Capitol Bancorp (CBCRQ) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2006
	OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

Commission file number: 001-31708

CAPITOL BANCORP LTD.

(Exact name of registrant as specified in its charter)

Michigan	38-2761672
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
Capitol Bancorp Center
200 Washington Square North
Lansing, Michigan	48933
(Address of principal executive offices)	(Zip Code)

(517) 487-6555

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  Yes&# 160;__No X

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer __Accelerated filer XNon-accelerated filer __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

  Yes __No X

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at April 15, 2006
Common Stock, No par value	15,911,228 shares

Page 1 of 25

INDEX

PART I.FINANCIAL INFORMATION

Forward-Looking Statements

Certain of the statements contained in this document, including Capitol’s consolidated financial statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations and in documents incorporated into this document by reference that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of Capitol and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements. The words “intend,” “expect,” “project,” “estimate,” “predict,” “anticipate,” “should,” “believe,” and similar expressions also are intended to identify forward-looking statements. Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of Capitol’s efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol’s banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of Capitol’s banks and Capitol’s ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol’s asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, and (xi) other risks detailed in Capitol’s other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written or oral forward-looking statements attributable to Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors. Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements. Capitol undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.

		Page
Item 1.	Financial Statements (unaudited):
	Condensed consolidated balance sheets - March 31, 2006 and December 31, 2005.	3
	Condensed consolidated statements of income - Three months ended March 31, 2006 and 2005.	4
	Condensed consolidated statements of changes in stockholders’ equity - Three months ended March 31, 2006 and 2005.	5
	Condensed consolidated statements of cash flows - Three months ended March 31, 2006 and 2005.	6
	Notes to condensed consolidated financial statements.	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	22
Item 4.	Controls and Procedures.	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	23
Item 1.A.	Risk Factors.	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	23
Item 3.	Defaults Upon Senior Securities.	23
Item 4.	Submission of Matters to a Vote of Security Holders.	23
Item 5.	Other Information.	23
Item 6.	Exhibits.	23
SIGNATURES		24
EXHIBIT INDEX		25

Page 2 of 25

PART I, ITEM I
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of March 31, 2006 and December 31, 2005
(in thousands, except share data)
	(Unaudited)
	March 31			December 31
	2006			2005
ASSETS
Cash and due from banks	$	165,078		$	157,963
Money market and interest-bearing deposits		26,344			19,846
Federal funds sold		186,144			128,299
Cash and cash equivalents		377,566			306,108
Loans held for resale		22,109			21,638
Investment securities:
Available for sale, carried at market value		25,195			25,929
Held for long-term investment, carried at amortized cost which
approximates market value		20,766			17,745
Total investment securities		45,961			43,674
Portfolio loans:
Commercial		2,768,610			2,688,361
Real estate mortgage		205,948			212,142
Installment		95,042			90,686
Total portfolio loans		3,069,600			2,991,189
Less allowance for loan losses		(41,600	)		(40,559	)
Net portfolio loans		3,028,000			2,950,630
Premises and equipment		45,235			41,629
Accrued interest income		13,582			13,719
Goodwill and other intangibles		50,232			50,378
Other assets		44,439			47,945
TOTAL ASSETS	$	3,627,124		$	3,475,721
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	610,924		$	591,229
Interest-bearing		2,327,424			2,194,030
Total deposits		2,938,348			2,785,259
Debt obligations:
Notes payable and short-term borrowings		167,268			175,729
Subordinated debentures		100,964			100,940
Total debt obligations		268,232			276,669
Accrued interest on deposits and other liabilities		22,174			28,089
Total liabilities		3,228,754			3,090,017
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES		87,951			83,838
STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000,000 shares authorized;
issued and outstanding:  2005 - 15,776,192 shares  2006 - 15,897,294 shares
		218,372			216,539
Retained earnings		92,333			85,553
Market value adjustment (net of tax effect) for investment securities
available for sale (accumulated other comprehensive income)		(286	)		(226	)
Total stockholders' equity		310,419			301,866
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,627,124		$	3,475,721
See notes to condensed consolidated financial statements.

Page 3 of 25

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(in thousands, except per share data)
	2006		2005
Interest income:
Portfolio loans (including fees)	$	60,143	$	48,237
Loans held for resale		523		637
Taxable investment securities		263		235
Federal funds sold		1,818		621
Other		350		191
Total interest income		63,097		49,921
Interest expense:
Deposits		17,782		10,571
Debt obligations and other		3,962		3,547
Total interest expense		21,744		14,118
Net interest income		41,353		35,803
Provision for loan losses		2,456		2,023
Net interest income after provision for loan losses		38,897		33,780
Noninterest income:
Service charges on deposit accounts		1,031		1,011
Trust fee income		867		605
Fees from origination of non-portfolio residential mortgage loans		1,289		1,265
Gain on sale of investment securities available for sale				1
Other		1,923		1,691
Total noninterest income		5,110		4,573
Noninterest expense:
Salaries and employee benefits		21,550		17,217
Occupancy		2,678		2,300
Equipment rent, depreciation and maintenance		1,966		1,439
Other		5,638		5,518
Total noninterest expense		31,832		26,474
Income before income taxes and minority interest		12,175		11,879
Income taxes		4,381		4,560
Income before minority interest		7,794		7,319
Minority interest in net losses of consolidated subsidiaries		2,159		696
NET INCOME	$	9,953	$	8,015
NET INCOME PER SHARE--Note D:
Basic	$	0.64	$	0.55
Diluted	$	0.61	$	0.52
See notes to condensed consolidated financial statements.

Page 4 of 25

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(in thousands, except share and per-share data)
						Accumulated
						Other
	Common		Retained			Comprehensive
	Stock		Earnings			Income (Loss)			Total
Three Months Ended March 31, 2005
Balances at January 1, 2005	$	191,719	$	60,476		$	(36	)	$	252,159
Issuance of 92,433 shares of common stock upon exercise
of stock options, net of common stock surrendered to
facilitate exercise		842								842
Recognition of compensation expense relating to
restricted common stock		305								305
Cash dividends paid ($.17 per share)				(2,531	)					(2,531	)
Components of comprehensive income:
Net income for the period				8,015						8,015
Market value adjustment for investment securities
available for sale (net of income tax effect)							(152	)		(152	)
Comprehensive income for the period										7,863
BALANCES AT MARCH 31, 2005	$	192,866	$	65,960		$	(188	)	$	258,638
Three Months Ended March 31, 2006
Balances at January 1, 2006	$	216,539	$	85,553		$	(226	)	$	301,866
Issuance of 55,352 shares of common stock upon exercise
of stock options, net of common stock surrendered to
facilitate exercise		1,449								1,449
Issuance of 65,750 unvested shares of restricted common
stock, net of related unearned employee compensation		--								--
Recognition of compensation expense relating to
restricted common stock		384								384
Cash dividends paid ($.20 per share)				(3,173	)					(3,173	)
Components of comprehensive income:
Net income for the period				9,953						9,953
Market value adjustment for investment securities
available for sale (net of income tax effect)							(60	)		(60	)
Comprehensive income for the period										9,893
BALANCES AT MARCH 31, 2006	$	218,372	$	92,333		$	(286	)	$	310,419
See notes to condensed consolidated financial statements.

Page 5 of 25

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(in thousands)
	2006			2005
OPERATING ACTIVITIES
Net income	$	9,953		$	8,015
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,456			2,023
Depreciation of premises and equipment		1,660			1,363
Amortization of intangibles		146			139
Net amortization (accretion) of investment security premiums (discounts)		(1	)		11
Loss on sale of premises and equipment		12			1
Minority interest in net losses of consolidated subsidiaries		(2,159	)		(696	)
Compensation expense relating to restricted common stock		384			305
Originations and purchases of loans held for resale		(114,117	)		(152,231	)
Proceeds from sales of loans held for resale		113,646			160,528
Decrease (increase) in accrued interest income and other assets		3,699			(5,677	)
Increase (decrease) in accrued interest expense on deposits and other liabilities		(5,915	)		4,093
NET CASH PROVIDED BY OPERATING ACTIVITIES		9,764			17,874
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale		12			--
Proceeds from calls, prepayments and maturities of investment securities		1,517			961
Purchases of investment securities		(3,907	)		(2,972	)
Net increase in portfolio loans		(79,826	)		(68,410	)
Proceeds from sales of premises and equipment		23			4
Purchases of premises and equipment		(5,301	)		(1,308	)
NET CASH USED BY INVESTING ACTIVITIES		(87,482	)		(71,725	)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		58,300			42,948
Net increase in certificates of deposit		94,789			51,844
Net borrowings from (payments on) debt obligations		(8,461	)		14,608
Resources provided by minority interest		6,272			4,475
Net proceeds from issuance of common stock		1,449			842
Cash dividends paid		(3,173	)		(2,531	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		149,176			112,186
INCREASE IN CASH AND CASH EQUIVALENTS		71,458			58,335
Cash and cash equivalents at beginning of period		306,108			231,104
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	377,566		$	289,439
See notes to condensed consolidated financial statements.

Page 6 of 25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LTD.

Note A - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Ltd. (“Capitol”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

The statements do, however, include all adjustments of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Capitol considers necessary for a fair presentation of the interim periods.

The results of operations for the period ended March 31, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

The consolidated balance sheet as of December 31, 2005 was derived from audited consolidated financial statements as of that date. Certain 2005 amounts have been reclassified to conform to the 2006 presentation.

Note B - Implementation of New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision of Statement No. 123. Statement No. 123(R), Share-Based Payment, is broader in scope than the original statement (which was more narrowly focused on stock-based compensation) and makes significant changes to accounting for “payments” involving employee compensation and “shares” or securities, in the form of stock options, restricted stock or other arrangements settled in the reporting entity’s securities. Most significant in the standard is the requirement that all stock options be measured at estimated fair value at the grant date and recorded as compensation expense over the requisite service period associated with the option, usually the vesting period. The revised standard is effective at the beginning of 2006 for calendar-year public companies and is applied prospectively to stock options granted after the effective date and any unvested stock options at that date. There were no unvested stock options of Capitol outstanding at December 31, 2005.

The primary effect of the revised standard’s implementation on Capitol will be recognition of compensation expense associated with stock options. During the three months ended March 31, 2006, no stock options were granted and, accordingly, no compensation expense related to stock options was recorded for that period. Previously, Capitol used the intrinsic-value method which did not result in expense recognition but, instead, required pro forma presentation of what compensation expense would have been recorded if the fair-value measurement and expense recognition provisions had been applied, which is presented in Note C. An additional change in accounting resulting from the implementation of Statement No. 123(R) is the reclassification of unvested restricted stock to the common stock account on

Page 7 of 25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LTD.

Note B - Implementation of New Accounting Standards - Continued

Capitol’s balance sheet at January 1, 2006; such reclassification has also been reflected in the accompanying consolidated balance sheet as of December 31, 2005.

In late 2005, the FASB’s staff issued Staff Position (FSP) FAS 115-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. This FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss. Additionally, the FSP requires certain disclosures about unrealized losses which have not been recognized as other-than-temporary. The effect of this guidance did not have a material effect on Capitol’s consolidated financial statements upon implementation on January 1, 2006.

Note C - Stock Options

Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, requires the fair value method of accounting for stock options whereby compensation expense will be recognized based on the computed fair value of the options on the grant date for stock options granted on or after the effective date of the standard, January 1, 2006 (see Note B). Certain pro forma disclosures of the expense recognition provisions of Statement No. 123(R) are required for periods prior to implementation of the standard for companies, such as Capitol, which used the intrinsic-value method for accounting for stock options, and are as follows:

	Three Months Ended March 31, 2005
Fair value assumptions:
Risk-free interest rate		4.1	%
Dividend yield		2.1	%
Stock price volatility		.25
Expected option life		7 years
Aggregate estimated fair value of options
granted (in thousands)	$	362
Net income (in thousands):
As reported	$	8,015
Less pro forma compensation expense
regarding fair value of stock option
awards, net of related income tax effect		(223	)
Pro forma	$	7,792
Net income per share:
Basic:
As reported	$	0.55
Pro forma		0.53
Diluted:
As reported		0.52
Pro forma	$	0.51

Page 8 of 25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LTD.

Note C - Stock Options - Continued

Stock option activity for the interim 2006 period is summarized as follows:

	Number of Stock Options Outstanding			Exercise Price Range		Weighted Average Exercise Price
Outstanding at January 1		2,882,283		$	10.81 to  $37.48	$	26.07
Exercised		(103,086	)		10.85 to    34.84		22.63
Granted		--
Cancelled or expired		--
Outstanding at March 31		2,779,197		$	10.81 to  $37.48	$	26.20

As of March 31, 2006, stock options outstanding had a weighted average remaining contractual life of 4.3 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value at March 31, 2006:

			Weighted Average
Exercise Price Range	Number Outstanding		Exercise Price		Remaining Contractual Life		Aggregate Intrinsic Value
$10.00 to 14.99		241,220	$	11.18		1.2 years	$	8,580,195
$15.00 to 19.99		303,613		16.60		1.9 years		9,153,932
$20.00 to 24.99		474,151		21.69		4.5 years		11,882,224
$25.00 to 29.99		699,283		26.99		4.1 years		13,817,832
$30.00 to 34.99		710,832		32.08		5.4 years		10,427,905
$35.00 or more		350,098	$	37.48		6.6 years		3,245,408
Total		2,779,197					$	57,107,496

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Page 9 of 25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LTD.

Note D - Net Income Per Share

The computations of basic and diluted earnings per share were as follows:

	Three Months Ended March 31
	2006		2005
Numerator—net income for the period	$	9,953,000	$	8,015,000
Denominator:
Weighted average number of common shares outstanding, excluding unvested shares of restricted common stock (denominator for basic earnings per share)		15,641,710		14,648,473
Weighted average number of unvested shares of restricted common stock outstanding		60,991		215,489
Effect of other dilutive securities (stock options)		689,659		549,430
Denominator for diluted net income per share—
Weighted average number of common shares and potential dilution		16,392,360		15,413,392
Number of antidilutive stock options excluded from diluted earnings per share computation		--		206,042

Note E - New Bank and Bank Development Activities

In January 2006, Capitol announced the formation of a wealth management subsidiary, Capitol Wealth Advisors, headquartered in Charlotte, North Carolina, and a de novo bank, Community Bank of Rowan, located in Salisbury, North Carolina, opened in February 2006. Each is majority-owned by bank-development subsidiaries controlled by Capitol.

Bank development efforts were currently under consideration at March 31, 2006 in several states including pre-development exploratory discussions, lease and employment negotiations and preparation of preliminary regulatory applications for formation and/or acquisition of community banks. As of March 31, 2006, Capitol had applications pending for additional de novo community banks in Arizona, Georgia (2), Indiana, Nevada, Ohio and Washington.

Note F - Impact of New Accounting Standards

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets, which is an amendment of Statement No. 140, intended to simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. Statement No. 156 is effective for years beginning after September 15, 2006, although earlier adoption is permitted. Capitol’s management has not completed its review

Page 10 of 25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LTD.

Note F - Impact of New Accounting Standards - Continued

of the new guidance, however, the effect of the standard’s adoption is not expected to be material.

Also recently, the FASB has issued several proposals to amend, supersede or interpret existing accounting standards which may impact Capitol’s financial statements at a later date:

·   Proposed amendment to Statement No. 128, Earnings per Share.

·   Proposed amendments to guidance regarding postemployment obligations, including pensions.

·   Proposed interpretation regarding Uncertain Tax Positions.

·   Proposed replacement of Statement No. 141 regarding Business Combinations.

·   Proposed replacement of Accounting Research Bulletin No. 51 regarding Consolidated Financial Statements, Including Accounting and Reporting for Noncontrolling Interests.

Due to the uncertain future status of these proposals, Capitol’s management is unable to estimate their potential impact on Capitol’s consolidated financial statements.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to Capitol’s consolidated financial statements.

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Page 11 of 25

PART I. ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Financial Condition

Total assets approximated $3.6 billion at March 31, 2006, an increase of $151.4 million from the December 31, 2005 level of $3.5 billion. The balance sheet includes Capitol and its consolidated subsidiaries:

	Total Assets (in $1,000’s)
	March 31, 2006			Dec 31, 2005
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	319,832		$	320,075
Bank of Auburn Hills		14,236			10,848
Bank of Belleville		17,919			14,641
Bank of Michigan		36,343			31,119
Brighton Commerce Bank		107,487			105,694
Capitol National Bank		250,831			246,132
Detroit Commerce Bank		91,043			84,979
Elkhart Community Bank		78,951			75,648
Goshen Community Bank		67,495			74,545
Grand Haven Bank		128,501			122,757
Kent Commerce Bank		81,467			78,939
Macomb Community Bank		98,090			93,497
Muskegon Commerce Bank		97,896			96,649
Oakland Commerce Bank		116,503			115,720
Paragon Bank & Trust		106,240			106,535
Portage Commerce Bank		183,050			183,018
Great Lakes Region Total		1,795,884			1,760,796
Southeast Region:
Community Bank of Rowan(1)		19,827
First Carolina State Bank		84,849			83,345
Peoples State Bank		33,778			31,620
Southeast Region Total		138,454			114,965
Midwest Region-Summit Bank of Kansas City		10,010			9,152
Eastern Regions Total		1,944,348			1,884,913
Western Regions:
Southwest Region:
Arrowhead Community Bank		89,588			83,639
Bank of Las Vegas		69,679			58,315
Bank of Tucson		176,832			167,638
Black Mountain Community Bank		134,870			128,958
Camelback Community Bank		83,929			82,309
Desert Community Bank		80,963			78,907
East Valley Community Bank		43,652			43,352
Fort Collins Commerce Bank		33,679			27,427
Mesa Bank		149,645			132,775
Red Rock Community Bank		105,038			102,618
Southern Arizona Community Bank		87,080			98,849
Sunrise Bank of Albuquerque		59,337			61,812
Sunrise Bank of Arizona		116,472			111,204
Valley First Community Bank		73,967			72,759
Yuma Community Bank		66,634			61,523
Southwest Region Total		1,371,365			1,312,085
California Region:
Bank of Escondido		76,351			70,807
Bank of San Francisco		16,751			13,685
Bank of Santa Barbara		13,775			14,386
Napa Community Bank		83,903			84,512
Point Loma Community Bank		39,788			34,213
Sunrise Bank of San Diego		70,145			66,809
California Region Total		300,713			284,412
Northwest Region-Bank of Bellevue		25,256			19,726
Western Regions Total		1,697,334			1,616,223
Other, net		(14,558	)		(25,415	)
Consolidated	$	3,627,124		$	3,475,721

(1)Commenced operations in February 2006 and is 51%-owned by Capitol Development Bancorp Limited III, a

  controlled subsidiary of Capitol.

Page 12 of 25

Portfolio loans increased during the three-month 2006 period by approximately $78 million, compared to about $67 million during the corresponding period of 2005. 2006 loan growth represents a continuation of prior-period demand and growth at many of Capitol’s younger banks. The majority of portfolio loan growth occurred in commercial loans, consistent with the banks’ emphasis on commercial lending activities.

The allowance for loan losses at March 31, 2006 approximated $42 million or 1.36% of total portfolio loans, which was unchanged from the year-end 2005 ratio, as asset quality remained steady during the 2006 interim period.

The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio at the balance sheet date. Management’s determination of the adequacy of the allowance is based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio and other factors. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the periods ended March 31 (in thousands):

	2006			2005
Allowance for loan losses at January 1	$	40,559		$	37,572
Loans charged-off:
Commercial		(1,718	)		(2,071	)
Real estate mortgage		(25	)		--
Installment		(112	)		(252	)
Total charge-offs		(1,855	)		(2,323	)
Recoveries:
Commercial		353			410
Real estate mortgage		1			--
Installment		86			43
Total recoveries		440			453
Net charge-offs		(1,415	)		(1,870	)
Additions to allowance charged to expense		2,456			2,023
Allowance for loan losses at March 31	$	41,600		$	37,725
Average total portfolio loans for period ended March 31	$	3,010,849		$	2,726,965
Ratio of net charge-offs (annualized) to average portfolio loans outstanding		0.19	%		0.27	%

Page 13 of 25

Net charge-offs of loans in the interim 2006 period decreased about 25% compared to the corresponding 2005 period, along with the ratio of net charge-offs as a percentage of average loans which decreased to .19% in the 2006 interim period, compared to .27% in the 2005 period.

The amounts of the allowance for loan losses allocated in the following table (in thousands) are based on management’s estimate of potential losses inherent in the portfolio at the balance-sheet date, include all loans for which, based on Capitol’s loan rating system, management has concerns, and should not be interpreted as an indication of future charge-offs.

	March 31, 2006					December 31, 2005
			Percentage					Percentage
			of Total					of Total
			Portfolio					Portfolio
	Amount		Loans			Amount		Loans
Commercial	$	38,415		1.25	%	$	37,498		1.25	%
Real estate mortgage		1,942		.07			1,866		.07
Installment		1,243		.04			1,195		.04
Total allowance for loan losses	$	41,600		1.36	%	$	40,559		1.36	%
Total portfolio loans outstanding	$	3,069,600				$	2,991,189

Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) and other nonperforming assets are summarized below (in thousands):

	March 31		Dec 31
	2006		2005
Nonaccrual loans:
Commercial	$	19,179	$	19,734
Real estate mortgage		2,009		1,734
Installment		1,399		1,154
Total nonaccrual loans		22,587		22,622
Past due (>90 days) loans:
Commercial		3,493		3,235
Real estate mortgage		366		592
Installment		165		283
Total past due loans		4,024		4,110
Total nonperforming loans	$	26,611	$	26,732
Real estate owned and other repossessed assets		5,275		3,745
Total nonperforming assets	$	31,886	$	30,477

Nonperforming loans decreased by $121,000 during the three-month period ended March 31, 2006. Nonperforming loans as a percentage of portfolio loans outstanding at March 31, 2006 were 0.87%, a slight reduction from the beginning of year level of 0.89%. Of the nonperforming

Page 14 of 25

loans at March 31, 2006, about82% were real estate secured. Those loans, when originated, had appropriate loan-to-value ratios and, accordingly, have loss exposure which is expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies. Most other nonperforming loans were generally secured by other business assets. Nonperforming loans at March 31, 2006 were in various stages of resolution and management believes such loans are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses.

In addition to the identification of nonperforming loans involving borrowers with payment performance difficulties (i.e., nonaccrual loans and loans past-due 90 days or more), management utilizes an internal loan review process to identify other potential problem loans which may warrant additional monitoring or other attention. This loan review process is a continuous activity which periodically updates internal loan ratings. At inception, all loans are individually assigned a rating which grades the credits on a risk basis, based on the type and value of collateral, financial strength of the borrower and guarantors and other factors such as nature of the borrower’s business climate, local economic conditions and other subjective factors. The loan rating process is fluid and subjective.

Potential problem loans include loans which are generally performing as agreed; however, because of internal loan reviews and/or lending staff’s risk assessment, increased monitoring is deemed appropriate. In addition, some loans are assigned a more adverse classification, with specific performance issues or other risk factors requiring close management and development of specific remedial action plans.

At March 31, 2006, potential problem loans (including the previously mentioned nonperforming loans) approximated $128 million, or about 4% of total consolidated portfolio loans. These potential problem loans do not necessarily have significant loss exposure (nor are they necessarily deemed ‘impaired’), but rather are identified by management in this manner to aid in loan administration and risk management. Management believes such loans to be adequately considered in its evaluation of the adequacy of the allowance for loan losses. Management believes, however, that current general economic conditions may result in higher levels of future loan losses, in comparison to previous years, as evidenced by higher provisions for loan losses in recent periods.

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Page 15 of 25

The following comparative analysis summarizes each bank’s total portfolio loans, allowance for loan losses, nonperforming loans and ratio of the allowance as a percentage of portfolio loans (dollars in thousands):

	Total Portfolio Loans				Allowance for Loan Losses				Nonperforming Loans				Allowance as a Percentage of Total Portfolio Loans
	March 31		Dec 31		March 31		Dec 31		March 31		Dec 31		March 31			Dec 31
	2006		2005		2006		2005		2006		2005		2006			2005
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	277,999	$	286,146	$	4,724	$	4,712	$	3,157	$	3,103		1.70	%		1.65	%
Bank of Auburn Hills		12,318		6,058		180		90						1.46	%		1.49	%
Bank of Belleville		4,910		1,534		70		23						1.43	%		1.50	%
Bank of Michigan		32,473		28,062		487		421						1.50	%		1.50	%
Brighton Commerce Bank		95,417		93,553		994		978		1,954		1,412		1.04	%		1.05	%
Capitol National Bank		200,804		197,062		3,440		3,233		5,055		4,938		1.71	%		1.64	%
Detroit Commerce Bank		87,060		81,533		1,149		1,104		539		110		1.32	%		1.35	%
Elkhart Community Bank		73,863		70,671		919		919		137		908		1.24	%		1.30	%
Goshen Community Bank		53,864		53,497		693		648		561		443		1.29	%		1.21	%
Grand Haven Bank		121,757		117,241		2,515		2,575		3,135		3,342		2.07	%		2.20	%
Kent Commerce Bank		76,733		74,385		1,112		1,277		1,376		1,751		1.45	%		1.72	%
Macomb Community Bank		94,107		90,448		1,417		1,422		1,637		2,142		1.51	%		1.57	%
Muskegon Commerce Bank		88,885		88,007		1,032		1,021		2,257		1,430		1.16	%		1.16	%
Oakland Commerce Bank		99,440		101,859		1,456		1,424		800		948		1.46	%		1.40	%
Paragon Bank & Trust		87,449		92,427		1,330		1,375		1,173		2,216		1.52	%		1.49	%
Portage Commerce Bank		168,881		171,679		1,937		2,057		2,891		2,119		1.15	%		1.20	%
Great Lakes Region Total		1,575,960		1,554,162		23,455		23,279		24,672		24,862
Southeast Region:
Community Bank of Rowan(1)		10,717				160								1.49	%
First Carolina State Bank		64,081		68,235		707		690		240		173		1.10	%		1.01	%
Peoples State Bank		23,220		19,909		169		140				16		0.73	%		0.70	%
Southeast Region Total		98,018		88,144		1,036		830		240		189
Midwest Region-Summit Bank of Kansas City		3,164		644		48		10						1.52	%		1.55	%
Eastern Regions Total		1,677,142		1,642,950		24,539		24,119		24,912		25,051
Western Regions:
Southwest Region:
Arrowhead Community Bank		75,082		73,800		736		654		125		140		0.98	%		0.89	%
Bank of Las Vegas		52,340		50,899		610		495						1.17	%		0.97	%
Bank of Tucson		137,196		143,900		1,220		1,405				200		0.89	%		0.98	%
Black Mountain Community Bank		103,410		103,627		1,243		1,277		125		131		1.20	%		1.23	%
Camelback Community Bank		72,517		73,813		860		852		101		41		1.19	%		1.15	%
Desert Community Bank		72,782		71,050		800		830		145		273		1.10	%		1.17	%
East Valley Community Bank		34,403		38,716		456		497						1.33	%		1.28	%
Fort Collins Commerce Bank		30,922		22,619		402		306						1.30	%		1.35	%
Mesa Bank		135,728		125,513		1,276		1,215						0.94	%		0.97	%
Red Rock Community Bank		91,098		83,259		1,350		1,300		136		198		1.48	%		1.56	%
Southern Arizona Community Bank		74,681		76,953		745		720		18		59		1.00	%		0.94	%
Sunrise Bank of Albuquerque		49,684		53,669		693		693		520		300		1.39	%		1.29	%
Sunrise Bank of Arizona		109,039		101,846		1,256		1,253		69		70		1.15	%		1.23	%
Valley First Community Bank		61,807		57,794		600		526						0.97	%		0.91	%
Yuma Community Bank		54,427		50,474		513		485				27		0.94	%		0.96	%
Southwest Region Total		1,155,116		1,127,932		12,760		12,508		1,239		1,439
California Region:
Bank of Escondido		36,575		38,228		475		460		22		23		1.30	%		1.20	%
Bank of San Francisco		12,584		7,291		183		102						1.45	%		1.40	%
Bank of Santa Barbara		10,161		3,546		144		54						1.42	%		1.52	%
Napa Community Bank		68,674		70,359		1,237		1,237				19		1.80	%		1.76	%
Point Loma Community Bank		32,072		29,759		453		423						1.41	%		1.42	%
Sunrise Bank of San Diego		57,974		58,983		559		588				200		0.96	%		1.00	%
California Region Total		218,040		208,166		3,051		2,864		22		242
Northwest Region-Bank of Bellevue		14,408		8,327		202		120						1.40	%		1.44	%
Western Regions Total		1,387,564		1,344,425		16,013		15,492		1,261		1,681
Other, net		4,894		3,814		1,048		948		438
Consolidated	$	3,069,600	$	2,991,189	$	41,600	$	40,559	$	26,611	$	26,732		1.36	%		1.36	%

(1)   Commenced operations in February 2006 and is 51%-owned by Capitol Development Bancorp Limited III, a controlled subsidiary of Capitol.

Page 16 of 25

Results of Operations

Net income for the three months ended March 31, 2006 approximated $10 million, an increase of $1.9 million or 24% over the corresponding period in 2005. Diluted earnings per share for the three-month 2006 period were $0.61 compared to $0.52 for the 2005 period, an increase of 17%.

Net interest income for the first three months of 2006 totaled $41.4 million, a 16% increase compared to $35.8 million in 2005. This increase is attributable to the banks’ growth in size and a comparatively increased net interest margin (5.06% in 2006 and 4.90% in the corresponding 2005 period). Net interest margin in the first three months of 2006 decreased from the fourth quarter 2005 level of 5.21%.

Noninterest income for the three months ended March 31, 2006 was $5.1 million, an increase of $537,000, or 12%, over the same period in 2005. The increase is due primarily to an increase of $262,000 in trust fee income. Other noninterest income in the 2006 period includes $360,000 of gains on sale of government guaranteed loans, as compared to $456,000 for the first quarter in 2005, and income approximating $550,000 from an equity-method investee in the 2006 period (none in 2005).

The provision for loan losses for the three-month period in 2006 was $2.5 million, as compared to $2 million for the same period in 2005. The provisions for loan losses are based upon management’s analysis of the adequacy of the allowance for loan losses, as previously discussed.

Noninterest expense totaled $31.8 million for the first quarter in 2006, as compared to $26.5 million for the comparable period in 2005. The increase in noninterest expense is associated with adding new banks, growth in the size of previously-existing banks and increases in general operating costs. Increases in both occupancy and salaries and employee benefits relate primarily to the addition of nine new banks since the first quarter of 2005, growth in the size of banks within the consolidated group, the addition of a wealth management unit and a de novo bank in the first quarter of 2006 (one de novo bank in the first quarter of 2005), and added regional bank development executives as part of Capitol’s 2006 expansion campaign. The more significant elements of other noninterest expense consisted of the following:

	Three months ended March 31
	2006		2005
	(In 1,000s)
Professional fees	$	636	$	453
Advertising		633		464
Preopening and start-up costs of de novo banks, bank-development subsidiaries and other units		596		161
Directors’ fees		581		326
Paper, printing and supplies		546		482
Taxes other than income taxes		378		364
Bank services (ATMs, telephone banking and Internet banking)		334		316
Communications		310		308
Other		1,624		2,644
Total	$	5,638	$	5,518

Page 17 of 25

Operating results (dollars in thousands) were as follows:

	Three months ended March 31
												Return on						Return on
	Total Revenues					Net Income						Average Equity(1)						Average Assets(1)
	2006		2005			2006			2005			2006			2005			2006			2005
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	5,791	$	5,767		$	926		$	910			13.99	%		14.22	%		1.21	%		1.15	%
Bank of Auburn Hills		235		n/a			(151	)		n/a			n/a			n/a			n/a			n/a
Bank of Belleville		198		n/a			(188	)		n/a			n/a			n/a			n/a			n/a
Bank of Michigan		644		54			(150	)		(276	)		n/a			n/a			n/a			n/a
Brighton Commerce Bank		1,892		1,700			211			275			8.96			12.39			.80			1.04
Capitol National Bank		4,282		3,735			777			888			16.29			19.88			1.28			1.58
Detroit Commerce Bank		2,093		1,413			135			145			7.00			9.38			.63			.81
Elkhart Community Bank		1,472		1,163			264			171			12.96			9.28			1.39			1.03
Goshen Community Bank		1,219		865			82			87			4.96			5.31			.49			.66
Grand Haven Bank		2,290		2,051			285			270			11.04			11.08			.93			.94
Kent Commerce Bank		1,495		1,444			58			104			2.83			5.29			.30			.49
Macomb Community Bank		1,770		1,625			(28	)		271			n/a			12.60			n/a			1.15
Muskegon Commerce Bank		1,792		1,644			153			295			7.10			12.38			.64			1.27
Oakland Commerce Bank		2,112		2,111			332			468			14.09			18.62			1.17			1.47
Paragon Bank & Trust		1,957		2,087			269			372			9.79			13.01			1.05			1.39
Portage Commerce Bank		3,577		3,280			645			746			16.14			19.74			1.44			1.66
Great Lakes Region Total		32,819		28,939			3,620			4,726
Southeast Region:
Community Bank of Rowan(2)		99		n/a			(563	)		n/a			n/a			n/a			n/a			n/a
First Carolina State Bank		1,513		948			219			119			8.20			4.63			1.07			.72
Peoples State Bank		579		n/a			18			n/a			2.12			n/a			.24			n/a
Southeast Region Total		2,191		948			(326	)		119
Midwest Region-Summit Bank of Kansas City		107		n/a			(174	)		n/a			n/a			n/a			n/a			n/a
Eastern Regions Total		35,117		29,887			3,120			4,845
Western Regions:
Southwest Region:
Arrowhead Community Bank		1,869		1,506			226			204			11.59			12.35			1.05			1.14
Bank of Las Vegas		1,167		872			113			142			4.82			9.25			.77			1.13
Bank of Tucson		3,438		2,774			1,058			792			29.34			25.25			2.52			1.93
Black Mountain Community Bank		2,474		1,882			634			445			21.81			18.51			1.99			1.73
Camelback Community Bank		1,468		1,395			207			307			10.31			14.42			1.04			1.55
Desert Community Bank		1,608		1,289			297			215			14.90			10.86			1.50			1.28
East Valley Community Bank		920		895			193			37			14.99			3.13			1.83			.32
Fort Collins Commerce Bank		639		n/a			(32	)		n/a			n/a			n/a			n/a			n/a
Mesa Bank		3,453		2,049			844			448			30.69			22.46			2.40			1.87
Red Rock Community Bank		1,980		1,544			465			337			15.76			10.50			1.88			1.33
Southern Arizona Community Bank		1,586		1,431			290			316			13.46			14.73			1.37			1.52
Sunrise Bank of Albuquerque		1,123		1,275			120			260			7.17			15.73			.83			1.54
Sunrise Bank of Arizona		2,532		2,529			413			519			13.25			16.21			1.47			1.64
Valley First Community Bank		1,402		971			161			180			9.24			11.49			.86			1.34
Yuma Community Bank		1,278		1,048			188			228			11.48			14.45			1.24			1.59
Southwest Region Total		26,937		21,460			5,177			4,430
California Region:
Bank of Escondido		1,238		805			199			71			8.21			3.10			1.09			.51
Bank of San Francisco		269		n/a			(237	)		n/a			n/a			n/a			n/a			n/a
Bank of Santa Barbara		316		n/a			(223	)		n/a			n/a			n/a			n/a			n/a
Napa Community Bank		1,630		1,167			276			228			10.27			10.11			1.33			1.31
Point Loma Community Bank		774		297			18			(206	)		1.05			n/a			.19			n/a
Sunrise Bank of San Diego		1,366		1,131			231			134			8.61			4.81			1.34			.89
California Region Total		5,593		3,400			264			227
Northwest Region-Bank of Bellevue		366		n/a			(141	)		n/a			n/a			n/a			n/a			n/a
Western Regions Total		32,896		24,860			5,300			4,657
Other, net		195		(253	)		1,533			(1,487	)		n/a			n/a			n/a			n/a
Consolidated	$	68,207	$	54,494		$	9,953		$	8,015			13.12	%		12.55	%		1.13	%		1.02	%
n/a Not applicable

(1)Annualized for period presented.

(2)Commenced operations in February 2006 and is 51%-owned by Capitol Development Bancorp Limited III, a controlled subsidiary of

      Capitol.

Page 18 of 25

Liquidity and Capital Resources

The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $153 million for the three months ended March 31, 2006, significantly more than the $94.8 million increase in the corresponding period of 2005. Growth occurred in most interest-bearing deposit categories, with the majority coming from certificate of deposit accounts. The banks generally do not rely significantly on brokered deposits as a key funding source. Brokered deposits approximated $265 million as of March 31, 2006, or about 9% of total deposits, an increase of $27 million during the interim 2006 period, as the banks have sought to add these funds selectively based on maturity and interest-rate opportunities, to aid in matching repricing of funding sources and assets.

Noninterest-bearing deposits approximated 21% of total deposits at both March 31, 2006 and December 31, 2005. Levels of noninterest-bearing deposits can, however, fluctuate based on customers’ transaction activity, as evidenced by the change in this ratio during the interim 2006 period.

Interim 2006 deposit growth was deployed primarily into commercial loans, consistent with the banks’ emphasis on commercial lending activities.

Cash and cash equivalents amounted to $378 million or 10% of total assets at March 31, 2006, compared with $306 million or 9% of total assets at December 31, 2005. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the banks’ liquidity position at March 31, 2006 is adequate to fund loan demand and meet depositor needs.

In addition to cash and cash equivalents, a source of long-term liquidity is the banks’ marketable investment securities. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements. The banks have not engaged in active trading of their investments. At March 31, 2006, the banks had approximately $25 million of investment securities classified as available for sale, which can be utilized to meet various liquidity needs as they arise.

Several of the banks have secured lines of credit with correspondent banks and regional Federal Home Loan Banks. Borrowings thereunder approximated $167 million and additional borrowing capacity approximated $201 million at March 31, 2006. These facilities are used from time to time as a lower-cost source of funds versus various rates and maturities of time deposits or to meet temporary needs. Total notes payable and short-term borrowings decreased $8 million in the interim 2006 period. At March 31, 2006, Capitol had unused lines of credit from an unrelated financial institution aggregating $25 million.

Trust-preferred securities, approximating $101 million ($103 million principal amount), augment Capitol’s existing capital base, which totaled $499 million (subordinated debentures--formerly ‘trust-preferred securities’, minority interests in consolidated subsidiaries and stockholders’ equity) or 14% of total assets at March 31, 2006.

Stockholders’ equity, as a percentage of total assets, approximated 9% at March 31, 2006 and December 31, 2005.

Page 19 of 25

In January 2006, Capitol announced the formation of a wealth management subsidiary, Capitol Wealth Advisors, headquartered in Charlotte, North Carolina, and a de novo bank, Community Bank of Rowan, located in Salisbury, North Carolina, opened in February 2006. Each is majority-owned by bank-development subsidiaries controlled by Capitol.

Bank development efforts were under consideration at March 31, 2006 in several states including pre-development exploratory discussions, lease and employment negotiations and preparation of preliminary regulatory applications for formation and/or acquisition of community banks. As of March 31, 2006, Capitol had applications pending for additional de novo community banks in Arizona, Georgia (2), Indiana, Nevada, Ohio and Washington.

Capitol’s operating strategy continues to be focused on the ongoing growth and maturity of its existing banks, coupled with new bank expansion in selected markets as opportunities arise. Accordingly, Capitol may invest in, acquire or otherwise develop additional banks in future periods, subject to economic conditions and other factors, although the timing of such additional banking units, if any, is uncertain. Such future new banks and/or additions of other operating units could be either wholly-owned, majority-owned or otherwise controlled by Capitol. Most recently, Capitol has recruited several regional bank development executives to pursue de novo and other bank development opportunities in certain regions of the United States where it seeks to expand in future periods.

Capitol and its banks are subject to complex regulatory capital requirements, which require maintaining certain minimum capital ratios. These ratio measurements, in addition to certain other requirements, are used by regulatory agencies to determine the level of regulatory intervention and enforcement applied to financial institutions. Management believes Capitol and each of its banks are in compliance with regulatory requirements and are expected to maintain such compliance.

Trends Affecting Operations

One of the most significant trends which can impact the financial condition and results of operations of financial institutions are changes in market rates of interest.

Changes in interest rates, either up or down, have an impact on net interest income (plus or minus), depending on the direction and timing of such changes. At any point in time, there is a difference between interest rate-sensitive assets and interest rate-sensitive liabilities. This means that when interest rates change, the timing and magnitude of the effect of such interest rate changes can alter the relationship between asset yields and the cost of funds.

The Board of Governors of the Federal Reserve, which influences interest rates, has continued to increase interbank borrowing rates in early 2006 and expressed several concerns about economic conditions. Home mortgage rates have recently increased, which has adversely impacted fee income from the origination of residential mortgages, particularly from refinancing activities. Many of Capitol’s loans are variable-rate and, accordingly, such rate increases should result in higher interest income to Capitol in the near term; however, depositors will similarly expect higher rates of interest on their accounts, potentially offsetting much of the benefit of rising interest rates. The future outlook on interest rates and their impact on Capitol’s interest income, interest expense and net interest income is uncertain.

Page 20 of 25

Start-up banks generally incur operating losses during their early periods of operations. Recently-formed start-up banks are expected to detract from consolidated earnings performance and start-up banks formed in 2006 and beyond will similarly negatively impact short-term profitability.

General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions.

Media reports raising questions about the health of the domestic economy have continued in 2006. During this early interim period of 2006, the amount of nonperforming loans has decreased, however, it is difficult to predict future movements in levels of nonperforming loans and related loan losses may increase as economic conditions, locally and nationally, evolve.

Impact of New Accounting Standards

There are several new accounting standards either becoming effective or being issued in 2006. They are listed and discussed in Notes B and F of the accompanying condensed consolidated financial statements.

Critical Accounting Policies

Capitol’s critical accounting policies are described on pages F-24 - F-26 of the financial information section of its 2005 Annual Report. In the circumstances of Capitol, management believes its “critical accounting policies” are those which encompass the use of estimates in determining the allowance for loan losses (because of inherent subjectivity), accounting for stock options, goodwill and other intangibles (due to inherent subjectivity in evaluating potential impairment) and consolidation policy.

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PART I. ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information about Capitol’s quantitative and qualitative disclosures about market risk were included in Capitol’s annual report on Form 10-K for the year ended December 31, 2005. Capitol’s management does not believe that there has been a material change in the nature or categories of market risk exposure, except as noted in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein (Part I, Item 2), under the caption, “Trends Affecting Operations.”

PART I. ITEM 4

CONTROLS AND PROCEDURES

Capitol maintains disclosure controls and procedures designed to provide reasonable assurance that the information Capitol must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. Capitol's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated Capitol's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, Capitol's disclosure controls and procedures, in all material respects, are effective in bringing to their attention on a timely basis material information relating to Capitol required to be included in Capitol's periodic filings under the Exchange Act.

No change in Capitol’s internal control over financial reporting occurred during Capitol’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect Capitol’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.	Legal Proceedings. Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on Capitol’s consolidated financial position or results of operations.
Item 1.A.	There were no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of Capitol’s Form 10-K for the year ended December 31, 2005, during the three months ended March 31, 2006. Please refer to that section of Capitol’s Form 10-K for disclosures regarding the risks and uncertainties related to Capitol’s business.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
	(a)None. (b)Not applicable. (c)None.
Item 3.	Defaults Upon Senior Securities. None.
Item 4.	Submission of Matters to a Vote of Security Holders. None.
Item 5.	Other Information. None.
Item 6.	Exhibits. (a)Exhibits:

Exhibit No.	Description of Exhibit
31.1	Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CAPITOL BANCORP LTD.

(Registrant)

/s/ Joseph D. Reid   

Joseph D. Reid

Chairman and CEO

(duly authorized to sign on behalf

of the registrant)

/s/ Lee W. Hendrickson

Lee W. Hendrickson

Chief Financial Officer

Date: April 28, 2006

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INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
31.1	Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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