Capitol Bancorp (CBCRQ) 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

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	(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. Yesþ Noo

     Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Act). Yesþ Noo

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: 14,999,012 shares outstanding as of July 15, 2005.

Page 1 of 27

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 — June 30, 2005 and December 31, 2004.		3
	Condensed consolidated statements of income — Three months and six months ended June 30, 2005 and 2004.		4
	Condensed consolidated statements of changes in stockholders’ equity — Six months ended June 30, 2005 and 2004.		5
	Condensed consolidated statements of cash flows — Six months ended June 30, 2005 and 2004.		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 2.	Unregistered Sales of 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.		24
Item 6.	Exhibits and Reports on Form 8-K.		24
SIGNATURES			26
EXHIBIT INDEX			27
Amendment to Articles of Incorporation
Capital Bancorp Ltd. Management Incentive Plan
Certification of Chief Executive Officer to Section 302
Certification of Chief Financial Officer to Section 302
Certification of Chief Executive Officer to Section 906
Certification of Chief Financial Officer to Section 906

Page 2 of 27

PART I, ITEM I

CAPITOL BANCORP LIMITED

Condensed Consolidated Balance Sheets
As of June 30, 2005 and December 31, 2004
(in thousands, except share data)

	(Unaudited)
	June 30			December 31
	2005			2004
ASSETS
Cash and due from banks	$	171,542		$	123,969
Money market and interest-bearing deposits		20,840			10,745
Federal funds sold		130,396			96,390
Cash and cash equivalents		322,778			231,104
Loans held for resale		34,149			43,143
Investment securities:
Available for sale, carried at market value		30,692			28,172
Held for long-term investment, carried at amortized cost which approximates market value		16,858			14,191
Total investment securities		47,550			42,363
Portfolio loans:
Commercial		2,573,586			2,444,492
Real estate mortgage		185,033			177,204
Installment		84,889			71,208
Total portfolio loans		2,843,508			2,692,904
Less allowance for loan losses		(38,870	)		(37,572	)
Net portfolio loans		2,804,638			2,655,332
Premises and equipment		32,814			32,661
Accrued interest income		11,664			10,447
Goodwill and other intangibles		42,963			41,943
Other assets		44,444			34,425
TOTAL ASSETS	$	3,341,000		$	3,091,418
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	602,610		$	503,902
Interest-bearing		2,118,647			2,006,170
Total deposits		2,721,257			2,510,072
Debt obligations:
Notes payable and short-term borrowings		165,998			172,534
Subordinated debentures		100,893			100,845
Total debt obligations		266,891			273,379
Accrued interest on deposits and other liabilities		20,181			16,288
Total liabilities		3,008,329			2,799,739
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES		66,588			39,520
STOCKHOLDERS’ EQUITY:
Common stock, no par value, 50,000,000 shares authorized; issued and outstanding: 2005 - 14,994,585 shares
2004 - 14,828,750 shares		198,613			196,271
Retained earnings		71,571			60,476
Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income)		(159	)		(36	)
		270,025			256,711
Less unearned compensation regarding restricted stock and other		(3,942	)		(4,552	)
Total stockholders’ equity		266,083			252,159
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,341,000		$	3,091,418

Page 3 of 27

CAPITOL BANCORP LTD.

Condensed Consolidated Statements of Income (Unaudited)
For the Three Months and Six Months Ended June 30, 2005 and 2004
(in thousands, except per share data)

	Three Months Ended				Six Months Ended
	June 30				June 30
	2005		2004		2005		2004
Interest income:
Portfolio loans (including fees)	$	52,347	$	42,038	$	100,584	$	82,068
Loans held for resale		636		602		1,273		1,025
Taxable investment securities		284		266		519		796
Federal funds sold		932		354		1,553		646
Other		292		174		483		348
Total interest income		54,491		43,434		104,412		84,883
Interest expense:
Deposits		12,472		8,925		23,043		17,715
Debt obligations and other		3,427		2,561		6,974		4,990
Total interest expense		15,899		11,486		30,017		22,705
Net interest income		38,592		31,948		74,395		62,178
Provision for loan losses		3,039		2,536		5,062		6,044
Net interest income after provision for loan losses		35,553		29,412		69,333		56,134
Noninterest income:
Service charges on deposit accounts		1,042		1,162		2,053		2,245
Trust fee income		523		858		1,128		1,739
Fees from origination of non-portfolio residential mortgage loans		1,505		1,625		2,770		2,897
Realized gains (losses) on sales of investment securities available for sale		1		211		2		(233	)
Other		2,553		1,900		4,244		3,246
Total noninterest income		5,624		5,756		10,197		9,894
Noninterest expense:
Salaries and employee benefits		18,135		16,202		35,352		31,589
Occupancy		2,387		2,122		4,687		4,255
Equipment rent, depreciation and maintenance		1,583		1,574		3,022		2,941
Other		6,590		4,462		12,108		9,139
Total noninterest expense		28,695		24,360		55,169		47,924
Income before income taxes and minority interest		12,482		10,808		24,361		18,104
Income taxes		4,763		4,137		9,323		7,027
Income before minority interest		7,719		6,671		15,038		11,077
Minority interest in net losses of consolidated subsidiaries		578		240		1,274		250
NET INCOME	$	8,297	$	6,911	$	16,312	$	11,327
NET INCOME PER SHARE — Note D:
Basic	$	0.56	$	0.49	$	1.11	$	0.81
Diluted	$	0.54	$	0.47	$	1.06	$	0.77

Page 4 of 27

CAPITOL BANCORP LIMITED

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Six Months Ended June 30, 2005 and 2004
(in thousands except share data)

									Unearned
						Accumulated			Compensation
						Other			Regarding
	Common		Retained			Comprehensive			Restricted Stock
	Stock		Earnings			Income			and Other			Total
Six Months Ended June 30, 2004
Balances at January 1, 2004	$	180,957	$	43,135		$	(200	)	$	(4,995	)	$	218,897
Issuance of 183,349 shares of common stock in conjunction with acquisition of First Carolina State Bank		4,970											4,970
Issuance of 206,999 shares of common stock to acquire minority interest in bank subsidiary		4,974											4,974
Issuance of 73,276 shares of common stock upon exercise of stock options, net of common stock surrendered to facilitate exercise		1,232											1,232
Issuance of 13,063 shares of restricted common stock		377								(377	)		0
Recognition of compensation expense relating to restricted common stock										643			643
Cash dividends paid ($0.31 per share)				(4,396	)								(4,396	)
Components of comprehensive income:
Net income for the period				11,327									11,327
Market value adjustment for investment securities available for sale (net of income tax effect)							139						139
Comprehensive income for the period													11,466
BALANCES AT JUNE 30, 2004	$	192,510	$	50,066		$	(61	)	$	(4,729	)	$	237,786
Six Months Ended June 30, 2005
Balances at January 1, 2005	$	196,271	$	60,476		$	(36	)	$	(4,552	)	$	252,159
Issuance of 165,835 shares of common stock upon exercise of stock options, net of common stock surrendered to facilitate exercise		2,342											2,342
Recognition of compensation expense relating to restricted common stock										610			610
Cash dividends paid ($0.35 per share)				(5,217	)								(5,217	)
Components of comprehensive income:
Net income for the period				16,312									16,312
Market value adjustment for investment securities available for sale (net of income tax effect)							(123	)					(123	)
Comprehensive income for the period													16,189
BALANCES AT JUNE 30, 2005	$	198,613	$	71,571		$	(159	)	$	(3,942	)	$	266,083

Page 5 of 27

CAPITOL BANCORP LTD.

Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2005 and 2004

	2005			2004
	(in thousands)
OPERATING ACTIVITIES
Net income	$	16,312		$	11,327
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		5,062			6,044
Depreciation of premises and equipment		2,720			2,273
Amortization of intangibles		285			271
Net amortization of investment security premiums		17			3
Loss on sale of premises and equipment		15			3
Minority interest in net losses of consolidated subsidiaries		(1,274	)		(250	)
Compensation expense relating to restricted common stock		610			643
Originations and purchases of loans held for resale		(318,319	)		(403,754	)
Proceeds from sales of loans held for resale		327,313			404,833
Increase in accrued interest income and other assets		(13,787	)		(5,772	)
Increase (decrease) in accrued interest on deposits and other liabilities		3,893			(422	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		22,847			15,199
INVESTING ACTIVITIES
Cash and cash equivalents of acquired subsidiaries		1,357			4,202
Proceeds from sales of investment securities available for sale		122			66,774
Proceeds from calls, prepayments and maturities of investment securities		3,981			3,827
Purchases of investment securities		(9,493	)		(17,130	)
Net increase in portfolio loans		(154,368	)		(217,729	)
Proceeds from sales of premises and equipment		30			19
Purchases of premises and equipment		(2,918	)		(6,101	)
NET CASH USED BY INVESTING ACTIVITIES		(161,289	)		(166,138	)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		103,800			161,062
Net increase (decrease) in certificates of deposit		107,385			(32,904	)
Net borrowings from (payments on) debt obligations		(6,536	)		34,260
Net proceeds from issuance of subordinated debentures (trust-perferred securities)		—			9,935
Resources provided by minority interests		28,342			10,841
Net proceeds from issuance of common stock		2,342			1,232
Cash dividends paid		(5,217	)		(4,396	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		230,116			180,030
INCREASE IN CASH AND CASH EQUIVALENTS		91,674			29,091
Cash and cash equivalents at beginning of period		231,104			283,623
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	322,778		$	312,714

Page 6 of 27

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 June 30, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.

     The consolidated balance sheet as of December 31, 2004 was derived from audited consolidated financial statements as of that date. Certain 2004 amounts have been reclassified to conform to the 2005 presentation.

Note B — Implementation of New Accounting Standard

     AICPA Statement of Position 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer(SOP 03-3), addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from the initial investment in loans acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and does not apply to loans originated by the entity. The SOP prohibits carrying over or creation of valuation allowances in the initial accounting for loans acquired in a transfer. It is effective for loans acquired in fiscal years beginning after December 15, 2004. This new guidance had no significant effect on Capitol’s consolidated financial statements upon implementation.

[The remainder of this page intentionally left blank]

Page 7 of 27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note C — Stock Options

     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:

	Six Months Ended
	June 30
	2005			2004
Fair value assumptions:
Risk-free interest rate		4.1%			3.8%
Dividend yield		2.2%			2.2%
Stock price volatility		.27			.28
Expected option life	7 years			6 years
Aggregate estimated fair value of options granted (in thousands)	$	4,781		$	3,201
Net income (in thousands):
As reported	$	16,312		$	11,327
Less pro forma compensation expense regarding fair value of stock option awards, net of related income tax effect		(3,108	)		(2,081	)
Pro forma	$	13,204		$	9,246
Net income per share:
Basic:
As reported	$	1.11		$	0.81
Pro forma		0.90			0.66
Diluted:
As reported		1.06			0.77
Pro forma	$	0.86		$	0.63

     Stock option activity for the interim 2005 period is summarized as follows:

							Weighted
	Number of			Exercise			Average
	Stock Options			Price			Exercise
	Outstanding			Range			Price
Outstanding at January 1		2,584,139		$10.81	to	$33.01	$	21.06
Exercised		(279,054	)	11.00	to	27.05		16.28
Granted		533,327		30.21	to	34.84		31.60
Cancelled or expired		(4,771	)	23.24	to	29.10
Outstanding at June 30		2,833,641		$10.81	to	$34.84	$	23.53

Page 8 of 27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note C — Stock Options — Continued

     As of June 30, 2005, stock options outstanding had a weighted average remaining contractual life of 4.4 years. The following table summarizes stock options outstanding segregated by exercise price range:

			Weighted Average
					Remaining
Exercise Price	Number		Exercise		Contractual
Range	Outstanding		Price		Life
$10.00 to 14.99		317,989	$	11.32	2.0 years
$15.00 to 19.99		536,905		16.67	3.5 years
$20.00 to 24.99		536,570		21.92	3.8 years
$25.00 to 29.99		749,278		27.01	4.8 years
$30.00 or more		692,899		31.92	6.3 years
Total outstanding		2,833,641

Note D — Net Income Per Share

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

	Three Months Ended				Six Months Ended
	June 30				June 30
	2005		2004		2005		2004
Numerator—net income for the period	$	8,297,000	$	6,911,000	$	16,312,000	$	11,327,000
Denominator:
Weighted average number of common shares outstanding, excluding unvested shares of restricted common stock (denominator for basic earnings per share)		14,738,747		14,098,637		14,693,859		13,946,916
Weighted average number of unvested shares of restricted common stock outstanding		207,822		265,133		211,635		266,179
Effect of other dilutive securities		463,356		440,280		476,525		497,504
Denominator for diluted net income per share—
Weighted average number of common shares and potential dilution		15,409,925		14,804,050		15,382,019		14,710,599
Number of antidilutive stock options excluded from diluted earnings per share computation		692,899		721,483		692,899		—

Page 9 of 27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note E — New Bank and Bank Development Activities

     Bank of Michigan, located in Farmington Hills, Michigan, opened in January 2005. It is majority-owned by Capitol Development Bancorp Limited I, which is a controlled subsidiary of Capitol.

     During June 2005, the following banks opened: Bank of Bellevue, located in Bellevue, Washington, and Fort Collins Commerce Bank, located in Fort Collins, Colorado. Bank of Bellevue and Fort Collins Commerce Bank are majority-owned by Capitol Development Bancorp Limited II and Capitol Bancorp Colorado Limited, respectively, which are controlled subsidiaries of Capitol. Also, Capitol Development Bancorp Limited III was capitalized in June 2005, as a controlled subsidiary of Capitol, with approximately $15 million (including approximately $14 million provided by minority interests) to fund future bank development activity.

     Bank development efforts were in process at June 30, 2005 in several states pending approvals from regulatory agencies, including pre-development exploratory discussions, lease and employment negotiations and preparation of preliminary regulatory applications for formation and/or acquisition of community banks. At June 30, 2005, Capitol Bancorp had applications pending for additionalde novocommunity banks in California, Georgia, Illinois and Missouri.

Note F — Pending Share Exchange

     As of June 30, 2005, an exchange offer transaction was pending completion regarding Napa Community Bank which will result in Capitol issuing approximately 200,000 additional shares of common stock and the bank becoming approximately 87% owned, resulting from certain of the bank’s shareholders other than Capitol, which elected to exchange their shares of the bank’s common stock for shares of Capitol. Capitol anticipates concluding the resulting share exchange during the third quarter of 2005.

Note G — Acquisition of Bank

     In early April 2005, Capitol acquired a majority interest in Peoples State Bank (“Peoples”) located in Jeffersonville, Georgia, in a purchase transaction with total consideration approximating $2.2 million. At June 30, 2005, Peoples’ total assets approximated $27.2 million. Capitol’s acquisition of Peoples was accounted for under the purchase method of accounting and its results of operations are included in Capitol’s consolidated financial statements for periods after the effective date of the acquisition. The pro forma effect of this acquisition was not significant.

Note H — Subsequent New Bank Activity

     In early July 2005, Bank of Auburn Hills opened in Auburn Hills, Michigan. It is majority-owned by Capitol Development Bancorp Limited II, which is a controlled subsidiary of Capitol.

Page 10 of 27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. — Continued

Note I — Impact 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 was to become effective for interim periods beginning after June 30, 2005 and be applied prospectively to stock options granted after the effective date and any unvested stock options at that date; however, the SEC superseded the FASB’s implementation timetable in April 2005, changing the effective date to the beginning of 2006 for calendar-year public companies.

     Although Capitol’s management has not completed its analysis of the revised standard, the effect of the revised standard’s implementation will be recognition of compensation expense associated with stock options. Previously, Capitol has 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. Effective December 31, 2004, Capitol accelerated the vesting of all of its outstanding stock options in anticipation of implementation of Statement No. 123(R). Such acceleration of vesting, to make all such stock options vested as of December 31, 2004, was done for the purpose of avoiding future expense associated with any unvested stock options granted prior to the effective date of Statement No. 123(R). All stock options granted during the six months ended June 30, 2005 vested at the grant date.

     FASB’s Emerging Issues Task Force (“EITF”), reached consensus on “The Meaning of Other-Than-Temporary and Its Application to Certain Investments” in EITF Issue No. 03-1. The guidance included in the EITF largely consists of expanded disclosures and the guidance was intended to be fully effective in 2003, except for loss-recognition guidance which had a delayed effective date into 2004. In 2004, the FASB has further delayed the loss recognition provisions of Issue No. 03-1. In June 2005, the FASB announced plans to supersede the EITF guidance with a revised standard in late 2005. Because of the inconclusive status of the guidance on the loss recognition aspects of Issue No. 03-1, Capitol’s management is unable to speculate on the potential impact of this matter 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.

Page 11 of 27

PART I, ITEM 2

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

Financial Condition

     Total assets approximated $3.3 billion at June 30, 2005, an increase of $250 million from the December 31, 2004 level of $3.1 billion. The balance sheet includes Capitol and its consolidated subsidiaries:

	Total Assets (in $1,000’s)
	June 30, 2005			Dec 31, 2004
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	334,951		$	330,488
Bank of Michigan(1)		15,827			n/a
Brighton Commerce Bank		116,104			105,890
Capitol National Bank		250,978			228,656
Detroit Commerce Bank		78,088			70,036
Elkhart Community Bank		73,346			67,099
Goshen Community Bank		57,153			54,571
Grand Haven Bank		122,322			119,254
Kent Commerce Bank		85,262			89,393
Macomb Community Bank		94,588			94,847
Muskegon Commerce Bank		95,364			94,162
Oakland Commerce Bank		126,233			130,779
Paragon Bank & Trust		113,434			110,128
Portage Commerce Bank		191,753			180,817
Great Lakes Region Total		1,755,403			1,676,120
Southeast Region:
First Carolina State Bank		78,720			68,598
Peoples State Bank(2)		27,238			n/a
Southeast Region Total		105,958			68,598
Eastern Regions Total		1,861,351			1,744,718
Western Regions:
Southwest Region:
Arrowhead Community Bank		89,945			70,989
Bank of Las Vegas		54,096			47,538
Bank of Tucson		170,988			168,469
Black Mountain Community Bank		111,616			100,415
Camelback Community Bank		83,000			83,414
Desert Community Bank		77,043			63,276
East Valley Community Bank		49,499			46,549
Fort Collins Commerce Bank(3)		9,486			n/a
Mesa Bank		117,078			96,158
Red Rock Community Bank		110,196			102,832
Southern Arizona Community Bank		89,169			83,140
Sunrise Bank of Albuquerque		69,174			69,055
Sunrise Bank of Arizona		123,008			128,192
Valley First Community Bank		74,071			54,857
Yuma Community Bank		59,021			59,355
Southwest Region Total		1,287,390			1,174,239
California Region:
Bank of Escondido		59,866			50,956
Napa Community Bank		77,875			79,396
Point Loma Community Bank		35,010			20,857
Sunrise Bank of San Diego		59,175			62,672
California Region Total		231,926			213,881
Northwest Region — Bank of Bellevue(4)		10,436			n/a
Western Regions Total		1,529,752			1,388,120
Other, net		(50,103	)		(41,420	)
Consolidated	$	3,341,000		$	3,091,418

	n/a — Not applicable.
(1)	Commenced operations in January 2005 and is 51%-owned by Capitol Development Bancorp Limited I, a controlled subsidiary of Capitol.
(2)	Acquired in April 2005 and is 51%-owned by Capitol.
(3)	Commenced operations in June 2005 and is 51%-owned by Capitol Bancorp Colorado Limited, a wholly-owned subsidiary of Capitol.
(4)	Commenced operations in June 2005 and is 51%-owned by Capitol Development Bancorp Limited II, a controlled subsidiary of Capitol.

Page 12 of 27

     Portfolio loans increased during the six-month 2005 period by approximately $151 million, compared to net loan growth of about $264 million during the corresponding period of 2004. Second quarter 2005 loan growth approximated $84 million compared to $165 million in 2004. The pace of loan growth in the interim 2005 period is less than 2004 mainly due to unexpectedly strong growth in the first quarter of 2004. 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 June 30, 2005 approximated $39 million or 1.37% of total portfolio loans, a decrease from the year-end 2004 ratio of 1.40%. The interim 2005 decrease in the allowance ratio is consistent with improvements in asset quality during the 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 interim periods (in thousands):

	2005			2004
Allowance for loan losses at January 1	$	37,572		$	31,404
Allowance for loan losses of acquired bank subsidiary		—			724
Loans charged-off:
Commercial		(4,237	)		(3,469	)
Real estate mortgage		—			(99	)
Installment		(311	)		(140	)
Total charge-offs		(4,548	)		(3,708	)
Recoveries:
Commercial		717			631
Real estate mortgage		1			11
Installment		66			31
Total recoveries		784			673
Net charge-offs		(3,764	)		(3,035	)
Additions to allowance charged to expense		5,062			6,044
Allowance for loan losses at June 30	$	38,870		$	35,137
Average total portfolio loans for period ended June 30	$	2,771,720		$	2,374,923
Ratio of net charge-offs (annualized) to average portfolio loans outstanding		0.27	%		0.26	%

     The interim 2004 provision for loan losses was at a higher level due to unexpectedly strong loan growth in the first quarter of 2004 and a special provision of $1 million recorded for estimated losses on one lending relationship.

Page 13 of 27

     Net charge-offs of loans in the interim 2005 period increased approximately $729,000, compared to the corresponding 2004 period. The increase was mainly due to charge-offs associated with commercial loans, while the amount of recoveries increased marginally for 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 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:

	June 30, 2005					December 31, 2004
			Percentage					Percentage
			of Total					of Total
			Portfolio					Portfolio
	Amount		Loans			Amount		Loans
Commercial	$	36,174		1.27	%	$	34,753		1.29	%
Real estate mortgage		1,596		0.06			1,808		0.07
Installment		1,100		0.04			1,011		0.04
Total allowance for loan losses	$	38,870		1.37	%	$	37,572		1.40	%
Total portfolio loans outstanding	$	2,843,508				$	2,692,904

     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):

	June 30		Dec 31
	2005		2004
Nonaccrual loans:
Commercial	$	17,478	$	20,618
Real estate mortgage		880		2,396
Installment		864		195
Total nonaccrual loans		19,222		23,209
Past due (³90 days) loans:
Commercial		5,951		3,529
Real estate mortgage		1,343		1,382
Installment		345		351
Total past due loans		7,639		5,262
Total nonperforming loans		26,861		28,471
Real estate owned and other repossessed assets		3,315		3,907
Total nonperforming assets	$	30,176	$	32,378

Page 14 of 27

     Nonperforming loans decreased 6% or $1.6 million during the six-month period ended June 30, 2005. Nonperforming loans at June 30, 2005 were 0.94% of total portfolio loans, a significant improvement from the corresponding period in 2004 of 1.06%. Of the nonperforming loans at June 30, 2005, about 52% 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 June 30, 2005 were 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 June 30, 2005, potential problem loans (including the previously mentioned nonperforming loans) approximated $118 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 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.

[The remainder of this page intentionally left blank]

Page 15 of 27

     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				Allowance for				Nonperforming				Allowance as a Percentage
	Portfolio Loans				Loan Losses				Loans				of Total Portfolio Loans
	June 30		Dec 31		June 30		Dec 31		June 30		Dec 31		June 30			Dec 31
	2005		2004		2005		2004		2005		2004		2005			2004
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	302,952	$	297,936	$	4,215	$	3,907	$	3,998	$	2,460		1.39	%		1.31	%
Bank of Michigan(1)		3,057		n/a		47		n/a		—		n/a		1.54			n/a
Brighton Commerce Bank		94,582		95,408		977		969		1,390		1,035		1.03			1.02
Capitol National Bank		196,698		196,519		2,492		2,723		1,791		2,053		1.27			1.39
Detroit Commerce Bank		72,960		66,280		927		806		194		338		1.27			1.22
Elkhart Community Bank		68,762		63,987		705		712		163		277		1.03			1.11
Goshen Community Bank		52,094		48,059		564		644		274		703		1.08			1.34
Grand Haven Bank		113,016		109,612		2,514		2,522		3,628		7,264		2.22			2.30
Kent Commerce Bank		81,317		86,090		1,212		1,269		2,866		2,445		1.49			1.47
Macomb Community Bank		90,496		91,173		1,432		1,327		2,483		1,768		1.58			1.46
Muskegon Commerce Bank		89,460		88,692		912		904		1,151		1,524		1.02			1.02
Oakland Commerce Bank		102,218		107,037		1,414		1,850		405		2,402		1.38			1.73
Paragon Bank & Trust		98,935		96,428		1,576		1,350		3,207		783		1.59			1.40
Portage Commerce Bank		178,697		170,479		2,066		1,977		3,626		2,820		1.16			1.16
Great Lakes Region Total		1,545,244		1,517,700		21,053		20,960		25,176		25,872
Southeast Region:
First Carolina State Bank		60,755		51,867		614		525		103		11		1.01			1.01
Peoples State Bank(2)		14,080		n/a		52		n/a		—		n/a		0.37			n/a
Southeast Region Total		74,835		51,867		666		525		103		11
Eastern Regions Total		1,620,079		1,569,567		21,719		21,485		25,279		25,883
Western Regions:
Southwest Region:
Arrowhead Community Bank		68,452		62,737		680		620		276		29		0.99			0.99
Bank of Las Vegas		46,488		41,134		435		425		—		—		0.94			1.03
Bank of Tucson		125,649		115,694		1,255		1,170		—		455		1.00			1.01
Black Mountain Community Bank		95,201		84,163		1,154		1,014		336		368		1.21			1.20
Camelback Community Bank		76,419		75,146		1,025		1,186		—		—		1.34			1.58
Desert Community Bank		70,273		58,751		820		722		107		107		1.17			1.23
East Valley Community Bank		44,242		42,614		575		520		—		—		1.30			1.22
Fort Collins Commerce Bank(3)		—		n/a		—		n/a		—		n/a		n/a			n/a
Mesa Bank		102,415		85,561		993		800		—		—		0.97			0.94
Red Rock Community Bank		80,882		72,938		1,567		1,714		376		762		1.94			2.35
Southern Arizona Community Bank		73,364		72,226		735		736		—		—		1.00			1.02
Sunrise Bank of Albuquerque		58,766		59,766		943		895		127		459		1.60			1.50
Sunrise Bank of Arizona		107,272		118,617		1,203		1,400		10		111		1.12			1.18
Valley First Community Bank		53,539		49,518		437		469		—		—		0.82			0.95
Yuma Community Bank		47,916		41,460		430		465		—		—		0.90			1.12
Southwest Region Total		1,050,878		980,325		12,252		12,136		1,232		2,291
California Region:
Bank of Escondido		36,274		33,166		410		350		—		—		1.13			1.06
Napa Community Bank		59,986		53,033		720		720		53		—		1.20			1.36
Point Loma Community Bank		21,419		8,590		220		88		—		—		1.03			1.02
Sunrise Bank of San Diego		52,760		46,945		465		415		297		297		0.88			0.88
California Region Total		170,439		141,734		1,815		1,573		350		297
Northwest Region — Bank of Bellevue(4)		500		n/a		6		n/a		—		n/a		1.20			n/a
Western Regions Total		1,221,817		1,122,059		14,073		13,709		1,582		2,588
Other, net		1,612		1,278		3,078		2,378		—		—		—			—
Consolidated	$	2,843,508	$	2,692,904	$	38,870	$	37,572	$	26,861	$	28,471		1.37	%		1.40	%

	n/a — Not applicable.
(1)	Commenced operations in January 2005 and is 51%-owned by Capitol Development Bancorp Limited I, a controlled subsidiary of Capitol.
(2)	Acquired in April 2005 and is 51%-owned by Capitol.
(3)	Commenced operations in June 2005 and is 51%-owned by Capitol Bancorp Colorado Limited, a wholly-owned subsidiary of Capitol.
(4)	Commenced operations in June 2005 and is 51%-owned by Capitol Development Bancorp Limited II, a controlled subsidiary of Capitol.

Page 16 of 27

Results of Operations

     Second quarter 2005 earnings were a record level, $8.3 million, an increase of $1.4 million over the same period in 2004; diluted earnings per share were $0.54 for the 2005 period compared to $0.47 in 2004. Net income for the six months ended June 30, 2005 was $16.3 million, an increase of 44% over the same period in 2004. Diluted earnings per share for the six-month 2005 period were $1.06 compared to $0.77 for the prior year period. The more significant increase in six-month results was due to decreased earnings in the first quarter of 2004.

     Net interest income for the first six months of 2005 totaled $74.4 million, a 20% increase compared to $62.2 million in 2004. Net interest income for the second quarter of 2005 totaled $38.6 million, a 21% increase, compared to $31.9 million for the comparable period in 2004. This increase is attributable to the banks’ growth in size and a relatively stable, but increasing, interest rate environment.

     Noninterest income for the six months ended June 30, 2005 was $10.2 million, an increase of $303,000, or 3%, over the same period in 2004. Noninterest income for the quarter ended June 30, 2005 was $5.6 million, a decrease of $132,000, or 2%, over the same period in 2004. Fees from origination of nonportfolio residential mortgage loans totaled $1.5 million for the second quarter of 2005, and were $2.8 million for the six-month period, as compared to $1.6 million and $2.9 million for the comparable periods in 2004, respectively, due to lower volume of loan fees derived from reduced residential mortgage loan refinance activity. Service charges on deposit accounts in the six-month 2005 period decreased slightly compared to 2004. Other noninterest income increased about $1 million for the six months ended June 30, 2005, primarily due to gains on sale of government-guaranteed commercial loans and fees earned from syndication of commercial loans to unaffiliated financial institutions.

     The provision for loan losses for the six-month period in 2005 was $5.1 million, as compared to $6 million for the same period in 2004. The provision for loan losses for the quarter ended June 30, 2005 was $3 million as compared to $2.5 million during the corresponding 2004 period. Provisions for loan losses were lower for the six months ended June 30, 2005, due primarily to a decrease in nonperforming loans. 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 $55.2 million for the six-month 2005 period and $28.7 million for the three months ended June 30, 2005, as compared to $47.9 million and $24.4 million, respectively, for the comparable periods in 2004. 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 and the addition of four banks in the six-month period of 2005 (compared to the addition of one bank in the six-month 2004 period) and added regional bank development executives as part of Capitol’s 2005 expansion campaign.

Page 17 of 27

     Operating results (dollars in thousands) were as follows:

	Six months ended June 30
												Return on						Return on
	Total Revenues					Net Income						Average Equity(1)						Average Assets(1)
	2005			2004		2005			2004			2005			2004			2005			2004
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	11,637		$	10,795	$	2,097		$	2,143			15.72	%		16.78	%		1.28	%		1.34	%
Bank of Michigan(2)		150			n/a		(496	)		n/a			n/a			n/a			n/a			n/a
Brighton Commerce Bank		3,532			3,012		559			505			12.37			12.53			1.04			1.06
Capitol National Bank		7,788			6,740		1,861			1,721			20.32			20.50			1.59			1.55
Detroit Commerce Bank		3,000			1,658		256			34			7.81			1.53			0.68			.14
Elkhart Community Bank		2,443			1,857		310			352			8.06			10.14			0.88			1.25
Goshen Community Bank		1,825			1,523		(38	)		293			n/a			9.33			n/a			1.24
Grand Haven Bank		4,228			3,521		559			(117	)		11.08			n/a			0.92			n/a
Kent Commerce Bank		3,108			2,622		222			324			5.38			7.97			0.50			.80
Macomb Community Bank		3,183			2,770		255			312			5.80			7.13			0.53			.70
Muskegon Commerce Bank		3,559			2,883		765			625			15.72			13.84			1.63			1.49
Oakland Commerce Bank		4,285			3,751		959			106			18.59			2.03			1.50			.15
Paragon Bank & Trust		4,168			3,469		613			521			10.65			9.47			1.12			.99
Portage Commerce Bank		6,776			5,467		1,532			1,264			19.63			19.48			1.65			1.53
Great Lakes Region Total		59,682			50,068		9,454			8,083
Southeast Region:
First Carolina State Bank		2,052			781		238			223			4.58			8.78			0.68			1.33
Peoples State Bank(3)		424			n/a		36			n/a			4.46			n/a			0.61			n/a
Southeast Region Total		2,476			781		274			223
Eastern Regions Total		62,158			50,849		9,728			8,306
Western Regions:
Southwest Region:
Arrowhead Community Bank		3,170			2,338		458			269			13.38			9.90			1.20			.87
Bank of Las Vegas		1,837			1,274		257			—			8.03			n/a			0.99			n/a
Bank of Tucson		6,029			4,889		1,811			1,447			27.87			24.92			2.13			1.87
Black Mountain Community Bank		4,051			2,844		992			602			20.00			14.50			1.74			1.38
Camelback Community Bank		2,865			2,771		613			220			14.36			5.13			1.53			.55
Desert Community Bank		2,706			1,932		505			263			13.10			7.06			1.43			.92
East Valley Community Bank		1,905			1,521		104			81			4.36			4.03			0.43			.39
Fort Collins Commerce Bank(4)		99			n/a		(125	)		n/a			n/a			n/a			n/a			n/a
Mesa Bank		4,536			3,189		1,026			700			24.97			20.12			2.01			1.79
Red Rock Community Bank		3,281			2,949		715			112			11.41			1.83			1.43			.21
Southern Arizona Community Bank		2,901			2,698		615			654			14.04			16.15			1.42			1.57
Sunrise Bank of Albuquerque		2,591			2,639		527			439			15.57			14.97			1.54			1.25
Sunrise Bank of Arizona		5,072			5,775		1,121			1,120			18.12			21.00			1.78			1.75
Valley First Community Bank		2,118			1,469		338			75			10.54			2.64			1.06			.34
Yuma Community Bank		2,169			1,832		486			363			15.02			13.08			1.65			1.49
Southwest Region Total		45,330			38,120		9,443			6,345
California Region:
Bank of Escondido		1,725			749		207			(230	)		4.48			n/a			0.74			n/a
Napa Community Bank		2,698			1,890		615			102			12.96			4.29			1.70			.59
Point Loma Community Bank		783			n/a		(337	)		n/a			n/a			n/a			n/a			n/a
Sunrise Bank of San Diego		2,666			2,938		481			617			8.97			13.68			1.56			1.75
California Region Total		7,872			5,577		966			489
Northwest Region — Bank of Bellevue(5)		13			n/a		(188	)		n/a			n/a			n/a			n/a			n/a
Western Regions Total		53,215			43,697		10,221			6,834
Other, net		(751	)		231		(3,637	)		(3,813	)		n/a			n/a			n/a			n/a
Consolidated	$	114,622		$	94,777	$	16,312		$	11,327			12.68	%		9.96	%		1.02	%		.79	%

	n/a — Not applicable.
(1)	Annualized for period presented.
(2)	Commenced operations in January 2005 and is 51%-owned by Capitol Development Bancorp Limited I, a controlled subsidiary of Capitol.
(3)	Acquired in April 2005 and is 51%-owned by Capitol.
(4)	Commenced operations in June 2005 and is 51%-owned by Capitol Bancorp Colorado Limited, a wholly-owned subsidiary of Capitol.
(5)	Commenced operations in June 2005 and is 51%-owned by Capitol Development Bancorp Limited II, a controlled subsidiary of Capitol.

Page 18 of 27

Liquidity and Capital Resources

     The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $211 million for the six months ended June 30, 2005, compared to a $182 million increase in the corresponding period of 2004. Growth occurred in most interest-bearing deposit categories, with the majority coming from certificate of deposit accounts. The banks generally do not significantly rely on brokered deposits as a key funding source. Brokered deposits approximated $225 million as of June 30, 2005, or about 8% of total deposits, an increase of $44 million during the interim 2005 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 22% of total deposits at June 30, 2005 and 20% at December 31, 2004. Levels of noninterest-bearing deposits can, however, fluctuate based on customers’ transaction activity.

     Interim 2005 deposit growth was deployed primarily into commercial loans, consistent with the banks’ emphasis on commercial lending activities.

     Cash and cash equivalents amounted to $323 million or 10% of total assets at June 30, 2005, compared with $231 million or 7% of total assets at December 31, 2004. 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 June 30, 2005 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 June 30, 2005, the banks had approximately $31 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 $163 million and additional borrowing capacity approximated $153 million at June 30, 2005. They are used from time to time as a lower-cost funding source versus various rates and maturities of time deposits. Total notes payable and short-term borrowings approximated $166 million in the interim period of 2005. At June 30, 2005, Capitol had unused lines of credit from an unrelated financial institution aggregating $25 million.

     Stockholders’ equity, as a percentage of total assets, approximated 8% at June 30, 2005 and 8.2% at December 31, 2004.

     Effective April 2005, Capitol acquired a majority interest in Peoples State Bank (“Peoples”) located in Jeffersonville, Georgia, in a purchase transaction with total consideration approximating $2.2 million. At June 30, 2005, Peoples’ total assets approximated $27.2 million. Capitol’s acquisition of Peoples was accounted for under the purchase-method of accounting and its results of operations are included in Capitol’s consolidated financial statements for periods after the effective date of the acquisition.

Page 19 of 27

     Bank of Michigan, located in Farmington Hills, Michigan, opened in January 2005. It is majority-owned by Capitol Development Bancorp Limited I, which is a controlled subsidiary of Capitol.

     During June 2005, the following banks opened: Bank of Bellevue, located in Bellevue, Washington, and Fort Collins Commerce Bank, located in Fort Collins, Colorado. Bank of Bellevue and Fort Collins Commerce Bank are majority-owned by Capitol Development Bancorp Limited II and Capitol Bancorp Colorado Limited, respectively, which are controlled subsidiaries of Capitol. Also, Capitol Development Bancorp Limited III was capitalized in June 2005, as a controlled subsidiary of Capitol, with approximately $15 million (including approximately $14 million provided by minority interests) to fund future bank development activity.

     As of June 30, 2005, an exchange offer transaction was pending completion regarding Napa Community Bank which will result in Capitol issuing approximately 200,000 additional shares of common stock and the bank becoming approximately 87% owned, resulting from certain of the bank’s shareholders other than Capitol, which elected to exchange their shares of the bank’s common stock for shares of Capitol. Capitol anticipates concluding the resulting share exchange during the third quarter of 2005.

     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 pursuede novoand 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 increased interbank borrowing rates several times during the interim 2005 period and expressed several concerns about a variety of economic conditions. Home mortgage refinancing volume has decreased from record 2003 levels, which has adversely impacted fee income from the origination

Page 20 of 27

of residential mortgages. 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.

     Start-up banks generally incur operating losses during their early periods of operations. Recently formed start-up banks may not contribute consolidated earnings performance and start-up banks formed in 2005 and beyond may similarly negatively impact short-term profitability. Capitol seeks to reduce the adverse impact of early-period losses of start-up banks through the use of partial ownership of such banks and partially-owned development subsidiaries which own controlling interests in certain of thosede novobanks.

     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 2005. During the interim 2005 period, nonperforming loans have 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 2005. They are listed and discussed in Notes B and I of the accompanying condensed consolidated financial statements.

Critical Accounting Policies

     Capitol’s critical accounting policies are described on pages F-9, F-10 and F-11 of the financial section of its 2004 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 classification of trust-preferred securities.

[The remainder of this page intentionally left blank]

Page 21 of 27

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, 2004. Capitol 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.

[The remainder of this page intentionally left blank]

Page 22 of 27

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. Unregistered Sales of 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.

(a)	Capitol’s annual meeting of shareholders was held May 5, 2005.
(b)	The following matters were voted upon at the annual meeting of shareholders:

1. The election of the nominees for the board of directors who will serve for a term to expire at the 2006 annual meeting was voted on by the shareholders. The nominees, all of whom were elected, are listed below. The following votes were tabulated:

	For		Withheld
Louis G. Allen		12,044,248		408,468
Paul R. Ballard		10,814,200		1,638,517
David L. Becker		10,495,802		1,956,914
Robert C. Carr		10,630,408		1,822,308
Douglas E. Crist		11,839,925		612,791
Michael J. Devine		10,815,589		1,637,127
Cristin Reid English		10,623,699		1,829,017
James C. Epolito		10,697,755		1,754,961
Gary A. Falkenberg		11,996,381		456,335
Joel I. Ferguson		12,044,942		407,774
Kathleen A. Gaskin		11,839,610		613,107
H. Nicholas Genova		12,050,683		402,033
Michael F. Hannley		10,629,910		1,822,806
Lewis D. Johns		10,456,781		1,995,935
Michael L. Kasten		10,630,069		1,822,647
John S. Lewis		10,620,819		1,831,897
Leonard Maas		11,913,806		538,910
Lyle W. Miller		10,439,313		2,013,403
Kathryn L. Munro		12,123,469		329,247
Myrl D. Nofziger		12,127,032		325,684
David O’Leary		10,629,462		1,823,254
Joseph D. Reid		10,636,334		1,816,382
Ronald K. Sable		10,757,476		1,695,240

There were no broker non-votes.

Page 23 of 27

PART II. OTHER INFORMATION — Continued

2. A proposal to approve the proposed amendment to Capitol’s Articles of Incorporation to increase the number of authorized shares from 25,000,000 to 50,000,000 was approved by the shareholders. The following votes were tabulated:

For	Against		Abstain		Non-Vote
11,695,002		704,196		53,518		0

The proposal passed with 93.9% of the outstanding shares entitled to vote being voted “FOR” the proposal.

3. A proposal to approve the proposed amendment to the Capitol Bancorp Limited 2003 Stock Plan to authorize the reservation of an additional 1,000,000 shares of Capitol’s common stock for future issuance was approved by the shareholders. The following votes were tabulated:

For	Against		Abstain		Non-Vote
7,330,399		1,935,397		40,342		3,146,578

The proposal passed with 58.9% of the voted shares entitled to vote being voted “FOR” the proposal.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits:

Exhibit
No.			Description of Exhibit
	3	(i)	Amendment to Articles of Incorporation.
	10.1		First Amendment to 2003 Stock Plan (incorporated by reference from Registration Statement on Form S-8, Reg. No. 333-126206, filed June 26, 2005).
	10.2		Capitol Bancorp Ltd. Management Incentive Plan
	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 24 of 27

(b) Reports on Form 8-K:

On April 25, 2005, a report on Form 8-K was filed, reporting first quarter earnings.

On April 27, 2005, a report on Form 8-K was filed, reporting a second quarter 2005 dividend.

On May 11, 2005, a report on Form 8-K was filed reporting that the shareholders of Capitol Bancorp Ltd. approved the First Amendment to the Capitol Bancorp Ltd. 2003 Stock Plan (the “Plan”) increasing the number of shares reserved for issuance under the Plan from 1,000,000 to 2,000,000.

Page 25 of 27

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  

Chief Financial Officer 

Date: July 29, 2005

Page 26 of 27

INDEX TO EXHIBITS

Exhibit No.			Description of Exhibit
	3	(i)	Amendment to Articles of Incorporation.
	10.2		Capitol Bancorp Ltd. Management Incentive Plan.
	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 27 of 27