Capitol Bancorp (CBCRQ) 10-Q 2003 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003

OR

( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from                 to                 

Commission file number33-24728C

CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)

Michigan	38-2761672
(State or other jurisdiction	(I.R.S. Employer
of incorporation or	Identification
organization)	Number)

Capitol Bancorp Center
200 Washington Square North, Lansing, Michigan
(Address of principal executive offices)
48933
(Zip Code)
(517) 487-6555
(Registrant’s telephone number)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No       

         Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Act). Yes  X  No       

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

       Common stock, No par value: 13,674,401 shares outstanding as of October 31, 2003.

Page 1 of 25

INDEX

PART I. FINANCIAL INFORMATION

Forward-Looking Statements

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

		Page
Item 1.	Financial Statements (unaudited):
	Consolidated balance sheets - September 30, 2003 and December 31, 2002.	3
	Consolidated statements of income - Three months and nine months ended
	September 30, 2003 and 2002.	4
	Consolidated statements of changes in stockholders' equity - Nine months ended
	September 30, 2003 and 2002.	5
	Consolidated statements of cash flows - Nine months ended
	September 30, 2003 and 2002.	6
	Notes to 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 2.	Changes in 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 and Reports on Form 8-K.	23
SIGNATURES		24
EXHIBIT INDEX		25

Page 2 of 25

PART I, ITEM I

CAPITOL BANCORP LTD.
Consolidated Balance Sheets
As of September 30, 2003 and December 31, 2002

	(Unaudited) September 30 2003			December 31 2002
	(in thousands)
ASSETS
Cash and due from banks	$	149,356		$	125,146
Money market, mutual funds and interest-bearing deposits		64,885			42,301
Federal funds sold		141,324			83,737
Cash and cash equivalents		355,565			251,184
Loans held for resale		56,781			75,420
Investment securities:
Available for sale, carried at market value		23,040			25,355
Held for long-term investment, carried at
amortized cost which approximates market value		9,841			8,784
Total investment securities		32,881			34,139
Portfolio loans:
Commercial		1,929,705			1,789,036
Real estate mortgage		136,164			127,855
Installment		70,991			74,481
Total portfolio loans		2,136,860			1,991,372
Less allowance for loan losses		(30,513	)		(28,953	)
Net portfolio loans		2,106,347			1,962,419
Premises and equipment		24,604			21,737
Accrued interest income		9,374			9,286
Goodwill and other intangibles		30,141			24,739
Other assets		34,997			30,364
TOTAL ASSETS	$	2,650,690		$	2,409,288
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing	$	393,224		$	360,669
Interest-bearing		1,869,614			1,701,403
Total deposits		2,262,838			2,062,072
Debt obligations:
Notes payable		83,198			93,398
Trust-preferred securities -- Note B		61,336			51,583
Total debt obligations		144,534			144,981
Accrued interest on deposits and other liabilities		17,124			14,182
Total liabilities		2,424,496			2,221,235
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES		20,736			28,016
STOCKHOLDERS' EQUITY
Common stock, no par value, 25,000,000 shares authorized;
issued and outstanding: 2003 - 13,656,216 shares
2002 - 11,663,412 shares		172,008			135,234
Retained earnings		38,864			26,318
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income)		(67	)		191
		210,805			161,743
Less unearned compensation regarding restricted stock,
note receivable from exercise of stock options
and unallocated ESOP shares		(5,347	)		(1,706	)
Total stockholders' equity		205,458			160,037
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,650,690		$	2,409,288

Page 3 of 25

CAPITOL BANCORP LIMITED
Consolidated Statements of Income (Unaudited)
For the Three Months and Nine Months Ended September 30, 2003 and 2002
(in thousands, except per share data)

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
Interest income:
Portfolio loans (including fees)	$	39,354		$	38,807		$	116,788		$	111,508
Loans held for resale		1,156			535			2,818			1,769
Taxable investment securities		169			357			579			1,142
Federal funds sold		306			455			997			1,055
Other		499			308			1,375			804
Total interest income		41,484			40,462			122,557			116,278
Interest expense:
Deposits		9,972			12,113			31,981			36,121
Debt obligations and other		2,093			2,156			6,204			6,720
Total interest expense		12,065			14,269			38,185			42,841
Net interest income		29,419			26,193			84,372			73,437
Provision for loan losses		2,892			3,918			6,608			8,692
Net interest income after provision
for loan losses		26,527			22,275			77,764			64,745
Noninterest income:
Service charges on deposit accounts		1,112			1,041			3,228			2,980
Trust fee income		717			712			1,880			1,882
Fees from origination of non-portfolio
residential mortgage loans		2,629			2,011			7,456			4,382
Realized gains (losses) on sale of
investment securities available for sale		(2	)		12			(2	)		(6	)
Other		985			377			2,625			1,137
Total noninterest income		5,441			4,153			15,187			10,375
Noninterest expense:
Salaries and employee benefits		13,927			12,113			41,498			34,916
Occupancy		1,983			1,655			5,644			4,797
Equipment rent, depreciation
and maintenance		1,172			1,052			3,527			3,396
Other		5,302			4,109			14,824			13,653
Total noninterest expense		22,384			18,929			65,493			56,762
Income before federal income taxes and
minority interest		9,584			7,499			27,458			18,358
Federal income taxes		3,405			2,686			9,560			6,380
Income before minority interest		6,179			4,813			17,898			11,978
Minority interest in net income of
consolidated subsidiaries		(130	)		(366	)		(842	)		(574	)
NET INCOME	$	6,049		$	4,447		$	17,056		$	11,404
NET INCOME PER SHARE -- Note E
Basic	$	0.46		$	0.42		$	1.38		$	1.17
Diluted	$	0.44		$	0.40		$	1.33		$	1.12

Page 4 of 25

CAPITOL BANCORP LIMITED
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2003 and 2002
(in thousands except share data)

	Common Stock			Retained Earnings			Accumulated Other Comprehensive Income			Unearned Compensation Regarding Restricted Stock, Note Receivable from Exercise of Stock Options and Unallocated ESOP Shares			Total
Nine Months Ended September 30, 2002
Balances at January 1, 2002	$	67,692		$	14,173		$	158		$	(1,851	)	$	80,172
Issuance of common stock and stock options to
acquire minority interests in bank
holding-company subsidiaries		54,144												54,144
Issuance of 113,398 shares of common stock
upon exercise of stock options		1,340												1,340
Issuance of 53,804 shares of common stock
upon exercise of warrants		596												596
Issuance of 15,598 shares of common stock
in exchange for investment security		250												250
Cash dividends paid ($0.32 per share)					(3,142	)								(3,142	)
Components of comprehensive income:
Net income for the period					11,404									11,404
Market value adjustment (net of tax) for
investment securities available for sale
(accumulated other comprehensive income)								74						74
Comprehensive income for the period														11,478
BALANCES AT SEPTEMBER 30, 2002	$	124,022		$	22,435		$	232		$	(1,851	)	$	144,838
Nine Months Ended September 30, 2003
Balances at January 1, 2003	$	135,234		$	26,318		$	191		$	(1,706	)	$	160,037
Issuance of common stock to acquire
minority interests in bank subsidiaries		20,002												20,002
Issuance of 183,465 shares of common stock
upon exercise of stock options, net of
common stock surrendered to
facilitate exercise		2,646												2,646
Issuance of 22,512 shares of common stock
upon exercise of warrants		259												259
Private placement of 549,000 shares
of common stock to institutional investors		10,226												10,226
Surrender and cancellation of 74,179 shares
of common stock in repayment
of note receivable from exercise
of stock options		(1,561	)								1,561			0
Issuance of 255,632 shares of restricted
common stock		5,202									(5,202	)		0
Cash dividends paid ($0.36 per share)					(4,510	)								(4,510	)
Components of comprehensive income:
Net income for the period					17,056									17,056
Market value adjustment (net of tax) for
investment securities available for sale
(accumulated other comprehensive income)								(258	)					(258	)
Comprehensive income for the period														16,798
BALANCES AT SEPTEMBER 30, 2003	$	172,008		$	38,864		$	(67	)	$	(5,347	)	$	205,458

Page 5 of 25

CAPITOL BANCORP LTD.
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2003 and 2002

	2003			2002
	(in thousands)
OPERATING ACTIVITIES
Net income	$	17,056		$	11,404
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		6,608			8,692
Depreciation of premises and equipment		2,959			2,517
Amortization of intangibles		399			266
Net amortization (accretion) of investment
security premiums (discounts)		53			(33	)
Gain on sale of premises and equipment		(68	)		(4	)
Minority interest in net income of consolidated subsidiaries		842			574
Originations and purchases of loans held for resale		(1,060,120	)		(593,581	)
Proceeds from sales of loans held for resale		1,078,759			590,572
Increase in accrued interest income and other assets		(1,993	)		(3,710	)
Increase in accrued interest expense and other liabilities		2,942			1,384

NET CASH PROVIDED BY OPERATING ACTIVITIES 47,437 18,081

INVESTING ACTIVITIES
Proceeds from sale of investment securities available for sale	22,160		6,477
Proceeds from calls, prepayments and maturities of
investment securities	14,963		45,865
Purchases of investment securities	(36,309	)	(54,388	)
Net increase in portfolio loans	(150,536	)	(228,263	)
Proceeds from sales of premises and equipment	1,496		56
Purchases of premises and equipment	(7,254	)	(5,360	)

NET CASH PROVIDED BY INVESTING ACTIVITIES (155,480 ) (235,613 )

FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts	167,525		213,679
Net increase in certificates of deposit	33,241		63,987
Net payments on notes payable	(10,200	)	(6,743	)
Resources provided by minority interests	3,537		8,386
Net proceeds from issuance of common stock	13,131		1,936
Net proceeds from issuance of trust-preferred securities	9,700		2,899
Cash dividends paid	(4,510	)	(3,142	)

	NET CASH PROVIDED BY FINANCING ACTIVITIES		212,424		281,002
	INCREASE IN CASH AND CASH EQUIVALENTS		104,381		63,470
Cash and cash equivalents at beginning of period			251,184		163,691
	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	355,565	$	227,161

Page 6 of 25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD.

Note A – Basis of Presentation

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

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

        The results of operations for the period ended September 30, 2003 are not necessarily indicative of the results to be expected for the year ending December 31, 2003.

        The consolidated balance sheet as of December 31, 2002 was derived from audited consolidated financial statements as of that date. Certain 2002 amounts have been reclassified to conform to the 2003 presentation.

Note B – Implementation of New Accounting Standard

        Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, clarifies how some instruments or securities should be classified on an issuer’s balance sheet and their related impact on income and results of operations. It is effective for Capitol’s consolidated financial statements beginning July 1, 2003. Implementation of this new standard resulted in the reclassification of Capitol’s trust-preferred securities from their prior “mezzanine” classification (between liabilities and equity) to part of debt obligations on Capitol’s consolidated balance sheet. Although trust-preferred securities are now classified for balance-sheet purposes as debt securities, they continue to be treated as an element of capital for regulatory purposes. Trust-preferred securities outstanding at December 31, 2002 have been similarly reclassified in the accompanying balance sheet for comparative purposes. This new standard had no impact on Capitol’s results of operations upon implementation.

Page 7 of 25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note C – Bank Development Activities

        Bank development efforts are currently under consideration at September 30, 2003 in several states including pre-development exploratory discussions, lease and employment negotiations and preparation of preliminary regulatory applications for formation and/or acquisition of community banks. On October 14, 2003, Capitol announced the opening of its 30^th bank affiliate, Bank of Escondido, located in San Diego County, California.

Note D – Share Exchange Transactions

        Share exchange transactions regarding Black Mountain Community Bank, Desert Community Bank, Elkhart Community Bank and Red Rock Community Bank were completed effective July 31, 2003. In each transaction, the shares acquired from shareholders other than Capitol were exchanged for Capitol’s common stock according to fixed, but differing, exchange ratios. Capitol issued approximately 982,000 shares of its common stock resulting from these share exchanges, for aggregate consideration approximating $20 million. These transactions have been recorded using the purchase-method of accounting. Had these transactions occurred at the beginning of the periods presented, net income would have approximated $17.4 million ($1.28 per diluted share) and $12.0 million ($1.08 per diluted share) for the nine months ended September 30, 2003 and 2002, respectively.

        Black Mountain, Desert, Elkhart and Red Rock were previously included in Capitol’s consolidated financial statements. The carrying value of assets and liabilities of those entities closely approximated their fair values at the date of the share exchanges. Additionally, goodwill of approximately $5.8 million was recorded in conjunction with the share exchanges and will not be amortized, but will be reviewed at least annually for impairment.

        As of September 30, 2003, potential share exchange transactions were in the proposal stage regarding the minority interests of Arrowhead Community Bank, Goshen Community Bank, Sunrise Bank of Albuquerque and Yuma Community Bank which, if completed, would result in Capitol issuing approximately 300,000 additional shares of common stock and those majority-owned subsidiaries becoming wholly-owned. Such proposed share exchanges are subject to the separate approval of the minority shareholders of those banks and other contingencies.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note E – Net Income Per Share

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

	Three Months Ended September 30				Nine Months Ended September 30
	2003		2002		2003		2002
Numerator--net income for the period	$	6,049,000	$	4,447,000	$	17,056,000	$	11,404,000
Denominator:
Weighted average number of common shares
outstanding, excluding unvested shares of
restricted common stock (denominator for
basic earnings per share)		13,050,227		10,713,287		12,328,380		9,776,774
Weighted average number of unvested shares
of restricted common stock outstanding		241,661				123,018
Effect of other dilutive securities--stock
options and, in 2002, warrants		515,132		525,301		414,884		420,179
Denominator for diluted net income per share--
Weighted average number of common shares
and potential dilution		13,807,020		11,238,588		12,866,282		10,196,953
Number of antidilutive stock options excluded
from diluted earnings per share computation		--		160,637		205,370		249,849

Note F – Stock Options

        Stock option activity for the interim 2003 period is summarized as follows:

	Number of Stock Options Outstanding	Exercise Price Range	Weighted Average Exercise Price
Outstanding at January 1	2,548,536	$  4.92 to $25.10	$15.23
Exercised	(731,294)	4.92 to   25.92	14.50
Granted	445,522	20.36 to   25.92	22.27
Cancelled or expired	(72,599)	--
Outstanding at September 30	2,190,165	$  9.88 to $25.92	$16.95

Page 9 of 25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note F – Stock Options – Continued

        As of September 30, 2003, stock options outstanding had a weighted average remaining contractual life of 4.7 years. The following table summarizes stock options outstanding segregated by exercise price range:

		Weighted Average
Exercise Price Range	Number Outstanding	Exercise Price	Remaining Contractual Life
Less than $10.00	55,718	$  9.88	4.3 years
$10.00  to  14.99	564,344	11.55	4.8 years
$15.00  to  19.99	910,195	16.59	4.6 years
$20.00  to  24.99	454,538	21.37	5.9 years
$25.00  or  more	205,370	$25.52	2.5 years
	2,190,165

        Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation, establishes an alternative fair value method of accounting for stock options whereby compensation expense would be recognized based on the computed fair value of the options on the grant date. By not electing this alternative, certain pro forma disclosures of the expense recognition provisions of Statement No. 123 are required, which are as follows:

	Nine Months Ended September 30
	2003	2002
Fair value assumptions:
Risk-free interest rate	3.4%	4.5%
Dividend yield	2.0%	2.5%
Stock price volatility	.47	.46
Expected option life	7 years	7 years
Aggregate estimated fair value of
options granted (in thousands)	$             4,821	$             5,364
Net income (in thousands):
As reported	17,056	11,404
Less pro forma compensation
expense regarding fair value
of stock option awards, net
of related income tax effect	(3,134)	(3,487)
Pro forma	13,922	7,917
Net income per share:
Basic:
As reported	1.38	1.17
Pro forma	1.13	0.81
Diluted:
As reported	1.33	1.12
Pro forma	$               1.08	$               0.78

Page 10 of 25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note G – Impact of New Accounting Standards

        The Financial Accounting Standards Board (FASB) recently issued Statements No. 146 (Accounting for Costs Associated With Exit or Disposal Activities) and No. 149 (Amendment of Statement 133 on Derivative Instruments and Hedging Activities). These new standards have varying effective dates in 2003 and had no material effect on Capitol’s financial statements, upon implementation.

        Statement No. 148,Accounting for Stock-Based Compensation–Transition and Disclosure, provides alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation and it amends the prior disclosure requirements of Statement No. 123 to require more prominent and frequent disclosures about the effects of stock-based compensation, including interim disclosures (such interim disclosures appear in Note F). As permitted, Capitol has retained its prior method of accounting for stock-based employee compensation.

        FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, expands disclosures about obligations under certain guarantees and, in addition, requires recording a liability for the fair value of the obligations undertaken in issuing the guarantee, applicable to guarantees issued or modified after December 31, 2002. This new guidance had no material effect on Capitol’s consolidated financial position or results of operations upon implementation.

        FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), clarifies when some entities previously not consolidated under prior accounting guidance, should be. FIN 46 applies immediately to variable interest entities created after January 31, 2003. The FASB deferred the implementation of FIN 46 relating to potential variable interest entities that existed prior to February 1, 2003 until the end of the first interim or annual period ending after December 15, 2003. Capitol is evaluating the impact of FIN 46 and believes that it will not have a material impact on its consolidated financial position or results of operations upon implementation. It is Capitol’s understanding that the issuance of Statement No. 150 (see Note B) and FIN 46 has resulted in the Federal Reserve Board announcing potential future reconsideration of trust-preferred securities as elements of regulatory capital.

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

Page 11 of 25

PART I, ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Financial Condition

        Total assets approximated $2.7 billion at September 30, 2003, an increase of $241 million from the December 31, 2002 level of $2.4 billion. The balance sheet includes Capitol and its consolidated subsidiaries:

	Total Assets (in $1,000's)
	Sept 30 2003	Dec 31 2002
Great Lakes Region:
Ann Arbor Commerce Bank	$    326,527	$    309,152
Brighton Commerce Bank	92,448	78,382
Capitol National Bank	198,150	206,130
Detroit Commerce Bank	44,728	30,589
Grand Haven Bank	130,418	123,505
Kent Commerce Bank	78,064	73,801
Macomb Community Bank	90,996	87,050
Muskegon Commerce Bank	86,227	86,465
Oakland Commerce Bank	115,691	115,916
Paragon Bank & Trust	103,886	103,044
Portage Commerce Bank	152,426	139,068
Elkhart Community Bank	48,376	53,210
Goshen Community Bank	46,160	38,115
Great Lakes Region Total	1,514,097	1,444,427
Southwest Region:
Arrowhead Community Bank	55,965	47,427
Bank of Tucson	146,308	132,094
Camelback Community Bank	87,157	82,387
East Valley Community Bank	43,989	37,640
Mesa Bank	70,067	66,312
Southern Arizona Community Bank	88,935	75,253
Valley First Community Bank	48,682	42,127
Yuma Community Bank	46,167	38,214
Bank of Las Vegas	34,743	26,880
Black Mountain Community Bank	71,192	63,202
Desert Community Bank	54,234	55,170
Red Rock Community Bank	100,991	96,906
Sunrise Bank of Albuquerque	63,829	46,898
Sunrise Bank of Arizona	104,224	82,126
Southwest Region Total	1,016,483	892,636
California Region:
Sunrise Bank of San Diego	66,722	50,450
First California Northern Bancorp:
Napa Community Bank	50,427	36,042
California Region Total	117,149	86,492
Other, net	2,961	(14,267)
Consolidated	$ 2,650,690	$ 2,409,288

        Effective July 31, 2003, four previously 51%-owned bank subsidiaries became wholly-owned as a result of share exchange transactions which are discussed later in this narrative. The acquisitions of these minority interests did not have a material impact on Capitol’s financial position or results of operations for the interim 2003 period.

Page 12 of 25

        Portfolio loans increased during the nine-month 2003 period by approximately $145 million. The majority of portfolio loan growth occurred in commercial loans, consistent with the banks’ emphasis on commercial lending activities. Portfolio loan growth in 2003 is net of about $59 million of commercial loans sold to other financial institutions.

        The allowance for loan losses at September 30, 2003 approximated $31 million or 1.43% of total portfolio loans, a decrease from the year-end 2002 ratio of 1.45%.

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

        The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands):

	2003			2002
Allowance for loan losses at January 1	$	28,953		$	23,238
Loans charged-off:
Commercial		(5,205	)		(4,079	)
Real estate mortgage		(47	)		(204	)
Installment		(492	)		(206	)
Total charge-offs		(5,744	)		(4,489	)
Recoveries:
Commercial		609			318
Real estate mortgage		--			61
Installment		87			78
Total recoveries		696			457
Net charge-offs		(5,048	)		(4,032	)
Additions to allowance charged to expense		6,608			8,692
Allowance for loan losses at September 30	$	30,513		$	27,898
Average total portfolio loans for period ended September 30	$	2,073,478		$	1,847,149
Ratio of net charge-offs (annualized) to average portfolio
loans outstanding		0.32	%		0.29	%

        Net charge-offs of loans in the interim 2003 period increased approximately $1 million, compared to the corresponding 2002 period. The increase was mainly due to losses associated with loans secured by business equipment and accounts receivable.

Page 13 of 25

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

	September 30, 2003				December 31, 2002
	Amount		Percentage of Total Portfolio Loans		Amount		Percentage of Total Portfolio Loans
Commercial	$	28,076		1.31%	$	27,226		1.37%
Real estate mortgage		1,439		0.07		1,009		0.05
Installment		998		0.05		718		0.03
Total allowance for loan losses	$	30,513		1.43%	$	28,953		1.45%
Total portfolio loans outstanding	$	2,136,860			$	1,991,372

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

	Sept 30 2003		Dec 31 2002
Nonaccrual loans:
Commercial	$	21,677	$	15,444
Real estate		490		560
Installment		561		613
Total nonaccrual loans		22,728		16,617
Past due (>=90 days) loans:
Commercial		7,242		5,728
Real estate		1,486		323
Installment		275		222
Total past due loans		9,003		6,273
Total nonperforming loans	$	31,731	$	22,890

Page 14 of 25

        Nonperforming loans increased approximately $9 million during the nine-month period ended September 30, 2003. Of the nonperforming loans at September 30, 2003, about 65% are real estate secured. Those loans, when originated, had appropriate loan-to-value ratios and, accordingly, have loss exposure which is expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies. Most other nonperforming loans are generally secured by other business assets. Nonperforming loans at September 30, 2003 are in various stages of resolution for which management believes such loans are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses.

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

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

        At September 30, 2003, potential problem loans (including the previously mentioned nonperforming loans) approximated $114 million, or about 5% of total consolidated portfolio loans. These potential problem loans do not necessarily have significant loss exposure (nor are they necessarily deemed ‘impaired’), but rather are classified by management in this manner to aid in loan administration and risk management. Management believes such loans to be adequately considered in its evaluation of the adequacy of the allowance for loan losses. Management believes, however, that current general economic conditions may result in higher levels of future loan losses, in comparison to previous years, as evidenced by higher loan losses in the interim 2003 period.

        Other real estate (included as a component of other assets), comprises properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure, approximated $3.8 million at September 30, 2003, a decrease of $800,000 from the beginning of the year level of $4.6 million.

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
	Sept 30 2003	Dec 31 2002	Sept 30 2003	Dec 31 2002	Sept 30 2003	Dec 31 2002	Sept 30 2003		Dec 31 2002
Great Lakes Region:
Ann Arbor Commerce Bank	$  277,809	$  272,604	$  4,050	$  3,840	$  3,214	$  2,624	1	.46%	1	.41%
Brighton Commerce Bank	74,524	68,239	748	851	1,000	170	1	.00	1	.25
Capitol National Bank	165,491	158,651	2,321	2,322	2,077	1,753	1	.40	1	.46
Detroit Commerce Bank	37,539	26,799	574	627	1,366	751	1	.53	2	.34
Grand Haven Bank	113,459	114,616	1,783	1,626	2,423	1,605	1	.57	1	.42
Kent Commerce Bank	74,098	68,848	860	830	1,054	293	1	.16	1	.21
Macomb Community Bank	84,385	73,915	1,050	1,136	2,815	3,012	1	.24	1	.54
Muskegon Commerce Bank	80,046	77,247	1,042	966	2,988	1,806	1	.30	1	.25
Oakland Commerce Bank	90,039	86,049	1,243	1,119	2,911	1,805	1	.38	1	.30
Paragon Bank & Trust	87,423	86,571	1,436	1,291	2,840	2,628	1	.64	1	.49
Portage Commerce Bank	142,814	129,710	1,900	1,815	2,867	3,135	1	.33	1	.40
Elkhart Community Bank	44,197	43,277	611	658	160	245	1	.38	1	.52
Goshen Community Bank	40,674	35,408	610	532	13	--	1	.50	1	.50
Great Lakes Region Total	1,312,498	1,241,934	18,228	17,613	25,728	19,827
Southwest Region:
Arrowhead Community Bank	39,581	36,185	527	543	--	--	1	.33	1	.50
Bank of Tucson	93,789	90,176	1,107	1,461	142	187	1	.18	1	.62
Camelback Community Bank	67,579	63,516	757	960	145	232	1	.12	1	.51
East Valley Community Bank	27,470	25,932	382	389	156	17	1	.39	1	.50
Mesa Bank	60,193	55,588	664	834	--	242	1	.10	1	.50
Southern Arizona Community Bank	62,774	60,913	744	914	180	--	1	.19	1	.50
Valley First Community Bank	28,567	29,075	540	620	868	261	1	.88	2	.13
Yuma Community Bank	28,647	25,485	429	383	7	--	1	.50	1	.50
Bank of Las Vegas	26,718	19,404	327	292	--	--	1	.22	1	.50
Black Mountain Community Bank	57,949	52,240	655	784	242	324	1	.13	1	.50
Desert Community Bank	40,753	43,351	694	675	1,077	734	1	.70	1	.56
Red Rock Community Bank	76,464	80,152	2,579	1,203	3,017	861	3	.37	1	.50
Sunrise Bank of Albuquerque	51,106	38,577	595	521	14	--	1	.16	1	.35
Sunrise Bank of Arizona	90,132	65,195	1,057	881	155	205	1	.17	1	.35
Southwest Region Total	751,812	685,789	11,057	10,460	6,003	3,063
California Region:
Sunrise Bank of San Diego	42,115	39,116	577	577	--	--	1	.37	1	.48
First California Northern Bancorp:
Napa Community Bank	29,022	20,177	412	303	--	--	1	.42	1	.50
California Region Total	71,137	59,293	989	880	--	--	--		--
Other, net	1,413	4,356	239	--	--	--	--		---
Consolidated	$2,136,860	$1,991,372	$  30,513	$  28,953	$  31,731	$  22,890	1	.43%	1	.45%

Page 16 of 25

Results of Operations

        Net income for the nine months ended September 30, 2003 was $17 million, an increase of $5.7 million or 50% over the same period in 2002. Diluted earnings per share for the nine-month 2003 period were $1.33 compared to $1.12 for the prior year period. Third quarter 2003 earnings were a new record level, $6 million, an increase of $1.6 million over the same period in 2002; diluted earnings per share were $0.44 compared to $0.40 in 2002. The percentage increase in net income per share was less than the percentage increase in the amount of net income in 2003 because of the larger share base resulting primarily from Capitol’s share exchanges in 2003 and 2002.

        Net interest income for the first nine months of 2003 totaled $84.4 million, a 15% increase compared to $73.4 million in 2002. Net interest income for the third quarter of 2003 totaled $29.4 million, a 12% increase as compared to $26.2 million for the comparable period in 2002. This increase is attributable to the banks’ growth in size and a relatively stable interest rate environment.

        Noninterest income for the nine months ended September 30, 2003 was $15.2 million, an increase of $4.8 million, or 46%, over the same period in 2002. Noninterest income for the three months ended September 30, 2003 was $5.4 million, an increase of $1.3 million, or 31%, over the same period in 2002. Fees from origination of nonportfolio residential mortgage loans totaled $2.6 million for the third quarter of 2003, and were $7.5 million for the nine-month period, as compared to $2 million and $4.4 million for the comparable periods in 2002, respectively, due to continuing high volume of loan fees derived from residential mortgage loan refinance activity resulting from record low interest rates; however, interest rates have recently risen which may adversely impact this revenue source in future periods. Service charges on deposit accounts for the nine-month 2003 period increased by 8%, compared to 2002, due to growth in the size of banks.

        The provision for loan losses for the nine-month period in 2003 was $6.6 million, as compared to $8.7 million for the same period in 2002. The provision for loan losses for the quarter ended September 30, 2003 was $2.9 million as compared to $3.9 million during the corresponding 2002 period. 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 $65.5 million for the nine-month period and $22.4 million for the third quarter in 2003, as compared to $56.8 million and $18.9 million, respectively, for the comparable periods in 2002. The increase in noninterest expense is associated with growth in the size of the banks and increases in general operating costs. Increases in both occupancy and salaries and employee benefits relate primarily to the growth in the size of banks within the consolidated group. Other noninterest expense in the 2002 period included the preopening costs of two start-up banks which commenced operations in the first quarter of the year (none in the interim 2003 period).

Page 17 of 25

        Operating results (dollars in thousands) were as follows:

	Nine months ended September 30
	Total Revenues		Net Income		Return on Average Equity		Return on Average Assets
	2003	2002	2003	2002	2003	2002	2003	2002
Great Lakes Region:

Ann Arbor Commerce Bank	$  17,379	$  17,041	$  3,613	$  3,670	19.66	%	22.23	%	1.52	%	1.71	%
Brighton Commerce Bank	4,354	4,204	893	679	16.79		14.46		1.42		1.21
Capitol National Bank	9,926	9,670	2,626	2,307	22.70		22.28		1.69		1.69
Detroit Commerce Bank	1,680	1,752	(377)	(275)	n/a		n/a		n/a		n/a
Grand Haven Bank	7,480	6,774	1,723	1,454	21.38		21.26		1.76		1.72
Kent Commerce Bank	4,108	4,378	591	745	9.97		14.09		1.03		1.33
Macomb Community Bank	4,227	4,441	(32)	438	n/a		8.25		n/a		.91
Muskegon Commerce Bank	4,798	4,829	1,091	1,038	16.85		14.46		1.71		1.21
Oakland Commerce Bank	6,021	5,502	1,233	1,034	16.97		15.76		1.30		1.35
Paragon Bank & Trust	6,324	6,132	719	664	9.11		9.47		.90		.90
Portage Commerce Bank	7,979	7,800	1,738	1,441	20.50		18.09		1.60		1.50
Elkhart Community Bank	2,379	2,093	335	163	8.29		4.65		.61		.54
Goshen Community Bank	2,213	1,663	282	75	8.05		2.28		.89		.30
Great Lakes Region Total	78,868	76,279	14,435	13,433
Southwest Region:
Arrowhead Community Bank	3,054	2,485	327	64	9.77		2.33		.86		.26
Bank of Tucson	7,061	7,439	2,013	1,688	24.64		21.62		1.92		1.82
Camelback Community Bank	4,418	4,461	397	449	6.30		8.39		.59		.77
East Valley Community Bank	2,154	2,061	(134)	(275)	n/a		n/a		n/a		n/a
Mesa Bank	4,147	3,718	1,065	579	20.72		13.46		2.08		1.34
Southern Arizona Community Bank	3,989	3,658	849	459	15.64		10.03		1.34		.89
Valley First Community Bank	2,276	2,793	211	127	4.84		2.99		.64		.33
Yuma Community Bank	2,478	1,874	340	63	11.67		2.33		1.08		.26
Bank of Las Vegas	1,452	774	(39)	(535)	n/a		n/a		n/a		n/a
Black Mountain Community Bank	3,563	2,869	643	235	14.43		6.74		1.30		.61
Desert Community Bank	2,881	3,260	325	129	7.58		3.44		.77		.29
Red Rock Community Bank	5,310	5,032	(315)	734	n/a		10.94		n/a		1.08
Sunrise Bank of Albuquerque	3,236	2,054	411	(61)	13.31		n/a		.98		n/a
Sunrise Bank of Arizona	7,398	4,567	607	65	11.77		1.41		.86		.13
Southwest Region Total	53,417	47,045	6,700	3,721
California Region:
Sunrise Bank of San Diego	3,217	2,971	325	250	5.60		4.55		.75		.75
First California Northern Bancorp:
Napa Community Bank	1,901	816	154	(535)	2.58		n/a		.47		n/a
California Region Total	5,118	3,787	479	(285)
Other, net	341	(458)	(4,558)	(5,465)	n/a		n/a		n/a		n/a
Consolidated	$  137,744	$  126,653	$  17,056	$  11,404	12.88	%	13.78	%	.89	%	.70	%
n/a Not applicable

Liquidity and Capital Resources

        The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $201 million for the nine months ended September 30, 2003, less than the $278 million increase in the corresponding period of 2002. Growth occurred in most interest-bearing deposit categories, with the majority coming from time deposits. The banks generally do not significantly rely on brokered deposits as a key funding source; brokered deposits approximated $193 million as of September 30, 2003, or about 9% of total deposits, a decrease of $7.5 million during the interim 2003 period. Brokered deposits, as a funding source, have decreased in the recent period due to selective opportunities to grow local, core deposits at a lower cost.

Page 18 of 25

        Noninterest-bearing deposits approximated 17.4% of total deposits at September 30, 2003 and 17.5% at December 31, 2002. Levels of noninterest-bearing deposits can, however, fluctuate based on customers’ transaction activity.

        Interim 2003 deposit growth was deployed primarily into commercial loans, consistent with the banks’ emphasis on commercial lending activities.

        Cash and cash equivalents amounted to $355.6 million or 13.4% of total assets at September 30, 2003, compared with $251.2 million or 10.4% of total assets at December 31, 2002. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the banks’ liquidity position at September 30, 2003 is adequate to fund loan demand and meet depositor needs.

        In addition to cash and cash equivalents, a source of long-term liquidity is the banks’ marketable investment securities. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements. The banks have not engaged in active trading of their investments. At September 30, 2003, the banks had approximately $23 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 regional Federal Home Loan Banks. Borrowings thereunder approximated $83.2 million and additional borrowing capacity approximated $39.4 million at September 30, 2003. They are used from time to time as a lower-cost funding source versus various rates and maturities of time deposits. Total borrowings have decreased $10.2 million in the interim period of 2003. At September 30, 2003, Capitol had unused lines of credit from an unrelated financial institution aggregating $25 million.

        In March 2003, Capitol participated in a pooled trust-preferred securities offering, structured with a 30-year maturity and a variable interest rate, with net proceeds of approximately $9.7 million. These securities augment Capitol’s existing capital base and the proceeds were used to reduce borrowings from an unaffiliated bank.

        In April 2003, Capitol completed an $11 million private placement of its common stock to select institutional investors and the issuance of approximately 550,000 shares of previously unissued common stock. Proceeds from the offering have been used for bank development and deployed into short-term investments.

        Effective June 24, 2003, Capitol’s common stock began trading on the New York Stock Exchange under the trading symbol “CBC”. Upon becoming NYSE-listed, Capitol terminated its prior Nasdaq listing.

Page 19 of 25

        Share exchange transactions regarding Black Mountain Community Bank, Desert Community Bank, Elkhart Community Bank and Red Rock Community Bank were completed effective July 31, 2003. In each transaction, the shares acquired from shareholders other than Capitol were exchanged for Capitol’s common stock according to a fixed, but differing, exchange ratio. Capitol issued approximately 982,000 shares of its common stock resulting from these share exchanges, for aggregate consideration approximating $20 million.

        Stockholders’ equity, as a percentage of total assets, approximated 7.8% at September 30, 2003 an increase from 6.6% at the beginning of the year. Total capital funds (Capitol’s stockholders’ equity, plus minority interests in consolidated subsidiaries, plus trust-preferred securities) aggregated $287.5 million or 11% of total assets at September 30, 2003.

        As of September 30, 2003, potential share exchange transactions were in the proposal stage regarding the minority interests of Arrowhead Community Bank, Goshen Community Bank, Sunrise Bank of Albuquerque and Yuma Community Bank which, if completed, would result in Capitol issuing approximately 300,000 additional shares of common stock and those majority-owned subsidiaries becoming wholly-owned. Such proposed share exchanges are subject to the separate approval of the minority shareholders of those banks and other contingencies.

        In mid-October 2003, Capitol announced that it had participated in a pooled, fixed-rate, trust-preferred securities offering, structured similar to its other trust-preferred securities, with net proceeds of approximately $9.8 million.

        Also in October 2003, when announcing its 45^th consecutive quarterly dividend, Capitol announced a 25% increase from $0.12 per share to $0.15 per share, payable December 1, 2003 to shareholders of record as of November 3, 2003.

        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.

        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.

Page 20 of 25

Trends Affecting Operations

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

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

        In the first nine months of 2003, interest rates have remained relatively stable. The Board of Governors of the Federal Reserve, which influences interest rates, has endeavored to maintain a relatively stable, low-rate environment. Home mortgage rates, however, have recently increased, which may adversely impact future fee income from the origination of residential mortgages. The future outlook on interest rates and their impact on Capitol���s interest income, interest expense and net interest income is uncertain.

        Start-up banks generally incur operating losses during their early periods of operations. Recently-formed start-up banks are expected to detract from consolidated earnings performance and start-up banks formed in 2003 and beyond will similarly negatively impact short-term profitability.

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

        Media reports raising questions about the health of the domestic economy have continued in 2003. During the interim periods of 2003, nonperforming loans have increased and it is anticipated that levels of nonperforming loans and related loan losses may increase as economic conditions, locally and nationally, evolve.

Impact of New Accounting Standards

        There are several new accounting standards either becoming effective or being issued in 2003. They are listed and discussed in Note G of the accompanying condensed consolidated financial statements.

Critical Accounting Policies

        Capitol’s critical accounting policies are described on page 10 of the financial section of its 2002 Annual Report. In the circumstances of Capitol, management believes its “critical accounting policies” are those which encompass the use of estimates (because of inherent subjectivity), allowance for loan losses (due to the inherent subjectivity in estimating loan losses), accounting for income taxes (due to the significant U.S. corporate income tax rate and realization of deferred tax assets) and accounting for goodwill (due to new accounting standards effective at the beginning of 2002).

Page 21 of 25

PART I, ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Not applicable.

PART I, ITEM 4

CONTROLS AND PROCEDURES

Capitol maintains disclosure controls and procedures designed to ensure 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 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.

[The remainder of this page intentionally left blank]

Page 22 of 25

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings. Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on Capitol’s consolidated financial position or results of operations.
Item 2.	Changes in Securities and Use of Proceeds. None.
Item 3.	Defaults Upon Senior Securities. None.
Item 4.	Submission of Matters to a Vote of Security Holders. None.
Item 5.	Other Information. None.
Item 6.	Exhibits and Reports on Form 8-K.

(a) Exhibits:
	Exhibit No.	Description of Exhibit
	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.

(b) Reports on Form 8-K:
	On July 15, 2003, a report on Form 8-K was filed which contained a copy of Capitol’s announcement of financial results for the interim period ended June 30, 2003.

Page 23 of 25

SIGNATURES

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

CAPITOL BANCORP LTD.
(Registrant)

/s/ Joseph D. ReidJoseph D. Reid
Chairman and CEO
(duly authorized to sign on behalf of the registrant)

/s/ Lee W. HendricksonLee W. Hendrickson
Chief Financial Officer

Date: November 6, 2003

Page 24 of 25

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.

Page 25 of 25

EXHIBIT 31.1

Chief Executive Officer Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Joseph D. Reid, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Capitol Bancorp Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2003 /s/ Joseph D. ReidJoseph D. Reid
Chief Executive Officer

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EXHIBIT 31.2

Chief Financial Officer Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Lee W. Hendrickson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Capitol Bancorp Ltd.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2003 /s/ Lee W. HendricksonLee W. Hendrickson
Chief Financial Officer

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EXHIBIT 32.1

Chief Executive Officer Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of Capitol Bancorp Ltd. (the “Company”) on Form 10-Q (the “Form 10-Q”) for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof, I, Joseph D. Reid, the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 6, 2003

/s/ Joseph D. ReidJoseph D. Reid
Chief Executive Officer

This certification accompanies the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Capitol Bancorp Ltd. and will be retained by Capitol Bancorp Ltd. and furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT 32.2

Chief Financial Officer Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of Capitol Bancorp Ltd. (the “Company”) on Form 10-Q (the “Form 10-Q”) for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof, I, Lee W. Hendrickson, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 6, 2003

/s/ Lee W. HendricksonLee W. Hendrickson
Chief Financial Officer

This certification accompanies the Periodic Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Capitol Bancorp Ltd. and will be retained by Capitol Bancorp Ltd. and furnished to the Securities and Exchange Commission or its staff upon request.

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