EX-99.1 7 exhibit99_1.htm INFORMATION STATEMENT exhibit99_1.htm
 
EXHIBIT 99.1
 
 
Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the United States Securities and Exchange Commission under the United States Securities Exchange Act of 1934, as amended.
 
 


 Preliminary and Subject to Completion, dated _______, 2009
Preliminary Information Statement
 
Michigan Commerce Bancorp Limited

Common Stock (no par value per share)


 
This information statement is being furnished in connection with the distribution of 95.1% of the outstanding shares of common stock, no par value per share, of Michigan Commerce Bancorp Limited a Michigan corporation (MCBL) to holders of Capitol Bancorp Limited’s (“Capitol”) Common Stock and Series A Noncumulative Convertible Perpetual Preferred Stock (“Series A Preferred”).
 
MCBL is currently a wholly-owned subsidiary of Capitol. Following the spin-off, MCBL will be an independent publicly-traded company, and MCBL’s assets and business will consist largely of those currently reported in Capitol’s financial statements as Capitol’s prior wholly-owned subsidiary, Michigan Commerce Bank.
 
Shares of MCBL’s common stock will be distributed to holders of Capitol’s common stock and the Series A Preferred of record as of the close of business on _______, 2009 (the “record date”).  These shareholders will receive one share of MCBL’s common stock for every [___] shares of Capitol’s common stock and [___] share of MCBL’s common stock for every [___] shares of the Series A Preferred held on the record date. The distribution of the shares of MCBL’s common stock will be made in book-entry form. The spin-off will be effective at 5:00 p.m., Lansing, Michigan time on _______, 2009. Capitol currently intends the spin-off to be tax-free for U.S. federal income tax purposes.
 
No shareholder approval of the spin-off is required or sought. MCBL is not asking you for a proxy and you are requested not to send a proxy.  Capitol’s shareholders will not be required to pay for the shares of MCBL’s common stock to be received by them in the spin-off or to surrender or exchange shares of Capitol’s common stock or Series A Preferred in order to receive MCBL’s common stock or to take any other action in connection with the spin-off.
 
There is no current trading market for MCBL’s common stock. However, MCBL expects that a limited market, commonly known as a “when-issued” trading market, for MCBL’s common stock will develop on or shortly before the record date for the spin-off, and MCBL expects that “regular way” trading of MCBL’s common stock will begin the first trading day after the spin-off. The shares of MCBL’s common stock have been approved for listing on the NASDAQ Stock Market LLC under the symbol “MCBL.”
 
In reviewing this information statement, you should carefully consider the matters described under “Risk Factors” for a discussion of certain factors that should be considered by recipients of MCBL’s common stock. 
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.
 
This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities. 

 
The date of this information statement is __________, 2009.
 
 

 
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This information statement is being furnished solely to provide information to Capitol shareholders who will receive shares of MCBL’s common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of MCBL securities or any securities of Capitol. This information statement describes MCBL’s business, MCBL’s relationship with Capitol and how the proposed spin-off affects Capitol and its shareholders, and provides other information to assist you in evaluating the benefits and risks of holding or disposing of MCBL’s common stock that you will receive in the distribution. You should be aware of certain risks relating to the spin-off, MCBL business and ownership of MCBL’s common stock, which are described under the heading “Risk Factors.”
 
You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and MCBL and/or Capitol undertakes no obligation to update the information, except in the normal course of MCBL’s public disclosure obligations and practices.
 



 
 

 

QUESTIONS AND ANSWERS ABOUT MCBL AND THE SPIN-OFF

Q:           Why am I receiving this document?
 
A:
Capitol is delivering this document to you because you were a holder of Capitol’s common stock on the record date for the distribution of shares of MCBL’s common stock. Accordingly, you are entitled to receive one share of MCBL’s common stock for every [___] shares of Capitol’s common stock and [___] share of MCBL’s common stock for every [___] shares of Capitol’s Series A Noncumulative Convertible Perpetual Preferred Stock (“Series A Preferred”) that you held on the record date. No action is required for you to participate in the distribution.

Q:           What is the spin-off?
 
A:
The spin-off is the overall transaction of separating MCBL from Capitol, which will be accomplished through a series of transactions which will result in MCBL shareholders owning the Michigan-based banking business operated by Capitol, but excluding the assets and business of Capitol National Bank, Paragon Bank & Trust and Bank of Michigan.  The final step of the transactions will be the pro rata distribution of MCBL’s common stock by Capitol to holders of Capitol’s common stock and Capitol’s Series A Preferred (the “distribution”).

Q:           What is MCBL?
 
A:
MCBL is an existing wholly-owned bank holding company subsidiary of Capitol. Following the spin-off, MCBL will be an independent publicly-traded company, providing banking products and services to individuals and businesses in the State of Michigan through its wholly-owned subsidiaries, Michigan Commerce Bank and Bank of Auburn Hills.

Q:           Why is Capitol separating MCBL and distributing its stock?
 
A:
Capitol and MCBL have become fundamentally different types of businesses and the separation of the two businesses will help highlight unique characteristics and values of these businesses for investors and better position each company to access the capital markets. Capitol and MCBL have become banking enterprises driven by diverging growth and valuation dynamics. The separation of MCBL’s banking business from Capitol will result in two separate companies that can each focus on maximizing opportunities for its distinct business. Capitol believes this separation will present the opportunity for enhanced performance of each of the two companies. Capitol will focus on the expansion-oriented, growth-driven operations associated with its national community banking franchise and MCBL will focus on the growth opportunities and bank operations in the State of Michigan.  The following potential benefits were considered by Capitol’s Board of Directors in making the determination to effect the spin-off:
 
·  
allowing MCBL to separately pursue the business strategies that best suit its long-term interests;

·  
creating separate companies that have different financial characteristics, which may appeal to different investor bases and allow for clarity on valuation of the respective businesses;

·  
creating opportunities to more efficiently develop and finance ongoing operations and future possible acquisitions;

·  
allowing each company to establish an expense structure appropriate for its business and size; and

·  
creating effective management incentives tied to MCBL’s performance.
 
For a further explanation of the reasons for the spin-off and more information about MCBL’s business, see“The Spin-Off—Reasons for the Spin-Off” and “Business.”

 
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Q:           Why is the separation of the two companies structured as a spin-off?
 
A:
Capitol’s Board of Directors believes that a distribution of shares of MCBL’s common stock is a cost-effective way to separate the companies.

Q:           What is the record date for the distribution?
 
A:
The record date is__________, 2009, and ownership will be determined as of 5:00 p.m., Lansing, Michigan time, on that date.

Q:           When will the distribution occur?
 
A:
Shares of MCBL’s common stock will be distributed on or about ____________, 2009 (the “distribution date”).

Q:
Can Capitol decide to cancel the distribution of MCBL’s common stock even if all the conditions have been met?
 
A:
Yes. The distribution is conditioned upon satisfaction or waiver of certain conditions. See “The Spin-Off—Spin-Off Conditions and Termination.” Capitol has the right to terminate the distribution, even if all of these conditions are met, if at any time Capitol’s Board of Directors determines, in its sole discretion that Capitol and MCBL are better served with MCBL continuing as a wholly-owned subsidiary of Capitol, thereby making the distribution not in the best interest of Capitol and its shareholders.

Q:
What will happen to the listing of Capitol’s common stock and Capitol’s Series A Preferred?
 
A:
Nothing. Capitol’s common stock will continue to be traded on the New York Stock Exchange under the symbol “CBC.”  Capitol’s Series A Preferred will continue to be traded on the NASDAQ Capital Market under the symbol “CBCP.P.”

 Q:
Will the spin-off affect the market price of shares of Capitol’s common stock or Capitol’s Series A Preferred?
 
A:
Yes. As a result of the spin-off, Capitol expects the trading price of shares of Capitol’s common stock and Series A Preferred immediately following the distribution date to be lower than immediately prior to the distribution date because the trading price will no longer reflect the perceived inherent value of MCBL’s business. In addition, until the market has fully analyzed the operations of Capitol without MCBL, the price of shares of Capitol’s common stock and Series A Preferred may fluctuate significantly. Furthermore, the combined trading prices of Capitol’s common stock, Series A Preferred and MCBL’s common stock after the distribution date may be less than the trading price of Capitol’s common stock and Series A Preferred prior to the distribution date.

Q:
What will Capitol’s shareholders receive in the spin-off?
 
A:
In the spin-off, Capitol’s shareholders will receive one share of MCBL’s common stock for every [___] shares of Capitol’s common stock or one share of MCBL’s common stock for every __ shares of Series A Preferred they own as of the record date of the spin-off. No fractional shares will be issued. Those shareholders who would otherwise be entitled to receive fractional shares will receive cash in lieu of fractional shares. For example, a Capitol shareholder that holds shares of Capitol’s common stock as of the record date will, after the spin-off, (i) continue to hold shares of Capitol’s common stock and (ii) receive shares of MCBL’s common stock and cash in lieu of fractional shares. Immediately after the spin-off, Capitol’s shareholders will still own their shares of Capitol’s common stock and the same shareholders will still own all of Capitol’s current businesses, but they will own them as two separate investments rather than as a single investment.


 
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After the spin-off, the certificates and book-entry interests representing the “old” shares of Capitol’s common stock or Capitol’s Series A Preferred will represent such shareholders’ respective interests in Capitol’s businesses following the spin-off, excluding MCBL but including Capitol National Bank, Paragon Bank & Trust and Bank of Michigan, and the book-entry interests representing MCBL’s common stock that such shareholders receive in the spin-off will represent their interest in MCBL’s business.

Q:
What does a Capitol shareholder need to do now?
 
A:
Capitol’s shareholders do not need to take any action, although you are urged to read this entire document carefully. The approval of Capitol’s shareholders is not required or sought to effect the spin-off and Capitol’s shareholders have no appraisal rights in connection with the spin-off. Capitol is not seeking a proxy from any shareholders and you are requested not to send a proxy.

 
Capitol’s shareholders will not be required to pay anything for the shares of MCBL’s common stock distributed in the spin-off or to surrender any shares of Capitol’s common stock or Series A Preferred. Capitol’s shareholders should not send in their share certificates of Capitol. Capitol’s shareholders will automatically receive their shares of MCBL’s common stock when the spin-off is effected and will receive cash for any fractional shares.

Q:
Are there risks to owning MCBL’s common stock?
 
A:
Yes. MCBL’s business is subject to both general and specific risks relating to MCBL’s operations. In addition, MCBL’s spin-off from Capitol presents risks relating to MCBL becoming an independent publicly-traded company as well as risks relating to the nature of the spin-off transaction itself.

Q:
What are the U.S. federal income tax consequences of the spin-off to Capitol’s shareholders?
 
 
A:
It is intended that Capitol’s shareholders will not recognize gain or loss on the receipt of shares of MCBL’s common stock in the spin-off. In that case, Capitol’s shareholders will apportion their tax basis in their Capitol’s common stock or Series A Preferred, as the case may be between such Capitol’s common stock or Series A Preferred (as the case may be) and MCBL’s common stock received in the spin-off in proportion to the relative fair market values of such stock at the time of the spin-off. A Capitol shareholder’s holding period for MCBL’s common stock received in the spin-off will include the period for which that shareholder’s shares of Capitol’s common stock or Series A Preferred was held.

 
If instead the spin-off is determined to be a taxable transaction, a taxable U.S. shareholder receiving shares of MCBL’s common stock in the spin-off would be treated as if such shareholder had received a taxable distribution in an amount equal to the fair market value of MCBL’s common stock received, which could, depending on the circumstances, give rise to capital gain or loss or a dividend. Subject to certain limitations, individuals may be taxed at a reduced rate of 15% with respect to dividends generally and capital gains to the extent they have held their shares of Capitol’s common stock or Series A Preferred for more than one year. In addition, if the spin-off is treated as a taxable transaction, a shareholder’s tax basis in MCBL’s common stock would be equal to its fair market value at the time of the spin-off and the holding period in MCBL’s common stock would begin the day after the spin-off. Depending on the circumstances, non-U.S. shareholders may be subject to a withholding tax at a rate of 30% on the fair market value of the common stock received by them.

 
See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”  You should consult your own tax advisor as to the particular consequences of the spin-off to you.

 Q:
What if I want to sell my shares of common stock of Capitol, my shares of Series A Preferred of Capitol or my MCBL common stock?
 
A:
You should consult with your financial advisors, such as your stockbroker, bank or tax advisor. Capitol does not make any recommendations on the purchase, retention or sale of shares of Capitol’s common stock, Capitol’s Series A Preferred or the MCBL common stock to be distributed. If you do decide to sell
 
 
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any shares, you should make sure your stockbroker, bank or other nominee understands whether you want to sell any or all of your common stock of Capitol, Series A Preferred of Capitol or MCBL common stock after it is distributed.
 
Q:
Where will I be able to trade shares of my MCBL common stock?
 
A:
There is not currently a public market for MCBL’s common stock. The shares of MCBL’s common stock have been approved for listing on the NASDAQ Stock Market LLC under the symbol “MCBL.” MCBL anticipates that trading in shares of MCBL’s common stock will begin on a “when-issued” basis on or shortly before the record date and before the distribution date and “regular way” trading will begin on the first trading day following the distribution date. If trading does begin on a “when-issued” basis, you may purchase or sell MCBL’s common stock after that time, but your transaction will not settle until after the distribution date. On the first trading day following the distribution date, when-issued trading in respect of MCBL’s common stock will end and regular way trading will begin. MCBL cannot predict the trading prices for MCBL’s common stock before or after the distribution date.

Q:
Do I have appraisal rights?
 
A:
No. Holders of Capitol’s common stock and Capitol’s Series A Preferred have no appraisal rights in connection with the spin-off.

Q:
Where can Capitol shareholders get more information?
 
A:
Before the distribution, if you have any questions relating to the distribution, you should contact:
 
Capitol Bancorp Limited
Investor Relations
Capitol Bancorp Center
200 Washington Square North, Fourth Floor
Lansing, Michigan 48933
Telephone: (517) 487-6555

After the distribution, if you have any questions relating to MCBL’s common stock, you should contact:
 
Michigan Commerce Bancorp Limited
Investor Relations
222 North Washington Square, Suite One
    Lansing, Michigan 48933
Telephone: 517-374-5333

Q:
Who will be the distribution agent, transfer agent and registrar for MCBL’s common stock?
 
A:
The distribution agent for MCBL’s common stock will be BNY Mellon Shareowner Services. After the distribution, the transfer agent and registrar for MCBL’s common stock will be BNY Mellon Shareowner Services.
 

 
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This summary highlights information contained elsewhere in this information statement and may not contain all of the information that may be important to you. For a complete understanding of Michigan Commerce Bancorp Limited, its wholly-owned subsidiaries, Michigan Commerce Bank and Bank of Auburn Hills, and the spin-off, you should read this summary together with the more detailed information and financial statements appearing elsewhere in this information statement. You should read this entire information statement carefully, including the “Risk Factors” and “Special Note About Forward-Looking Statements” sections.
 
References in this information statement to (1)“MCBL,” or “Michigan Commerce Bancorp Limited,”  refer to Michigan Commerce Bancorp Limited, a Michigan corporation, and its subsidiaries, and (2) “Capitol” refers collectively to Capitol Bancorp Limited, a Michigan corporation, and its direct and indirect subsidiaries, in each case, unless the context otherwise requires. The transaction in which MCBL will be separated from Capitol and become an independent publicly-traded company is referred to in this information statement as the “spin-off.”

MCBL

Following the spin-off, MCBL will operate substantially all of the Michigan-based businesses currently operated by Capitol with the exception of Capitol National Bank, Paragon Bank & Trust and Bank of Michigan.  MCBL’s operations will be conducted through its wholly-owned subsidiaries: Michigan Commerce Bank (MCB) and Bank of Auburn Hills (BAH).

Summary Consolidated Financial Data

The following tables set forth MCBL’s summary consolidated financial data. The summary results of operations data for each of the three years in the period ended December 31, 2008 are derived from audited financial statements of Michigan Commerce Bank included elsewhere in this information statement, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The results of operations data for the three months ended March 31, 2008 and March 31, 2009 are derived from MCBL’s unaudited consolidated financial statements included elsewhere in this information statement. The unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements of Michigan Commerce Bank and in MCBL’s opinion include all adjustments, consisting only of normal recurring adjustments that MCBL consider necessary for a fair presentation of MCBL and Michigan Commerce Bank’s results of operations and financial position for these periods and as of such dates.
 
The following tables also present MCBL’s summary unaudited pro forma consolidated financial information, which has been derived from MCBL’s unaudited pro forma consolidated financial information and audited financial statements of Michigan Commerce Bank included elsewhere in this information statement.

   
Three Months Ended March 31
   
Year Ended December 31
   
2009
   
Pro Forma
   
2008
   
2008
   
Pro Forma
   
2007
   
2006
(in $1,000’s)
                                       
Results of Operations
                                       
Interest income
  $ 15,826     $ 16,377     $ 20,797     $ 75,446     $ 78,120     $ 92,196     $ 90,483
Interest expense
    7,497       7,846       10,660       36,809       38,521       46,082       40,078
Net interest income
    8,329       8,531       10,137       38,637       39,599       46,114       50,405
Provision for loan losses
    8,103       8,437       5,265       30,040       31,229       9,084       4,748
Noninterest income
    816       839       1,162       4,491       4,582       5,042       5,628
Noninterest expense
    9,330       9,882       8,068       33,916       35,825       32,830       32,292
Income (loss) before income tax
    (8,288 )     (8,949 )     (2,034 )     (20,828 )     (22,873 )     9,242       18,993
Net income (loss)
    (5,468 )     (5,905 )     (1,359 )     (13,768 )     (15,122 )     6,050       12,476


 
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As of March 31 
   
As of December 31 
   
2009
   
Pro Forma
   
2008
   
2008
   
2007
   
2006
Balance Sheet Data
                                 
Cash and cash equivalents
  $ 146,773     $ 155,181     $ 47,971     $ 102,663     $ 55,093     $ 58,781
Portfolio loans
    1,093,401       1,130,902       1,189,018       1,127,348       1,208,545       1,143,853
                                               
Total assets
    1,290,734       1,338,021       1,266,654       1,275,125       1,290,681       1,239,846
Deposits
    1,110,742       1,149,739       1,054,017       1,077,246       1,080,383       1,031,148
                                               
Stockholder’s equity
    105,690       111,292       113,686       112,502       112,584       110,600
 

 
Notes to Summary Consolidated Financial Data

 
MCBL’s unaudited pro forma consolidated financial statements have been prepared to reflect adjustments to MCBL’s historical financial information to give effect to the distribution of MCBL’s common stock to the shareholders of Capitol and the following transactions, as if these transactions had been completed at earlier dates:

·  
The addition of BAH as a wholly-owned subsidiary of MCBL.  BAH became a wholly-owned subsidiary of MCBL effective June 30, 2009.  On June 16, 2009, an application was filed with bank regulatory agencies seeking permission to merge BAH with and into MCB at a future date.  The pro forma consolidated financial statements reflect BAH as if it had become a wholly-owned subsidiary as of the beginning of the period presented.

·  
Operating costs related to human resources, facilities, corporate communications, compliance, administration, legal, internal audit and tax service were previously charged to MCBL by Capitol. Costs for these functions will be directly incurred by MCBL after the spin-off. In addition, costs have been adjusted to include Board of Directors’ expenses, transfer agent fees and stock exchange listing fees. This resulted in net cost increases of $400,000 and $100,000 for 2008 and the first three months of 2009, respectively.
 
The unaudited pro forma consolidated financial data presented for the year ended December 31, 2008 and for the three months ended March 31, 2009 has been derived from audited financial statements for the year ended December 31, 2008 of Michigan Commerce Bank and MCBL’s unaudited consolidated financial statements for the three months ended March 31, 2009, respectively. The unaudited pro forma consolidated results of operations data for the year ended December 31, 2008 and the three-months ended March 31, 2009 assumes the items listed above occurred as of the beginning of the periods reported. For a more complete explanation see “Unaudited Pro Forma Consolidated Financial Data.”
 
MCBL’s consolidated financial information may not be indicative of MCBL’s future performance and does not necessarily reflect what MCBL’s financial condition and results of operations would have been had MCBL operated as a separate, stand-alone entity during the periods presented, including many changes that will occur in the operations and capitalization of MCBL as a result of MCBL’s separation from Capitol.

Summary of the Spin-Off
 
The following is a summary of the terms of the proposed spin-off. See “The Spin-Off” for a more detailed description of the matters described below.
 
Distributing Company:
Capitol Bancorp Limited
   
Distributed Company:
Michigan Commerce Bancorp Limited
   
Distribution ratio:
Each holder of Capitol’s common stock will receive one share of MCBL’s common stock for every [___] shares of Capitol’s common stock held on the record date.


 
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Each holder of Capitol’s Series A Preferred will receive one share of MCBL’s common stock for every [___] shares of Capitol’s Series A Preferred held on the record date. 
   
Securities to be distributed:
Shares of MCBL’s common stock and accompanying share purchase rights will constitute all of the outstanding shares of MCBL’s common stock immediately after the spin-off. The number of shares that Capitol will distribute to its shareholders will be reduced to the extent that cash payments are to be made in lieu of the issuance of fractional shares of MCBL’s common stock, as described below. See “Description of MCBL Capital Stock—Common Stock” and “Description of MCBL Capital Stock—Anti-Takeover Provisions—Rights Agreement.”
   
Fractional shares:
Capitol will not distribute any fractional shares of MCBL’s common stock to its shareholders. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds of the sales pro rata to each holder of Capitol’s common stock and each holder of Capitol’s Series A Preferred who otherwise would have been entitled to receive a fractional share in the distribution. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.
   
Record date:
The record date is the close of business on __________, 2009. In order to be entitled to receive shares of MCBL’s common stock in the spin-off, holders of shares of Capitol’s common stock or holders of shares of Capitol’s Series A Preferred must be shareholders as of the close of business on the record date.
   
Distribution date:
The distribution date will be on or about ______________, 2009.
   
Relationship between MCBL
and Capitol after
the spin-off:
After the spin-off, neither Capitol nor MCBL will have any ownership interest in the other (except for Capitol’s retention of a 4.9% interest in MCBL’s common stock), and each of Capitol and MCBL will be an independent publicly-traded company. In connection with the spin-off, MCBL is entering into a number of transitional agreements with Capitol that will govern MCBL’s future relationship with Capitol. Under these transitional agreements, MCBL expects Capitol will provide MCBL with the following transition services, among others: information technology support, human resources, legal and other limited services consistent with past practices. MCBL will also enter into other agreements with Capitol providing for the allocation of tax benefits, employee matters and liabilities arising from periods prior to the spin-off. MCBL may enter into other agreements with Capitol prior to or concurrently with the distribution that would relate to other aspects of MCBL’s relationship with Capitol following the spin-off. See “MCBL’s Relationship With Capitol After the Spin-Off.”
   
Management of MCBL:
Following the spin-off, MCBL will have an initial Board of Directors (the “Board”) consisting of seven directors. MCBL’s Amended and Restated Articles of Incorporation and Bylaws provide that MCBL’s Board is divided into three classes. The term of the first class of directors expires at MCBL’s 2010 annual meeting of shareholders, the term of the second class of directors expires at MCBL’s 2011 annual meeting of shareholders and the term of the third class of directors expires at MCBL’s 2012 annual meeting of shareholders. At each of MCBL’s annual meetings of shareholders, the successors of the class of directors whose term expires at that meeting of shareholders will be elected for a three year term, one class being elected each year by MCBL’s shareholders. See “Management—Board of Directors.”
   
Description of indebtedness:
$2.5 million payable to Capitol on demand, bearing an annual interest rate of 8%, payable quarterly.
   

 
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Dividend policy:
MCBL does not plan on paying cash dividends for the foreseeable future. However, the owners of MCBL’s common stock may receive dividends when declared by MCBL’s Board from funds legally available for the payment of dividends. All decisions regarding the declaration and payment of dividends will be evaluated from time to time in light of MCBL’s financial condition, earnings, growth prospects, regulatory capital requirements, other uses of cash, funding requirements, applicable law and other factors MCBL’s Board deems relevant. See “Dividend Policy.”
   
Anti-takeover provisions:
In connection with the spin-off, MCBL intends to adopt a shareholders’ rights agreement, which will expire on or before ______, 2012, which could have the effect of discouraging, delaying or preventing a change of control of MCBL not approved by MCBL’s Board. If the rights become exercisable, the rights will cause substantial dilution to a person or group that attempts to acquire MCBL on terms not approved by MCBL’s Board.  Additionally, certain provisions of MCBL’s Amended and Restated Articles of Incorporation and Bylaws may have the effect of making the acquisition of control of MCBL in a transaction not approved by MCBL’s Board more difficult.  Moreover, certain provisions of the agreement providing for certain tax disaffiliation and other tax-related matters that MCBL will enter into in connection with the distribution could discourage potential acquisition proposals.
   
Risk Factors:
You should carefully consider the matters discussed under the section entitled “Risk Factors.”
 
Corporate Information and Structure
 
MCBL is a Michigan corporation and an existing wholly-owned subsidiary of Capitol. MCBL’s principal executive offices are located at 222 North Washington Square, Suite One, Lansing, Michigan 48933 and MCBL’s telephone number is 517-374-5333.
 
Pursuant to the spin-off, MCBL will be separated from Capitol and become an independent publicly-traded company. The spin-off and MCBL’s resulting separation from Capitol involve the following steps:

·  
Before the distribution date:

§  
Capitol’s Board of Directors will determine the record date for the distribution of MCBL’s common stock to Capitol’s shareholders, approve the distribution and determine the distribution ratio.

§  
MCBL’s common stock is expected to begin trading on a “when-issued” basis on or shortly before the record date for the spin-off.

§  
Capitol, as the majority shareholder prior to the spin-off, will:

·  
elect MCBL’s Board;

·  
approve MCBL’s adoption of certain benefit plans; and

·  
approve various actions related to the spin-off as described in this information statement.

§  
MCBL’s Board will approve:

·  
the adoption of certain benefit plans;

·  
MCBL’s corporate governance documents and policies; and

·  
approve various actions related to the spin-off as described in this information statement.
 
 
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§  
The Securities and Exchange Commission (the “SEC”) will declare effective under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), MCBL’s Form 10, of which this information statement is a part.

§  
 Capitol will mail this information statement to its shareholders.

·  
On or before the distribution date:

§  
MCBL will have entered into numerous agreements with Capitol, including a:

·  
Separation and Distribution Agreement;

·  
Transition Services Agreement;

·  
Tax Separation Agreement; and

·  
Employee Matters Agreement.

·  
On the distribution date:

§  
Capitol will distribute 95.1% of the issued and outstanding shares of MCBL’s common stock (other than shares withheld to satisfy certain withholding obligations) pro rata to all of its shareholders of record as of the record date.

·  
Following the distribution date:

§  
MCBL expects that MCBL’s common stock will begin trading on the NASDAQ Stock Market LLC on a “regular way” basis under the symbol “MCBL” on the first trading day following the distribution date. MCBL will operate as an independent publicly-traded company.
 
For a further explanation of the spin-off, see “The Spin-Off.” The following diagram depicts MCBL’s corporate structure after giving effect to the distribution and the other concurrent transactions described in this information statement:
 
 

 
 
9

 
 
 
The historical financial data has been derived from MCBL’s consolidated financial statements using the historical results of operations and basis of the assets and liabilities of MCBL’s businesses and give effect to additional estimated expenses which MCBL would have incurred if it was an independent company. The historical consolidated results of operations data set forth below does not reflect changes that will occur in the operations and funding of MCBL as a result of MCBL’s separation from Capitol. The historical consolidated balance sheet data set forth below reflects the assets and liabilities transferred to MCBL as a result of MCBL’s separation from Capitol.
 
The selected consolidated financial data should be read in conjunction with, and are qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical audited and interim unaudited consolidated financial statements and the accompanying notes thereto, which for certain periods are included elsewhere in this information statement. The results of operations for each of the three years in the period ended December 31, 2008 and the balance sheet data as of December 31, 2008 and 2007 are derived from the audited financial statements of Michigan Commerce Bank included elsewhere in this information statement and should be read in conjunction with those financial statements and the accompanying notes. The results of operations and the balance sheet data set forth below for the three months ended March 31, 2009 and 2008 are derived from the unaudited consolidated financial statements of MCBL included elsewhere in this information statement. In management’s opinion, these unaudited consolidated financial statements have been prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial data for the periods presented. The results of operations for the interim period are not necessarily indicative of the operating results for the entire year or any future period.
 

 

 

 

 

 

 
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10

 


   
As of and for the Three
Months Ended March 31
   
As of and for the Years Ended December 31 
 
   
2009
   
2008
   
2008
   
2007
   
2006
   
2005
   
2004
 
Selected Results of
Operations Data:
                                         
Interest income
  $ 15,826     $ 20,797     $ 75,446     $ 92,196     $ 90,483     $ 82,279     $ 69,855  
Interest expense
    7,497       10,660       36,809       46,082       40,078       28,555       20,239  
Net interest income
    8,329       10,137       38,637       46,114       50,405       53,724       49,616  
Provision for loan losses
    8,103       5,265       30,040       9,084       4,748       6,507       7,355  
Net interest income after
                                                       
provision for loan
                                                       
losses
    226       4,872       8,597       37,030       45,657       47,217       42,261  
Noninterest income
    816       1,162       4,491       5,042       5,628       7,283       6,030  
Noninterest expense
    9,330       8,068       33,916       32,830       32,292       32,187       30,173  
Income (loss) before
                                                       
income taxes (benefit)
    (8,288 )     (2,034 )     (20,828 )     9,242       18,993       22,313       18,118  
Income taxes (benefit)
    (2,820 )     (675 )     (7,060 )     3,192       6,517       7,656       6,205  
Net income (loss)
    (5,468 )     (1,359 )     (13,768 )     6,050       12,476       14,657       11,913  
                                                         
Per Share Data:
                                                       
Net income (loss) per
                                                       
common share
  $ (0.96 )   $ (0.24 )   $ (36.71 )   $ 16.13     $ 33.27     $ 39.09     $ 31.77  
Book value
    18.54       19.73       300.01       300.22       294.93       284.09       277.39  
                                                         
Selected Balance Sheet
Data:
                                                       
Total assets
  $ 1,290,734     $ 1,266,654     $ 1,275,125     $ 1,290,681     $ 1,239,846     $ 1,193,282     $ 1,215,665  
Investment securities
    11,985       7,985       14,023       7,893       8,354       10,032       10,160  
Portfolio loans
    1,093,401       1,189,018       1,127,348       1,208,545       1,143,853       1,105,795       1,112,706  
Allowance for loan losses
    32,662       20,254       30,258       18,721       16,869       16,570       15,531  
Deposits
    1,110,742       1,054,017       1,077,246       1,080,383       1,031,148       983,670       992,701  
Stockholders' equity
    105,690       113,686       112,502       112,584       110,600       106,534       104,023  
                                                         
Performance Ratios: (2)
                                                       
Return on average equity
    N/A       N/A       N/A       5.66 %     11.71 %     13.86 %     11.61 %
Return on average assets
    N/A       N/A       N/A       0.48 %     1.01 %     1.20 %     1.02 %
Net interest margin (fully
                                                       
taxable equivalent)
    2.86 %     3.34 %     3.12 %     3.81 %     4.28 %     4.58 %     4.45 %
Efficiency ratio (1)
    102.02 %     71.40 %     78.64 %     64.18 %     57.63 %     52.76 %     54.22 %
                                                         
Asset Quality:
                                                       
Nonperforming loans
  $ 74,009     $ 39,946     $ 63,092     $ 37,691     $ 23,646     $ 15,766     $ 22,057  
Allowance for loan losses
                                                       
to nonperforming loans
    44.13 %     50.70 %     47.96 %     49.67 %     71.34 %     105.10 %     70.41 %
Allowance for loan losses
                                                       
to portfolio loans
    2.99 %     1.70 %     2.68 %     1.55 %     1.47 %     1.50 %     1.40 %
Nonperforming loans to
                                                       
total portfolio loans
    6.77 %     3.36 %     5.60 %     3.12 %     2.07 %     1.43 %     1.98 %
Net loan losses (recoveries)
                                                       
to average portfolio
                                                       
loans (2)
    2.04 %     1.23 %     1.57 %     0.62 %     0.40 %     0.49 %     0.51 %
                                                         
Capital Ratios:
                                                       
Average equity to average
                                                       
assets
    8.48 %     8.77 %     8.50 %     8.46 %     8.65 %     8.63 %     8.78 %
Tier 1 risk-based capital
                                                       
ratio
    9.25 %     9.38 %     9.29 %     9.21 %     9.43 %     9.37 %     9.10 %
Total risk-based capital
                                                       
ratio
    10.52 %     10.64 %     10.56 %     10.46 %     10.69 %     10.62 %     10.35 %
Leverage ratio
    7.83 %     8.55 %     8.17 %     8.53 %     8.77 %     8.65 %     8.38 %

(1) Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income.
 
(2) Annualized for interim periods, where applicable.
 


 
11

 

SELECTED CONSOLIDATED FINANCIAL DATA OF MICHIGAN COMMERCE BANCORP LIMITED, continued

   
Quarterly Results of Operations
 
   
Total for
the year
   
Fourth
Quarter
   
Third
Quarter
   
Second
Quarter
   
First
Quarter
 
                               
Year ended December 31, 2008:
                             
Interest income
  $ 75,446     $ 17,352     $ 18,251     $ 19,046     $ 20,797  
Interest expense
    36,809       8,466       8,617       9,066       10,660  
Net interest income
    38,637       8,886       9,634       9,980       10,137  
Provision for loan losses
    30,040       11,414       10,330       3,031       5,265  
Net interest income after provision for loan losses
    8,597       (2,528 )     (696 )     6,949       4,872  
Noninterest income
    4,491       1,622       987       761       1,121  
Noninterest expense
    33,916       9,137       8,425       8,286       8,068  
Income (loss) before income tax (benefit)
    (20,828 )     (10,043 )     (8,134 )     (576 )     (2,075 )
Income tax (benefit)
    (7,060 )     (3,406 )     (2,777 )     (188 )     (689 )
Net income (loss)
    (13,768 )     (6,637 )     (5,357 )     (388 )     (1,386 )
Net income (loss) per share
    (36.71 )     (17.70 )     (14.28 )     (1.03 )     (3.70 )
                                         
Year ended December 31, 2007:
                                       
Interest income
  $ 92,196     $ 28,866     $ 17,454     $ 22,831     $ 23,045  
Interest expense
    46,082       14,639       8,837       11,368       11,238  
Net interest income
    46,114       14,227       8,617       11,463       11,807  
Provision for loan losses
    9,084       3,262       2,425       1,040       2,357  
Net interest income after provision for loan losses
    37,030       10,965       6,192       10,423       9,450  
Noninterest income
    5,042       1,525       938       1,258       1,321  
Noninterest expense
    32,830       10,942       5,382       8,044       8,462  
Income before income tax
    9,242       1,548       1,748       3,637       2,309  
Income taxes
    3,192       538       589       1,261       804  
Net income
    6,050       1,010       1,159       2,376       1,505  
Net income per share
    16.13       2.69       3.09       6.34       4.01  



 

 

 
12

 


You should carefully consider the risks described below, together with all of the other information included in this information statement, in evaluating MCBL and MCBL’s common stock. If any of the events described below actually occurs, MCBL’s business, financial results, financial condition and stock price could be materially adversely affected.

Risk Factors Relating to the Spin-Off

There is no current trading market for MCBL’s common stock.

There has not been any prior trading market for MCBL’s common stock.  There is no current trading market for MCBL’s common stock, although a when-issued trading market may develop prior to completion of the distribution.  MCBL’s common stock will be listed on the NASDAQ Stock Market LLC under the symbol “MCBL” following completion of the distribution.  Until MCBL’s common stock is fully distributed and an orderly market develops, the prices at which MCBL’s common stock trades may fluctuate significantly and may be lower than the price that would be expected for a fully distributed issue.  Substantial sales of MCBL’s common stock following the distribution may have an adverse impact on the trading price of MCBL’s common stock.

Under the United States federal securities laws, all of the shares of MCBL’s common stock issued in the distribution may be resold immediately in the public market without restriction, except for shares held by MCBL’s affiliates.  Some of the Capitol’s shareholders who receive MCBL’s common stock may decide that they do not want shares in a bank holding company with operations solely in Michigan, and may sell their shares following the spin-off.  MCBL cannot predict whether shareholders will sell large numbers of MCBL’s shares in the public market following the distribution or how quickly they may sell those shares.  If MCBL’s shareholders sell large numbers of MCBL’s shares over a short period of time, or if investors anticipate large sales of MCBL’s shares over a short period of time, the trading price of MCBL’s common stock could be adversely affected.

Substantial sales of Capitol’s common stock following the distribution may have an adverse impact on the trading price of Capitol’s common stock.

MCBL’s Amended and Restated Articles of Incorporation, Bylaws, rights plan and applicable laws may discourage takeovers and business combinations that MCBL shareholders might consider in their best interests.

MCBL’s Amended and Restated Articles of Incorporation and Bylaws, and the laws of the State of Michigan, include provisions which are designed to provide MCBL’s Board of Directors with time to consider whether a hostile takeover offer is in MCBL’s best interest and the best interests of MCBL’s shareholders. These provisions, however, could discourage potential acquisition proposals and could delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of MCBL’s common stock to participate in tender offers, including tender offers at a price above the then-current price for MCBL’s common stock. These provisions could also prevent transactions in which MCBL’s shareholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of MCBL’s shareholders to approve transactions that they may deem to be in their best interests.

The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or discourage certain types of hostile takeover activities. In addition to these provisions and the provisions of MCBL’s Amended and Restated Articles of Incorporation and Bylaws, Federal law requires the Federal Reserve Board’s approval prior to acquisition of “control” of a bank holding company. All of these provisions may have the effect of delaying or preventing a change in control at the company level without action by MCBL’s shareholders, and therefore, could adversely affect the price of MCBL’s common stock.

In addition, MCBL intends to adopt a shareholders’ rights agreement. Under the agreement, if any person or group acquires, or begins a tender or exchange offer that could result in such person acquiring, 10% or more of MCBL’s common stock, without approval by MCBL’s Board under specified circumstances, MCBL’s other shareholders will have the right to purchase shares of MCBL’s common stock, or shares of the acquiring MCBL, at a substantial discount to the public market price. See “Description of MCBL Capital Stock—Anti-Takeover Provisions—Rights Agreement.”

 
13

 

Because of MCBL’s size, there may be little institutional interest or trading volume in, or research analyst coverage of, MCBL’s common stock.

Public companies with relatively small market capitalizations have difficulty generating institutional interest or trading volume, which illiquidity can translate into price discounts as compared to industry peers or to the shares’ inherent value. In addition, the smaller size of MCBL’s market capitalization after the spin-off, compared to the market capitalization of Capitol prior to the spin-off may result in the absence of research analyst coverage of MCBL. The absence of research analyst coverage makes it difficult for a company to establish and hold a market following. Accordingly, MCBL’s size could lead to MCBL’s shares trading at prices that are significantly lower than MCBL’s estimate of their inherent value.

Sales of a substantial number of shares of MCBL’s common stock following the spin-off may adversely affect the market price of MCBL’s common stock and the issuance of additional shares will dilute all other stockholdings.

Sales or distributions of a substantial number of shares of MCBL’s common stock in the public market or otherwise following the spin-off, or the perception that such sales could occur, could adversely affect the market price of MCBL’s common stock. After the spin-off, all of the shares of MCBL’s common stock will be eligible for immediate sale in the public market. Investment criteria of certain investment funds and other holders of MCBL’s common stock may result in the immediate sale of MCBL’s common stock after the spin-off to the extent such stock no longer meets these criteria. Substantial selling of MCBL’s common stock, whether as a result of the spin-off or otherwise, could adversely affect the market price of MCBL’s common stock.

MCBL cannot predict the price range or volatility of MCBL’s common stock after the spin-off.

From time to time, the market price and volume of shares traded of companies in the financial institution sector experience periods of significant volatility. The market price of MCBL’s common stock may fluctuate in response to a number of events and factors, including:

·  
general economic, market and political conditions;

·  
quarterly variations in results of operations or results of operations that could be below the expectations of the public market analysts and investors;

·  
changes in financial estimates and recommendations by securities analysts;

·  
operating and market price performance of other companies that investors may deem comparable;

·  
press releases or publicity relating to MCBL or its competitors or relating to trends in MCBL’s markets; and

·  
purchases or sales of common stock or other securities by insiders.
 
In addition, broad market and industry fluctuations, as well as investor perception and the depth and liquidity of the market for MCBL’s common stock, may adversely affect the trading price of MCBL’s common stock, regardless of actual operating performance.

There can be no assurance as to the price at which MCBL’s common stock will trade after the distribution date. Until an orderly market develops in MCBL’s common stock, the price at which MCBL’s common stock trades may fluctuate significantly and may be lower or higher than the price that would be expected for a more seasoned outstanding issue.

There may not be an active trading market for shares of MCBL’s common stock.

Prior to the spin-off, there has been no public trading market for shares of MCBL’s common stock. The shares of MCBL’s common stock have been approved for listing on the NASDAQ Stock Market LLC under the symbol “MCBL.” MCBL cannot predict the extent to which investor interest in MCBL will lead to the development of an active trading market in MCBL’s common stock or how liquid such a market might become. It is possible that, after
 
 
14

 
the spin-off, an active trading market will not develop or continue and there can be no assurance as to the price at which MCBL’s common stock will trade. The initial price of shares of MCBL’s common stock may not be indicative of prices that will prevail in any future trading market.

In addition, because of the significant changes that will take place as a result of the spin-off, the trading market for each of MCBL’s common stock and Capitol’s common stock after the spin-off may be significantly different from that for Capitol’s common stock prior to the spin-off. The market may view MCBL and Capitol as “new” companies after the spin-off and it is possible that neither will be the subject of significant research analyst coverage. The absence of significant research analyst coverage of MCBL can adversely affect the market value and liquidity of MCBL’s common stock.

MCBL may not pay dividends on its common stock.

MCBL does not plan on paying cash dividends for the foreseeable future. However, the owners of MCBL’s common stock may receive dividends when declared by MCBL’s Board of Directors from funds legally available for the payment of dividends. All decisions regarding the declaration and payment of dividends will be evaluated from time to time in light of MCBL’s financial condition, earnings, growth prospects, regulatory capitol requirements, other uses of cash, funding requirements, applicable law and other factors that MCBL’s Board of Directors deems relevant. See “Dividend Policy.”

MCBL has no operating history as an independent public company and may be unable to operate profitably as a stand-alone company.
 
MCBL does not have an operating history as an independent public company.  Historically, since MCBL’s banking business and Capitol’s banking business have been under one ultimate parent, they have been able to rely, to some degree, on the resources of each other.  Following the spin-off, MCBL will maintain its own financial, accounting and administrative functions.  While MCBL, or its wholly-owned subsidiaries Michigan Commerce Bank and Bank of Auburn Hills, will employ a number of key employees following the spin-off that were previously employed by Capitol, there can be no assurance that MCBL will be able to successfully put in place the financial, administrative and managerial structure necessary to operate profitably as an independent public company, or that the development of such structure will not require a significant amount of management’s time and other resources, which could have a material adverse effect on MCBL’s common stock.
 
MCBL’s historical and pro forma consolidated financial information is not necessarily representative of the results MCBL would have achieved as a stand-alone company and may not be a reliable indicator of MCBL’s future results.

MCBL’s historical consolidated financial information and that of its wholly-owned subsidiary Michigan Commerce Bank included in this information statement does not reflect the financial condition, results of operations or cash flows they would have achieved as a stand-alone company during the periods presented or those MCBL will achieve in the future. This is primarily a result of the following factors:

·  
MCBL’s historical financial results reflect allocations of corporate expenses from Capitol, which may be different than the comparable expenses MCBL would have actually incurred or will incur in the future as a stand-alone company;

·  
MCBL’s cost of debt and MCBL’s capitalization will be different from that reflected in MCBL’s historical consolidated financial statements; and

·  
significant changes may occur in MCBL’s cost structure, management, financing and business operations as a result of MCBL’s separation from Capitol, including the costs for it to establish MCBL’s new operating infrastructure.

MCBL has made adjustments based upon available information and assumptions that MCBL believes are reasonable to reflect these factors, among others, in MCBL’s pro forma financial information. However, MCBL’s assumptions may prove not to be accurate, and accordingly, MCBL’s pro forma financial information should not be assumed to be indicative of what MCBL’s financial condition or results of operations actually would have been as a
 
 
15

 
stand-alone company nor to be a reliable indicator of what MCBL’s financial condition or results of operations actually may be in the future.

The agreements MCBL is entering into with Capitol may involve, or may appear to involve, conflicts of interest.

Because the spin-off involves the separation of Capitol’s existing businesses into two independent companies, MCBL is entering into certain agreements with Capitol to provide a framework for MCBL’s initial relationship with Capitol following the spin-off. MCBL has negotiated these agreements with Capitol while MCBL is still a wholly-owned subsidiary of Capitol. Accordingly, the persons who are expected to become MCBL’s officers are currently employees or officers of Capitol or its subsidiaries and, as such, have an obligation to serve the interests of Capitol and its subsidiaries.  As a result, they could be viewed as having a conflict of interest.

MCBL’s separation from Capitol could increase MCBL’s U.S. federal income tax costs and potentially require recording of a valuation allowance for MCBL’s deferred tax assets.

Due to the separation, MCBL will not be able to file a consolidated U.S. federal income tax return with Capitol. As a result, MCBL and Capitol will no longer be able to offset one another’s net operating and capital gains with net operating and capital losses to the extent available. It is also possible that, due to certain tax rules relating to the treatment of losses in connection with a spin-off, all or a portion of MCBL’s related net operating loss and capital loss carryovers may not be available to MCBL following the spin-off. Additionally, any other benefits relating to taxes arising from being part of the larger company, Capitol, may be lost at MCBL. As a result, the aggregate amount of U.S. federal income taxes applicable to MCBL’s business may increase after the distribution and MCBL may be required to record a valuation allowance for its deferred tax assets, which could adversely effect MCBL’s consolidated operating results.

Risk Factors Relating to MCBL’s Business

MCBL cannot predict the impact of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008, and its implementing regulations and actions by the FDIC.

The programs established or to be established under the Emergency Economic Stabilization Act of 2008 (“EESA”), including U.S. Treasury’s Capital Purchase Program, will result in increased regulation of the banking industry. Compliance with such regulation may increase operating costs and limit MCBL’s ability to pursue business opportunities.

Similarly, programs established by the FDIC under the systemic risk exception to the Federal Deposit Insurance Act, whether MCBL participates or not, may have an adverse effect on MCBL. Participation in the FDIC Temporary Liquidity Guarantee Program likely will require the payment of additional insurance premiums to the FDIC. MCBL may be required to pay significantly higher FDIC premiums even if it does not participate in the FDIC Temporary Liquidity Guarantee Program because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The impact on MCBL’s business as a result of participating or not participating in any such programs, and the extent of MCBL’s participation in such programs, cannot reliably be determined at this time.

There can be no assurance that the EESA and the American Recovery and Reinvestment Act will stabilize the U.S. economy and financial system.

The U.S. Congress enacted the EESA in response to the impact of the volatility and disruption in the capital and credit markets on the financial sector. The U.S. Department of the Treasury and the federal banking regulators are implementing a number of programs under this legislation that are intended to address these conditions and the asset quality, capital and liquidity issues they have caused for certain financial institutions and to improve the general availability of credit for consumers and businesses. In addition, the U.S. Congress recently enacted the American Recovery and Reinvestment Act (“ARRA”) in an effort to save and create jobs, stimulate the U.S. economy and promote long-term growth and stability. There can be no assurance that EESA, ARRA or the programs that are implemented under them will achieve their intended purposes. The failure of EESA, ARRA or the programs that are implemented under them to achieve their intended purposes could result in a continuation or worsening of current economic and market conditions, and this could adversely affect MCBL’s financial condition, results of operations,
 
 
16

 
and/or the trading price of MCBL’s common stock.

MCBL’s subsidiary banks’ allowances for loan losses may prove inadequate to absorb actual loan losses, which may adversely impact net income or increase operating losses.

MCBL believes that its consolidated allowance for loan losses is maintained at a level adequate to absorb inherent losses in the loan portfolio at the balance sheet date. Management’s determination 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 portfolio and other factors. These estimates are subjective and their accuracy depends on the outcome of future events. Actual future losses may differ from current estimates. Depending on changes in economic, operating and other conditions, including changes in fair value of collateral that are generally beyond MCBL’s control, actual loan losses could increase significantly. As a result, such losses could exceed current allowance estimates. No assurance can be provided that the allowance will be sufficient to cover actual future loan losses should such losses be realized.

MCBL’s subsidiary banks, MCB and BAH, which are solely located in Michigan, have recently experienced significantly elevated levels of loan losses due to adverse economic conditions in the state of Michigan.  The domestic economy is in a severe recession and MCBL’s levels of nonperforming loans have increased significantly. MCBL’s loan losses increased significantly in recent periods.  It is anticipated that levels of nonperforming loans and related loan losses will continue to increase as economic conditions, in Michigan and nationally, evolve.  In addition, bank regulatory agencies, as an integral part of their supervisory functions, periodically review the adequacy of the allowance for loan losses. Regulatory agencies may require MCBL or its bank subsidiaries to increase their provision for loan losses or to recognize further loan charge-offs based upon judgments different from those of management. Any increase in the allowance required by regulatory agencies could have a negative impact on MCBL’s operating results.

MCBL’s size may make it difficult to compete with larger institutions because MCBL is not able to compete with large banks in the offering of significantly larger loans.

MCBL endeavors to maintain an appropriate capital level for its size, while larger bank holding companies have larger capital levels. As a result, the legal lending limits of MCBL’s bank subsidiaries constrain the size of loans that it can make. In addition, many competitors of MCBL have significantly larger capitalization and, hence, an ability to make significantly larger loans. The inability to offer larger loans limits the revenues that can be earned from interest amounts charged on larger loan balances.

If MCBL cannot recruit additional highly qualified personnel, its banks’ customer service could suffer, causing its customer base to decline.

MCBL’s strategy is also dependent upon its ability to attract and retain highly qualified personnel. Competition for such employees among financial institutions is intense. Availability of personnel with appropriate community banking experience varies. If MCBL does not succeed in attracting new employees or retaining and motivating current and future employees, its business could suffer significantly, increasing the possibility of a loss of value in its common stock.


MCBL’s bank subsidiaries make various types of loans, including commercial, consumer, residential mortgage and construction loans. MCBL’s strategy emphasizes lending to small businesses and other commercial enterprises. MCBL typically relies upon commercial real estate as a source of collateral for many of MCBL’s loans. Recently, regulatory agencies have expressed concern with banks with a large concentration in commercial real estate due to the recent downturn in the real estate market in certain areas of the country, leading to increased risk of credit loss and extended periods of sale. Loans to small and medium-sized businesses are generally riskier than single-family mortgage loans. Typically, the success of a small or medium-sized business depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business. In addition, small and medium-sized businesses
 
 
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frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial variations in operating results, any of which may impair a borrower’s ability to repay a loan. During 2008 and the first part of 2009, due to borrower performance difficulties and adverse real estate market conditions, levels of nonperforming loans, foreclosures and loan losses increased significantly at MCBL, resulting from the continuing and deteriorating severe recessionary environment in Michigan. Substantial further credit losses could result, causing shareholders to lose their entire investment in MCBL’s common stock.

Loan origination activities, for both commercial and residential mortgages, involve significant potential collateral valuation risks and the risk of the subsequent identification of origination fraud or other losses which could exceed MCBL’s allowance for loan losses.

MCBL’s bank subsidiaries use a loan policy which provides for conservative loan-to-value guidelines when loans are originated. In today’s difficult real estate economy in many parts of the country, and particularly in Michigan, falling property values and significant foreclosure activity of both residential and commercial real estate property are resulting in significant loan losses at many financial institutions, including MCBL’s bank subsidiaries in recent periods. Additionally, although most residential mortgage loans have been originated and sold to investors, if it is subsequently determined that such loans were originated with any element of alleged fraud, such as exaggerated borrower income or assets, the originating institution may be liable for any losses with such loans and may have to buy back those loans. The potential for additional loan losses from valuation issues or fraud is unknown. Fraud risks are particularly difficult to identify and quantify, especially when the duration of the risk is the same as the term of the loan, often as long as 30 years or more. Occurrences of fraud are often more prevalent during an economic downturn or recession. Potential losses from valuation issues or occurrences of fraud could significantly exceed allowances for loan losses, adversely affecting MCBL’s results of operations.

Actions by the Open Market Committee of the Federal Reserve Board (“FRBOMC”) may adversely affect MCBL’s net interest income.

Changes in Market Interest Rates.    MCBL’s profitability is significantly dependent on net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans, and interest expense on interest-bearing liabilities, such as deposits. Therefore, any change in general market interest rates, whether as a result of changes in monetary policies of the Federal Reserve Board or otherwise, can have a significant effect on net interest income. MCBL’s assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristic of assets and liabilities. As a result, changes in interest rates can affect net interest income in either a positive or negative way.

Recently, the FRBOMC decreased interest rates to near zero. Future stability of interest rates and FRBOMC policy, which impact such rates, are uncertain.

Changes in the Yield Curve.    Changes in the difference between short and long-term interest rates, commonly known as the yield curve, may also harm MCBL’s business. For example, short-term deposits may be used to fund longer-term loans. When differences between short-term and long-term interest rates shrink or disappear, the spread between rates paid on deposits and received on loans could narrow significantly, decreasing net interest income.

New accounting or tax pronouncements or interpretations may be issued by the accounting standard-setters, regulators or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact MCBL’s results of operations and financial condition.

Current accounting and tax rules, standards, policies and interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on MCBL, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities responding by adopting and/or proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. New accounting pronouncements and varying interpretations of accounting
 
 
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pronouncements have occurred and are likely occur in the future. A change in accounting standards may adversely affect MCBL’s reported financial condition and results of operations.

MCBL’s business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, MCBL’s business and a negative impact on its results of operations.

MCBL relies heavily on communications and information systems to conduct its business. MCBL will rely on Capitol for some of its key communications and information systems. Any failure, interruption or breach in security of these systems, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management and other systems. While both MCBL and Capitol have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the information systems could damage the reputation of MCBL and its bank subsidiaries, result in a loss of customer business, subject MCBL and MCBL’s subsidiary bank to additional regulatory scrutiny, or expose MCBL to civil litigation and possible financial liability, any of which could have a material adverse effect on MCBL’s results of operations.

MCBL could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, could have a negative effect on expenses and results of operations.

A significant portion of MCBL’s consolidated loan portfolio is secured by real property. During the ordinary course of business, MCBL’s bank subsidiaries may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, MCBL’s bank subsidiaries may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require MCBL’s bank subsidiaries to incur substantial expenses and may materially reduce the affected property’s value or limit MCBL’s subsidiary banks’ ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase MCBL’s subsidiary banks’ exposure to environmental liability. Although MCBL’s subsidiary banks have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on results of operations.

MCBL intends to rely on dividends from its wholly-owned subsidiaries.

MCBL is a separate and distinct legal entity from its wholly-owned subsidiaries. It may receive dividends from its subsidiaries to help pay interest and principal on its debt in the future, however, the bank subsidiaries are currently prohibited from paying cash dividends.  Various federal and state laws and regulations limit the amount of dividends that the banks and certain non-bank subsidiaries may pay to their parent holding company. In the event subsidiaries are unable to pay sufficient dividends to MCBL, it may not be able to service its debt or pay its obligations. The inability to receive dividends from its subsidiaries could have a material adverse effect on MCBL’s business, financial condition and results of operations.

MCBL may participate in the U.S. Treasury’s Capital Assistance Program which may be dilutive to MCBL’s common stock.

In October 2008, the U.S. Department of Treasury (“U.S. Treasury”) announced the Troubled Asset Relief Program Capital Purchase Program (“TARP”).  This program makes $250 billion of capital available to U.S. financial institutions from the initial $350 billion authorized by the EESA in the form of preferred stock investments by the U.S. Treasury.

In February 2009, the American Recovery and Reinvestment Act of 2009 (“Recovery Act”) was signed into law. Included among the many provisions in the Recovery Act are restrictions affecting financial institutions who are participants in the TARP, which are set forth in the form of amendments to the EESA. These amendments
 
 
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provide that during the period in which any obligation under the TARP remains outstanding (other than obligations relating to outstanding warrants), TARP recipients are subject to appropriate standards for executive compensation and corporate governance to be set forth in regulations to be issued by Treasury. Among the executive compensation and corporate governance provisions included in the Recovery Act are the following (which provisions are expected to be clarified and potentially expanded by forthcoming Treasury regulations):
 
·  
an expansion of the incentive compensation “clawback” provision to cover senior executive officers (as defined above) and the next 20 most highly compensated employees;

·  
an expansion of the prohibition on certain golden parachute payments to cover any payment related to a departure for any reason (with limited exceptions) made to any senior executive officer (as defined above) and the next five most highly compensated employees;

·  
a limitation on incentive compensation paid or accrued to highly compensated employees of the financial institution. Under this provision, incentive compensation paid to such individuals, subject to certain exceptions for pre-existing arrangements set forth in written employment contracts executed on or prior to February 11, 2009, may not exceed  1/3  of annual compensation and must be paid in restricted stock which does not fully vest until Treasury’s preferred stock is redeemed in full. The number of highly compensated employees impacted by this provision is dependent on the size of the Treasury’s TARP investment;

·  
a requirement that the Chief Executive Officer and Chief Financial Officer provide in annual securities filings, a written certification of compliance with certain executive compensation and corporate governance provisions;

·  
a requirement that companies adopt a company-wide policy regarding excessive or luxury expenditures;

·  
a requirement that companies permit a separate, non-binding shareholder vote to approve the compensation of executives; and

·  
a provision that allows Treasury to review compensation paid prior to enactment of the Recovery Act to senior executive officers and the next 20 most highly-compensated employees to determine whether any payments were inconsistent with the executive compensation restrictions of the EESA, as amended, TARP or otherwise contrary to the public interest.

In addition, companies who have issued preferred stock to Treasury under TARP are now permitted to redeem such investments at any time, subject to consultation with banking regulators. Upon such redemption, the warrants issued to Treasury are to be immediately liquidated.
 
MCBL has, through Capitol, submitted an application to sell up to $___ million in convertible preferred stock of MCBL to the U.S. Treasury, pursuant to the U.S. Treasury’s Capital Assistance Program (“CAP”).  If MCBL’s CAP application is approved and its Board of Directors determines to move forward with participation in the program, it would, as stated above, generally be prohibited from paying dividends on the shares of MCBL’s common stock or purchasing any shares of its common stock, including the shares of convertible preferred stock issuable under the CAP, for three years after the preferred stock is sold, unless MCBL obtains the U.S. Treasury’s prior consent.  Accordingly, there can be no assurance that MCBL will pay dividends on the shares of MCBL’s common stock that you will receive in the spin-off.

In addition, participation on the terms set forth in CAP would require MCBL to issue a 10-year warrant permitting the U.S. Treasury to purchase up to $___ million in shares of MCBL’s common stock, which would be immediately exercisable.  The proceeds from these transactions would be allocated on a relative fair value basis between the convertible preferred stock and the warrant.  The convertible preferred stock and the warrant would both be classified in stockholders’ equity in MCBL’s consolidated balance sheet.  The issuance of the convertible preferred stock and the warrant, including preferred-stock dividends, would result in a reduction of basic and diluted earnings (loss) per common share.
 
There is no assurance MCBL will be approved to participate in the CAP or, if approved, whether it will choose to participate.

 
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MCB has restricted investments in a Federal Home Loan Bank which may be subject to future impairment.

As of March 31, 2009, MCB had investments in a Federal Home Loan Bank approximating $5.5 million. Such investment is a restricted security which may be redeemed only by the issuer. Future redemption of the securities is subject to the issuer’s liquidity and capital adequacy which are, in part, dependent upon valuation of the issuer’s significant mortgage-backed securities portfolios, which have been subject to market volatility or, with respect to private-label mortgage-backed securities, experiencing the absence of orderly markets.

MCBL may not be able to raise additional capital necessary to fund growth and achieve well-capitalized status.

MCBL’s ability to raise additional capital to support its growth and meet minimum regulatory capital requirements at the holding company level and at its bank subsidiaries are dependent on MCBL being able to efficiently and cost-effectively access the capital markets. Accordingly, MCBL must continue to be able to issue additional equity securities, trust-preferred securities and/or debt when and in the amounts MCBL deems necessary, and there must be ready purchasers of MCBL’s securities willing to invest in MCBL. However, events or circumstances in the capital markets generally that are beyond MCBL’s control may adversely affect its capital costs, its ability to raise capital at any given time and the dilution consequences of any common equity raise it may undertake. For instance, the capital and credit markets continue to experience high levels of volatility and disruption. In certain cases, especially in the case of stocks of financial institutions, the markets have produced significant downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength or condition. If current levels of market disruption and volatility continue or worsen, there can be no assurance that MCBL will not experience an adverse effect, including earnings per share dilution or an inability to access capital. MCBL’s inability to raise additional capital on terms satisfactory to MCBL or at all may affect MCBL’s ability to grow and would adversely affect its financial condition, results of operations and its regulatory capital ratios and those of its subsidiary banks.

MCB entered into a formal agreement with bank regulatory agencies which impose several requirements and conditions, for which noncompliance would have a material adverse effect on MCB and MCBL.

In conjunction with the merger of nine wholly-owned Michigan bank subsidiaries of Capitol which resulted in the formation of MCB effective March 31, 2009, MCB entered into a formal agreement with the Federal Deposit Insurance Corporation (FDIC) and Office of Financial and Insurance Regulation of the State of Michigan (OFIR) which requires the bank to, among other things,:

·  
Increase its Tier 1 capital ratio to a minimum of 9% and its total risk-based ratio to 12%;

·  
Reduce problem assets;

·  
Maintain an adequate allowance for loan losses and not reduce such allowance without prior written consent;

·  
Adopt a plan for  improving liquidity;

·  
Adopt and implement a profit improvement plan;

·  
Adopt and implement a plan to manage concentrations of credit;

·  
Retain qualified management; and

·  
Periodically report to the FDIC and OFIR regarding MCB’s compliance with the terms of the formal agreement.

Management believes MCB will be able to comply with the terms of the formal agreement.  The formal agreement will continue to be in effect until such time as it is terminated by the FDIC and OFIR.  Noncompliance with the terms of the formal agreement could result in more significant regulatory actions by the FDIC and OFIR, which could have a material adverse affect on MCB and MCBL.


 
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Continued tightening of the credit markets and instability in the financial markets could adversely affect MCBL’s industry, business and results of operations.

Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including other financial institutions. This has resulted in less available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity. A sustained period of such conditions could materially and adversely affect MCBL’s business, financial condition and results of operations and the value of its common stock.

As a financial services company, a sustained deterioration in general business or economic conditions could have a material adverse effect on MCBL’s financial condition and results of operations.

Recently the strength of the U.S. economy in general and the economy in the state of Michigan and the respective local economies in each of the markets where MCBL’s bank subsidiaries’ banking offices are located have seriously deteriorated.  Further, sustained deterioration in the national, Michigan or local business or economic conditions could result in, among other things, a further deterioration of credit quality or a reduced demand for credit, including a resultant effect on MCBL’s consolidated loan portfolio and allowance for loan losses. These factors could result in higher delinquencies and greater charge-offs in future periods especially given MCBL’s exposure to commercial real estate lending and residential development lending in Michigan, which would materially adversely affect MCBL’s financial condition and results of operations. Continued and sustained weakness in business and economic conditions generally, in Michigan, or in MCBL’s markets specifically could have one or more of the following adverse impacts on MCBL’s business:

·  
a decrease in the demand for loans and other products and services offered by MCBL’s bank subsidiaries;

·  
a decrease in the value of loans held for sale or other assets secured by consumer or commercial real estate; and

·  
an increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to MCBL or its bank subsidiaries.

An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provisions for loan losses, and valuation adjustments on loans held for sale, which would materially adversely affect MCBL’s financial condition and results of operations.
 
Various factors could depress the price of and affect trading activity in MCBL’s common stock.
 
The price of MCBL’s common stock may fluctuate significantly in response to a variety of factors, including, but not limited to:

·  
actual or anticipated variations in MCBL’s quarterly results of operations;

·  
earnings estimates and recommendations of securities analysts (if any);

·  
the performance and stock price of other companies that investors and analysts deem comparable to MCBL;

·  
the soundness or predicted soundness of other financial institutions;

·  
news reports regarding trends and issues in the financial services industry;

·  
actual or anticipated changes in the economy, the real estate markets, and interest rates;

·  
MCBL’s capital markets activities;
 
 
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·  
announcements of strategic developments, mergers, acquisitions and other material developments involving MCBL’s peers;

·  
delays in, or a failure to realize the anticipated benefits of, an acquisition;

·  
changes in legislation or regulation impacting the financial services industry in particular, or publicly-traded companies in general;

·  
changes in economic policy of the U.S. Treasury and the FRBOMC concerning management of the current financial crisis;

·  
regulatory enforcement or other actions against MCBL or its affiliates; and

·  
general market fluctuations.

Fluctuations in MCBL’s stock price may make it more difficult for you to sell your shares of MCBL’s common stock at an attractive price.

MCBL will guarantee a portion of Capitol’s Trust-Preferred Securities which in the event MCBL must honor such guarantee, could have a material adverse effect on MCBL.

Guarantee by MCBL related to Capitol’s Trust-Preferred Securities

Capitol has issued junior subordinated debentures (the “Debentures”) to Capitol Trust I, Capitol Trust II, Capitol Statutory Trust III, Capitol Trust IV, Capitol Trust VI, Capitol Trust VII, Capitol Statutory Trust VIII, Capitol Trust IX, Capitol Trust X, Capitol Trust XI and Capitol Trust XII (the “Trusts”) which were funded by the Trusts’ issuance of certain Trust-Preferred Securities (theTrust-Preferred Securities”).  Capitol has also issued guarantees (the TRUPS Guarantees”) to the holders of the Trust-Preferred Securities guaranteeing payments required under the terms of the Trust-Preferred Securities.

Incident to the Separation Agreement, MCBL intends to execute a guarantee (the MCBL Guarantee”), pursuant to which upon an event of default under the Debentures or the TRUPS Guarantees MCBL would be obligated to provide for payment of Capitol’s payment obligations arising under the Debentures and the TRUPS Guarantees in amount equal to MCBL’s pro rata amount of Capitol’s total consolidated risk-weighted assets as of the distribution date.  Capitol’s obligation under the Debentures and the TRUPS Guarantee approximates $194.3 million at an average interest rate currently approximating 6.3% per annum, payable quarterly.  As of the distribution date, MCBL’s pro rata obligation under the MCBL Guarantee would approximate $________________.

The terms of the Debentures and trust indentures (the “Indentures”) allow for Capitol to defer payment of interest on the Trust-Preferred Securities at any time or from time to time for up to 20 consecutive quarters provided no event of default (as defined in the Indentures) has occurred and is continuing.  Capitol is not in default with respect to the Indentures, and the deferral of interest does not constitute an event of default under the Indentures.  While Capitol defers the payment of interest, it will continue to accrue expense for interest owed at a compounded rate.  Upon the termination of the deferral period, all accrued and unpaid interest is due and payable.        

On April 17, 2009, Capitol announced that it elected to exercise its deferral right on the Debentures.  If Capitol defaults under the terms of the Debentures or the TRUPS Guarantees, under the MCBL would be obligated to pay its pro rata amount under the MCBL Guarantee which would negatively affect MCBL’s capital ratios.

MCBL may be unsuccessful in future acquisition endeavors, if any, which may have an adverse effect on MCBL’s business.

MCBL plans to seek to expand its operations by acquiring financial institutions and branches as well as non-depository entities engaged in permissible activities which complement the services MCBL will provide, although there are no currently planned acquisitions.  However, the market for acquisitions is highly competitive.  MCBL may not be successful in identifying financial institution and branch acquisition candidates, obtaining the capital resources which would be necessary to fund acquisitions, integrating acquired institutions or preventing deposit
 
 
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erosion at acquired institutions or branches.  MCBL may encounter unforeseen expenses, as well as difficulties and complications in integrating expanded operations and new employees without disruption to overall operations.  In addition, rapid growth could adversely affect operating results because of many factors, including start-up costs, diversion of management time and resources, asset quality and required operating adjustments.  MCBL may not successfully integrate or achieve the anticipated benefits of any growth or expanded operations.

One aspect of MCBL’s future growth potential depends in part on MCBL’s selective acquisition of additional businesses. MCBL may be unable to identify suitable targets for acquisition or make acquisitions at favorable prices. If MCBL identifies a suitable acquisition candidate, MCBL’s ability to successfully implement the acquisition would depend on a variety of factors, including MCBL’s ability to obtain financing and, for larger transactions, requisite government approvals.

Acquisitions involve risks, including those associated with integrating the operations, financial reporting, technologies and personnel of acquired companies; managing geographically dispersed operations; the diversion of management’s attention from other business concerns; the inherent risks in entering markets or lines of business in which MCBL has either limited or no direct experience; unknown risks; and the potential loss of key employees, customers and strategic partners of acquired companies. MCBL may not successfully integrate any businesses or technologies MCBL may acquire in the future and may not achieve pre-acquisition anticipated revenue and cost benefits. Acquisitions may be expensive, time consuming and may strain MCBL’s resources. Acquisitions may not be accretive to MCBL earnings and may negatively impact MCBL’s results of operations as a result of, among other things, the incurrence of debt, one-time write-offs of goodwill and amortization expenses of other intangible assets. In addition, future acquisitions that MCBL may pursue could result in dilutive issuances of equity securities.

 
This information statement and other materials filed or to be filed by MCBL and Capitol, as well as information in oral statements or other written statements made or to be made by MCBL and Capitol, contain statements, including in this document under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about MCBL’s beliefs or expectations, are forward-looking statements. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “foresees” or the negative version of those words or other comparable words and phrases. Any forward-looking statements contained in this information statement are based upon MCBL’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by MCBL or any other person that the future plans, estimates or expectations contemplated by MCBL will be achieved.
 
MCBL believes that the factors that could cause MCBL’s actual results to differ materially include but are not limited to the factors MCBL’s describe in this information statement, including under “Risk Factors,” “The Spin-Off” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:

·  
the results of MCBL's efforts to implement its business strategy;

·  
changes in interest rates;

·  
legislation or regulatory requirements adversely impacting MCBL’s banking business and/or growth strategy;

·  
adverse changes in business conditions or inflation;

·  
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;
 
 
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·  
competitive pressures among financial institutions;

·  
changes in securities markets;

·  
actions of competitors of MCBL’s banks and MCBL’s ability to respond to such actions;

·  
the cost of and access to capital, which may depend in part on MCBL's asset quality, prospects and outlook;

·  
changes in governmental regulation, tax rates and similar matters;

·  
availability of funds under the U.S. Treasury's Capital Assistance Program;

·  
changes in management; and

·  
other risks detailed in MCBL’s future filings with the Securities and Exchange Commission.
 
These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this information statement. If one or more of these or other risks or uncertainties materialize, or if MCBL’s underlying assumptions prove to be incorrect, actual results may vary materially from what MCBL projected. The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make certain estimates and assumptions, many of which are based on assumptions relating to the above-stated forward-looking statements, that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results will differ from those estimates because of the inherent subjectivity and inaccuracy of any estimation. Consequently, actual events and results may vary significantly from those included in or contemplated or implied by MCBL’s forward-looking statements. The forward-looking statements included in this information statement are made only as of the date of this information statement, and MCBL undertakes no obligation to publicly update or review any forward-looking statement made by MCBL or on MCBL’s behalf, whether as a result of new information, future developments, subsequent events or circumstances or otherwise.






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General

On ___________, 2009, Capitol’s Board of Directors declared a pro rata distribution, payable to the holders of record of outstanding shares of Capitol’s common stock and Series A Preferred at the close of business on _______, 2009, the record date for the distribution, of one share of MCBL’s common stock for every [____] shares of Capitol’s common stock and one share of MCBL’s common stock for every [___] share of Capitol’s Series A Preferred outstanding on the record date.  The distribution will be effected at 5:00 p.m., Lansing, Michigan time, on ______, 2009 (the “distribution date”).  MCBL is currently a wholly-owned subsidiary of Capitol.  As a result of the distribution, 95.1% of the outstanding shares of MCBL’s common stock will be distributed to Capitol’s shareholders.  Immediately following the distribution, Capitol will own 4.9% of the outstanding shares of MCBL’s common stock and MCBL will be an independent public company.  The distribution of the shares of MCBL’s common stock will be made in book-entry form. Each share of MCBL’s common stock that is distributed will be validly issued, fully paid and nonassessable and free of preemptive rights. See “Description of MCBL’s Capital Stock.”   Shares of MCBL’s common stock should be credited to accounts with stockbrokers, banks or nominees of Capitol’s shareholders that were record holders on the record date, on or about _________, 2009.
 
MCBL was originally incorporated under the laws of the State of Michigan on October 27, 1993 as Financial Center Interim Corporation.  MCBL’s principal executive offices are located at 222 North Washington Square, Suite One, Lansing, Michigan 48933 and MCBL’s telephone number is 517-374-5333

Following the distribution, MCBL will own and operate all of the businesses that are presently constituted by its wholly-owned subsidiaries, Michigan Commerce Bank and Bank of Auburn Hills.  The operations of Michigan Commerce Bank and Bank of Auburn Hills, represented approximately 23% of Capitol’s consolidated assets, 22% of Capitol’s consolidated revenues and 36% of Capitol’s net loss as of and for the three months ended March 31, 2009.

Reasons for the Distribution
 
Since it became a publicly-traded company in 1988, it has been the strategic plan of Capitol to be considered a growth company by the investment community.  Beginning in 2008, however, Capitol’s record of providing superior performance and shareholder returns began to diminish due to the lack of growth and other adverse economic conditions that had been impacting the Michigan market, where Capitol then conducted a larger percentage of its operations.  In recent years, in order to enhance its growth, Capitol began to emphasize deployment of available capital to bank development activities outside of Michigan.  The goal of this strategic plan was to improve future shareholder returns, with the expectation that the market would perceive and value Capitol as a growth company.
 
Unfortunately, Capitol’s strategic plan to attract new and retain existing shareholders by operating as a growth company has not been fully realized.  Notwithstanding management’s efforts, Capitol has had difficulty in developing a current perception in the investment community that it is a growth company.  Although Capitol’s return on equity and return on assets prior to the adverse results of 2009 and 2008 may be consistent with those of its peers outside of Michigan, its stock generally trades at a lower price/earnings multiple than these peers.  Capitol believes the reason for this disparity is that Capitol’s Michigan-based business adversely affects the investment community’s perception of Capitol as a Michigan-based bank holding company even though Michigan banking operations, while substantial, are less than 40% of Capitol’s consolidated enterprise.  Capitol believes that there are considerable consolidation opportunities for growth within Michigan that might not be supported by the investment community as part of Capitol, but would be supported by the investment community if such Michigan-based opportunities were part of a Michigan-based stand alone company.
 
In early 2009, Capitol’s executive management began to evaluate, with the assistance of Capitol’s financial, legal and accounting advisors, potential strategic alternatives to address the perception of Capitol in the marketplace and the price/earnings multiple at which its stock was trading compared to its peers.  On June 25, 2009, the executive committee of Capitol’s Board of Directors met to consider potential strategic alternatives: a sale of some or all of Capitol’s Michigan-based operations and a spin-off of Capitol’s Michigan-based operations.  The executive committee decided to present the alternatives to Capitol’s Board of Directors.
 

 
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On June 25, 2009, the Board of Directors of Capitol unanimously approved Capitol’s plan to effect the distribution described in this document, with the goal of creating one company that would focus on growth-oriented, high-performance, value-driven operations throughout the United States and that would be expected to appeal to growth-oriented investors, and one company that would focus on operations in Michigan and that would be expected to appeal to regional-oriented investors interested in participating in consolidation opportunities within the state of Michigan.  Capitol believes that the distribution should allow the investment community to better evaluate both MCBL’s and Capitol’s performance relative to their respective peers.
 
The distribution will also give MCBL independent access to the capital markets.  As part of Capitol, the national and Michigan-based businesses of MCBL competed with each other for capital to finance expansion and growth opportunities.  As a separate entity, MCBL should be in a better position to fund the implementation of its business strategy.  The spin-off should enable the investment community to better evaluate both companies’ performance relative to their respective peers.  The distribution will also enable management of each company to focus on its distinct markets.
 
The distribution will also enable MCBL to provide its management and employees incentive compensation in the form of direct equity ownership in MCBL, enhancing MCBL’s ability to attract, retain and motivate key employees in the state of Michigan.
 
Manner of Effecting the Spin-Off
 
The general terms and conditions relating to the spin-off are set forth in a separation and distribution agreement between MCBL and Capitol. The spin-off will be effective at 5:00 p.m., Lansing, Michigan time on the distribution date, which is ___________, 2009.  As a result of the spin-off, each Capitol shareholder will receive one share of MCBL’s common stock for every [___] shares of Capitol’s common stock and one share of MCBL’s common stock for every [____] shares of Capitol’s Series A Preferred that such shareholder owns. No fractional shares will be issued. Those shareholders who would otherwise be entitled to receive fractional shares will receive cash in lieu of fractional shares. In order to be entitled to receive shares of MCBL’s common stock in the spin-off, Capitol shareholders must be shareholders at the close of business of the New York Stock Exchange on the record date, which is ___________, 2009. The distribution of the shares of MCBL’s common stock will be made in book-entry form. Each share of MCBL’s common stock that is distributed will be validly issued, fully paid and nonassessable and free of preemptive rights. See “Description of MCBL’s Capital Stock.”
 
Capitol’s shareholders will not be required to pay for any shares of MCBL’s common stock received in the spin-off or to surrender or exchange shares of Capitol’s common stock or shares of Capitol’s Series A Preferred in order to receive MCBL’s common stock or to take any other action in connection with the spin-off. No vote of Capitol shareholders is required or sought in connection with the spin-off and Capitol shareholders have no appraisal rights in connection with the spin-off.
 
In addition, at the time of the spin-off, certain outstanding options to purchase Capitol’s common stock and certain outstanding service vested restricted stock held by MCBL’s employees on the distribution date will be converted into options to purchase MCBL’s common stock and restricted stock, respectively. The formula used in the conversion will be based on the applicable plans and accounting rules with the intention of keeping the holders in the same financial position immediately following the conversion as existed immediately before the conversion. See “MCBL’s Relationship With Capitol After the Spin-Off—Employee Matters Agreement—Treatment of Capitol Equity Awards Held by MCBL’s Employees.”
 
IN ORDER TO BE ENTITLED TO RECEIVE SHARES OF MCBL’S COMMON STOCK IN THE SPIN-OFF, YOU MUST BE A HOLDER OF CAPITOL’S COMMON STOCK OR CAPITOL’S SERIES A PREFERRED AT THE CLOSE OF BUSINESS ON THE RECORD DATE.
 
The distribution agent will not deliver any fractional shares of MCBL’s common stock in connection with the distribution. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds of the sales pro rata to each holder of Capitol’s common stock or Capitol’s Series A Preferred that would otherwise be entitled to receive a fractional share in the distribution. Such holders will then receive a cash payment in an amount equal to their pro rata share of the total net proceeds of those sales. Such cash payments will be made to the holders in the same
 
 
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accounts in which the underlying shares are held. If a Capitol shareholder physically holds Capitol’s stock certificates, such holder’s check for any cash that he or she may be entitled to receive instead of fractional shares of MCBL’s common stock will be included together with the account statement in the mailing that the distribution agent expects to send out on the distribution date.
 
None of Capitol, MCBL or the distribution agent will guarantee any minimum sale price for the fractional shares of MCBL’s common stock. Neither Capitol nor MCBL will pay any interest on the proceeds from the sale of fractional shares.
 
Results of the Spin-Off
 
After the spin-off, MCBL will be an independent publicly-traded company. Immediately following the spin-off, MCBL expects to have approximately [_______] beneficial holders of shares of MCBL’s common stock, based on the number of beneficial shareholders of Capitol’s common stock and Capitol’s Series A Preferred on _________, 2009, and approximately __________ shares of MCBL’s common stock outstanding. The actual number of shares to be distributed will be determined on the record date and will reflect any exercise of stock options of Capitol between the date the Board of Directors of Capitol approves the distribution for the spin-off and the record date for the spin-off.
 
MCBL and Capitol will be parties to a number of agreements that govern the spin-off and the future relationship between MCBL companies. For a more detailed description of these agreements, see “MCBL’s Relationship With Capitol After the Spin-Off.”
 
Treatment of Stock-Based Awards

In recent years, employees of Capitol (including certain of its executive officers) have been eligible to participate in Capitol’s 2003 Stock Plan and Capitol’s 2007 Equity Incentive Plan. Under these plans, Capitol’s Compensation Committee granted certain stock-based awards, including shares of restricted stock and stock options, to employees who are remaining with Capitol (“Remaining Employees”) and employees who are transferring to MCBL (“Transferring Employees”).  The outstanding stock-based awards held by Remaining Employees and Transferring Employees at the time of the spin-off will be treated as set forth below. The expected equity ownership of MCBL’s named executive officers after the spin-off is described in “Management — Security Ownership of Executive Officers and Directors.” The equity ownership of MCBL’s other employees is expected to be less than 1% in the aggregate of MCBL’s outstanding shares of MCBL’s common stock after the spin-off.

Restricted Stock

Capitol’s restricted stock held by Remaining Employees will remain unchanged by the spin-off and will continue to be subject to the vesting schedule and other terms of such awards. Remaining Employees will receive a distribution in the spin-off of [          ] fully vested shares of MCBL’s common stock for each share of Capitol restricted stock they own on the record date (unless the terms of such restricted stock award provide otherwise).

Transferring Employees likewise will receive a distribution in the spin-off of [          ] fully vested shares of MCBL’s common stock for each share of Capitol’s restricted stock they own on the record date (unless the terms of such restricted stock award provide otherwise). The unvested portion of the restricted stock of Capitol they hold will thereafter be forfeited as a result of the termination of their employment with Capitol. However, such Transferring Employees will be granted replacement awards of MCBL’s restricted stock, with the number of such MCBL restricted stock equal to (x) the closing price of Capitol’s common stock on the date of the spin-off multiplied by the number of forfeited shares of Capitol’s restricted stock, divided by (y) the closing price of MCBL’s common stock on the date of the spin-off. Such replacement awards will be subject to a vesting schedule that corresponds to the remaining vesting schedule of the forfeited award on the date of the spin-off.


 
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Stock Options

All stock options of Capitol outstanding at the time of the spin-off will remain stock options to purchase Capitol’s common stock, subject to the terms of the grant of such options, but Capitol’s Compensation Committee will adjust the number of shares subject to, and the exercise price of, each stock option using a formula designed to preserve the intrinsic value of each option to the holder (if any), taking into account any change in the value of shares of Capitol’s common stock resulting from the spin-off.

This formula requires adjustments to the exercise price and number of underlying option shares such that for each option:

·  
on a share-by-share comparison, the pre-spin-off ratio of the exercise price to the fair market value of  Capitol’s shares subject to the option immediately before the spin-off will be equal to the post-spin-off ratio of the exercise price to the fair market value of Capitol’s shares subject to the option immediately after the spin-off, and

·  
the pre-spin-off positive spread (if any), defined as the difference between the aggregate fair market value of the Capitol shares subject to the option immediately before the spin-off and the aggregate exercise price, will be equal to the post-spin-off spread, defined as the difference between the aggregate fair market value of the Capitol shares subject to the option immediately after the spin-off over the aggregate exercise price.
 
To illustrate the operation of this formula, assume an employee holds an option to acquire 1,000 shares of Capitol stock at an exercise price of $____ per share. Further assume that immediately prior to the spin-off, the market price of a share of Capitol stock (including the value of the distribution of MCBL stock for that share) is $       , and that immediately after the spin-off the market price of a share of Capitol stock is $____ (these hypothetical stock prices are provided for ease of computation and are not indicative of expected stock prices before or after the spin-off). In this example, the pre-spin-off ratio is _______, calculated as $___ / $____, and the pre-spin-off spread is $____, calculated as (___* $___) – (___* $___).

With respect to Transferring Employees, all such options are already vested. Options awards held by Transferring Employees will expire according to the terms of the grant of such options because the Transferring Employees are terminating their employment with Capitol. The option grants generally provide that expiration will occur 60 days after termination of employment with Capitol. The MCBL Board of Directors may, in its discretion, make new or replacement awards with respect to such forfeited options.

Separation Costs

In connection with the consummation of the spin-off, Capitol will allocate to MCBL certain one-time, nonrecurring pre-tax separation costs, of which approximately $_________ have been incurred by Capitol and accrued and expensed by MCBL as of _____, 2009. These one-time costs are expected to consist of, among other things: non-income tax costs and regulatory fees incurred as part of the separation of MCBL’s business from Capitol’s other businesses; costs for building and/or reconfiguring the required information systems to run the stand-alone companies; other various costs for branding the new company, stock exchange listing fees, investor and other stakeholder communications, fees of the distribution agent, employee recruiting fees and incentive compensation. In addition, Capitol also expects to incur other one-time, non-recurring costs in respect of certain financial, legal, accounting and other advisory fees, as well as printing fees and upfront fees associated with MCBL’s new credit facility. Those costs will be borne by Capitol and will not be charged to MCBL.

After the spin-off, to the extent additional one-time costs are incurred by MCBL in connection with the separation, they will be the direct responsibility of MCBL. However, such costs are not currently estimable. In addition, the costs to operate MCBL’s business as an independent public entity may exceed the historical allocations of expenses related to areas that include, but are not limited to, litigation and other legal matters, compliance with the Sarbanes-Oxley Act and other corporate compliance matters, insurance and claims management and the related cost of insurance, as well as general overall purchasing power. These costs will be MCBL’s responsibility and are discussed elsewhere in this information statement in the section entitled [“Unaudited Pro Forma Combined Financial Information.”]


 
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Material U.S. Federal Income Tax Consequences of the Spin-Off

The following is a summary of certain material U.S. federal income tax consequences relating to the spin-off by Capitol that are expected to apply generally to a U.S. Holder (as defined below) of Capitol’s common stock or Series A Preferred. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), existing U.S. Treasury Regulations promulgated thereunder, and current administrative rulings and court decisions,  in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect.

This summary does not discuss all the tax considerations that may be relevant to Capitol’s shareholders in light of their particular circumstances, nor does it address the consequences to Capitol’s shareholders subject to special treatment under the U.S. federal income tax laws (such as foreign persons, insurance companies, dealers or brokers in securities or currencies, traders in securities who elect to apply a mark-to-market method of accounting, tax-exempt organizations, financial institutions, mutual funds, pass-through entities and investors in such entities, holders who have a functional currency other than the U.S. dollar, holders who hold their shares as a hedge or as part of a hedging, straddle, conversion, synthetic security, integrated investment or other risk-reduction transaction or who are subject to alternative minimum tax or holders who acquired their shares upon the exercise of employee stock options or otherwise as compensation). In addition, this summary does not address the U.S. federal income tax consequences to those Capitol shareholders who do not hold their Capitol common stock or Series A Preferred as a capital asset within the meaning of Section 1221 of the Code. Finally, this summary does not address any state, local or foreign tax consequences.

For purposes of this discussion, “U.S. Holder” means a beneficial owner of Capitol’s stock who is:
 
·  
an individual who is a citizen or resident of the United States;
 
·  
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any subdivision thereof;
 
·  
an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
 
·  
a trust (other than a grantor trust) if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (B) it has a valid election in place to be treated as a U.S. person.
 
CAPITOL’S SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE AND LOCAL AND FOREIGN TAX CONSEQUENCES OF THE SPIN-OFF TO THEM.

The spin-off has been structured to qualify as a tax-free distribution within the meaning of Section 355 of the Code. The spin-off is conditioned upon receipt by Capitol of a private letter ruling from the IRS and an opinion from Honigman Miller Schwartz and Cohn LLP (which opinion will rely, in part, upon the continued effectiveness of such private letter ruling), in each case substantially to the effect that (i) the spin-off and certain related transactions will qualify under Sections 355 and/or 368 of the Code, and (ii) the spin-off and certain related transactions will further qualify for tax-free treatment to Capitol and to MCBL. In keeping with the IRS’s ruling practice, however, the private letter ruling will not cover certain matters which are relevant to the tax-free treatment of Capitol, its shareholders and MCBL. Those matters will be covered in the opinion of Honigman Miller Schwartz and Cohn LLP.

The spin-off was structured to qualify as, and Capitol and MCBL intend that the spin-off will be treated, as a tax-free distribution under Section 355(a) of the Code.  The discussion below assumes that the spin-off will qualify as a tax-free distribution within the meaning of Section 355(a) of the Code.


 
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Assuming the spin-off and such related transactions meet the conditions described above:

·  
Non-Recognition of Gain or Loss to Capitol and MCBL: The spin-off and certain related transactions will not result in any taxable income, gain or loss to Capitol or to MCBL, other than with respect to any intercompany items or excess loss accounts required to be taken into account under Treasury regulations relating to consolidated returns;

·  
No Recognition of Gain or Loss to Capitol Shareholders: No gain or loss will be recognized by (and no amount will be included in the income of) holders of Capitol’s common stock or Series A Preferred upon their receipt of shares of MCBL’s common stock in the spin-off;

·  
Holding Period: The holding period of the MCBL’s common stock received by each holder of Capitol’s common stock or Series A Preferred will include the holding period at the time of the spin-off for the holder of Capitol’s common stock or Series A Preferred on which the spin-off is made, so long as the shares of Capitol’s common stock or Series A Preferred are capital assets in the hands of such shareholder;

·  
Tax Basis in Capitol and MCBL stock: The tax basis of the Capitol’s common stock held by each Capitol shareholder immediately before the spin-off will be allocated between such shareholder’s Capitol common stock or Series A Preferred and the MCBL’s common stock received, including any fractional share of MCBL stock deemed received in the spin-off, in proportion to the relative fair market value of each on the date of the spin-off; and

·  
Cash in Lieu of Fractional Shares: A holder of Capitol’s common stock or Series A Preferred who receives cash in lieu of a fractional share of MCBL’s common stock will generally recognize capital gain or loss measured by the difference between the amount of cash received and the basis of the fractional share interest in MCBL’s common stock to which the shareholder would otherwise be entitled.

United States Treasury Regulations also generally provide that if a holder of Capitol’s common stock or Series A Preferred holds different blocks of Capitol’s common stock or Series A Preferred (generally shares of Capitol’s common stock or Series A Preferred purchased or acquired on different dates or at different prices), the aggregate basis for each block of Capitol’s common stock or Series A Preferred purchased or acquired on the same date and at the same price will be allocated, to the greatest extent possible, between the shares of MCBL’s common stock received in the spin-off in respect of such block of Capitol’s common stock or Series A Preferred and such block of Capitol’s common stock or Series A Preferred, in proportion to their respective fair market values, and the holding period of the shares of MCBL’s common stock received in the spin-off in respect of such block of Capitol’s common stock or Series A Preferred will include the holding period of such block of Capitol’s common stock or Series A Preferred. If a holder of Capitol’s common stock or Series A Preferred is not able to identify which particular shares of MCBL’s common stock are received in the spin-off with respect to a particular block of Capitol’s common stock or Series A Preferred, for purposes of applying the rules described above, the shareholder may designate which shares of MCBL’s common stock are received in the spin-off in respect of a particular block of Capitol’s common stock or Series A Preferred, provided that such designation is consistent with the terms of the spin-off. Holders of Capitol’s common stock or Series A Preferred are urged to consult their own tax advisors regarding the application of these rules to their particular circumstances.

Although a private letter ruling from the IRS generally is binding on the IRS, if the factual representations or assumptions made in the letter ruling request are untrue or incomplete in any material respect, MCBL will not be able to rely on the ruling. Furthermore, the IRS will not rule on whether a distribution satisfies certain requirements necessary to obtain tax-free treatment of Capitol and its shareholders under Section 355 of the Code. Rather, the ruling is based upon representations by Capitol that these conditions have been satisfied, and any inaccuracy in such representations could invalidate the ruling. In addition to obtaining the ruling from the IRS, Capitol has made it a condition to the spin-off that Capitol obtain an opinion of Honigman Miller Schwartz and Cohn LLP substantially to the effect that (i) the spin-off and certain related transactions will qualify under Sections 355 and/or 368 of the Code, and (ii) the spin-off and certain related transactions will further qualify for tax-free treatment to Capitol and to MCBL. The opinion will rely on the ruling as to matters covered by the ruling. In addition, the opinion will be based on, among other things, certain assumptions and representations made by Capitol and MCBL, which if incorrect or inaccurate in any material respect would jeopardize the conclusions reached by counsel in its opinion. The opinion will not be binding on the IRS or the courts and will be subject to other qualifications and limitations.


 
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Notwithstanding receipt by Capitol of the ruling and opinion of counsel, the IRS could assert that the spin-off and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, MCBL, its initial public shareholders, and Capitol could be subject to significant U.S. federal income tax liability. In general, (i) with respect to the spin-off, Capitol would be treated as if it had sold the common stock of MCBL in a taxable sale for its fair market value and MCBL’s initial public shareholders could be treated as if they had received a taxable distribution from Capitol in an amount equal to the fair market value of MCBL’s common stock that was distributed to them, and (ii) with respect to certain related transactions, MCBL would be treated as if MCBL had sold all or part of its assets (including certain assets that will be retained by Capitol, the value of which may be in excess of the assets MCBL will hold immediately after the spin-off) in a taxable sale for fair market value. In addition, even if the spin-off were otherwise to qualify under Section 355 of the Code, both it and certain related transactions may be taxable to MCBL and to Capitol (but not to Capitol’s shareholders) under Sections 355(e) and 355(f) of the Code, if the spin-off were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in Capitol or MCBL. For this purpose, any acquisitions of Capitol’s stock or of MCBL’s common stock within the period beginning two years before the spin-off and ending two years after the spin-off are presumed to be part of such a plan, although MCBL or Capitol may be able to rebut that presumption.

In connection with the spin-off, MCBL and Capitol will enter into a tax sharing agreement pursuant to which MCBL will agree to be responsible for certain liabilities and obligations following the spin-off. In general, under the terms of the tax sharing agreement, in the event that the spin-off and/or certain related transactions were to fail to qualify for tax-free treatment, MCBL would generally be responsible for 50% of the tax resulting from such failure. However, if the spin-off and/or certain related transactions were to fail to qualify for tax-free treatment because of certain actions or failures to act by MCBL or by Capitol, the party taking or failing to take such actions would be responsible for all of the tax resulting from such failure. For a more detailed discussion, see “Certain Relationships and Related Party Transactions — Agreements Between MCBL and Capitol — Tax Sharing Agreement.” MCBL’s indemnification obligations to Capitol for taxes under the tax sharing agreement are not limited in amount or subject to any cap. If MCBL is required to indemnify Capitol under the circumstances set forth in the tax sharing agreement, MCBL may be subject to substantial liabilities.

Capitol may incur some tax cost in connection with the spin-off (as a result of certain intercompany transactions or as a result of certain differences between federal, on the one hand, and foreign or state tax rules, on the other), whether or not the spin-off and certain related transactions qualify under Sections 355 and/or 368 of the Code.
 
Under U.S. Treasury regulations, each Capitol shareholder who, immediately before the distribution, owns at least 5% of the total outstanding stock of Capitol must attach to the shareholder’s U.S. federal income tax return for the year in which the spin-off occurs a statement setting forth certain information relating to the spin-off. In addition, all shareholders are required to retain permanent records relating to the amount, basis, and fair market value of the MCBL stock which they receive and to make those records available to the IRS upon request of the IRS.

THE FOREGOING IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF UNDER CURRENT LAW AND IS FOR GENERAL INFORMATION ONLY. THE FOREGOING DOES NOT PURPORT TO ADDRESS ALL U.S. FEDERAL INCOME TAX CONSEQUENCES OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR CATEGORIES OF SHAREHOLDERS. EACH CAPITOL SHAREHOLDER SHOULD CONSULT THEIR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE SPIN-OFF TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.

Market for MCBL’s common Stock

There is currently no public trading market for MCBL’s common stock. MCBL has been approved for listing MCBL’s common stock on the NASDAQ Stock Market LLC under the symbol “MCBL.” MCBL has not and will not set the initial price of its common stock. The initial price will be established by the public markets.


 
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Neither MCBL nor Capitol can predict the price at which MCBL’s common stock will trade after the distribution. In fact, the combined trading prices, after the separation, of the shares of MCBL’s common stock that each Capitol shareholder will receive in the distribution and the shares of Capitol’s common stock or shares of Capitol’s Series A Preferred held at the record date may not equal the “regular-way” trading price of a Capitol share immediately prior to the separation. The price at which MCBL’s common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for MCBL’s common stock will be determined in the public markets and may be influenced by many factors.

Trading Between the Record Date and Distribution Date

Beginning on or shortly before the record date and continuing up to and including through the distribution date, Capitol expects that there will be two markets in shares of Capitol’s common stock and shares of Capitol’s Series A Preferred: a “regular-way” market and an “ex-distribution” market. Shares of Capitol’s common stock and Capitol’s Series A Preferred that trade on the “regular-way” market will trade with an entitlement to MCBL’s common shares distributed pursuant to the separation.   Shares of Capitol’s common stock and Capitol’s Series A Preferred that trade on the “ex-distribution” market will trade without an entitlement to MCBL’s common stock distributed pursuant to the distribution. Therefore, if you sell shares of Capitol’s common stock and Capitol’s Series A Preferred in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive MCBL’s common stock in the distribution. If you own shares of Capitol’s common stock or Capitol’s Series A Preferred at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including through the distribution date, you will receive the shares of MCBL’s common stock that you are entitled to receive pursuant to your ownership as of the record date of the shares of Capitol’s common stock or Capitol’s Series A Preferred, as the case may be.
 
Furthermore, beginning on or shortly before the record date and continuing up to and including the distribution date, MCBL expects that there will be a “when-issued” market in MCBL’s common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for MCBL’s common stock that will be distributed to holders of shares of Capitol’s common stock and Capitol’s Series A Preferred on the distribution date. If you owned shares of Capitol’s common stock or Capitol’s Series A Preferred at the close of business on the record date, you would be entitled to MCBL’s common stock distributed pursuant to the distribution. You may trade this entitlement to shares of MCBL’s common stock, without shares of Capitol’s common stock and Capitol’s Series A Preferred you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to MCBL’s common stock will end, and “regular-way” trading will begin.

Spin-Off Conditions and Termination

MCBL expect that the spin-off will be effective on the distribution date, _________, 2009.  The master separation agreement will provide that the separation and distribution are subject to several conditions that must be satisfied or waived by Capitol, in its sole discretion, including:

·  
Capitol will have received an opinion of counsel from Honigman Miller Schwartz Cohn LLP satisfactory to Capitol substantially to the effect that for U.S. federal income tax purposes, the spin-off and certain related transactions will qualify under Sections 355 and/or 368 of the Code;

·  
Capitol will have received a private letter ruling issued to Capitol by the IRS regarding the tax-free status of the distribution and certain related transactions, and such ruling will remain effective;

·  
the registration statement of which this information statement is a part will have become effective under the Exchange Act;

·  
the actions and filings necessary or appropriate to comply with federal and state securities laws will have been taken;

·  
the NASDAQ Stock Market LLC will have approved for listing the shares of MCBL’s common stock to be issued in the spin-off, subject to official notice of issuance;


 
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·  
the separation of MCBL’s business from Capitol and the distribution of MCBL shares in the spin-off will not violate or result in a breach of any law or any material agreements of Capitol;

·  
no court or other order or other legal or regulatory restraint will exist that prevents, or materially limits the benefits of, completion of the separation or distribution;

·  
all consents and governmental or other regulatory approvals required in connection with the transactions contemplated by the separation agreement shall have been received and shall remain in full force and effect; and

·  
each of the ancillary agreements shall have been entered into before the spin-off and shall not have been materially breached by the parties.
 
The fulfillment of the foregoing conditions will not create any obligation on Capitol’s part to effect the spin-off, and the Board of Directors of Capitol has reserved the right to amend, modify or abandon the spin-off and the related transactions at any time prior to the distribution date. The Board of Directors of Capitol may also waive any of these conditions.
 
In addition, Capitol has the right not to complete the spin-off and related transactions if, at any time, Capitol’s Board of Directors determines, in its sole discretion, that the distribution is not in the best interests of Capitol and its shareholders.

Reason for Furnishing this Information Statement
 
This information statement is being furnished solely to provide information to Capitol’s shareholders who will receive shares of MCBL’s common stock in the spin-off. It is not and is not to be construed as an inducement or encouragement to buy or sell any securities. MCBL believes that the information contained in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither MCBL nor Capitol undertakes any obligation to update the information except in the normal course of MCBL respective public disclosure obligations.

 
MCBL does not plan on paying cash dividends for the foreseeable future. However, the owners of MCBL’s common stock may receive dividends when declared by MCBL’s Board from funds legally available for the payment of dividends. All decisions regarding the declaration and payment of dividends will be evaluated from time to time in light of MCBL’s financial condition, earnings, growth prospects, other uses of cash, funding requirements, regulatory capital requirements applicable law and other factors MCBL’s Board deems relevant.

In addition to the restrictions on dividends imposed by the Federal Reserve, Michigan law also places limitations on MCBL’s ability to pay dividends. For example, if the capital of the holding company has been diminished to an amount less than the aggregate amount of capital represented by the issued and outstanding stock, a dividend shall not be paid until the deficiency in capital is repaired. Because a major source of MCBL’s revenue could be dividends that MCBL expects to receive from its banking subsidiaries, its ability to pay dividends will depend on the amount of dividends paid by its banking subsidiaries. MCBL cannot be sure that its banking subsidiaries will pay such dividends to it.




 





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34

 

 
The following table sets forth the consolidated capitalization of MCBL (i) on an actual basis as of March 31, 2009 and (ii) on pro forma basis as adjusted to give effect to:

·  
all consents and governmental or other regulatory approvals required in connection with the transactions contemplated by the master separation agreement shall have been received and shall remain in full force and effect; and

·  
each of the ancillary agreements shall have been entered into before the spin-off and shall not have been materially breached by the parties.
 
You should read this table in conjunction with “Selected Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes that are included elsewhere in this information statement.
 
As of March 31, 2009
(dollars in thousands, except per share data)

   
 
Actual
   
 
Pro forma1
 
Debt obligations:
           
Notes payable and short-term borrowings
  $ 69,244     $ 71,744  
                 
Total Debt Obligations
  $ 69,244     $ 71,744  
                 
Stockholders’ Equity(1):
               
Preferred stock, 20,000,000 shares
  authorized:
               
Actual – none issued and outstanding
               
Pro Forma – none issued and outstanding
               
Common stock, no par value; 50,000,000
  shares authorized; issued, and outstanding:
               
Actual – 5,700,632 shares
  $ 110,546          
Pro Forma – 5,700,632 shares
          $ 118,546  
Retained earnings deficit
    (2,439 )     (4,837 )
Fair value adjustment (net of tax effect) for
investment securities available for sale
(accumulated other comprehensive
income/loss)
    (2,417 )     (2,417 )
                 
Total stockholders' equity
  $ 105,690     $ 111,292  
                 
Book value per share of common stock
  $ 18.54     $ 19.52  
                 
Capital ratio -total equity to total assets
    8.19 %     8.32 %

 
See “Management” and “Compensation of Executive Officers” for more information about options and restricted stock that may be granted.
 



 
1 Assumes transfer of Bank of Auburn Hills to MCBL from Capitol as if it had occurred on March 31, 2009 and pro forma borrowing of $2.5 million from Capitol for working capital and other corporate purposes of MCBL.

 
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The unaudited pro forma consolidated financial information presented below has been derived from audited financial statements for the year ended December 31, 2008 of Michigan Commerce Bank (MCB) and MCBL’s unaudited condensed interim financial statements for the three months ended March 31, 2009. This unaudited pro forma consolidated financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes related to those financial statements included elsewhere in this information statement.
 
The unaudited pro forma consolidated statements of operations for the year ended December 31, 2008 and for the three months ended March 31, 2009 have been prepared as if the distribution had occurred as of January 1, 2008. The unaudited pro forma consolidated balance sheet as of March 31, 2009 has been prepared as if the distribution occurred as of March 31, 2009. The pro forma adjustments are based on the best information available and assumptions that MCBL’s management believes are reasonable. The unaudited pro forma consolidated financial information is for illustrative and informational purposes only and is not intended to represent or be indicative of what MCBL’s results of operations or financial position would have been had the transactions contemplated by the separation and distribution and related transactions occurred on the dates indicated. The unaudited pro forma consolidated financial information also should not be considered representative of MCBL’s future results of operations or financial position.
 
MCBL’s unaudited pro forma consolidated financial statements have been prepared to reflect adjustments to MCBL’s historical financial information to give effect to the distribution of MCBL’s common stock to the shareholders of Capitol and the following transactions, as if these transactions had been completed at earlier dates:

·  
The addition of Bank of Auburn Hills (BAH) as a wholly-owned subsidiary of MCBL.  BAH became a wholly-owned subsidiary of MCBL effective June 30, 2009 upon its transfer from Capitol.  On June 16, 2009, an application was filed with bank regulatory agencies seeking permission to merge BAH with and into MCB at a future date.  The pro forma consolidated financial statements reflect BAH as if it had become a wholly-owned subsidiary as of the beginning of the period presented.

·  
Expected borrowing of $2.5 million by MCBL from Capitol for working capital and other corporate purposes, bearing interest at 8%.
 
·  
Operating costs related to human resources, facilities, corporate communications, compliance, corporate and staff, legal, internal audit and tax service were previously charged to MCBL by Capitol. Costs for these functions will be directly incurred by MCBL. In addition, costs have been adjusted to include Board of Directors’ expenses, transfer agent fees and stock exchange listing fees. This resulted in net cost adjustments of $400,000 and $100,000 for 2008 and the first three months of 2009, respectively.
 
The adjustments reflected in the pro forma consolidated statements of operations’ do not give effect to nonrecurring separation costs primarily comprised of services to effect the transaction and establish two independent companies, primarily infrastructure-related.

The unaudited pro forma consolidated financial information has been prepared on a consolidated basis from MCBL’s consolidated financial statements or MCB’s financial statements, using the historical results of operations and basis, as the case may be, of the assets and liabilities of MCBL’s businesses and give effect to allocations of expenses from Capitol. The unaudited pro forma consolidated financial information is not indicative of MCBL future performance or what MCBL results of operations and financial position would have been if MCBL had operated as an independent company during the periods presented or if the transactions reflected therein had actually occurred as of January 1, 2008 or March 31, 2009, as the case may be. The unaudited pro forma consolidated statement of operations may not reflect the complete impact of one-time and ongoing incremental costs required to operate as an independent publicly-traded company. These pro forma financial statements do not reflect the costs of a new equity incentive plan that MCBL expects to adopt after the distribution.


 
36

 

 Unaudited Pro Forma Condensed Consolidated Balance Sheet
         
 Michigan Commerce Bancorp Limited and Subsidiaries
           
 March 31, 2009
             
               
 (in $1,000s)
             
 
         
Pro Forma Adjustments
         
   
Historical
   
Acquisition of
               
   
Amounts
   
Bank of Auburn
   
 
     
Pro Forma
 
   
As Reported
   
Hills--Note A
   
Other
     
Consolidated
 
                           
 ASSETS
                         
                           
 Cash and cash equivalents
  $ 146,773     $ 5,908     $ 2,500   B   $ 155,181  
 Loans held for resale
    3,147       -                 3,147  
 Investment securities
    11,985       -                 11,985  
 Portfolio loans
    1,093,401       37,501                 1,130,902  
   Less allowance for loan losses
    (32,662 )     (1,155 )               (33,817 )
   Net portfolio loans
    1,060,739       36,346                 1,097,085  
 Premises and equipment, net
    11,758       128                 11,886  
 Goodwill
    2,875       -                 2,875  
 Other real estate owned
    23,870       951                 24,821  
 Other assets
    29,587       1,453                 31,040  
                                   
 TOTAL ASSETS
  $ 1,290,734     $ 44,787     $ 2,500       $ 1,338,021  
                                   
 LIABILITIES AND EQUITY
                                 
                                   
 Liabilities:
                                 
   Deposits
  $ 1,110,742     $ 38,997               $ 1,149,739  
   Debt obligations
    69,244       -     $ 2,500   B     71,744  
   Other liabilities
    5,058       187                 5,245  
     Total liabilities
    1,185,044       39,185       2,500         1,226,729  
                                   
 Stockholders' equity:
                                 
     Preferred stock
    -       -                 -  
     Common stock
    110,546       8,000                 118,546  
     Retained-earnings deficit
    (2,439 )     (2,398 )               (4,837 )
     Other, net
    (2,417 )     -                 (2,417 )
     Total stockholders' equity
    105,690