 and 1994 were derived from audited consolidated financial statements which are not presented in this prospectus. Capitol's audited consolidated financial statements as of and for the years ended December 31, 1998 and 1997 and related statements of operations for the years ended December 31, 1998, 1997 and 1996 are incorporated by reference in this prospectus. The selected data provided below as of and for the six months ended June 30, 1999 and 1998 have been derived from Capitol's unaudited consolidated financial statements which have also been incorporated by reference in this 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 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' 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.
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30 AS OF AND FOR THE (UNAUDITED) YEARS ENDED DECEMBER 31 --------------------- ------------------------------------------------------ 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED RESULTS OF OPERATIONS DATA: Interest income.............. $ 42,409 $ 31,772 $ 69,668 $ 49,549 $ 36,479 $ 29,914 $ 21,480 Interest expense............. 21,451 16,637 36,670 24,852 17,800 15,079 9,397 Net interest income.......... 20,958 15,135 32,998 24,697 18,679 14,835 12,083 Provision for loan losses.... 1,710 1,658 3,523 2,049 1,196 839 473 Net interest income after provision for loan losses..................... 19,248 13,477 29,475 22,648 17,483 13,996 11,610 Noninterest income........... 2,163 1,590 3,558 2,157 1,705 1,272 2,189 Noninterest expense.......... 16,874 11,857 25,821 16,360 12,307 10,460 10,563 Income before income tax expense.................... 4,537 3,210 7,212 8,445 6,881 4,808 3,236 Income tax expense........... 1,695 1,193 2,584 2,888 2,245 1,735 1,160 Income before cumulative effect of change in accounting principle....... 2,842 2,017 4,628 5,557 4,636 3,073 2,076 Cumulative effect of change in accounting principle(1)............... 197 Net income................... 2,645 2,017 4,628 5,557 4,636 3,073 2,076
8 10
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30 AS OF AND FOR THE (UNAUDITED) YEARS ENDED DECEMBER 31 --------------------- ------------------------------------------------------ 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PER SHARE DATA: Earnings per common share: Before cumulative effect of accounting change:....... Basic................. $ 0.45 $ 0.32 $ 0.74 $ 0.91 $ 0.85 $ 0.63 $ 0.52 Diluted............... 0.44 0.31 0.72 0.88 0.82 0.62 0.52 After cumulative effect of accounting change: Basic................. 0.42 0.32 0.74 0.91 0.85 0.63 0.52 Diluted............... 0.41 0.31 0.72 0.88 0.82 0.62 0.52 Cash dividends declared...... 0.18 0.17 0.33 0.30 0.25 0.19 0.19 Book value per share......... 7.90 7.45 7.77 7.22 7.43 7.58 6.79 Tangible book value per share...................... 7.58 7.09 7.35 6.87 6.99 6.95 5.60 Dividend payout ratio........ 43.18% 51.71% 43.63% 32.95% 29.05% 30.37% 37.15% Weighted average number of common shares outstanding................ 6,345 6,254 6,284 6,130 5,477 4,841 4,000 SELECTED BALANCE SHEET DATA: Total assets................. $1,114,165 $846,477 $1,024,444 $690,556 $492,263 $384,070 $316,312 Investment securities........ 71,712 66,734 86,464 64,470 48,725 36,329 33,802 Portfolio loans.............. 863,579 606,623 724,280 502,755 357,623 283,471 241,583 Allowance for loan losses.... (10,417) (7,373) (8,817) (6,229) (4,578) (3,687) (3,220) Deposits..................... 969,809 748,526 890,890 604,407 436,166 340,287 279,650 Debt obligations............. 25,200 3,000 23,600 6,500 8,712 7,924 Trust preferred securities... 24,273 24,237 24,255 24,126 Stockholders' equity......... 50,143 46,775 49,292 45,032 40,159 30,865 25,714 PERFORMANCE RATIOS:(2) Return on average equity..... 10.69% 8.91% 10.19% 13.28% 12.01% 10.55% 9.45% Return on average assets..... 0.50% 0.52% 0.55% 0.96% 1.08% 0.87% 0.75% Net interest margin (fully taxable equivalent)........ 4.22% 4.18% 4.15% 4.54% 4.62% 4.46% 4.71% Efficiency ratio(3).......... 75.62% 70.89% 70.63% 60.92% 60.38% 64.94% 74.01% ASSET QUALITY: Non-performing loans(4)...... $ 7,839 $ 4,926 $ 7,242 $ 4,011 $ 2,699 $ 1,341 $ 1,930 Allowance for loan losses to non-performing loans....... 132.89% 149.68% 121.75% 155.30% 169.62% 274.94% 166.84% Allowance for loan losses to portfolio loans............ 1.21% 1.22% 1.22% 1.24% 1.28% 1.30% 1.33% Non-performing loans to total portfolio loans............ 0.91% 0.81% 1.00% 0.80% 0.75% 0.47% 0.80% Net loan losses to average portfolio loans............ 0.01% 0.09% 0.15% 0.09% 0.10% 0.14% 0.13% CAPITAL RATIOS: Average equity to average assets..................... 4.67% 5.87% 5.36% 7.22% 8.97% 8.24% 7.93% Tier 1 risk-based capital ratio...................... 10.99% 13.30% 13.42% 14.26% 11.91% 9.80% 9.27% Total risk-based capital ratio...................... 12.05% 15.00% 14.60% 16.61% 12.88% 10.91% 10.51% Leverage ratio............... 4.50% 5.53% 4.88% 6.65% 8.16% 7.16% 6.95%
- ------------------------- (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 period 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. 9 11 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 the common stock from this offering 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 invest in shares of Capitol's common stock. This 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. 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. 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 10 12 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, 2001. 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 and Sun's senior management also have employment agreements with Capitol and/or Sun. 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, 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. 11 13 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 FUTURE 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 future 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. Many of the banks' commercial loans are secured by commercial real estate. Loans to small and medium-sized businesses are generally riskier than single-family mortgage loans. Typically, the success of a small or medium-sized business depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business. In addition, small and medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial variations in operating results, any of which may impair a borrower's ability to repay a loan. Substantial credit losses could result, which could cause you to lose your entire investment in the common stock. 12 14 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 51% of Sun's common stock. Sun completed its initial public offering (IPO) in July 1999 and its common stock is listed on the Nasdaq National Market. Although a trading market for Sun's common stock may develop, Capitol's investment in Sun is likely to remain illiquid because: - Capitol has entered into an agreement with the underwriters of Sun's IPO which prohibits Capitol from selling any of its shares in Sun for a six month period after Sun's IPO; - Capitol is currently encouraged by the Federal Reserve Board to maintain an investment of not less than 51% of 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 and have been unrelated to the operating performance of those companies. Any fluctuation may adversely affect the prevailing market price of Capitol's common stock. 13 15 CAPITOL RELIES ON COMPUTER HARDWARE, SOFTWARE, AND INTERNET-BASED TECHNOLOGY THAT COULD HAVE YEAR 2000 PROBLEMS AND ADVERSELY AFFECT THE DELIVERY OF BANK SERVICES TO CUSTOMERS. Capitol relies extensively on computer hardware, software and related technology, together with data, in the operation of its business. This technology and data are used in creating and delivering bank products and services, and in Capitol's internal operations, for example, its billing and accounting. An enterprise-wide program has been initiated to evaluate the technology and data used in the creation and delivery of bank products and services and in Capitol's and Sun's internal operations. If Capitol or Sun fails to complete the implementation of its Year 2000 plan prior to the commencement of the Year 2000, or bank customers and suppliers fail to successfully remediate their own Year 2000 issues, it could materially adversely affect Capitol, Sun and their banks. The planned enterprise-wide program includes resolving any Year 2000 issues that are related to Capitol and its banks' systems, customers and suppliers. However, there can be no assurances that third parties will successfully remedy their own Year 2000 issues over which Capitol has no control. 14 16 RECENT DEVELOPMENTS SUN'S INITIAL PUBLIC OFFERING On July 8, 1999, Sun completed an initial public offering of 1,650,000 shares of common stock, resulting in net proceeds of approximately $25 million. Of that offering, Capitol purchased 850,000 shares at the same price as offered to the public, $16.00 per share, for a total of $13.6 million. Capitol's ownership of Sun was 51% both before and remains at 51% after Sun's public offering transaction. Capitol and Sun are parties to an anti-dilution agreement whereby Capitol has the right to purchase additional shares of Sun, in the event of a stock offering by Sun, in order to maintain Capitol's ownership of at least 51% of Sun's common stock. Additionally, Capitol is currently encouraged by the Federal Reserve Board to maintain a controlling interest in Sun. Capitol's purchase of shares in Sun's initial public offering was funded by borrowings from Capitol's unaffiliated bank lender. The amounts borrowed were advanced under a short-term additional credit facility which Capitol negotiated in June 1999. RECENT EXPANSION ACTIVITY On June 30, 1999, Sun opened its seventh bank subsidiary, East Valley Community Bank located in Chandler, Arizona. Nevada Community Bancorp Limited was formed as a majority-owned subsidiary of Sun in April 1999. Indiana Community Bancorp Limited was formed as a majority-owned subsidiary of Capitol in May 1999. On August 6, 1999 Desert Community Bank commenced operations in Las Vegas, Nevada as a majority-owned start up banking subsidiary of Nevada Community Bancorp Limited. Nevada Community Bancorp Limited completed a $10 million private placement stock offering in which Sun invested $5.1 million; Indiana Community Bancorp Limited also completed a private placement stock offering of $5 million, of which $2.6 million was invested by Capitol. Applications are currently pending for the formation of two new banks, one in Las Vegas, Nevada, as a subsidiary of Nevada Community Bancorp Limited, and one in Elkhart, Indiana, as a subsidiary of Indiana Community Bancorp Limited. Sunrise Bank of Arizona, a majority-owned subsidiary of Sun, opened a loan production office in Albuquerque, New Mexico in July, 1999. Sunrise Capital Corporation, a to-be-formed bank holding company, and Sunrise Bank of Arizona have entered into a share exchange agreement which is subject to approval by Sunrise Bank of Arizona's shareholders. Once approved by the shareholders of Sunrise Bank of Arizona, a one for one share exchange will make Sunrise Capital Corporation a majority-owned subsidiary of Sun, and Sunrise Bank of Arizona a wholly-owned subsidiary of Sunrise Capital Corporation. Shareholder approval is expected in mid-September. Sunrise Capital Corporation is simultaneously engaged in a private placement of its shares and expects to raise between $3 million and $4 million. The proceeds will be used for future bank expansion and general corporate purposes. Sun Community Bancorp intends to maintain its 51% ownership in Sunrise Capital Corporation by purchasing 51% of the proposed offering. Additional expansion through the development of new banks in the states of Indiana, Nevada, New Mexico, California and others, is currently under consideration by Capitol or its subsidiary bank development entities. OTHER Capitol has entered into a share exchange agreement regarding Macomb Community Bank, a 51% owned subsidiary, whereby Capitol would issue approximately 230,000 shares of its common stock in exchange for the 49% of Macomb's common stock not already owned by Capitol. If consummated, Macomb would become a wholly-owned subsidiary of Capitol. The proposed share exchange is subject to approval by Macomb's minority shareholders at a special shareholder's meeting of Macomb scheduled to be held on September 28, 1999. 15 17 USE OF PROCEEDS The net proceeds to Capitol from the sale of the 1,700,000 shares of common stock in this offering are estimated to be approximately $20.7 million ($23.9 million if the underwriters' over-allotment option is exercised in full) after deducting the underwriting discount and other fees and expenses. It is currently expected that substantially all of the net proceeds from the offering will be used by Capitol for repayment of indebtedness. Capitol's indebtedness prior to this offering was incurred at various dates in 1998 and 1999 pursuant to lines of credit with an unaffiliated bank. Borrowed funds were principally used for investment in Capitol's subsidiaries for expansion purposes. This indebtedness includes $13.6 million borrowed in early July 1999 by Capitol to fund its purchase of 850,000 shares of Sun's common stock from Sun's initial public offering of common stock. That $13.6 million was borrowed pursuant to a temporary additional line of credit of $15 million from the unaffiliated bank, negotiated in June 1999. Borrowings under the credit lines bear interest at a rate slightly less than prime (effectively 6.26% at June 30, 1999) with interest payable monthly. The credit facility is reviewed annually for continuance. Any remaining net proceeds will be used for investment in bank and bank holding company subsidiaries to fund the development and growth of new or existing banks, including expansion into new geographic markets, as part of Capitol's growth strategy. 16 18 CAPITALIZATION The table presented below shows Capitol's actual total capitalization as of June 30, 1999, and as adjusted to reflect the issuance and sale of 1,700,000 shares of common stock Capitol is offering in this prospectus and the application of the estimated net proceeds as described in "Use of Proceeds."
AS OF JUNE 30, 1999 ---------------------------------------------- AS ADJUSTED FOR THE OFFERING AND USE OF ACTUAL NET PROCEEDS ------ ------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DEBT OBLIGATIONS: Notes payable to unaffiliated bank(1)..................... $ 16,700 $ -- Other..................................................... 8,500 8,500 -------- -------- Total debt obligations............................... 25,200 8,500 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES..................... 24,272 24,272 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.............. 35,875 35,875 STOCKHOLDERS' EQUITY(2): Common stock, no par value; 25,000,000 shares authorized; issued, and outstanding: Actual--6,344,886 shares As adjusted--8,044,886 shares.......................... 51,868 72,592 Retained earnings......................................... (516) (516) Market value adjustment for available-for-sale securities............................................. (484) (484) Less unallocated ESOP shares.............................. (725) (725) -------- -------- Total stockholders' equity........................... 50,143 70,867 -------- -------- TOTAL CAPITALIZATION........................................ $135,490 $139,514 ======== ======== Book value per share of common stock...................... $ 7.90 $ 8.80 ======== ======== CAPITAL RATIOS: Stockholders' equity to total assets...................... 4.50% 6.36% Total capital funds to total assets(3).................... 9.89% 11.76% Leverage ratio............................................ 4.50% 6.36% Risk-based capital ratios: Tier 1 capital to risk-weighted assets................. 10.99% 13.10% Tier 1 and Tier 2 capital to risk-weighted assets...... 12.05% 14.15%
- ------------------------- (1) Since June 30, 1999 the Company has incurred additional debt of approximately $13.2 million. (2) Does not include 617,714 shares of common stock issuable upon exercise of stock options. Also does not include 300,000 additional stock options issuable pursuant to Capitol's stock option program upon completion of this offering. See "Management--Stock Option Program." (3) Total capital funds includes guaranteed preferred beneficial interests in the corporation's subordinated debentures, minority interest in consolidated subsidiaries and stockholders' equity. 17 19 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 and have been restated, where appropriate, for Capitol's 6-for-5 stock split in December 1998. The last reported sale price of Capitol's common stock was $13.125 on August 31, 1999.
CASH DIVIDENDS HIGH LOW PAID ---- --- --------- 1997 - ------------------------------------------------------------ 1st Quarter................................................. $13.542 $12.083 $0.075 2nd Quarter................................................. 15.000 11.458 0.075 3rd Quarter................................................. 22.083 14.375 0.075 4th Quarter................................................. 27.500 20.104 0.075 1998 - ------------------------------------------------------------ 1st Quarter................................................. 25.625 20.833 0.083 2nd Quarter................................................. 25.417 20.104 0.083 3rd Quarter................................................. 21.667 18.333 0.083 4th Quarter................................................. 22.500 16.250 0.083 1999 - ------------------------------------------------------------ 1st Quarter................................................. 21.750 18.250 0.090 2nd Quarter................................................. 20.000 16.875 0.090 3rd Quarter (through August 31, 1999)....................... 18.250 12.562 --
As of August 31, 1999, the Company had a total of approximately 2,400 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. 18 20 BUSINESS OVERVIEW Capitol Bancorp Ltd. is a $1.1 billion multi-bank holding company headquartered in Lansing, Michigan. Capitol is engaged in the business of bank development and community banking. Organized as a Michigan corporation in 1985, Capitol became a bank holding company in May 1988 when it completed a share exchange with the shareholders of Capitol National Bank, a bank which was formed by the same group of organizers in 1982. As a result of the share exchange, Capitol National Bank became Capitol Bancorp's first bank subsidiary, and is 100% owned by Capitol. Since that time, Capitol has expanded significantly principally through start-up state-chartered banks. Capitol believes it follows a unique approach to developing and managing community banks. It emphasizes local decision making at the bank level with significant community ownership and individual boards of directors for each bank, drawn from the community. Its customer focused approach to banking is founded on the operating philosophy of local leadership and decision-making authority in all aspects of making loans and providing deposit services. While customer related activities are performed at each bank, the so-called "back-office" services, such as operations, data processing, and administrative services, are centralized. As of June 30, 1999, Capitol controlled, directly and indirectly, 18 bank subsidiaries, which includes banks in Michigan and Arizona. In addition, applications are pending for formation of start-up banks in Indiana and Nevada. At June 30, 1999, Capitol had total assets of $1.1 billion, loans of $863.6 million, deposits of $969.8 million and stockholders' equity of $50.1 million. Capitol uses a unique strategy of bank ownership and development through a tiered structured shown below: FLOW CHART 19 21 CAPITOL'S BANKING PHILOSOPHY The focus of Capitol's banking philosophy is the bank customer. Management believes that the trend towards bank consolidation and branch closings, and the apparent decreased personal service creates significant opportunities for customer-focused banking. Each of Capitol's banks typically has only one location. They focus on meeting the banking needs of small businesses, professionals and other high net worth individuals seeking customer-tailored service. Capitol's banks are small compared to their competitors but operate in large markets. Emphasis on a high level of personal service requires each bank to be committed to maintaining the stability of its senior personnel. In contrast to large financial institutions, which frequently rotate or transfer management personnel, Capitol emphasizes stability and consistency of senior staff to enhance its capacity to deliver the highest level of personal service. Capitol's banks start small and stay relatively small from a management and staffing perspective in an effort to provide customers with prompt local decision making in all aspects of product delivery. By taking an active interest in their customers' business and personal financial needs, Capitol's banks are more likely to be successful in attracting individuals and small- to medium-sized businesses as customers. CAPITOL'S OPERATING STRATEGY Community-Based Banking Structure Capitol is a uniquely structured affiliation of community banks. Each bank is viewed by management as being a separate business from the perspective of monitoring performance and allocation of financial resources. Subsidiary banks have full decision-making authority in structuring and approving loans and in the delivery and pricing of other banking services. The banks are managed by an on-site president and management team under the direction of its own board of directors comprised of business leaders from that bank's community. Each bank's board of directors has full authority over each bank, unlike many competitors' use of "advisory" boards, which often lack authority. As of June 30, 1999, Capitol was comprised of eleven community banks in Michigan and two second-tier bank development companies, one in Indiana and one in Arizona. The Arizona-based bank development company, Sun, has seven community banks in Arizona and a subsidiary bank development company in Nevada. 20 22 Capitol's banks comprise a blend of seasoned, maturing and start-up banks. The following table lists each of the subsidiary banks, their formation dates, ownership and assets as of June 30, 1999:
PERCENTAGE OWNERSHIP -------------------- DATE DIRECTLY DIRECTLY FORMED OR BY BY TOTAL ASSETS AT ACQUIRED CAPITOL SUN JUNE 30, 1999 --------- -------- -------- --------------- (IN THOUSANDS) Capitol National Bank................................ 1982 100% $ 125,891 Ann Arbor Commerce Bank.............................. 1990 100% 197,846 Portage Commerce Bank................................ 1990 100% 111,131 Oakland Commerce Bank................................ 1992 100% 98,720 Paragon Bank & Trust................................. 1994 100% 82,929 Grand Haven Bank..................................... 1995 100% 71,781 Macomb Community Bank................................ 1996 51% 82,919 Brighton Commerce Bank............................... 1997 59% 50,006 Muskegon Commerce Bank............................... 1997 51% 37,300 Detroit Commerce Bank................................ 1998 93% 23,103 Kent Commerce Bank................................... 1998 51% 35,880 Sun Community Bancorp Limited: 1997 51% Bank of Tucson..................................... 1996 100% 76,731 Valley First Community Bank........................ 1997 52% 36,984 Camelback Community Bank........................... 1998 55% 26,414 Mesa Bank.......................................... 1998 53% 17,669 Southern Arizona Community Bank.................... 1998 51% 19,373 Sunrise Bank of Arizona............................ 1998 51% 15,033 East Valley Community Bank......................... 1999 86% 4,406 Nevada Community Bancorp Limited................... 1999 51% 10,000 Indiana Community Bancorp Limited.................... 1999 51% 5,027 Intercompany eliminations and other, net............. (14,978) ---------- Consolidated.................................. $1,114,165 ==========
Centralized Administrative and Operational Support 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 roles are provided by Capitol in Michigan and by Sun in the southwest. 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 customer relationship. This also reinforces Capitol's belief that customer service and relationships should remain the primary focus of each subsidiary bank. Management believes Capitol is able to provide these services economically and efficiently and at a lower cost to each bank than if each bank had to contract for those services through external providers. The processing and support services provided by Capitol and Sun include, but are not limited to: - data processing; - processing of checks and deposits; - accounting; - internal and external financial reporting; - asset/liability management; - internal audit; 21 23 - credit administration and loan review; - regulatory compliance assistance; - budgeting; - strategic planning; - legal support services; - human resources and employee benefits administration; and - other administrative support services. Capitol and Sun also actively monitor and mentor their banks by: - reviewing monthly financial statements of each bank, including comparisons to budget and other goals or performance targets; - actively participating in the development of detailed budgets for each bank; - periodic internal auditing of transactions, balances, lending activity and deposit gathering; - loan review procedures to monitor loan quality, origination procedures and identification of problem loans; - asset/liability management assistance to monitor and enhance net interest margins, overall profitability and balance sheet matters; and - implementing a comprehensive risk management program which includes a risk matrix and assesses trends in business and financial risk at each bank. CAPITOL'S BANK DEVELOPMENT STRATEGY--CONCEPT OF SHARED VISION Although viewed by regulators as a bank holding company, Capitol describes itself as a bank development company. The concept of "bank development" differs from "bank holding" because it is more active, proactive and dynamic in its approach. Capitol views bank development as: - identifying opportunities for development; - recruiting management from the local community; - recruiting directors from the local community; - facilitating the regulatory process; - raising capital; - mentoring new banks through their early and formative periods; and - managing Capitol's investments. Under Capitol's approach, each new bank conducts a community offering prior to opening. Typically, up to 49% of the bank's stock is sold within the local community, involving more than 100 local investors. Capitol or a subsidiary controlled by Capitol purchases a majority interest of at least 51%. Capitol views this joint ownership structure to be a shared vision. It is shared because of the joint investment of community investors and Capitol. It is a vision that the community has a need for a new, customer-focused bank. Capitol's management believes its shared vision concept also applies to its relationship with other stakeholders including bank customers and employees. 22 24 Management believes the strategy of involving community investors in newly formed banks has several advantages because it: - requires significantly less capital investment in new banks by Capitol at the outset; - effectively ties the local community to the bank by creating a participating interest; and - greatly reduces the effect of early period start-up losses in Capitol's net income. This shared investment affects Capitol's reporting because under current accounting rules, entities which are more than 50% owned by another are consolidated or combined for financial reporting purposes. This means that 100% of each banks' assets are included in Capitol's consolidated balance sheet, regardless of the percentage owned by Capitol. Reported net income, however, will only include the subsidiaries' net income or net loss to the extent of Capitol's ownership percentage. When a newly formed bank incurs early start-up losses, Capitol will only reflect that loss based on its ownership percentage. Conversely, when the subsidiary banks generate income, Capitol will only reflect that income based on its ownership percentage. Recent industry statistics report that newly formed banks on average take between one and two years to reach break-even results. Capitol's banks seek to achieve profitability within their first year of operation and earn back their operating losses in advance of their 36th month of operation. Capitol emphasizes minimal capitalization of its banks, generally $5 million or less, in order to achieve the benefits of leverage earlier and, in Capitol's opinion, at a significantly lower cost than independently formed banks. Capitol's external costs of raising capital for its banks on a community offering basis have typically been less than $50,000 per bank. Some unaffiliated start-up banks are, in Capitol's opinion, excessively capitalized at $10 million or more, often through an initial public offering of their common stock. When capitalized at this level, the costs of raising capital can be $750,000 or more, and can often take an extended period of time to achieve appropriate leverage (i.e. adding sufficient loans and deposits to create a reasonable return on equity). Capitol's banks utilize their small size to emphasize customer-focused banking. Larger banks tend to emphasize their need for a targeted market share because they need to, in part due to their larger capitalization. On the other hand, Capitol's banks do not focus on market share as a key indicator of success; being a small bank in a big market can provide a superior rate of return on deployed capital and assets. Capitol is able to achieve consolidated asset growth through formation of new banks without forcing its existing banks to outgrow their niche focus. Plans for 1999 include the ongoing growth and development of Capitol's existing banks and the formation of additional new banks. As of August 31, 1999, applications were pending for two new banks, one in Indiana and one in Nevada. See "Recent Developments." Capitol's new bank development activity occurs on various levels. In Michigan, Capitol has direct ownership of its bank subsidiaries ranging from 51% to 100%, a 51% ownership in a new Indiana bank development company and a 51% ownership of Sun in Arizona. Sun's current banks are direct subsidiaries of it with ownership varying from 51% to 100%. Sun also owns 51% of a newly formed Nevada bank development company. In other southwestern states, Sun may form new banks through subsidiary bank holding companies which are majority owned by Sun. For example, in early 1999, Nevada Community Bancorp Limited was formed. A private placement of $10 million was completed in April 1999 with Sun purchasing $5.1 million or 51% of the common stock, retaining majority voting control in the Nevada company. The Nevada company will purchase a majority interest in a new community bank being formed in Las Vegas in August 1999 and may also purchase a majority interest in one or two additional banks in Nevada thereafter. Following its development strategy, Sun will provide support services to the Nevada bank development company and its future subsidiary banks. Capitol is employing a similar bank development strategy in Indiana through Indiana Community Bancorp Limited which is 51% owned by Capitol. Sun currently anticipates using a similar bank development strategy in other southwestern states such as California. 23 25 BANK PRODUCTS AND SERVICES Each of the banks offers a comprehensive range of banking products and services, tailored to meet the needs of the bank customers. The banks' primary customer emphasis is on small businesses, professionals and other high net worth individuals seeking personalized banking services. The banks emphasize commercial loans, consistent with the banks' focus on business customers. Capitol's banks emphasize commercial loans of $350,000 to $600,000 individually, and larger loans through loan participations with affiliated or nonaffiliated banks. The banks also offer residential and other consumer loans. One bank, Sunrise Bank of Arizona, emphasizes SBA lending (loans made through the Small Business Administration, an agency of the US government). Each of the banks offers a wide range of deposit products, with emphasis on business checking accounts and time deposits. Each bank defines its own particular market. No map lines are drawn to prohibit any of Capitol's or Sun's banks from pursuing customers in particular areas. Each bank develops its own marketing effort, tailored to the strengths of bank management, the bank's location and the bank's board of directors. The banks offer trust services through Paragon Bank & Trust in Michigan and Valley First Community Bank in Arizona. Certain mortgage loans are originated through Amera Mortgage Corporation, a 49% owned affiliate of Capitol, headquartered in Michigan, and Sun Community Mortgage Company, a wholly-owned subsidiary of Bank of Tucson, in addition to other residential mortgages originated directly by the banks for holding in their portfolio or for sale into the secondary market. COMPETITION The markets of Capitol's banks are dynamic and highly competitive. The banks are generally small and are located in large markets. The market share of these banks, individually and collectively, is not significant. Capitol's banks are not expected to achieve significant market share; rather, they are expected to remain small. Banking services, in general, are becoming viewed as a commodity. This perception seems to result from an apparent retail banking strategy of larger, megabanks and other mass marketers of financial services. Capitol's banks do not have a mass marketing retail focus, they have a relationship focus. Capitol's banks seek the profitable customer relationships which are often displaced through mergers, mass marketing and an impersonal approach to handling the customer. Capitol believes that there is a large enough group of profitable customers seeking a banking relationship within Capitol's target markets to enable small customer-focused banks to thrive in the shadows of larger institutions. Competition for loans and deposits is intense in Capitol's markets. Larger banks and nonbank financial institutions are aggressive in their efforts to obtain banking business on the basis of price, delivery and service. While Capitol's banks frequently encounter competitive situations in both loans and deposits which are price driven, Capitol's banks emphasize personalized service and the ability to meet the customers' needs, rather than emphasizing price. Capitol believes its banks' competitive advantages are: - local decision making, - quick response time, - service, and - follow-through. The competitors of Capitol's banks vary from small to large to very large banks. In addition, there are a significant number of nonbank competitors, including commercial finance companies, credit unions, credit card issuers, loan 'stores' and numerous other companies and agencies which provide credit or deposits, investment accounts and the like. Most of the competitors are significantly larger than Capitol's banks, individually and collectively, and have resources much larger than Capitol or its banks. 24 26 The small size of Capitol's banks limits the size of the loans each bank can make. All commercial banks have legal lending limits which are based primarily upon a bank's capital. Larger banks have significantly larger legal lending limits than small banks, such as Capitol's. While this can adversely impact the banks' ability to compete on loan transactions, the banks can make larger loans than their individual lending limit through having other banks, which can be affiliated or unaffiliated banks, participate in making the loan. Each of Capitol's banks generally operate from a single location. Competitors generally operate from multiple locations including branches and the Internet. The single locations of Capitol's banks are not perceived to be a limiting factor but are perceived to be a competitive advantage because: - the customer seeks a banking relationship, - the bank's decision-makers are on site, and - the bank makes house calls (courier service or other on-site delivery). EMPLOYEES At June 30, 1999, Capitol and its banks employed a total of 391 full time equivalent employees. None of the work force is unionized. Management believes that its relationships with employees is good. PROPERTIES Substantially all of the bank facility locations are leased. Each of the banks operate from a single location, except Capitol National Bank (which has one branch located in Okemos, Michigan). Ann Arbor Commerce Bank, in 1998, and Portage Commerce Bank, in 1997, relocated their main offices to substantially larger leased facilities (approximately 18,000 and 10,000 square feet, respectively) in response to asset growth and to better serve customers. Most of the other bank subsidiaries' facilities are generally small (i.e., less than 10,000 square feet), first floor offices with convenient access to parking. Some of the banks have drive-up customer service. The banks are typically located in or near high traffic centers of commerce in their respective communities. Customer service is enhanced through utilization of ATMs to process some customer-initiated transactions and some of the banks also make available a courier service to pick up transactions at customers' locations. The principal offices of Capitol are located within the same building as Capitol National Bank in Lansing, Michigan. Those headquarters include administrative, operations, accounting, and executive staff and Capitol's data center. Sun occupies executive office space adjacent to Camelback Community Bank in Phoenix, Arizona. Certain of the office locations are leased from related parties and are believed to be on terms comparable with terms with unrelated parties. Bank lease agreements typically have a lease term of 10 years plus renewal options. Capitol believes that its facilities are adequate for its operations, as now conducted. RELATIONSHIP WITH SUN Sun is 51% owned by Capitol. Sun completed an initial public offering in early July 1999 and its common stock is publicly traded. Sun is included in Capitol's financial statements as a consolidated subsidiary, it is also a separate reporting company to its shareholders, regulatory agencies and others. Capitol has entered into an anti-dilution agreement with Sun which requires Sun to afford to Capitol the opportunity to maintain Capitol's ownership percentage of Sun at 51%. Pursuant to Capitol's By-Laws, Joseph D. Reid, as President of Capitol, has authority to vote Sun's shares held by Capitol. Sun and Capitol, and their bank subsidiaries, share a number of common directors and executive officers. Sun's Chairman and Chief Executive Officer, Joseph D. Reid, is also Chairman, President and Chief Executive Officer of Capitol. Mr. Reid is also a significant shareholder of Sun and Capitol. Lee W. 25 27 Hendrickson is Executive Vice President and Chief Financial Officer of Sun and Capitol. Cristin Reid English is Vice President and General Counsel of Sun and Capitol, and director of two subsidiary banks of Capitol. Michael L. Kasten, Sun's Vice Chairman, is also a director of Capitol and is Chairman and a director of Portage Commerce Bank. Michael J. Devine, a director of Sun, is also a director of Oakland Commerce Bank, a subsidiary of Capitol. Messrs. Kasten and Devine both serve as directors of each of Sun's current subsidiaries, Sun and Nevada Community Bancorp Limited. Sun and its banks operate separately from Capitol. Although Sun's and Capitol's data processing systems are substantially similar, they are physically separate in different states and are not interdependent. Some of Sun's employee benefit plans are either patterned after Capitol's or are a part of a multiemployer plan with Capitol. Sun and Capitol jointly purchase some insurance, including property, casualty, directors' and officers' insurance. 26 28 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table lists the executive officers and directors of Capitol:
DIRECTOR AND/OR EXECUTIVE OFFICER NAME AGE POSITION SINCE ---- --- -------- ----------------- Joseph D. Reid....................... 56 Chairman, President, Chief Executive 1988 Officer and Director Robert C. Carr....................... 59 Treasurer, Executive Vice President and 1988 Director David O'Leary........................ 68 Secretary and Director 1988 Paul R. Ballard...................... 49 Executive Vice President and Director 1990 Bruce A. Thomas...................... 42 Executive Vice President and Chief 1998 Operating Officer David K. Powers...................... 53 Executive Vice President and Chief Credit 1990 Officer Lee W. Hendrickson................... 43 Executive Vice President and Chief 1991 Financial Officer Cristin Reid English................. 30 Vice President and General Counsel 1997 Louis G. Allen....................... 69 Director 1989 David L. Becker...................... 63 Director 1990 Douglas E. Crist..................... 58 Director 1988 James C. Epolito..................... 44 Director 1999 Gary A. Falkenberg................... 60 Director 1988 Joel I. Ferguson..................... 60 Director 1988 Kathleen A. Gaskin................... 57 Director 1988 H. Nicholas Genova................... 59 Director 1992 Michael L. Kasten.................... 54 Director 1990 L. Douglas Johns..................... 55 Director 1988 Leonard Maas......................... 77 Director 1995 Lyle W. Miller....................... 55 Director 1988
JOSEPH D. REID, CHAIRMAN, CHIEF EXECUTIVE OFFICER, DIRECTOR, is the founder of Capitol and Sun and most of their banks. He serves as Chairman, President and Chief Executive Officer of Capitol. Mr. Reid also holds the office of Chairman of the Board of Directors and Chief Executive Officer of Sun, and Chairman of the Board and Chief Executive Officer of each of its banks. Mr. Reid has been in the bank development business since 1982 and has an extensive background in the formation, organization and operation of community based banks. To date, Mr. Reid has organized 18 operating banks in the states of Michigan and Arizona. Mr. Reid is developing three additional bank holding companies to be located in Nevada, California, and Indiana. ROBERT C. CARR, TREASURER, EXECUTIVE VICE PRESIDENT AND DIRECTOR, is President and a director of Indiana Community Bancorp Limited and will serve as Chairman and CEO of its future bank subsidiaries in Indiana. He served as President and CEO of Capitol National Bank from inception through 1998. Mr. Carr is a member of the board of directors of Capitol, Capitol National Bank, Ann Arbor Commerce Bank, Brighton Commerce Bank, Macomb Community Bank and Detroit Commerce Bank. He also serves as Chairman of Capitol National Bank, which he co-founded with Mr. Reid in 1982. DAVID O'LEARY, SECRETARY AND DIRECTOR, is Chairman of O'Leary Paint Company, a Lansing, Michigan-based producer and retailer of paint and ancillary products. He has been a director of Capitol since 1988 and, prior to that, was a founding director of Capitol National Bank. 27 29 PAUL R. BALLARD, EXECUTIVE VICE PRESIDENT AND DIRECTOR, is President and CEO of Portage Commerce Bank. He co-founded Portage Commerce Bank with Mr. Reid in 1988. He also serves as a member of the board of directors of Portage Commerce Bank, Grand Haven Bank, Muskegon Commerce Bank, Kent Commerce Bank, Paragon Bank & Trust and also serves as Chief Operating Officer of Indiana Community Bancorp Limited. BRUCE A. THOMAS, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER, joined Capitol in early 1998 to oversee Capitol's risk management function, including asset/liability management, insurance, loan review, internal audit and related functions. In addition to those responsibilities, he became Chief Operating Officer in early 1999 and has responsibility for the day-to-day operation functions of Capitol. Previously, Mr. Thomas held senior management positions with the Office of the Comptroller of the Currency, eastern region. DAVID K. POWERS, EXECUTIVE VICE PRESIDENT AND CHIEF CREDIT OFFICER, has more than 20 years of commercial credit experience. He has been Chief Credit Officer since 1990. LEE W. HENDRICKSON, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, has served as Chief Financial Officer for Capitol since 1991 and has served as Executive Vice President and Chief Financial Officer of Sun since its inception. Upon commencement of operations, he will also serve as Executive Vice President and Chief Financial Officer of Nevada Community Bancorp Limited and Indiana Community Bancorp Limited. Prior to joining Capitol, he was engaged in the practice of public accounting with a major international public accounting firm, with emphasis on community banking. CRISTIN REID ENGLISH, VICE PRESIDENT AND GENERAL COUNSEL, has served as Vice President of Corporate Development and General Counsel of Capitol and Sun since September of 1997. Upon commencement of operations, she will also serve as Vice President and General Counsel of Nevada Community Bancorp Limited and Indiana Community Bancorp Limited. Prior to these positions, she served as Vice President of Access BIDCO, Incorporated (a specialized commercial finance company) from 1995 to 1998, and from 1993 to 1995 she was engaged in the private practice of law in Lansing, Michigan. She currently serves as a director of Ann Arbor Commerce Bank and Portage Commerce Bank and is a director of Nevada Community Bancorp Limited. Ms. English is the daughter of Joseph D. Reid. LOUIS G. ALLEN, DIRECTOR, is a retired bank executive. DAVID L. BECKER, DIRECTOR, is President of Becker Insurance Agency, P.C., a full-service insurance agency located in Portage, Michigan. Mr. Becker is also a director of Portage Commerce Bank. DOUGLAS E. CRIST, DIRECTOR, is President of Developers of S.W. Florida, Inc. He has been a director of Capitol since 1988 and, prior to that, was a founding director of Capitol National Bank. JAMES C. EPOLITO, DIRECTOR, is President and CEO of the Accident Fund Company, which provides workers' compensation insurance coverage to Michigan employers. GARY A. FALKENBERG, DIRECTOR, is a doctor of osteopathic medicine. He has been a director of Capitol since 1988 and, prior to that, was a founding director of Capitol National Bank. JOEL I. FERGUSON, DIRECTOR, is Chairman of Ferguson Development, LLC. Additionally, he is General Partner, F&S Development Co. (a real estate development firm). He also serves as a member of the board of trustees of Michigan State University. He has been a director of Capitol since 1988 and, prior to that, was a founding director of Capitol National Bank. KATHLEEN A. GASKIN, DIRECTOR, is Associate Broker/State Appraiser, Tomie Raines, Inc. Realtors. She has been a director of Capitol since 1988 and, prior to that, was a founding director of Capitol National Bank. H. NICHOLAS GENOVA, DIRECTOR, is Chairman and CEO of Washtenaw News Company, Inc. and President of H.N. Genova Development Company. Additionally, he serves as a member of the board of directors of Ann Arbor Commerce Bank. 28 30 L. DOUGLAS JOHNS, DIRECTOR, is President of Mid-Michigan Investment Company. He has been a director of Capitol since 1988 and, prior to that, was a founding director of Capitol National Bank. MICHAEL L. KASTEN, DIRECTOR, is Managing Partner of Kasten Investment, LLC. Additionally, he is Vice President, Kasten Insulation Services, Inc. He serves as Chairman and Director of Portage Commerce Bank. Additionally, he is Director and Vice Chairman of Sun Community Bancorp and is a Director of each of its bank subsidiaries. Additionally, he serves on the board of directors of Nevada Community Bancorp Limited. LEONARD MAAS, DIRECTOR, is President of Gillisse Construction Company, an underground utility construction firm, and is a partner of CP Limited Partnership. He also serves as a director of Paragon Bank & Trust. LYLE W. MILLER, DIRECTOR, is President of SERVCO, Inc., a provider of credit card and computer enhancement services. Additionally, he is President of Northern Connections, LLC (a property leasing company); President, Northern Leasing and Sales (property leasing entity); President, Lansing Ice & Gymnastics Center; President, McMiller Holding Company (land holding company); President, Cove Leasing & Rental (boat rental company); and President, Ironton Cove Landing, Inc. (a restaurant). He has been a director of Capitol since 1988 and, prior to that, was a founding director of Capitol National Bank. STOCK OWNERSHIP The following table presents information regarding the beneficial ownership as of July 15, 1999 of Capitol's common stock: - Each beneficial owner of more than 5% of Capitol's outstanding common shares, - Each director or executive officer of Capitol owning 1% or more of Capitol's outstanding common shares, and - All of Capitol's directors and executive officers as a group. Unless otherwise indicated, each of the shareholders listed below has sole voting and investment power with respect to the shares beneficially owned and the address of each of the listed shareholders is 200 Washington Square North, One Business and Trade Center, Lansing, MI 48933.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING(1) ------------------------- ------------------------- NAME AND TITLE OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE ---------------------------------- ------ ---------- ------ ---------- Joseph D. Reid, Chairman and CEO................ 1,036,607(2) 15.18% 1,225,495(6) 14.06% Paul R. Ballard, Executive Vice President....... 86,072(3) 1.35% 86,072(3) 1.07% Robert C. Carr, Treasurer and Executive Vice President..................................... 68,336(4) 1.07% 68,336(4) 0.85% L. Douglas Johns, Director...................... 96,160 1.52% 96,160 1.20% Michael L. Kasten, Director..................... 78,741 1.24% 78,741 0.98% Leonard Maas, Director.......................... 94,807 1.49% 94,807 1.18% All directors and executive officers as a group (33 persons).................................. 1,909,633(5) 27.66% 2,209,633(7) 24.82%
- ------------------------- (1) Assuming no purchase of common stock in this offering. (2) Includes 485,119 stock options, each to purchase one share of common stock. (3) Includes 21,600 stock options, each to purchase one share of common stock. (4) Includes 39,600 stock options, each to purchase one share of common stock. (5) Includes 559,519 stock options, each to purchase one share of common stock. (6) Includes 674,007 stock options, each to purchase one share of common stock. (7) Includes 859,519 stock options, each to purchase one share of common stock. 29 31 STOCK OPTION PROGRAM Under the terms of Capitol's employment agreement with Joseph D. Reid, additional stock options will be granted to Mr. Reid when Capitol issues additional shares of common stock so that total options granted to Mr. Reid equal 15% of shares issued. In May 1999, Capitol's board of directors approved a proposal submitted by its compensation committee to negotiate a reduction in the percentage of future stock options to be granted to 10% with the remaining 5% to be granted as a pool of stock options to directors and executive officers of Capitol to be allocated to individuals by Capitol's board of directors. All stock options granted have an exercise price equal to fair market value at the time of grant and a seven-year exercise period. Upon completion of this offering, an additional 300,000 stock options will be granted, including 188,888 stock options to be granted to Mr. Reid, based on the proposed modification to the percentage to be granted to Mr. Reid discussed above, in accordance with his employment agreement (assuming the underwriters exercise their option to purchase 255,000 additional shares of common stock). 30 32 SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under federal and state law. References under this heading to applicable statutes or regulations are brief summaries of portions of the regulations that do not purport to be complete and that are qualified in their entirety by reference to those statutes and regulations. Any change in applicable laws or regulations may have a material adverse effect on Capitol's business. Furthermore, formation of additional banks may subject Capitol and its subsidiaries to additional supervision and regulation under various state laws. BANK HOLDING COMPANY REGULATION FEDERAL RESERVE BOARD. Capitol is regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act (the "BHC Act"). As a result, Capitol is required to file periodic reports, and other additional information as the Federal Reserve Board may require, pursuant to the BHC Act. Capitol is examined by the Federal Reserve Board, which may also examine its banking and non-banking affiliates. Because Sun and other second tier bank holding companies of Capitol are bank holding companies, ("BHC subsidiaries") they are similarly regulated and examined by the Federal Reserve Board. ACQUISITIONS AND ACTIVITIES. Under the BHC Act, Capitol and its BHC subsidiaries must obtain prior Federal Reserve Board approval for the acquisition of more than 5% of the voting shares, or substantially all the assets, of any bank or bank holding company. They must also obtain approval for any merger or consolidation with another bank holding company. With certain exceptions, the BHC Act prohibits Capitol and its BHC subsidiaries from acquiring the voting shares or assets of any company that is not a bank or bank holding company. It also prevents Capitol and its BHC subsidiaries from engaging in any activity other than banking, managing or controlling banks, or performing services for its authorized affiliates. Capitol and its BHC subsidiaries may, however, acquire an interest in a company or engage in an activity if the Federal Reserve Board determines that it is so closely related to banking or managing or controlling banks that it should be permitted. Even if a specific activity has previously been approved, the Federal Reserve Board may still order Capitol and its BHC subsidiaries to terminate the activity, or to terminate its ownership or control of any subsidiary, if it constitutes a serious risk to the financial safety, soundness or stability of any banking subsidiaries. ACQUISITIONS OF CONTROL OVER A BANK HOLDING COMPANY. Under the Change in Bank Control Act, any person is required to give notice to the Federal Reserve Board upon acquiring 10% of the common stock of Capitol. In addition, any corporation, partnership, trust or organized group that acquires 25% of more of Capitol's common stock may have to obtain the Federal Reserve Board's approval to become a bank holding company and as a result will become subject to its regulations. CAPITAL ADEQUACY REQUIREMENTS. Under Federal Reserve Board policy, Capitol is expected to act as a source of financial strength and commit resources to support its banking affiliates. It is the Federal Reserve Board's position that Capitol must provide support even when it would otherwise not consider itself able to do so. The Federal Reserve Board has adopted risk-based capital requirements for assessing the capital adequacy of bank holding companies. These standards define regulatory capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. The Federal Reserve Board's risk-based guidelines apply on a consolidated basis for bank holding companies with consolidated assets of $150 million or more and on a "bank-only" basis for bank holding companies with consolidated assets of less than $150 million. Under the Federal Reserve Board's risk-based guidelines, capital is classified into two categories: - Tier 1 or "core" capital, which consists of the following: - common shareholders' equity, - a portion of the preferred securities, 31 33 - minority interests in the common equity accounts of consolidated affiliates, and - certain other capital instruments. Tier 1 capital is reduced by goodwill, certain other intangible assets and certain investments in other corporations. - Tier 2 capital, which consists of the following: - allowance for loan and lease losses, - the remainder of the preferred securities, - "hybrid capital instruments," - perpetual debt and mandatory convertible debt securities, - term subordinated debt, - intermediate term preferred stock, and - certain other capital instruments excluded from Tier 1 capital. Under the Federal Reserve Board's capital guidelines, bank holding companies are required to maintain a minimum ratio of qualifying capital to risk-weighted assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 capital. The Federal Reserve Board also requires a minimum leverage ratio of Tier 1 capital to total assets of 3.0%, except that bank holding companies not rated in the highest category under the regulatory rating system are required to maintain a leverage ratio of 1.0% to 2.0% above the minimum. The 3.0% Tier 1 capital to total assets ratio constitutes the minimum leverage standard for the strongest bank holding companies under the rating system, and is used in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations. In addition, the Federal Reserve Board continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities. In its capital adequacy guidelines, the Federal Reserve Board emphasizes that these standards are supervisory minimums and that banking organizations generally are expected to operate well above the minimum ratios. These guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum levels. Capitol's banking affiliates are subject to these requirements. They are also subject to requirements of the FDIC, state banking regulatory agencies and other agencies, whether as a condition of charter approval or other circumstances. BANK REGULATION The deposits of Capitol's affiliate banks are insured under the provisions of the Federal Deposit Insurance Act. As a result, the state chartered affiliate banks are regulated by the FDIC which supervises compliance with federal law and regulations. These laws and regulations place restrictions on loans between FDIC-insured banks and their directors, executive officers and other controlling persons. The OCC supervises Capitol National Bank's compliance with federal laws and regulations. Capitol is also affected by the credit policies of other monetary authorities, including the Federal Reserve Board, which regulate the national supply of bank credit. These policies influence the overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Capitol's state chartered banks are subject to regulation by the banking regulators of the state in which the bank is chartered. The state banking regulators supervise compliance with the state banking 32 34 laws and regulations from time to time and also review compliance with applicable federal banking laws and regulations. State banking regulators often cooperate with and coordinate their activities with federal regulators, but their primary emphasis is on compliance with state banking laws and regulations. FINANCIAL INSTITUTION REGULATION GENERALLY TRANSACTIONS WITH AFFILIATES. State and federal regulatory agencies impose various restrictions on transactions between a bank and its holding company or other affiliates. These transactions include loans and other extensions of credit, purchases of securities and other assets, and payments of fees or other distributions. In general, these restrictions may limit or prohibit the amount of transactions between Capitol and its affiliates. The restrictions also require that transactions with affiliates be on terms comparable to those with unaffiliated entities. LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS. Loans between Capitol and its affiliates and any of their respective bank directors, executive officers or principal shareholders must be made on substantially the same terms as a comparable transaction with a person who is not in the same position. This restriction does not apply if the loan is made pursuant to a compensation or benefit plan that is widely available to all of Capitol's employees and does not favor insiders. Under Federal law, outstanding loans to Capitol's and its affiliates' executive officers, directors, principal shareholders and affiliates generally may not exceed 15% of its unimpaired capital and surplus for loans that are not fully secured and 10% of unimpaired capital and surplus for loans that are fully secured by readily marketable collateral. A majority of Capitol's disinterested directors must approve any loans to insiders in excess of the greater of $25,000 or 5% of capital and unimpaired surplus. State laws may additionally limit the aggregate value of loans made to any one director, officer, or employee. DIVIDEND LIMITATIONS. As a bank holding company, Capitol is primarily dependent upon dividend distributions from its bank affiliates. A major source of Capitol's revenue comes from dividends received or expected to be received from its bank affiliates. As a result, Capitol's ability to pay dividends is dependent on the amount of dividends paid by its bank affiliates. Capitol's bank affiliates are prohibited from paying dividends until start up losses are recovered and a cumulative profit is made. No assurance can be given that Capitol's bank affiliates will, in any circumstances, pay dividends. Federal and state statutes and regulations impose restrictions on Capitol's ability to pay dividends: - Federal Reserve Board policy provides that a bank holding company should not pay dividends unless: - the bank holding company's net income over the prior year is sufficient to fully fund the dividends, and - the prospective rate of earnings retention appears consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its affiliates. In addition, Capitol's ability to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"). Capitol's right and the right of its shareholders and creditors to participate in any distribution of the assets or earnings of Capitol's affiliates exists only after satisfaction of the prior claims of creditors of the affiliate. In addition to the restrictions on dividends imposed by the Federal Reserve Board, Michigan law provides that dividends may be declared or paid if, after the distribution, Capitol can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities. Arizona law provides that dividends may be declared by Sun as permitted by the general laws governing Arizona corporations, except that approval of the regulatory authority is required prior to the declaration of any dividend by Sun which is payable out of its capital surplus. 33 35 YEAR 2000 COMPLIANCE. The federal banking agencies, through the Federal Financial Institutions Examination Council, expect the senior management and board of directors of banks and their holding companies to be actively involved in overseeing the Year 2000 issue. The agencies expect active involvement in the readiness and monitoring of business risks posed not only by vendors of computer systems but business partners, counter parties, and major loan customers. The Office of the Controller of the Currency ("OCC") issued an advisory letter in May 1997 providing comprehensive Year 2000 guidance and establishing a schedule for banks to achieve Year 2000 compliance. Senior management is expected to report at least quarterly to the board of directors on Year 2000 compliance progress and to notify the board immediately if critical benchmarks are missed. The agencies have indicated that Year 2000 readiness progress will be required as a condition to regulatory approval of expansion proposals. Enforcement actions may also be brought against banking organizations that have inadequate Year 2000 readiness programs. STANDARDS FOR SAFETY AND SOUNDNESS The FDICIA requires the Federal Reserve Board, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to the FDICIA. The guidelines establish general standards relating to: - internal controls and information systems, - internal audit systems, - loan documentation, - credit underwriting, - interest rate exposure, - asset growth, - compensation, and - fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice. Compensation is deemed excessive when the amount paid is unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. The Federal Reserve Board, FDIC and the OCC have adopted regulations that authorize the agencies to order non-complying institutions to submit a compliance plan. If the institution fails to submit or implement an acceptable compliance plan, the applicable agency must issue an order directing action to correct the deficiency. The agency may also issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of the FDICIA. If an institution fails to comply with an order the agency may seek to enforce it through judicial proceedings and impose civil money penalties. The agencies may also propose guidelines for asset quality and earnings standards. A range of other provisions of the FDICIA include: - requirements applicable to closure of branches; - additional disclosures to depositors with respect to terms and interest rates applicable to deposit accounts; - uniform regulations for extensions of credit secured by real estate; 34 36 - restrictions on activities of, and investments by, state-chartered banks; - modification of accounting standards to conform to generally accepted accounting principles including (1) the reporting of off-balance sheet items and (2) supplemental disclosure of the estimated fair market value of assets and liabilities in financial statements filed with the banking regulators; - increased penalties in making or failing to file assessment reports with the FDIC; - greater restrictions on extensions of credit to directors, officers and principal shareholders; and - increased reporting requirements on agricultural loans and loans to small businesses. The Federal Reserve Board, OCC, FDIC and other federal banking agencies' risk-based capital standards provide for consideration of interest rate risk when assessing the capital adequacy of a bank. The agencies must explicitly include a bank's exposure to declines in the economic value of its capital due to changes in interest rates as a factor in evaluating its capital adequacy. The agencies have also adopted a joint agency policy statement providing guidance to banks for managing interest rate risk. The policy statement emphasizes the importance of adequate oversight by management and a sound risk management process. The assessment of interest rate risk management made by the banks' examiners will be incorporated into the banks' overall risk management rating and used to determine the effectiveness of management. PROMPT CORRECTIVE ACTION. The FDICIA requires the federal banking regulators, including the Federal Reserve Board, the OCC and the FDIC, to take prompt corrective action with respect to depository institutions that fall below certain capital standards. It also prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions including the following: - restrictions on growth; - restrictions on investment activities; - restrictions on capital distributions; - restrictions on affiliate transactions; and - required to submit a capital restoration plan guaranteed in part by any company having control of the institution. In other respects, the FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for under-capitalized institutions. The capital-based prompt corrective action provisions of the FDICIA and their implementing regulations apply to FDIC- insured depository institutions. Federal banking agencies, however, have indicated that they may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon affiliate insured depository institutions pursuant to the prompt corrective action provisions of the FDICIA. INSURANCE OF DEPOSIT ACCOUNTS. The banks' deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $100,000 per depositor in most cases. FDIC insurance premiums are assessed on a risk-based system, meaning that the amount of a depositary institution's premium depends on its risk classification. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve certain designated reserve ratios in the insurance funds. The FDIC may also impose special additional assessments. Each depository institution is assigned to one of three capital groups: "well capitalized," "adequately capitalized" or "undercapitalized". Within each capital group, institutions are assigned to one of three subgroups. The institution is assigned to a subgroup on the basis of supervisory evaluations by the institution's primary supervisory authority and other information the FDIC determines to be relevant to its financial condition and the risk posed to the deposit insurance fund. 35 37 An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC's current assessment rate schedule for the Bank Insurance Fund ("BIF") provides an assessment rate of zero for well-capitalized institutions with the highest supervisory ratings and the schedule calls for an assessment rate of 0.27% of insured deposits for institutions in the lowest risk assessment classification. ENFORCEMENT ACTIONS. Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions include the following: - the imposition of a capital restoration plan and capital directive, - receivership, - conservatorship, or - the termination of deposit insurance. INTERSTATE BANKING AND BRANCHING LEGISLATION. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, adequately capitalized and adequately managed bank holding companies are allowed to acquire banks across state lines after complying with various regulations. It also permits banks to merge with one another across state lines resulting in a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, a bank could then establish and acquire additional branches at any location in the state where the bank involved in the interstate merger could have established or acquired branches under applicable federal and state law. COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act is intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the bank. The CRA regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications regarding establishing branches, merger or other bank or branch acquisitions. By law, federal banking agencies make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in any transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations discussed in this prospectus, Capitol's subsidiary banks are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include, among others, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Fair Housing Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with consumers when taking deposits or making loans to such customers. Capitol's banks must comply with the applicable provisions of these consumer protection laws and regulations as part of their conduct of banking. MONETARY POLICY AND ECONOMIC CONDITIONS The earnings of banks and bank holding companies are affected by general economic conditions and by the fiscal and monetary policies of federal regulatory agencies, including the Federal Reserve Board. Through open market transactions, variations in the discount rate and the establishment of reserve requirements, the Federal Reserve Board exerts considerable influence over the cost and availability of funds obtainable for lending or investing. 36 38 The above monetary and fiscal policies and resulting changes in interest rates have affected the operating results of all commercial banks in the past and are expected to do so in the future. It is impossible to predict the nature or the extent of any effects which fiscal or monetary policies may have on Capitol's business and earnings. 37 39 DESCRIPTION OF CAPITAL STOCK Capitol's Articles of Incorporation, as amended to date, authorize the issuance of up to 25,000,000 shares of common stock, without par value. Capitol's articles of incorporation do not authorize the issuance of any other class of stock. As of June 30, 1999, 6,344,886 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 offered by this 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 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 will have no preemptive rights to subscribe to newly issued shares. Moreover, it will be possible that additional shares of common stock would be issued for the purpose of making an acquisition by an unwanted suitor of a controlling interest in Capitol more difficult, time consuming or costly or would otherwise discourage an attempt to acquire control of Capitol. Under such circumstances, the availability of authorized and unissued shares of common stock may make it more difficult for shareholders to obtain a premium for their shares. Such authorized and unissued shares could be used to create voting or other impediments or to frustrate a person seeking to obtain control of Capitol by means of a merger, tender offer, proxy contest or other means. Such shares could be privately placed with purchasers who might cooperate with the board of directors of Capitol in opposing such an attempt by a third party to gain control of Capitol. The issuance of new shares of common stock could also be 38 40 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 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 contain other provisions which could be utilized by Company to impede certain 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 supermajority vote of 90% of the shareholders and no less than two-thirds of the votes of non-interested shareholders must approve a "business combination." The act defines a "business combination" to encompass any merger, consolidation, share exchange, sale of assets, stock issue, liquidation, or reclassification of securities involving an "interested shareholder" or certain "affiliates." An "interested 39 41 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. At this time, Capitol's management beneficially owns (including immediately exercisable stock options) control of approximately 27.66% of the outstanding common stock. It is now unknown what percentage will be owned by management upon completion of the offering. 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. 40 42 UNDERWRITING Subject to the terms and conditions of the Purchase Agreement among Capitol and the Representatives, on behalf of the Underwriters, the Underwriters named below have severally agreed to purchase from Capitol and the selling shareholder, the following respective numbers of shares of common stock at the initial public offering price less the underwriting discount set forth on the cover page of this prospectus.
NAME NUMBER OF SHARES ---- ---------------- Keefe, Bruyette & Woods, Inc. .............................. Raymond James & Associates, Inc. ........................... U.S. Bancorp Piper Jaffray Inc. ............................ --------- Total.................................................. 1,700,000 =========
The Purchase Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all such shares of the common stock if any of such shares are purchased. The Underwriters are obligated to take and pay for all of the shares of common stock offered hereby (other than those covered by the over-allotment option described below) if any are taken. Capitol has been advised by the Representatives of the Underwriters that the Underwriters propose to offer such shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After the offering, the offering price and other selling terms may be changed by the Representatives and the Underwriters. Pursuant to the Purchase Agreement, Capitol has granted to the Underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to 255,000 additional shares of common stock at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus, solely to cover over-allotments. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares in such table, and Capitol will be obligated, pursuant to the option, to sell such shares to the Underwriters. Capitol, each of its directors and executive officers and certain other shareholders of the Company have agreed not to sell or otherwise dispose of any shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of the Representatives of the Underwriters, except that Capitol may issue shares of common stock upon the exercise of currently outstanding options. The Representatives of the Underwriters have advised Capitol that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Capitol has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. Until the distribution of the common stock is completed, rules of the SEC may limit the ability of the Underwriters and certain selling group members to bid for and purchase the common stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock. If the Underwriters create a short position in the common stock in connection with the offering, i.e., if they sell a greater aggregate number of shares of common stock than is set forth on the cover page of this prospectus, the Underwriters may reduce the short position by purchasing shares of common stock in the 41 43 open market. The Underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Underwriters may also impose a penalty bid on certain selling group members. This means that if the Underwriters purchase common stock in the open market to reduce the selling group members' short position or to stabilize the price of the common stock, they may reclaim the amount of the selling concession from the selling group members who sold those shares of common stock as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither Capitol nor the Representatives make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither Capitol nor the Representatives make any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Underwriters and dealers may engage in passive market making transactions in the shares of common stock in accordance with Rule 103 of Regulation M promulgated by the SEC. In general, a passive market maker may not bid for, or purchase, shares of common stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the common stock during a specified two month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq electronic inter-dealer reporting system. Passive market making may stabilize or maintain the market price of the common stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. 42 44 LEGAL MATTERS The legality of the shares of common stock offered hereby will be passed upon for Capitol by Strobl Cunningham Caretti & Sharp, P.C., Bloomfield Hills, Michigan. Certain legal matters will be passed upon for the Underwriters by Varnum, Riddering, Schmidt & Howlett LLP, Grand Rapids, Michigan. EXPERTS The consolidated financial statements of Capitol incorporated in this prospectus by reference to Capitol's annual report on Form 10-K for the fiscal year ended December 31, 1998, have been audited by BDO Seidman, LLP, independent auditors, as stated in their report, which is incorporated here by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents are incorporated by reference into this prospectus: - Capitol's annual report on Form 10-K for the fiscal year ended December 31, 1998, - Capitol's report on Form 10-Q for the quarterly period ended March 31, 1999, and - Capitol's report on Form 10-Q for the quarterly period and six months ended June 30, 1999. 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 prospectus shall be deemed to be incorporated by reference into this prospectus and to be a part hereof from the date of filing such documents. Any statement contained in this 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 prospectus to the extent that a statement contained in this 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 prospectus. This prospectus incorporates documents by reference which are not presented here or delivered with this document. These documents (excluding exhibits unless specifically incorporated in these documents) are available without charge upon written or oral request to Capitol Bancorp Ltd., 200 Washington Square North, 4th Floor, Lansing, Michigan 48933, attention: General Counsel, telephone number (517) 487-6555. 43 45 WHERE YOU CAN FIND MORE INFORMATION Capitol and Sun are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance with the Exchange Act, file reports, proxy statements, information statements and other information with the SEC. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Citicorp Center, 14th Floor, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. Copies of this material can also be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. This material also may be accessed electronically by means of the SEC's home page on the Internet at www.sec.gov. Capitol's common stock trades on the Nasdaq National Market under the symbol "CBCL." In addition to Capitol's common stock, trust-preferred securities of Capitol Trust I are also traded on the Nasdaq National Market under the symbol "CBCLP." Documents filed by Capitol with the SEC also can be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Capitol has filed a registration statement on Form S-3 with the SEC under the Securities Act of 1933 in connection with the offering. This prospectus does not contain all of the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the SEC. The registration statement, including any amendments, schedules and exhibits thereto, is available for inspection and copying as set forth above. Statements contained in this prospectus as to the contents of any contract or other document referred to in this document include all material terms of such contract or other documents but are not necessarily complete, and in each instance reference is made to the copy of any such contract or other document which may have been filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. 44 46 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. TABLE OF CONTENTS
PAGE ---- Cautionary Statement Regarding Forward-Looking Information......... 3 Prospectus Summary.................... 4 Selected Consolidated Financial Data................................ 8 Risk Factors.......................... 10 Recent Developments................... 15 Use of Proceeds....................... 16 Capitalization........................ 17 Dividends and Market For Common Stock............................... 18 Business.............................. 19 Management............................ 27 Supervision and Regulation............ 31 Description of Capital Stock.......... 38 Underwriting.......................... 41 Legal Matters......................... 43 Experts............................... 43 Incorporation of Certain Documents By Reference........................... 43 Where You Can Find More Information... 44
CAPITOL BANCORP LTD LOGO 1,700,000 SHARES $ PER SHARE CAPITOL BANCORP LTD. COMMON STOCK PROSPECTUS KEEFE, BRUYETTE & WOODS, INC. RAYMOND JAMES & ASSOCIATES, INC. U.S. BANCORP PIPER JAFFRAY SEPTEMBER , 1999 47 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Expenses in connection with the issuance and distribution of the securities being registered are estimated as follows, all of which are to be paid by the Company: SEC Registration Fee........................................ $ 10,071 NASD Filing Fee............................................. 4,123 Nasdaq Additional Listing Fee............................... 17,500 Printing and Mailing Expenses............................... 50,000 Accounting Fees............................................. 35,000 Transfer and Registrar's Fees............................... 5,000 Legal Fees and Expenses..................................... 25,000 Blue Sky Fees and Expenses.................................. 5,000 Miscellaneous............................................... 98,306 -------- Total.................................................. $250,000 ========
ITEM 15. 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 16. EXHIBITS. Reference is made to the Exhibit Index which appears at page II-5 of the Registration Statement. II-1 48 ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the forgoing provisions described in Item 15 above, 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 Securities 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 Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (a) 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 shall be deemed to be the initial bona fide offering thereof. (b) 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. (c) The undersigned registrant hereby undertakes that, for the 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 Securities Exchange Act of 1934, as amended (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. (d) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (e) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus 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. II-2 49 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Lansing, Michigan on September 2, 1999. CAPITOL BANCORP LTD. By: /s/ JOSEPH D. REID ------------------------------------ Joseph D. Reid Chairman of the Board President and Chief Executive Officer POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to this Registration Statement has been signed by the following persons in the capacities indicated on September 2, 1999:
SIGNATURE TITLE --------- ----- /s/ JOSEPH D. REID Chairman of the Board, President and Chief - --------------------------------------------- Executive Officer, Director (Principal Joseph D. Reid Executive Officer) /s/ LEE W. HENDRICKSON Chief Financial Officer (Principal Financial - --------------------------------------------- and Accounting Officer) Lee W. Hendrickson /s/ ROBERT C. CARR* 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 /s/ DOUGLAS E. CRIST* Director - --------------------------------------------- Douglas E. Crist /s/ JAMES C. EPOLITO* Director - --------------------------------------------- James C. Epolito /s/ GARY A. FALKENBERG* Director - --------------------------------------------- Gary A. Falkenberg /s/ JOEL I. FERGUSON* Director - --------------------------------------------- Joel I. Ferguson /s/ KATHLEEN A. GASKIN* Director - --------------------------------------------- Kathleen A. Gaskin
II-3 50
SIGNATURE TITLE --------- ----- /s/ H. NICHOLAS GENOVA* Director - --------------------------------------------- H. Nicholas Genova /s/ L. DOUGLAS JOHNS* Director - --------------------------------------------- L. Douglas Johns /s/ MICHAEL L. KASTEN* Director - --------------------------------------------- Michael L. Kasten /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-4 51 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT NUMBER AND DESCRIPTION PAGE ------------------------------ ------------ 1 -- Underwriting Agreement. *** 3(i) -- Amendment to Articles of Incorporation dated June 30, ** 1999. 5 -- Opinion re legality of shares to be issued. ** 10.1 -- Employment Agreement by and between Sun Community Bancorp * Limited and Joseph D. Reid. (Exhibit 10.1 of Sun Community Bancorp Limited). 10.2 -- Employment Agreement by and between Sun Community Bancorp * Limited and John S. Lewis. (Exhibit 10.7 of Sun Community Bancorp Limited). 10.3 -- Anti-dilution Agreement by and between Sun Community * Bancorp Limited and Capitol Bancorp Ltd. (Exhibit 10.10 of Sun Community Bancorp Limited) 21 -- Subsidiaries of Capitol Bancorp Ltd. ** 23.1 -- Consent of BDO Seidman, LLP, independent public *** accountants. 23.2 -- Consent of Strobl Cunningham Caretti & Sharp, P.C. ** (included in their opinion filed as Exhibit 5). 24 -- Powers of Attorney (set forth on signature page included ** in Registration Statement).
- ------------------------- * Incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 of Sun Community Bancorp Limited (Registration No. 333-76719) dated June 15, 1999. ** Previously filed. *** Filed herewith II-5 EX-1 2 UNDERWRITING AGREEMENT 1 CAPITOL BANCORP LTD. (a Michigan corporation) 1,700,000 Shares of Common Stock (No Par Value Per Share) PURCHASE AGREEMENT , 1999 KEEFE, BRUYETTE & WOODS, INC. US BANCORP PIPER JAFFRAY, INC. RAYMOND JAMES & ASSOCIATES, INC. as Representatives of the several Underwriters c/o Keefe, Bruyette & Woods, Inc. 85th Floor Two World Trade Center New York, New York 10048 Ladies and Gentlemen: Capitol Bancorp Ltd., a Michigan corporation (the "Company") confirms its agreement with Keefe, Bruyette & Woods, Inc. ("Keefe Bruyette") and each of the other Underwriters named in Schedule A hereto (collectively, the "Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Keefe Bruyette, US Bancorp Piper Jaffray, Inc. and Raymond James & Associates, Inc. are acting as representatives (in such capacity, the "Representatives"), with respect to (i) the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, no par value per share, of the Company ("Common Stock") set forth in Schedules A and B hereto and (ii) the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 255,000 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 1,700,000 shares of Common Stock (the "Initial Securities") to be purchased by the Underwriters and all or any part of the 255,000 shares of Common Stock subject to the option described in Section 2(b) hereof (the "Option Securities") are hereinafter called, collectively, the "Securities". 2 The Company understands that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-84009) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The information included in such prospectus or in such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the form first furnished to the Underwriters for use in connection with the offering of the Securities is herein called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary prospectus dated September 2, 1999 together with the Term Sheet and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement, any preliminary prospectus or the Prospectus (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, any 2 3 preliminary prospectus or the Prospectus shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the Registration Statement, such preliminary prospectus or the Prospectus, as the case may be. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows: (i) Compliance with Registration Requirements. The Company meets the requirements for use of Form S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither the Prospectus nor any amendments or supplements thereto, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through Keefe Bruyette expressly for use in the Registration Statement or Prospectus. Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act 3 4 Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Incorporated Documents. The documents incorporated or deemed to be incorporated by reference in the Registration Statement and the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Prospectus, at the time the Registration Statement became effective, at the time the Prospectus was issued and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (iii) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements. The financial statements included in the Registration Statement and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved except as disclosed therein. The supporting schedules, if any, included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected consolidated financial data included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. (v) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the Common Stock and guaranteed preferred beneficial interests in the Company's 4 5 subordinated debentures in amounts per share and per preferred security that are consistent with past practice, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Michigan, and is duly registered under Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of Subsidiaries. Each direct and indirect subsidiary (whether wholly or partially owned by the Company) of the Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable (except to the extent provided, as to Michigan bank Subsidiaries, in Section 201 of the Michigan Bank Code of 1969, and as to the national bank Subsidiary in Section 55 of the National Bank Act or to the extent provided by 12 U.S.C. Section 1831o) and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. None of the outstanding shares of capital stock of any Subsidiary was issued in violation of the 1933 Act, the 1933 Act Regulations or any state securities laws or regulations. The only subsidiaries of the Company are the subsidiaries listed on Exhibit 21 to the Registration Statement. Sun Community Bancorp Limited is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Each of Nevada Community Bancorp, California Community Bancorp, Sunrise Capital Corp. and Indiana Community Bancorp will, at the time of becoming a bank holding company, be duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The deposit accounts of each Subsidiary that is a bank are insured by the Bank Insurance Fund administered by the Federal Deposit Insurance Corporation up to the maximum amount provided by law, and 5 6 no proceedings for the modification, termination or revocation of such insurance are pending or, to the knowledge of the Company, threatened. (viii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus, pursuant to the exercise of convertible securities or options referred to in the Prospectus, or pursuant to the issuance of the Company's common stock to shareholders of Macomb Community Bank in exchange for issued and outstanding shares of Macomb Community Bank). The shares of issued and outstanding capital stock, have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock, was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (ix) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company. (x) Authorization and Description of Securities. The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectus and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (xi) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or 6 7 constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xii) Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xiii) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiv) Accuracy of Exhibits. There are no contracts or documents which are required to be described in the Registration Statement, the Prospectus or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required. (xv) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, 7 8 service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xvi) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (xvii) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xviii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectus, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights 8 9 of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xix) Compliance with Cuba Act. The Company has complied with, and is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. (xx) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxi) Environmental Laws. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (xxii) Tax Matters. The Company and its subsidiaries have filed all federal, state, local and foreign tax returns that are required to be filed or have duly requested extensions thereof and have paid all taxes required to be paid by any of them and any related assessments, fines or penalties, except for any such tax, assessment, fine or penalty that is being contested in good faith and by appropriate proceedings; and adequate charges, accruals 9 10 and reserves have been provided for in the financial statements referred to in Section 1(a)(iv) above in respect of all federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined or remains open to examination by applicable taxing authorities. (xxiii) Insurance. The Company and its subsidiaries carry or are entitled to the benefits of insurance in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. (xxiv) Accounting Controls. The Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general and specific authorizations; (ii) transactions are recorded as necessary to permit preparations of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxv) Fees. Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or any other fee, commission or payment as a result of the transactions contemplated by this Agreement. (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to Underwriters; Closing. (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule C, that proportion of the number of Initial Securities set forth in Schedule B opposite the name of the Company which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial Securities, subject, in each case, to such adjustments among the Underwriters as the Representative in their sole discretion shall make to eliminate any sales or purchases of fractional securities. 10 11 (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional 255,000 shares of Common Stock, as set forth in Schedule B, at the price per share set forth in Schedule C, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representative to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representative(s), but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities, subject in each case to such adjustments as the Representatives in their discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Varnum, Riddering, Schmidt & Howlett LLP, or at such other place as shall be agreed upon by the Representatives and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representatives and the Company on each Date of Delivery as specified in the notice from the Representatives to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to bank account(s) designated by the Company against delivery to the Representative(s) for the respective accounts of the Underwriters of certificates for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Keefe Bruyette, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter 11 12 whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representative(s) in The City of Chicago not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Representative(s) immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Representative(s) with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representative(s) or counsel for the Underwriters shall object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, signed copies of the 12 13 Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Representative(s), without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative(s) may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in 13 14 which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds". (i) Listing. The Company will use its best efforts to effect and maintain the quotation of the Securities on the Nasdaq National Market and will file with the Nasdaq National Market all documents and notices required by the Nasdaq National Market of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq National Market. (j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of Keefe Bruyette, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing (except for share exchanges with holders of issued and outstanding common stock of one or more Subsidiaries of the Company) or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectus, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan. (k) Reporting Requirements. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. 14 15 SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectus and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities and (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the inclusion of the Securities in the Nasdaq National Market. (b) Termination of Agreement. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5, Section 9(a)(i) or Section 11 hereof, the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters, up to a maximum of $25,000 for fees and disbursements of such counsel. SECTION 5. Conditions of Underwriters' Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements 15 16 of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the Representative(s) shall have received the favorable opinion, dated as of Closing Time, of Strobl, Cunningham, Caretti & Sharp, P.C., counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibit A hereto and to such further effect as counsel to the Underwriters may reasonably request. (c) Opinion of Counsel for Underwriters. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of Varnum, Riddering, Schmidt & Howlett LLP, counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (viii) through (x), inclusive, and the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of Michigan and the federal law of the United States, upon the opinions of counsel satisfactory to the Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representatives shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Representatives shall have received from BDO Seidman, LLP a letter dated such date, in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. 16 17 (f) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from BDO Seidman, LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (g) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (g) Approval of Listing. At Closing Time, the Securities shall have been approved for inclusion in the Nasdaq National Market, subject only to official notice of issuance. (h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (i) Lock-up Agreements. At the date of this Agreement, the Representatives shall have received an agreement substantially in the form of Exhibit C hereto signed by the persons listed on Schedule E hereto. (j) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company and any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received: (i) Officers' Certificate. A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery. (ii) Opinion of Counsel for Company. The favorable opinion of Strobl Cunningham Caretti & Sharp, P.C., counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. (iii) Opinion of Counsel for Underwriters. The favorable opinion of Varnum, Riddering, Schmidt & Howlett LLP, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof. (iv) Bring-down Comfort Letter. A letter from BDO Seidman, LLP, in form and substance satisfactory to the Representative(s) and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representative(s) pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. 17 18 (k) Additional Documents. At Closing Time and at each Date of Delivery counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representatives and counsel for the Underwriters. (l) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representatives by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. (a) Indemnification of Underwriters. The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (i), (ii) and (iii) below as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; 18 19 (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Keefe Bruyette), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Keefe Bruyette expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) Indemnification of Company, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Keefe Bruyette expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Keefe Bruyette, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying 19 20 party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the Underwriters, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet bear to the aggregate initial public offering price of the Securities as set forth on such cover. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue 20 21 statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint. The provisions of this Section shall not affect any agreement among the Company with respect to contribution. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Underwriters. 21 22 SECTION 9. Termination of Agreement. (a) Termination; General. The Representatives may terminate this Agreement, by notice to the Company at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the Nasdaq National Market, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or Michigan authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the Underwriters. If one or more of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after 22 23 the Closing Time, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, either (i) the Representatives or (ii) the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. SECTION 11. Default by the Company. If the Company shall fail at Closing Time or at the Date of Delivery to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any nondefaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. SECTION 12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representatives c/o Keefe, Bruyette & Woods, Inc., at 85th Floor, Two World Trade Center, New York, New York 10048, attention of ; and notices to the Company shall be directed to it at Capitol Bancorp Ltd., One Business and Trade Center, 200 Washington Square North, Lansing, Michigan 48933, attention of Cristin Reid English. SECTION 13. Parties. This Agreement shall each inure to the benefit of and be binding upon the Underwriters and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE 23 24 OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 24 25 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters and the Company in accordance with its terms. Very truly yours, CAPITOL BANCORP LTD. By: ---------------------------------- Title: CONFIRMED AND ACCEPTED, as of the date first above written: KEEFE BRUYETTE & WOODS, INC. US BANCORP PIPER JAFFRAY, INC. RAYMOND JAMES & ASSOCIATES, INC. By: KEEFE BRUYETTE & WOODS, INC. By ------------------------------------- Authorized Signatory For itself and as Representative of the other Underwriters named in Schedule A hereto. 25 26 SCHEDULE A Number of Initial Name of Underwriter Securities - ------------------- ---------- Keefe, Bruyette & Woods, Inc. US Bancorp Piper Jaffray, Inc. Raymond James & Associates, Inc. ----------- Total 1,700,000 Sch A-1 27 SCHEDULE B Number of Initial Maximum Number of Option Securities to be Sold Securities to Be Sold --------------------- --------------------- CAPITOL BANCORP LTD. 1,700,000 255,000 Total Sch B-1 28 SCHEDULE C CAPITOL BANCORP LTD. 1,700,000 Shares of Common Stock (No Par Value Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $ . 2. The purchase price per share for the Securities to be paid by the several Underwriters shall be $ , being an amount equal to the initial public offering price set forth above less $ per share; provided that the purchase price per share for any Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. Sch C-1 29 SCHEDULE E Joseph D. Reid David O'Leary Robert C. Carr Paul R. Ballard David K. Powers Lee W. Hendrickson Carl C. Farrar John C. Smythe Bruce A. Thomas Cristin Reid English Louis G. Allen David L. Becker Douglas E. Crist James C. Epolito Gary A. Falkenberg Joel I. Ferguson Kathleen A. Gaskin H. Nicholas Genova L. Douglas Johns Michael L. Kasten Leonard Maas Lyle W. Miller Sch E-1 30 EXHIBIT A FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Michigan. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus); the shares of issued and outstanding capital stock of the Company, have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (v) The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreement and, when issued and delivered by the Company pursuant to the Purchase Agreement against payment of the consideration set forth in the Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (vi) The issuance and sale of the Securities by the Company is not subject to the preemptive or other similar rights of any securityholder of the Company. A-1 31 (vii) Each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. (viii) The Purchase Agreement has been duly authorized, executed and delivered by the Company. (ix) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus, excluding the documents incorporated by reference therein, and each amendment or supplement to the Registration Statement and Prospectus, excluding the documents incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xi) The documents incorporated by reference in the Prospectus (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion), when they were filed with the Commission complied as to form in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder. (xii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements A-2 32 of the charter and by-laws of the Company and the requirements of the Nasdaq National Market. (xiii) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Company of its obligations thereunder. (xiv) The information in the Prospectus under "Business--Relationship with Sun Community Bancorp Limited", "Supervision and Regulation," and in the Registration Statement under Item 15, to the extent that it constitutes matters of law, summaries of legal matters, the Company's charter and bylaws or legal proceedings, or legal conclusions, has been reviewed by us and is correct in all material respects (xv) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectus that are not described as required. (xvii) All descriptions in the Registration Statement of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xviii) To the best of our knowledge, neither the Company nor any subsidiary is in violation of its charter or by-laws and no default by the Company or any subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement. (xix) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance, sale or delivery of the Securities. A-3 33 (xx) The execution, delivery and performance of the Purchase Agreement and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use Of Proceeds") and compliance by the Company with its obligations under the Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(xi) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their respective properties, assets or operations. (xxi) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included or incorporated by reference therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included or incorporated by reference therein or omitted therefrom, as to which we need make no statement), at the time the Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document A-4 34 relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-5 35 EXHIBIT C FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(K) , 1999 KEEFE BRUYETTE & WOODS, INC. US BANCORP PIPER JAFFRAY, INC. RAYMOND JAMES & ASSOCIATES, INC. as Representatives of the several Underwriters to be named in the within-mentioned Purchase Agreement c/o Keefe Bruyette & Woods, Inc. 85th Floor Two World Trade Center New York, New York 10048 Re: Proposed Public Offering by Capitol Bancorp Ltd. Dear Sirs: The undersigned, a stockholder [and an officer and/or director] of Capitol Bancorp Ltd., a Michigan corporation (the "Company"), understands that Keefe Bruyette & Woods, Inc. ("Keefe Bruyette"), US Bancorp Piper Jaffray, Inc. and Raymond James & Associates, Inc. propose to enter into a Purchase Agreement (the "Purchase Agreement") with the Company providing for the public offering of shares (the "Securities") of the Company's common stock, no par value per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder, officer and/or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreement that, during a period of 180 days from the date of the Purchase Agreement, the undersigned will not, without the prior written consent of Keefe Bruyette, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic B-1 36 consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: Print Name: B-2 EX-23.1 3 CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Capitol Bancorp Ltd. Lansing, Michigan We hereby consent to the incorporation by reference in the Prospectus constituting a part of this Registration Statement (Amendment No. 1) of our report dated January 29, 1999, relating to the consolidated financial statements of Capitol Bancorp Ltd. appearing in the Companies' Annual Report on Form 10-K for the year ended December 31, 1998. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN LLP Grand Rapids, Michigan September 2, 1999 -----END PRIVACY-ENHANCED MESSAGE-----