-----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, Vc1Qd1W9H0OrmkbdEJ8MXtu3rRhDUbc4tuRmDb/euzpdxGrxJCoAvHBym1Mra+J0 0X9znq9K3lx1vR3jr/vr/g== 0000950147-03-000616.txt : 20030514 0000950147-03-000616.hdr.sgml : 20030514 20030514165920 ACCESSION NUMBER: 0000950147-03-000616 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18461 FILM NUMBER: 03699880 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 10-Q 1 e-9986.txt QUARTERLY REPORT FOR QTR ENDING 3-31-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to _________ Commission file number 33-24728C CAPITOL BANCORP LTD. (Exact name of registrant as specified in its charter) MICHIGAN 38-2761672 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) Number) 200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN (Address of principal executive offices) 48933 (Zip Code) (517) 487-6555 (Registrant's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Act). Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, No par value: 12,293,820 shares outstanding as of April 22, 2003. Page 1 of 25 INDEX PART I. FINANCIAL INFORMATION FORWARD-LOOKING STATEMENTS Certain of the statements contained in this document, including Capitol's consolidated financial statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and in documents incorporated into this document by reference that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of Capitol and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements. The words "intend", "expect", "project", "estimate", "predict", "anticipate", "should", "believe", and similar expressions also are intended to identify forward-looking statements. Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of Capitol's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol's banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of Capitol's banks and Capitol's ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, and (xi) other risks detailed in Capitol's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written or oral forward-looking statements attributable to Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors. Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements. Capitol undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events. Page ---- Item 1. Financial Statements (unaudited): Consolidated balance sheets - March 31, 2003 and December 31, 2002. 3 Consolidated statements of income - Three months ended March 31, 2003 and 2002. 4 Consolidated statements of changes in stockholders' equity - Three months ended March 31, 2003 and 2002. 5 Consolidated statements of cash flows - Three months ended March 31, 2003 and 2002. 6 Notes to consolidated financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 20 Item 4. Controls and Procedures. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 21 Item 2. Changes in Securities and Use of Proceeds. 21 Item 3. Defaults Upon Senior Securities. 21 Item 4. Submission of Matters to a Vote of Security Holders. 21 Item 5. Other Information. 21 Item 6. Exhibits and Reports on Form 8-K. 21 SIGNATURES 22 CERTIFICATIONS 23 Page 2 of 25 PART I, ITEM I CAPITOL BANCORP LTD. Consolidated Balance Sheets As of March 31, 2003 and December 31, 2002
(Unaudited) March 31 December 31 2003 2002 ----------- ----------- (in thousands) ASSETS Cash and due from banks $ 128,623 $ 125,146 Money market, mutual funds and interest-bearing deposits 54,958 42,301 Federal funds sold 140,364 83,737 ----------- ----------- Cash and cash equivalents 323,945 251,184 Loans held for resale 65,465 75,420 Investment securities: Available for sale, carried at market value 31,693 25,355 Held for long-term investment, carried at amortized cost which approximates market value 8,824 8,784 ----------- ----------- Total investment securities 40,517 34,139 Portfolio loans: Commercial 1,846,601 1,789,036 Real estate mortgage 128,605 127,855 Installment 76,951 74,481 ----------- ----------- Total portfolio loans 2,052,157 1,991,372 Less allowance for loan losses (30,034) (28,953) ----------- ----------- Net portfolio loans 2,022,123 1,962,419 Premises and equipment 20,565 21,737 Accrued interest income 9,342 9,286 Goodwill and other intangibles 24,606 24,739 Other assets 33,726 30,364 ----------- ----------- TOTAL ASSETS $ 2,540,289 $ 2,409,288 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 359,916 $ 360,669 Interest-bearing 1,821,524 1,701,403 ----------- ----------- Total deposits 2,181,440 2,062,072 Debt obligations 84,348 93,398 Accrued interest on deposits and other liabilities 16,923 14,182 ----------- ----------- Total liabilities 2,282,711 2,169,652 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES 61,299 51,583 MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 31,808 28,016 STOCKHOLDERS' EQUITY Common stock, no par value, 25,000,000 shares authorized; issued and outstanding: 2003 - 11,737,860 shares 2002 - 11,663,412 shares 134,211 135,234 Retained earnings 30,228 26,318 Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) 177 191 ----------- ----------- 164,616 161,743 Less note receivable from exercise of stock options and unallocated ESOP shares (145) (1,706) ----------- ----------- Total stockholders' equity 164,471 160,037 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,540,289 $ 2,409,288 =========== ===========
Page 3 of 25 CAPITOL BANCORP LTD. Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 2003 and 2002 (in thousands, except per share data) Three Months Ended March 31 -------------------- 2003 2002 -------- -------- Interest income: Portfolio loans (including fees) $ 38,385 $ 35,619 Loans held for resale 762 734 Taxable investment securities 199 397 Federal funds sold 284 264 Other 356 241 -------- -------- Total interest income 39,986 37,255 Interest expense: Deposits 11,002 12,193 Debt obligations and other 1,997 2,239 -------- -------- Total interest expense 12,999 14,432 -------- -------- Net interest income 26,987 22,823 Provision for loan losses 1,890 2,090 -------- -------- Net interest income after provision for loan losses 25,097 20,733 Noninterest income: Service charges on deposit accounts 1,071 958 Trust fee income 522 531 Fees from origination of non-portfolio residential mortgage loans 2,237 893 Realized gain (loss) on sale of investment securities available for sale 3 (64) Other 696 480 -------- -------- Total noninterest income 4,529 2,798 Noninterest expense: Salaries and employee benefits 13,427 11,027 Occupancy 1,873 1,520 Equipment rent, depreciation and maintenance 1,165 1,055 Other 4,691 5,191 -------- -------- Total noninterest expense 21,156 18,793 -------- -------- Income before federal income taxes and minority interest 8,470 4,738 Federal income taxes 2,944 1,543 -------- -------- Income before minority interest 5,526 3,195 Minority interest in net income of consolidated subsidiaries (213) (151) -------- -------- NET INCOME $ 5,313 $ 3,044 ======== ======== NET INCOME PER SHARE--Note C Basic $ 0.45 $ 0.39 ======== ======== Diluted $ 0.44 $ 0.38 ======== ======== Page 4 of 25 CAPITOL BANCORP LTD. Consolidated Statements of Changes in Stockholders' Equity (Unaudited) For the Three Months Ended March 31, 2003 and 2002 (in thousands except share data)
Note Receivable from Exercise of Stock Accumulated Options and Other Unallocated Common Retained Comprehensive ESOP Stock Earnings Income Shares Total --------- --------- --------- --------- --------- THREE MONTHS ENDED MARCH 31, 2002 Balances at January 1, 2002 $ 67,692 $ 14,173 $ 158 $ (1,851) $ 80,172 Issuance of 2,721,749 shares of common stock to acquire shares of Sun Community Bancorp held by shareholders other than Capitol 43,165 43,165 Issuance of 70,174 shares of common stock upon exercise of stock options 753 753 Issuance of 19,100 shares of common stock upon exercise of warrants 213 213 Cash dividends paid ($.10 per share) (789) (789) Components of comprehensive income: Net income for the period 3,044 3,044 Market value adjustment for investment securities available for sale (net of income tax effect) (194) (194) --------- Comprehensive income for the period 2,850 --------- --------- --------- --------- --------- BALANCES AT MARCH 31, 2002 $ 111,823 $ 16,428 $ (36) $ (1,851) $ 126,364 ========= ========= ========= ========= ========= THREE MONTHS ENDED MARCH 31, 2003 Balances at January 1, 2003 $ 135,234 $ 26,318 $ 191 $ (1,706) $ 160,037 Issuance of 123,850 shares of common stock upon exercise of stock options, net of common stock surrendered to facilitate exercise 279 279 Issuance of 22,512 shares of common stock upon exercise of warrants 259 259 Surrender and cancellation of 71,914 shares of common stock in repayment of note receivable from exercise of stock options (1,561) 1,561 0 Cash dividends paid ($.12 per share) (1,403) (1,403) Components of comprehensive income: Net income for the period 5,313 5,313 Market value adjustment for investment securities available for sale (net of income tax effect) (14) (14) --------- Comprehensive income for the period 5,299 --------- --------- --------- --------- --------- BALANCES AT MARCH 31, 2003 $ 134,211 $ 30,228 $ 177 $ (145) $ 164,471 ========= ========= ========= ========= =========
Page 5 of 25 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2003 and 2002
2003 2002 --------- --------- (in thousands) OPERATING ACTIVITIES Net income $ 5,313 $ 3,044 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,890 2,090 Depreciation of premises and equipment 958 802 Amortization of intangibles 133 -- Net amortization of investment security premiums 29 1 Loss (gain) on sale of premises and equipment (90) 5 Minority interest in net income of consolidated subsidiaries 213 151 Originations and purchases of loans held for resale (257,718) (203,954) Proceeds from sales of loans held for resale 267,673 216,552 Increase in accrued interest income and other assets (3,393) (2,649) Increase in accrued interest on deposits and other liabilities 2,741 2,066 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 17,749 18,108 INVESTING ACTIVITIES Proceeds from sale of investment securities available for sale 4,625 -- Proceeds from calls, prepayments & maturities of investment securities 6,626 11,560 Purchases of investment securities (17,681) (12,313) Net increase in portfolio loans (61,594) (60,202) Proceeds from sales of premises and equipment 1,509 -- Purchases of premises and equipment (1,205) (852) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (67,720) (61,807) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts and savings accounts 34,661 83,333 Net increase in certificates of deposit 84,707 29,625 Net payments on debt obligations (9,050) (550) Net proceeds from issuance of trust-preferred securities 9,700 -- Resources provided by minority interests 3,579 8,383 Net proceeds from issuance of common stock 538 966 Cash dividends paid (1,403) (789) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 122,732 120,968 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 72,761 77,269 Cash and cash equivalents at beginning of period 251,184 163,691 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 323,945 $ 240,960 ========= =========
Page 6 of 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Ltd. ("Capitol") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The statements do, however, include all adjustments of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Capitol considers necessary for a fair presentation of the interim periods. The results of operations for the three-month period ended March 31, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003. The consolidated balance sheet as of December 31, 2002 was derived from audited consolidated financial statements as of that date. Certain 2002 amounts have been reclassified to conform to the 2003 presentation. NOTE B - BANK DEVELOPMENT ACTIVITIES Bank development efforts are currently under consideration at March 31, 2003 in several states including pre-development exploratory discussions, lease and employment negotiations and preparation of preliminary regulatory applications for formation and/or acquisition of community banks. NOTE C - NET INCOME PER SHARE The computations of basic and diluted earnings per share were as follows:
Three Months Ended March 31 ------------------------- 2003 2002 ----------- ----------- Numerator--net income for the period $ 5,313,000 $ 3,044,000 =========== =========== Denominator: Weighted average number of common shares outstanding (denominator for basic earnings per share) 11,697,756 7,900,928 Effect of dilutive securities--stock options and warrants 438,359 178,937 ----------- ----------- Denominator for dilutive net income per share-- Weighted average number of common shares and potential dilution 12,136,115 8,079,865 =========== =========== Number of antidilutive stock options excluded from diluted earnings per share computation 202,372 119,336 =========== ===========
Page 7 of 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. - CONTINUED NOTE D - STOCK OPTIONS Stock option activity for the interim 2003 period is summarized as follows: Weighted Number of Exercise Average Stock Options Price Exercise Outstanding Range Price ------------- ------------------ ------- Outstanding at January 1 2,548,536 $ 4.92 to $ 25.10 $ 15.23 Exercised (335,893) 8.54 to 16.40 15.13 Granted 198,580 20.36 to 23.37 21.32 Cancelled or expired (23,290) -- --------- ------------------ ------- Outstanding at March 31 2,387,933 $ 4.92 to $ 25.10 $ 15.75 As of March 31, 2003, stock options outstanding had a weighted average remaining contractual life of 4.9 years. The following table summarizes stock options outstanding segregated by exercise price range: Weighted Average ------------------------ Remaining Exercise Price Number Exercise Contractual Range Outstanding Price Life ----- ----------- ----- ---- Less than $10.00 95,377 $ 9.14 2.8 years $10.00 to 14.99 908,099 12.49 4.7 years $15.00 to 19.99 977,480 16.62 5.2 years $20.00 to 24.99 306,351 21.60 6.2 years $25.00 or more 100,626 $25.10 1.7 years --------- 2,387,933 Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, establishes an alternative fair value method of accounting for stock options whereby compensation expense would be recognized based on the computed fair value of the options on the grant date. By not electing this alternative, certain pro forma disclosures of the expense recognition provisions of Statement No. 123 are required, which are as follows: 2003 2002 ------- ------- Fair value assumptions: Risk-free interest rate 3.5% 4.5% Dividend yield 2.2% 2.5% Stock price volatility .50 .46 Expected option life 7 years 7 years Aggregate estimated fair value of options granted (in thousands) $ 1,890 $ 62 Net income (in thousands): As reported 5,313 3,044 Less pro forma compensation expense regarding fair value of stock option awards, net of related income tax effect (1,229) (41) ------- ------- Pro forma 4,084 3,003 Net income per share: Basic: As reported 0.45 0.39 Pro forma 0.35 0.38 Diluted: As reported 0.44 0.38 Pro forma $ 0.34 $ 0.37 Page 8 of 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LTD. -CONTINUED NOTE E - IMPACT OF NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) recently issued Statements No. 146 (ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES) and No. 149 (AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES). These new standards have varying effective dates in 2003 and had no material effect on Capitol's financial statements, upon implementation. Statement No. 148 (ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE) provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation and it amends the prior disclosure requirements of Statement No. 123 to require more prominent and frequent disclosures about the effects of stock-based compensation, including interim disclosures (such interim disclosures appear in Note D). As permitted, Capitol has retained its prior method of accounting for stock-based employee compensation. FASB Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES AND INDEBTEDNESS OF OTHERS, expands disclosures about obligations under certain guarantees and, in addition, requires recording a liability for the fair value of the obligations undertaken in issuing the guarantee, applicable to guarantees issued or modified after December 31, 2002. This new guidance had no material effect on Capitol's consolidated financial position or results of operations, upon implementation. FASB Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, clarifies when some entities previously not consolidated under prior accounting guidance, should be. This new guidance, which was effective upon issuance in January 2003, had no material effect upon Capitol's consolidated financial statements upon implementation. A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to Capitol's consolidated financial statements. Page 9 of 25 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Total assets approximated $2.5 billion at March 31, 2003, an increase of $131 million from the December 31, 2002 level of $2.4 billion. The balance sheet includes Capitol and its consolidated subsidiaries: Total Assets (in $1,000's) --------------------------- March 31 Dec 31 2003 2002 ----------- ----------- Great Lakes Region: Ann Arbor Commerce Bank $ 325,946 $ 309,152 Brighton Commerce Bank 83,323 78,382 Capitol National Bank 211,867 206,130 Detroit Commerce Bank 37,908 30,589 Grand Haven Bank 128,483 123,505 Kent Commerce Bank 73,832 73,801 Macomb Community Bank 88,749 87,050 Muskegon Commerce Bank 86,239 86,465 Oakland Commerce Bank 125,280 115,916 Paragon Bank & Trust 106,754 103,044 Portage Commerce Bank 140,926 139,068 Elkhart Community Bank 48,297 53,210 Goshen Community Bank 39,608 38,115 ----------- ----------- Great Lakes Region Total 1,497,212 1,444,427 Southwest Region: Arrowhead Community Bank 48,427 47,427 Bank of Tucson 141,104 132,094 Camelback Community Bank 87,483 82,387 East Valley Community Bank 37,766 37,640 Mesa Bank 64,585 66,312 Southern Arizona Community Bank 84,444 75,253 Valley First Community Bank 43,379 42,127 Yuma Community Bank 41,589 38,214 Bank of Las Vegas 28,983 26,880 Black Mountain Community Bank 67,626 63,202 Desert Community Bank 59,812 55,170 Red Rock Community Bank 110,276 96,906 Sunrise Bank of Albuquerque 50,267 46,898 Sunrise Bank of Arizona 90,691 82,126 ----------- ----------- Southwest Region Total 956,432 892,636 California Region: Sunrise Bank of San Diego 58,801 50,450 First California Northern Bancorp: Napa Community Bank 39,545 36,042 ----------- ----------- California Region Total 98,346 86,492 Other, net (11,701) (14,267) ----------- ----------- Consolidated $ 2,540,289 $ 2,409,288 =========== =========== Portfolio loans increased during the three-month 2003 period by approximately $61 million. Loan growth was funded primarily by higher levels of time deposits. The majority of portfolio loan growth occurred in commercial loans, consistent with the banks' emphasis on commercial lending activities. Portfolio loan growth in 2003 is net of about $19 million of commercial loans sold to other financial institutions. Page 10 of 25 The allowance for loan losses at March 31, 2003 approximated $30 million or 1.46% of total portfolio loans, an increase from the year-end 2002 ratio of 1.45%. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio at the balance sheet date. Management's determination of the adequacy of the allowance is based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio, loan commitments outstanding and other factors. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands):
2003 2002 ----------- ----------- Allowance for loan losses at January 1 $ 28,953 $ 23,238 Loans charged-off: Commercial (887) (530) Real estate mortgage (21) (25) Installment (96) (90) ----------- ----------- Total charge-offs (1,004) (645) Recoveries: Commercial 154 38 Real estate mortgage -- 2 Installment 41 21 ----------- ----------- Total recoveries 195 61 ----------- ----------- Net charge-offs (809) (584) Additions to allowance charged to expense 1,890 2,090 ----------- ----------- Allowance for loan losses at March 31 $ 30,034 $ 24,744 =========== =========== Average total portfolio loans for period ended March 31 $ 2,023,830 $ 1,761,605 =========== =========== Ratio of net charge-offs (annualized) to average portfolio loans outstanding 0.16% 0.13% =========== ===========
Net charge-offs of loans increased $225,000 in 2003, compared to the three-month period in 2002. The increase, during the quarter ended March 31, 2003, was mainly due to losses associated with loans secured by business equipment and accounts receivable. Page 11 of 25 The amounts of the allowance for loan losses allocated in the following table (in thousands) include all loans for which, based on Capitol's loan rating system, management has concerns, and should not be interpreted as an indication of future charge-offs.
March 31, 2003 December 31, 2002 ------------------------- -------------------------- Percentage Percentage of Total of Total Portfolio Portfolio Amount Loans Amount Loans ------ ----- ------ ----- Commercial $ 27,610 1.35% $ 27,226 1.37% Real estate mortgage 1,358 0.06 1,009 0.05 Installment 1,066 0.05 718 0.03 ---------- ----- ----------- ----- Total allowance for loan losses $ 30,034 1.46% $ 28,953 1.45% ========== ===== =========== ===== Total portfolio loans outstanding $2,052,157 $ 1,991,372 ========== ===========
Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) are summarized below (in thousands): March 31 Dec 31 2003 2002 ------- ------- Nonaccrual loans: Commercial $18,414 $15,444 Real estate 657 560 Installment 995 613 ------- ------- Total nonaccrual loans 20,066 16,617 Past due (>=90 days) loans: Commercial 5,045 5,728 Real estate 736 323 Installment 134 222 ------- ------- Total past due loans 5,915 6,273 ------- ------- Total nonperforming loans $25,981 $22,890 ======= ======= Page 12 of 25 Nonperforming loans increased approximately $3.1 million during the three-month period ended March 31, 2003. Of the nonperforming loans at March 31, 2003, about 65% are real estate secured. Those loans, when originated, had appropriate loan-to-value ratios and, accordingly, have loss exposure which is expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies. Most other nonperforming loans are generally secured by other business assets. Nonperforming loans at March 31, 2003 are in various stages of resolution for which management believes such loans are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses. In addition to the identification of nonperforming loans involving borrowers with payment performance difficulties (i.e., nonaccrual loans and loans past-due 90 days or more), management utilizes an internal loan review process to identify other potential problem loans which may warrant additional monitoring or other attention. This loan review process is a continuous activity which periodically updates internal loan ratings. At inception, all loans are individually assigned a rating which grades the credits on a risk basis, based on the type and discounted value of collateral, financial strength of the borrower and guarantors and other factors such as nature of the borrower's business climate, local economic conditions and other subjective factors. The loan rating process is fluid and subjective. Potential problem loans include loans which are generally performing as agreed; however, because of loan review's and/or lending staff's risk assessment, increased monitoring is deemed appropriate. In addition, some loans are assigned a more adverse classification, with specific performance issues or other risk factors requiring close management and development of specific remedial action plans. At March 31, 2003, potential problem loans (including the previously mentioned nonperforming loans) approximated $104 million, or about 5% of total consolidated portfolio loans. These potential problem loans do not necessarily have significant loss exposure (nor are they necessarily deemed `impaired'), but rather are classified by management in this manner to aid in loan administration and risk management. Management believes such loans to be adequately considered in its evaluation of the adequacy of the allowance for loan losses. Management believes, however, that current general economic conditions may result in higher levels of future loan losses, in comparison to previous years, as evidenced by higher loan losses in the interim 2003 period. Page 13 of 25 The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming loans and ratio of the allowance as a percentage of portfolio loans (dollars in thousands):
Allowance as a Percentage Total Allowance for Nonperforming of Total Portfolio Loans Loan Losses Loans Portfolio Loans ----------------------- ----------------------- --------------------- ------------------ March 31 Dec 31 March 31 Dec 31 March Dec 31 March 31 Dec 31 2003 2002 2003 2002 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ---------- ---------- ------- ------- Great Lakes Region: Ann Arbor Commerce Bank $ 281,066 $ 272,604 $ 4,025 $ 3,840 $ 2,829 $ 2,624 1.43% 1.41% Brighton Commerce Bank 69,664 68,239 721 851 170 170 1.03 1.25 Capitol National Bank 162,305 158,651 2,308 2,322 1,764 1,753 1.42 1.46 Detroit Commerce Bank 28,719 26,799 585 627 1,098 751 2.04 2.34 Grand Haven Bank 121,114 114,616 1,744 1,626 2,038 1,605 1.44 1.42 Kent Commerce Bank 69,575 68,848 835 830 86 293 1.20 1.21 Macomb Community Bank 78,890 73,915 1,142 1,136 3,040 3,012 1.45 1.54 Muskegon Commerce Bank 79,544 77,247 1,012 966 2,890 1,806 1.27 1.25 Oakland Commerce Bank 89,857 86,049 1,173 1,119 1,375 1,805 1.31 1.30 Paragon Bank & Trust 91,872 86,571 1,562 1,291 3,035 2,628 1.70 1.49 Portage Commerce Bank 132,111 129,710 1,905 1,815 3,305 3,135 1.44 1.40 Elkhart Community Bank 44,279 43,277 664 658 244 245 1.50 1.52 Goshen Community Bank 36,936 35,408 556 532 -- -- 1.51 1.50 ---------- ---------- ---------- ---------- ---------- ---------- Great Lakes Region Total 1,285,932 1,241,934 18,232 17,613 21,874 19,827 Southwest Region: Arrowhead Community Bank 36,008 36,185 530 543 -- -- 1.47 1.50 Bank of Tucson 90,519 90,176 1,164 1,461 187 187 1.29 1.62 Camelback Community Bank 60,559 63,516 816 960 -- 232 1.35 1.51 East Valley Community Bank 26,748 25,932 405 389 233 17 1.51 1.50 Mesa Bank 59,878 55,588 724 834 -- 242 1.21 1.50 Southern Arizona Community Bank 61,928 60,913 789 914 -- -- 1.27 1.50 Valley First Community Bank 28,490 29,075 641 620 260 261 2.25 2.13 Yuma Community Bank 24,871 25,485 383 383 -- -- 1.54 1.50 Bank of Las Vegas 20,515 19,404 321 292 -- -- 1.56 1.50 Black Mountain Community Bank 50,796 52,240 786 784 327 324 1.55 1.50 Desert Community Bank 43,037 43,351 661 675 1,166 734 1.54 1.56 Red Rock Community Bank 82,025 80,152 1,833 1,203 1,789 861 2.23 1.50 Sunrise Bank of Albuquerque 43,286 38,577 585 521 -- -- 1.35 1.35 Sunrise Bank of Arizona 72,117 65,195 931 881 145 205 1.29 1.35 ---------- ---------- ---------- ---------- ---------- ---------- Southwest Region Total 700,777 685,789 10,569 10,460 4,107 3,063 California Region: Sunrise Bank of San Diego 39,087 39,116 577 577 -- -- 1.48 1.48 First California Northern Bancorp Napa Community Bank 24,697 20,177 392 303 -- -- 1.59 1.50 ---------- ---------- ---------- ---------- ---------- ---------- California Region Total 63,784 59,293 969 880 -- -- -- -- Other, net 1,664 4,356 264 -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ----- ----- Consolidated $2,052,157 $1,991,372 $ 30,034 $ 28,953 $ 25,981 $ 22,890 1.46% 1.45% ========== ========== ========== ========== ========== ========== ===== =====
RESULTS OF OPERATIONS Net income for the three months ended March 31, 2003, was $5.3 million, an increase of $2.3 million or 75% over the same period last year. Diluted earnings per share were $0.44 compared to $0.38 for the prior year period. The percentage increase in net income per share was less than the percentage increase in the amount of net income in 2003 because of the larger share base resulting from Capitol's 2002 share exchanges regarding Sun Community Bancorp, Sunrise Capital Corporation, Indiana Community Bancorp and Nevada Community Bancorp. Net interest income for the first three months of 2003 totaled $27 million, an 18% increase compared to $22.8 million in 2002. This increase is attributable to the expansion in number of banks, the banks' growth and a stable interest rate environment. Page 14 of 25 Noninterest income for the three months ended March 31, 2003 was $4.5 million, an increase of $1.7 million, or 62%, over the same period in 2002. Fees from origination of non-portfolio residential mortgage loans totaled $2.2 million in the interim 2003 period, as compared to $1 million in 2002, due to continuing high volume of loan fees derived from residential mortgage loan refinance activity resulting from sustained low interest rates. Service charges on deposit accounts increased in the first quarter of 2003 by 12%, compared to 2002 due to growth in the number and size of banks. The provision for loan losses for the first quarter of 2003 was $1.9 million as compared to $2.1 million during the corresponding 2002 period. The provision for loan losses is based upon management's analysis of the adequacy of the allowance for loan losses, as previously discussed. Noninterest expense totaled $21.2 million for the interim 2003 period compared to $18.8 million in 2002. The increase in noninterest expense is associated with newly formed banks, growth and increases in general operating costs. Increases in both occupancy and salaries and employee benefits relate primarily to the growth in the number and size of banks within the consolidated group. Other noninterest expense in the 2002 period was higher than in 2003 due to the preopening costs of two start-up banks which commenced operations in the first three months of 2002. Operating results (dollars in thousands) were as follows:
Three months ended March 31 ---------------------------------------------------------------------------------------- Return on Return on Total Revenues Net Income Average Equity Average Assets -------------------- -------------------- -------------------- ------------------ 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- ------- ------- ------- ------- Great Lakes Region: Ann Arbor Commerce Bank $ 5,828 $ 5,415 $ 1,319 $ 1,144 21.91% 21.39% 1.73% 1.69% Brighton Commerce Bank 1,367 1,353 319 188 18.88 12.40 1.60 1.05 Capitol National Bank 3,409 3,120 849 740 22.58 21.94 1.64 1.70 Detroit Commerce Bank 518 601 (21) (26) n/a n/a n/a n/a Grand Haven Bank 2,511 2,141 569 421 22.01 20.39 1.79 1.61 Kent Commerce Bank 1,288 1,408 129 176 13.95 10.64 1.34 .98 Macomb Community Bank 1,371 1,501 (29) 283 n/a 11.61 n/a 1.24 Muskegon Commerce Bank 1,614 1,564 366 331 17.29 17.50 1.74 1.75 Oakland Commerce Bank 1,909 1,870 382 307 16.54 14.24 1.32 1.17 Paragon Bank & Trust 2,164 1,971 166 230 6.41 10.72 .63 .96 Portage Commerce Bank 2,732 2,461 565 418 20.37 15.92 1.61 1.36 Elkhart Community Bank 810 626 118 29 9.64 2.53 .61 .32 Goshen Community Bank 749 493 118 6 10.30 .58 1.19 .09 -------- -------- -------- -------- Great Lakes Region Total 26,270 24,524 4,850 4,247 Southwest Region: Arrowhead Community Bank 917 666 82 (31) 7.52 n/a .71 n/a Bank of Tucson 2,281 2,432 780 573 29.35 22.73 2.33 1.94 Camelback Community Bank 1,447 1,403 306 153 14.98 9.33 1.43 .85 East Valley Community Bank 660 699 (86) (97) n/a n/a n/a n/a Mesa Bank 1,345 1,186 388 167 24.07 12.06 2.31 1.24 Southern Arizona Community Bank 1,282 1,140 305 158 17.61 11.08 1.56 1.00 Valley First Community Bank 689 997 69 63 4.82 4.51 .66 .46 Yuma Community Bank 753 518 82 (14) 8.71 n/a .82 n/a Bank of Las Vegas 382 130 (78) (337) n/a n/a n/a n/a Black Mountain Community Bank 1,105 836 180 55 13.64 4.85 1.13 .45 Desert Community Bank 964 1,152 121 104 9.28 8.51 .86 .69 Red Rock Community Bank 1,760 1,523 (106) 210 n/a 9.65 n/a .99 Sunrise Bank of Albuquerque 963 608 105 (25) 10.85 n/a .88 n/a Sunrise Bank of Arizona 2,312 1,372 91 261 5.85 17.15 .42 1.67 -------- -------- -------- -------- Southwest Region Total 16,860 14,662 2,239 1,240 California Region: Sunrise Bank of San Diego 935 954 43 93 2.30 5.10 .31 .90 First California Northern Bancorp: Napa Community Bank 551 44 (11) (394) n/a n/a n/a n/a -------- -------- -------- -------- California Region Total 1,486 998 32 (301) Other, net (101) (131) (1,808) (2,142) n/a n/a n/a n/a -------- -------- -------- -------- ------- ------- ------- ------- Consolidated $ 44,515 $ 40,053 $ 5,313 $ 3,044 13.09% 14.80% .87% .58% ======== ======== ======== ======== ======= ======= ======= =======
n/a Not applicable Page 15 of 25 LIQUIDITY AND CAPITAL RESOURCES The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $119 million for the three months ended March 31, 2003, slightly more than the $113 million increase in the corresponding period of 2002. Growth occurred in most interest-bearing deposit categories, with the majority coming from time deposits. The banks generally do not rely on brokered deposits as a key funding source; brokered deposits approximated $233 million as of March 31, 2003, or about 11% of total deposits, an increase of $32 million during the interim 2003 period. Brokered deposits, as a funding source, have increased in recent periods due to competitive environments and selective opportunities to grow deposits at a faster pace and/or lower cost than traditional sources, and may similarly increase in future periods. Noninterest-bearing deposits approximated 16.5% of total deposits at March 31, 2003 and 17.5% at December 31, 2002. Levels of noninterest-bearing deposits can, however, fluctuate based on customers' transaction activity. Interim 2003 deposit growth was deployed primarily into commercial loans, consistent with the banks' emphasis on commercial lending activities. Cash and cash equivalents amounted to $324 million or 13% of total assets at March 31, 2003, compared with $251 million or 10% of total assets at December 31, 2002. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the banks' liquidity position at March 31, 2003 is adequate to fund loan demand and meet depositor needs. In addition to cash and cash equivalents, a source of long-term liquidity is the banks' marketable investment securities. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements. The banks have not engaged in active trading of their investments. At March 31, 2003, the banks had approximately $32 million of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise. Some of the banks have secured lines of credit with a Federal Home Loan Bank. Borrowings thereunder approximated $80 million and additional borrowing capacity approximated $16 million at March 31, 2003. These borrowings increased slightly ($1 million in the interim period of 2003) as a lower-cost funding source versus various rates and maturities of time deposits. At March 31, 2003, Capitol had unused lines of credit from an unrelated financial institution aggregating $21 million. In March 2003, Capitol participated in a pooled trust-preferred securities offering, structured with a 30-year maturity and a variable interest rate, with net proceeds of approximately $9.7 million. These securities augment Capitol's existing capital base and the proceeds have been used to reduce borrowings from an unaffiliated bank. Page 16 of 25 Capitol and its banks are subject to complex regulatory capital requirements, which require maintaining certain minimum capital ratios. These ratio measurements, in addition to certain other requirements, are used by regulatory agencies to determine the level of regulatory intervention and enforcement applied to financial institutions. Management believes Capitol and each of its banks are in compliance with regulatory requirements and are expected to maintain such compliance. Stockholders' equity, as a percentage of total assets, approximated 6.5% at March 31, 2003 a slight decrease from 6.6% at the beginning of the year. Total capital funds (Capitol's stockholders' equity, plus minority interests in consolidated subsidiaries, plus guaranteed preferred beneficial interests in the Corporation's subordinated debentures) aggregated $258 million or 10% of total assets at March 31, 2003. In April 2003, Capitol announced the completion of an $11 million private placement of its common stock to select institutional investors and the issuance of approximately 550,000 shares of previously unissued common stock. Proceeds from the offering have been used to reduce borrowings from an unaffiliated bank and investment in short-term investments. Capitol's operating strategy continues to be focused on the ongoing growth and maturity of its existing banks, coupled with new bank expansion in selected markets as opportunities arise. Accordingly, Capitol may invest in, acquire or otherwise develop additional banks in future periods, subject to economic conditions and other factors, although the timing of such additional banking units, if any, is uncertain. Such future new banks and/or additions of other operating units could be either wholly-owned, majority-owned or otherwise controlled by Capitol. TRENDS AFFECTING OPERATIONS One of the most significant trends which can impact the financial condition and results of operations of financial institutions are changes in market rates of interest. Changes in interest rates, either up or down, have an impact on net interest income (plus or minus), depending on the direction and timing of such changes. At any point in time, there is a difference between interest rate-sensitive assets and interest rate-sensitive liabilities. This means that when interest rates change, the timing and magnitude of the effect of such interest rate changes can alter the relationship between asset yields and the cost of funds. In the first three months of 2003, interest rates have remained relatively stable. The future outlook on interest rates and their impact on Capitol's interest income, interest expense and net interest income is uncertain. Start-up banks generally incur operating losses during their early periods of operations. Recently-formed start-up banks are expected to detract from consolidated earnings performance and start-up banks formed in 2003 and beyond will similarly negatively impact short-term profitability. General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions. Page 17 of 25 Media reports raising questions about the health of the domestic economy have continued in 2003. During the first quarter of 2003, nonperforming loans have increased and it is anticipated that levels of nonperforming loans and related loan losses may increase as economic conditions, locally and nationally, evolve. IMPACT OF NEW ACCOUNTING STANDARDS There are several new accounting standards either becoming effective or being issued in 2003. They are listed and discussed in Note E of the accompanying condensed consolidated financial statements. CRITICAL ACCOUNTING POLICIES Capitol's critical accounting policies are described on page 10 of the financial section of its 2002 Annual Report. In the circumstances of Capitol, management believes its "critical accounting policies" are those which encompass the use of estimates (because of inherent subjectivity), allowance for loan losses (due to the inherent subjectivity in estimating loan losses), accounting for income taxes (due to the significant U.S. corporate income tax rate and realization of deferred tax assets) and accounting for goodwill (due to new accounting standards effective at the beginning of 2002). Page 18 of 25 PART I, ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART I, ITEM 4 CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Disclosure controls and procedures were evaluated as of March 31, 2003 ("Evaluation Date"). Such evaluation concluded that Capitol's disclosure controls and procedures are effective to ensure that material information relating to Capitol, including its consolidated subsidiaries, is made known to Capitol's senior management, particularly during the period for which this quarterly report has been prepared. (b) CHANGES IN INTERNAL CONTROL. As of the signature date of this report, there have been no significant changes in Capitol's internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date referred to in (a) above. (c) ASSET-BACKED ISSUERS. Not applicable. [The remainder of this page intentionally left blank] Page 19 of 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on Capitol's consolidated financial position or results of operations. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit No. Description of Exhibit ----------- ---------------------- 10a Amended and Restated Employment Agreement of Joseph D. Reid dated March 17, 2003 and amendment dated April 17, 2003. 99.1 Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the three months ended March 31, 2003. Page 20 of 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITOL BANCORP LTD. (Registrant) /s/ Joseph D. Reid ------------------------------------------ Joseph D. Reid Chairman and CEO (duly authorized to sign on behalf of the registrant) /s/ Lee W. Hendrickson ------------------------------------------ Lee W. Hendrickson Executive Vice President and Chief Financial Officer Date: May 14, 2003 Page 21 of 25 CERTIFICATIONS I, Joseph D. Reid, Chairman and CEO, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capitol Bancorp Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Page 22 of 25 CERTIFICATIONS--CONTINUED 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Joseph D. Reid ----------------------------- Joseph D. Reid Chairman and CEO [The remainder of this page intentionally left blank] Page 23 of 25 CERTIFICATIONS--CONTINUED I, Lee W. Hendrickson, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capitol Bancorp Ltd.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Page 24 of 25 CERTIFICATIONS--CONTINUED 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Lee W. Hendrickson ----------------------------- Lee W. Hendrickson Chief Financial Officer [The remainder of this page intentionally left blank] Page 25 of 25 EX-10.A 3 ex10a.txt AMENDED EMPLOYMENT AGREEMENT OF JOSEPH D. REID Exhibit 10a Execution Copy EMPLOYMENT AGREEMENT THIS AGREEMENT is made effective as of the 13th day of March, 2003 (the "Effective Date"), by and between CAPITOL BANCORP LTD., a Michigan corporation (the "Company") and Joseph D. Reid (the "Executive"). BACKGROUND The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to employ the Executive. The Company and the Executive established an employment relationship pursuant to an Employment Agreement dated February 21, 1989, as amended (the "Original Employment Agreement"). The Company and the Executive desire to enter into this Agreement to amend and restate the terms and conditions of such employment relationship and the Original Employment Agreement in their entirety. This Agreement shall represent the entire understanding and agreement between the parties with respect to the Executive's employment with the Company. NOW, THEREFORE, in consideration of the foregoing and the terms and conditions set forth herein, the parties agree as follows: TERMS AND CONDITIONS 1. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the Employment Period. The "Employment Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Employment Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Employment Period shall not be so extended. 2. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. (i) During the Employment Period, the Executive shall serve as the President and Chief Executive Officer of the Company and shall have such duties and responsibilities as are assigned to him by the Board. The Company shall nominate the Executive as a director at the relevant meeting of shareholders held for the election of directors until such time as the Executive resigns, is terminated, or until the Executive's death or Disability. The Company shall cause the Executive to continue to be elected to the position of Chairman of the Board during the Employment Period. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) COMPENSATION. (i) BASE SALARY. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal Nine Hundred Forty Thousand Dollars ($940,000), which shall be paid in accordance with the Company's normal payroll practices for senior executives as in effect from time to time. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term "Annual Base Salary" as utilized in this Agreement shall refer to Annual Base Salary as so increased. (ii) ANNUAL BONUS. In addition to Annual Base Salary, for each fiscal year ending during the Employment Period, the Executive shall be eligible for an annual cash bonus (the "Annual Bonus") in an amount specified on Exhibit A attached hereto pursuant to the terms of the Company's Management Incentive Plan, as amended ("MIP") (or any predecessor or successor plan thereof), as determined by the Compensation Committee of the Board, upon complete achievement of the targets set forth on Exhibit A attached hereto. Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. The amount of any Annual Bonus which exceeds the maximum bonus payable pursuant to the MIP in any one fiscal year, if any, shall be carried over (on a "first-in, first-out" basis) and added to the Annual Bonus (if any) determined for any of the next 2 three fiscal years, whether or not any one or more of such fiscal years ends before or after the end of the Employment Period. (iii) LONG-TERM INCENTIVE COMPENSATION. During the Employment Period, the Executive shall be awarded stock options on the terms and conditions set forth on Exhibit B attached hereto and otherwise in accordance with the applicable stock plan. The Executive shall also be entitled to receive a special long term incentive bonus in the amount and on the date set forth on Exhibit B attached hereto and in such amounts and on such future dates as determined by the Compensation Committee of the Board. (iv) WELFARE BENEFIT PLANS. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent available generally to other peer executives of the Company and its affiliated companies. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (v) EXPENSES. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable plans, practices, policies and programs of the Company and its affiliated companies to the extent applicable generally to other peer executives of the Company and its affiliated companies. (vi) FRINGE BENEFITS. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, policies and programs of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 3 (viii) VACATION. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, practices, policies and programs of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (c) OTHER AGREEMENTS. Notwithstanding the provisions of this Agreement, the Company and the Executive acknowledge and agree to the following: (i) Section 4(c) of the Original Employment Agreement shall apply to the share exchanges set forth on Exhibit C attached hereto; (ii) that certain Securities Repurchase Agreement between the Company and the Executive (the "Securities Repurchase Agreement") shall continue in full force and effect; (iii) the Executive shall prepay the outstanding principal balance of that certain promissory note in the original principal amount of $1,819,151 (the "Note") to the Company on or before April 30, 2003, the Company acknowledges that such prepayment of the Note will be made five (5) years before the Note's due date; and (iv) as soon as practicable after the Effective Date, the Company shall enter into an indemnification agreement with the Executive which is intended to maximize the indemnification coverage for the benefit of the Executive. 3. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 9(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. 4 (b) CAUSE. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliated companies (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board (excluding the vote of the Executive) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in clauses (i) or (ii) above, and specifying the particulars thereof in detail. (c) GOOD REASON. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's position, authority, duties or responsibilities as contemplated by Section 2(a) of this Agreement, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) failure by the Company to comply with any of the provisions of Section 2(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; 5 (iii) the Company's requiring the Executive to reside at any specific location, it being understood that the Executive maintains multiple residences and offices, or the Company's requiring the Executive to travel on Company business to a greater extent than required immediately prior to the Effective Date or in the event of a Change of Control (as such term is defined in Exhibit D attached hereto), the Company's requiring the Executive to travel in a manner inconsistent with current practice in effect immediately preceding the Change of Control date; (iv) failure by the Company to comply with and satisfy Section 8(c) of this Agreement; or (v) upon a Change of Control. Within one hundred eighty (180) days after the Executive has actual knowledge of the occurrence of an event or circumstances which would give him reason to believe constitute Good Reason, the Executive must give sixty (60) days prior written notice of his intent to terminate his employment for Good Reason, which notice shall set forth the event or circumstances believed to constitute Good Reason. Upon receipt of such notice, the Company shall have sixty (60) days to cure its conduct, to the extent such cure is possible. This notice period shall not be required after a Change of Control nor serve to limit the Executive's right to terminate for Good Reason at any time during the remaining term of this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 9(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which sets forth (i) the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, in reasonable detail, the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty (30) days after the giving of such notice). The failure by either party to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive the right of either party from asserting such fact or circumstance in enforcing its rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6 4. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY PRIOR TO A CHANGE OF CONTROL. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason prior to a Change of Control: (i) the Company shall pay to the Executive, in a lump sum in cash within 90 days after the Date of Termination, the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the most recent Annual Bonus (which shall not include the long-term incentive bonus contemplated by Section 2(b)(iii)) and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) three times the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; (ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 2(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to 7 those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (x) payment of Accrued Obligations, (y) the timely payment or provision of Other Benefits and (z) the Company's obligations under the Securities Repurchase Agreement. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 4(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any. (c) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 4(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any. (d) CAUSE, ETC.; OTHER THAN FOR GOOD REASON. If the Executive's employment during the Employment Period shall be terminated for Cause or if the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. In such case, the amounts contemplated by (x) and (y) shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 8 (e) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY WITHIN TWO YEARS AFTER A CHANGE OF CONTROL. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason within two (2) years after a Change of Control: (i) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts: A. the Accrued Obligations; B. the amount equal to the product of (1) three times the sum of (x) the Executive's Annual Base Salary, (y) the Highest Annual Bonus, and (z) the aggregate amount of the employer contributions made with respect to the most recently completed plan year before the Date of Termination to the Executive's account(s) in any qualified defined contribution plan sponsored by the Company or any of its affiliated companies in which the Executive participated and any related non-qualified plans; and C. an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's qualified defined benefit retirement plan (the "Retirement Plan") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's Retirement Plan immediately prior to the Effective Date), and any non-qualified excess or supplemental defined benefit retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that (x) all accrued benefits are fully vested, (y) the Executive is three years older and (z) the Executive is credited with three more years of service, and, assuming that the Executive's compensation in each of the three years is that required by Section 2(b)(i) and Section 2(b)(ii), over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; (ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 2(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the 9 Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iii) for all purposes of the vesting and exercisability of equity-based awards under the Company's stock incentive plans and the award agreements thereunder, the Executive shall be deemed to be on a leave of absence from the Company for three years after the Date of Termination and the Executive's termination of employment from the Company shall be deemed to occur on the third anniversary of the Date of Termination; and (iv) the Company shall pay and/or provide to the Executive the Other Benefits to the extent theretofore unpaid. (v) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 5. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 10 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary not withstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 6(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 6(c), all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by BDO Seidman LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. 11 (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be 12 limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 6(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 7 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 8. SUCCESSORS. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13 9. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: One Business & Trade Center 200 Washington Square Lansing, Michigan 48933 If to the Company: Capitol Bancorp Ltd. One Business & Trade Center 200 Washington Square Lansing, Michigan 48933 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 3(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) This Agreement, and all agreements, documents, instruments, schedules, exhibits or certificates prepared in connection herewith, represent the entire understanding and agreement between the parties with respect to the subject matter hereof, supersede all prior agreements or negotiations between such parties, including the Original Employment Agreement, and may be amended, supplemented or changed only by an agreement in writing which makes specific reference to this Agreement or the agreement or document delivered 14 pursuant hereto, as the case may be, and which is signed by the party against whom enforcement of any such amendment, supplement or modification is sought. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the 31st day of March, 2003. /s/ Joseph D. Reid ---------------------------------------- Joseph D. Reid CAPITOL BANCORP LTD., a Michigan corporation By: /s/ Lee W. Hendrickson ------------------------------------ Its: Chief Financial Officer AND /s/ David O'Leary ---------------------------------------- David O'Leary, Secretary of the Board of Directors of Capitol Bancorp Ltd. 15 EXHIBIT A ANNUAL BONUS PERFORMANCE GOALS Executive: Joseph D. Reid. Company: Capitol Bancorp Ltd. Plan: Capitol Bancorp Ltd. Management Incentive Plan. Target Annual Bonus: 2% of Net Income of Capitol Bancorp Ltd. for the immediately preceding fiscal year upon complete achievement of the performance goals set forth below. Performance Goals: The Annual Bonus contemplated in this Exhibit A shall be subject to the Company's complete achievement of the following performance goals: 1. Growth of the Company's Earnings Per Share ("EPS") equal to or greater than 10% for the immediately preceding fiscal year, PROVIDED, HOWEVER, in determining the EPS growth rate new affiliated institutions shall not be included in the EPS computation for the first twelve (12) months of their operation nor shall special charges associated with the acquisition of a bank, a holding company or a controlling interest in a bank or a holding company be included in the EPS computation; and 2. Growth of the Company's total assets, as reflected on the Company's year-end audited financial statements, equal to or greater than 10% for the immediately preceding fiscal year. Net Income: Means, with reference to any period, the net income (or loss) of the Company and its subsidiaries for such period (taken as a cumulative whole), as determined in accordance with generally accepted accounting principles and reported on the year-end audited financial statements of the Company. A-1 EXHIBIT B LONG-TERM INCENTIVE BONUS I. STOCK OPTIONS: Executive: Joseph D. Reid. Company: Capitol Bancorp Ltd. Plan: Capitol Bancorp Ltd. 2003 Stock Plan or any other stock option plan adopted by the Company in which the Executive may participate. Target Award: An option to purchase 30,000 shares of the Company's common stock at an exercise price equal to the fair market value of the Company's common stock on the date of such grant for (i) each new bank or holding company formed or opened by the Company or any of its affiliated companies during the term of this Agreement, and (ii) each bank, holding company or controlling interest in a bank or holding company acquired by the Company or any of its affiliated companies and banks by purchase transaction during the term of this Agreement. II. CASH: Executive: Joseph D. Reid. Company: Capitol Bancorp Ltd. Target Annual Bonus: Two times (2X) the Executive's Annual Base Salary paid to the Executive during the 5th year of this Agreement. Performance Goals: The Long-Term Cash Bonus contemplated in this Exhibit B shall be subject to the Company's complete achievement of the following performance goals: 1. Average Growth of the Company's Earnings Per Share ("EPS") equal to or greater than 15% for the Initial Measuring Period, PROVIDED, HOWEVER, in determining the EPS growth rate newly affiliated institutions which become operative during the Initial Measuring Period shall not be included in the EPS computation for the first twelve (12) months of their respective operation nor shall special charges associated with the acquisition of a bank, a holding company or a controlling interest in a bank or B-1 a holding company during the Initial Measuring Period be included in the EPS computation; and 2. Average Growth of the Company's total assets, as reflected on the Company's year-end audited financial statements for fiscal year ending December 31, 2007, equal to or greater than 15% for the Initial Measuring Period. Initial Measuring Period: The five year period beginning on January 1, 2003 and ending on December 31, 2007. Date Paid: No later than March 31, 2008, unless the Executive shall elect to defer the receipt or a portion of such bonus. B-2 EXHIBIT C SHARE EXCHANGES THAT REMAIN SUBJECT TO SECTION 4(C) OF THE ORIGINAL EMPLOYMENT AGREEMENT 1. Desert Community Bank 2. Red Rock Community Bank 3. Black Mountain Community Bank 4. Goshen Community Bank 5. Elkhart Community Bank 6. Arrowhead Community Bank 7. Yuma Community Bank 8. Sunrise Bank of Albuquerque C-1 EXHIBIT D CHANGE OF CONTROL For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2 or (v) any acquisition of shares of the Company's stock owned by the Executive; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock D-1 of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. D-2 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT is made effective as of the 22nd day of April, 2003, by and between Joseph D. Reid (the "Executive") and CAPITOL BANCORP LTD., a Michigan corporation (the "Company"). BACKGROUND On March 31, 2003, the Company and the Executive entered into an Employment Agreement dated effective March 13, 2003 (the "Employment Agreement"). The Company and the Executive now wish to amend the Employment Agreement as provided herein. NOW, THEREFORE, in consideration of the foregoing and the terms and conditions set forth below, the parties agree as follows: TERMS AND CONDITIONS 1. AMENDMENT TO SECTION 2(C). Section 2(c) of the Employment Agreement is hereby deleted in its entirety and amended to read as follows: "(c) OTHER AGREEMENTS. Notwithstanding the provisions of this Agreement, the Company and the Executive acknowledge and agree to the following: (i) Section 4(c) of the Original Employment Agreement shall apply to the share exchanges set forth on Exhibit C attached hereto; (ii) that certain Securities Repurchase Agreement between the Company and the Executive (the "Securities Repurchase Agreement") shall continue in full force and effect; (iii) the Executive shall prepay the outstanding principal balance of that certain promissory note in the original principal amount of $1,819,151 (the "Note") to the Company on or before April 30, 2003, the Company acknowledges that such prepayment of the Note will be made five (5) years before the Note's due date; (iv) as soon as practicable after the Effective Date, the Company shall enter into an indemnification agreement with the Executive which is intended to maximize the indemnification coverage for the benefit of the Executive; (v) on or before May 9, 2003, the Company shall grant to the Executive an award of 214,169 restricted shares of the Company's common stock (the "Restricted Stock"). The Restricted Stock shall be subject to such vesting and forfeiture conditions that are satisfactory to the Company; and 1 (vi) on or before April 30, 2003, the Executive shall exercise outstanding options to purchase shares of the Company's common stock currently held by the Executive which are exercisable for not less than 598,000 shares of the Company's common stock and have an average remaining exercise period of at least three (3) years." 2. AMENDMENT TO EXHIBIT B. Exhibit B of the Employment Agreement is hereby deleted in its entirety and amended to read as Exhibit B attached hereto. 3. CONSTRUCTION. Unless otherwise defined herein, capitalized terms shall have the meanings set forth in the Employment Agreement. The terms of this Amendment amend and modify the Employment Agreement as if fully set forth in the Employment Agreement. If there is any conflict between the terms, conditions and obligations of this Amendment and the Employment Agreement, this Amendment's terms, conditions and obligations shall control. All other provisions of the Employment Agreement not specifically modified by this Amendment are preserved. IN WITNESS WHEREOF, this Amendment has been made effective as of the date first set forth above. THE EXECUTIVE: /s/ Joseph D. Reid ---------------------------------------- Joseph D. Reid THE CORPORATION: CAPITOL BANCORP LTD., a Michigan corporation By: /s/ Lee W. Hendrickson ------------------------------------ Its: Chief Financial Officer AND /s/ David O'Leary ---------------------------------------- David O'Leary, Secretary of the Board of Directors of Capitol Bancorp Ltd. 2 EXHIBIT B LONG-TERM INCENTIVE BONUS I. STOCK OPTIONS/RESTRICTED STOCK /CASH: Executive: Joseph D. Reid. Company: Capitol Bancorp Ltd. Plan: Capitol Bancorp Ltd. 2003 Stock Plan, Capitol Bancorp Ltd. 2003 Management Incentive Plan or any other plan adopted by the Company in which the Executive may participate. Target Bonus & Performance Goals: During the term of this Agreement, the Company shall grant, issue or deliver to the Executive one of the following: (A) an option to purchase 30,000 shares of the Company's common stock at an exercise price equal to the fair market value of the Company's common stock on the date of such grant, (B) a restricted stock grant equal to the value of the option referred to in (A) utilizing the Black-Scholes model, or (C) cash in an amount equal to the value of the option referred to in (A) utilizing the Black-Scholes model, for each (i) new bank or holding company formed or opened for business by the Company or any of its affiliated companies or (ii) holding company or separate bank directly acquired (including the acquisition of a controlling interest therein) by the Company or any of its affiliated companies or banks by purchase transaction. The Company shall have the sole discretion to elect the method of payment set forth in (A), (B) and (C) above. II. CASH: Executive: Joseph D. Reid. Company: Capitol Bancorp Ltd. Plan: Capitol Bancorp Ltd. 2003 Management Incentive Plan, Capitol Bancorp Ltd. 2003 Stock Plan or any other plan adopted by the Company in which the Executive may participate. Target Bonus: Two times (2X) the Executive's Annual Base Salary paid to the Executive during the 5th year of this Agreement. B-1 Performance Goals: The Long-Term Cash Bonus contemplated in this Exhibit B shall be subject to the Company's complete achievement of the following performance goals: 1. Average Growth of the Company's Earnings Per Share ("EPS") equal to or greater than 15% for the Initial Measuring Period, PROVIDED, HOWEVER, in determining the EPS growth rate newly affiliated institutions which become operative during the Initial Measuring Period shall not be included in the EPS computation for the first twelve (12) months of their respective operation nor shall special charges associated with the acquisition of a bank, a holding company or a controlling interest in a bank or a holding company during the Initial Measuring Period be included in the EPS computation; and 2. Average Growth of the Company's total assets, as reflected on the Company's year-end audited financial statements for fiscal year ending December 31, 2007, equal to or greater than 15% for the Initial Measuring Period. Initial Measuring Period: The five year period beginning on January 1, 2003 and ending on December 31, 2007. Date Paid: No later than March 31, 2008, unless the Executive shall elect to defer the receipt or a portion of such bonus. B-2 EX-99.1 4 ex99-1.txt CEO CERTIFICATION EXHIBIT 99.1 Chief Executive Officer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss. 1350, as adopted), Joseph D. Reid, the Chief Executive Officer of Capitol Bancorp Ltd. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003, and to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 14, 2003 /s/ Joseph D. Reid ---------------------------- Joseph D. Reid Chief Executive Officer This certification accompanies the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.2 5 ex99-2.txt CFO CERTIFICATION EXHIBIT 99.2 CHIEF FINANCIAL OFFICER CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350, as adopted), Lee W. Hendrickson, the Chief Financial Officer of Capitol Bancorp Ltd. (the "Company") hereby certifies that, to the best of his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended March 31, 2003, and to which this Certification is attached as Exhibit 99.2 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 14, 2003 /s/ Lee W. Hendrickson ---------------------------- Lee W. Hendrickson Chief Financial Officer This certification accompanies the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----