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Exhibit 13 Table
Of Contents 2
    
    Chairmans LetterCOMMUNITY BANKS7
    
    Ann Arbor Commerce Bank8
    
    Arrowhead Community Bank9
    
    Bank of Escondido10
    
    Bank of Las Vegas11
    
    Bank of Tucson12
    
    Black Mountain Community Bank13
    
    Brighton Commerce Bank14
    
    Camelback Community15
    
    Capitol National Bank16
    
    Desert Community Bank17
    
    Detroit Commerce Bank18
    
    East Valley Community Bank19
    
    Elkhart Community20
    
    First Carolina State Bank21
    
    Goshen Community Bank22
    
    Grand Haven Bank23
    
    Kent Commerce Bank24
    
    Macomb Community Bank25
    
    Mesa Bank26
    
    Muskegon Commerce Bank27
    
    Napa Community Bank28
    
    Oakland Commerce Bank29
    
    Paragon Bank & Trust30
    
    Point Loma Community Bank31
    
    Portage Commerce Bank32
    
    Red Rock Community Bank33
    
    Southern Arizona Community Bank34
    
    Sunrise Bank of Albuquerque35
    
    Sunrise Bank of Arizona36
    
    Sunrise Bank of San Diego37
    
    Valley First Community Bank38
    
    Yuma Community BankRESIDENTIAL MORTGAGE AFFILIATE39
    
    Amera Mortgage CorporationFINANCIAL INFORMATION




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TO OUR SHAREHOLDERS From the Chairman
 (PHOTO OF JOSEPH D. REID) Dear
Shareholder: Capitol Bancorp Limited (CBC) is the only banking corporation in America which identities its
core business as the development of community-based de novobanks. Fundamental to this core
business is a commitment to a building to last corporate strategy. We have always been, and
will continue to be, a company committed to a long-term vision, versus a company focused on a
short-term, so-called value maximizing event. At December 31, 2004, CBC consisted of 32 separately chartered community banks. Each bank bears its
own locally branded name, its own board of directors, and, full decision-making authority over
operating strategy and all matters affecting the customer in lending and deposit transactions. During this past year, we have focused on a broadened development strategy which is based on the
successful recruitment of talented, senior bankers to serve as presidents of seven identified
regions of the contiguous United States. I am pleased to report to you that this effort is
delivering the desired results. Six of the seven regions (California, Great Lakes, Midwest,
Northwest, Southeast and Southwest) now operate with this structure. Only the Northeast regional
president position remains unfilled. The results of this energized development strategy will begin to be realized during the course of
the current year. We anticipate entry into four additional states and the organization of added
banks in those states with existing operations. Moreover, our current financial model, as in the
past, allows for this growth without bearing the full burden of early-stage operating losses
generally associated with a de novogrowth strategy. As I have previously noted, our board of
directors has unanimously endorsed a long-term building strategy. We recognize that our bank model
works. We recognize that the opportunity to build additional banking affiliates through this model
is currently unlimited from a practical point of view. We recognize that the continued development
of community bank affiliates serves to deliver a greater value to our shareholders than short-term
maximizing efforts. Growth, of course, creates excitement and energy. It captures the attention of industry analysts,
top banking talent and investors. Were excited about the buzz, to be sure, but we recognize that
this formula of success carries with it increasing demands on existing corporate personnel and
operating systems. Responsible growth requires ever-evolving sophistication of operating and technology systems.
During the course of this year we will initiate a core computer system conversion. This effort is
the product of a year-long study completed by numerous corporate and banking personnel within our
organization. It will cost approximately $5 million and will serve to facilitate data flow,
reporting, analysis and communications. The regional division of our corporate operations, coupled with the added sophistication of
state-of-the art technology, will provide an expanded foundation of support for our growing
company. While we are intently focused on the future, I am proud to highlight several major accomplishments
of the past year. In 2004, the Corporation:  
    Welcomed two banks into its community bank network  First Carolina
State Bank in Rocky Mount, North Carolina and Point Loma Community Bank in Point
Loma, California.
    Initiated a stock exchange so that two majority-owned investments
became wholly-owned. Shareholders in both Sunrise Bank of San Diego and First
California Northern Bancorp exchanged their shares for Capitols publicly-traded
common stock.
    Announced its 50th consecutive cash dividend in the fourth
quarter. Thank you for your support of our efforts. -s- Joseph D. Reid
Joseph D. ReidChairman & CEO 2   |   2004ANNUAL REPORT




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FINANCIAL HIGHLIGHTS  (BAR CHART) (BAR CHART) (BAR CHART) (BAR CHART)
 (BAR CHART) (BAR CHART) (BAR CHART) (BAR CHART)




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CAPITOL BANCORP LIMITED Board of Directors Louis G. AllenRetired Banker Paul R. BallardRetired President & CEO
Portage Commerce Bank David L. BeckerRetired Founder
Becker Insurance Agency, P.C. Robert C. CarrVice Chairman
Capitol Bancorp Limited Douglas E. CristPresident
Developers of SW Florida, Inc. Michael J. DevineAttorney at Law Cristin Reid EnglishChief Operating Officer
Capitol Bancorp Limited James C. EpolitoPresident & CEO
The Accident Fund Company Gary A. Falkenberg
Gary A. Falkenberg, D.O., P.C. Joel I. FergusonChairman
Ferguson Development, LLC Kathleen A. GaskinAssociate Broker/State Appraiser
Tomie Raines, Inc. Realtors H. Nicholas GenovaChairman & CEO
Washtenaw News Co. Inc. and
H.N. Genova Development Michael F. HannleyPresident & CEO
Bank of Tucson Lewis D. JohnsPresident
Mid-Michigan Investment Co. Michael L. Kasten,Vice ChairmanManaging Partner
Kasten Investments, LLC John S. LewisPresident-Western Regions
Capitol Bancorp Limited Leonard MaasPresident
L & M Maas Investments, LLC Lyle W. Miller,
Vice ChairmanPresident
L.W. Miller Holding Co. Kathryn L. MunroChairman & CEO
Bridge West, LLC Myrl D. NofzigerPresident
Hoogenboom Nofziger David J. OLeary,
SecretaryChairman
OLeary Paint Company Joseph D. ReidChairman & CEO
Capitol Bancorp Limited Ronald K. SablePresident
Concord Solutions Ltd. Officers Joseph D. ReidChairman & CEO Robert C. CarrVice Chairman Art R. AguirreVice President andSenior Risk Analyst Stephen W. AllenInvestment Sales Officer Scott R. AndrewsPresidentCalifornia Region Edward David G. AvancenaLoan Review Officer Carol A. BlaineVice President andSenior Loan Review Officer Katherine P. BowdenVice PresidentBank Performance Brent R. BranchAssistant Vice President andManager of Network Services Frances A. BurazinSenior Audit Officer Margarete L. ChalkerAssistant Vice President andTax Manager Staci L. CharlesMarketing Director James F. CrawfordDirector of Strategic Products & Services David J. DuttonChief Information Officer Brian K. EnglishGeneral Counsel Cristin Reid EnglishChief Operating Officer Carl C. FarrarSenior Vice PresidentCredit Administration David D. FortuneChief Credit Officer Kenneth L. FoutsBusiness Development Officer Thomas S. GiovanelliPresidentNorthwest Region Reginald A. Hansom Jr.Assistant Vice President andComputer Operations Manager Janet L. HardinVice PresidentBusiness Support Services Lee W. HendricksonChief Financial Officer Jocelyn S. HuntAssistant Vice PresidentCompliance Bruce D. JonesPresidentSoutheast Region Marsha L. JonesAssistant Vice President andItem Processing Manager Rick H. JamesVice PresidentBank Performance Sondra K. KoskelaLoan Quality Control Specialist John S. LewisPresidentWestern Regions Tina M. LuhaAssistant Vice President andBank Accounting Manager Stephanie A. MaatVice President, Director of Training andDean, Capitol University Charles J. McDonaldCashierEastern Regions David J. MeningaAssistant Corporate Counsel Michael M. MoranChief of Capital Markets John R. MyersVice President andSenior Loan Review Officer Phillip Kyle OesterleVice President andManager of Operations Services Gregory E. PattenVice PresidentTechnology Services Linda D. PavonaSenior Vice PresidentCorporate Relations David K. PowersDirector of Loan Administration Amy L. PramovVice President andDirector of Human Resources Services Steven J. PriccoVice President andRegional Government Lending Manager Joal R. RedmondSenior Communications Manager Joseph D. Reid IIICorporate Counsel William E. RheaumeSenior Counsel Stanley E. RickettsPresidentMidwest Region Nancy A. SchoolmanVice President andCorporate Compliance Officer Patricia L. StoneSenior Vice PresidentCredit Administration Patrick R. SturmCorporate Counsel Stephanie M. SwanAssistant Vice PresidentCorporate Governance Darryl S. TenenbaumVice President andCorporate Auditor Bruce A. ThomasPresidentEastern Regions Stephen D. ToddDirector of Bank PerformanceWestern Regions Marie D. WalkerSenior Vice President andDirector of Accounting Gary L. WeitnerSenior Vice PresidentCredit Administration Thomas C. WisehartAssistant Corporate Counsel Leonard C. ZazulaCashierWestern Regions




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BUILDING TO LAST




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CAPITOL BANCORP LIMITED Community Banks
 (COMMUNITY BANKS MAP) CALIFORNIA REGION  Scott R. Andrews,President Bank of Escondido, Bank of San Francisco (proposed), Napa Community Bank, Point Loma
Community Bank, Sunrise Bank of San Diego GREAT LAKES REGION  Bruce A. Thomas,President Indiana Elkhart Community Bank, Goshen Community Bank Michigan Ann Arbor Commerce Bank, Bank of Auburn Hills (in organization), Bank
of Michigan, Brighton Commerce Bank, Capitol National Bank, Detroit Commerce Bank, Grand Haven
Bank, Kent Commerce Bank, Macomb Community Bank, Muskegon Commerce Bank, Oakland Commerce Bank,
Paragon Bank & Trust, Portage Commerce Bank MIDWEST REGION  Stanley E. Ricketts,President NORTHEAST REGION  In Development NORTHWEST REGION  Thomas S. Giovanelli,President Washington Bank of Bellevue (in organization) SOUTHEAST REGION  Bruce D. Jones,President Georgia Sunrise Bank of Atlanta (loan production office) North Carolina First Carolina State Bank SOUTHWEST REGION  John S. Lewis,President Arizona
Arrowhead Community Bank, Bank of Tucson, Camelback Community Bank, East
Valley Community Bank, Mesa Bank, Southern Arizona Community Bank, Sunrise Bank of Arizona, Valley
First Community Bank, Yuma Community Bank Colorado Fort Collins Commerce Bank (in organization) Nevada Bank of Las Vegas, Black Mountain Community Bank, Desert Community Bank, Red Rock
Community Bank New Mexico Sunrise Bank of Albuquerque




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ANN ARBOR COMMERCE BANK Building lasting relationships. . . creating lifetime value.
 Leading the way Ann Arbor
Commerce Banks team is celebrating the banks 15thanniversary this
year. This milestone provides our directors, officers and employees with another entrée for telling
our story to clients and prospective clients in this vibrant, major university community. We have
built a great bank by delivering the best in client services and, adherence to that standard will
help us continue to fulfill our mission. We have had a family business for 48 years and have been a bank customer since
1993. We enjoy Ann Arbor Commerce Bank because the bank has personality. The staff is easy
to work with and they always take care of us and satisfy our needs. They are very
accommodating. Joseph Grammatico,CEO, Master Key Northern Our focus is on customer retention, enhanced relationships with core customers, expansion through
new business development and increased community involvement, an area in which we have always been
strong. Integral to both retention and development is our trust and investment services, which generated
record income in 2004. John Nixon III, a key member of our banks executive team, heads this
department. John was again named to the Presidents Club of Prime Vest, our brokerage services
provider. Only 25 people receive this honor nationwide. With a strong commitment to community
involvement, John recently joined the board of the Home Builders Association of Washtenaw County
and chairs the Education Foundation of Dexter, Michigan. We salute our entire team for loyalty and leadership. Twenty-five employees have been with us for
over five years and three have been here for over 10 years. Our team anticipates another prosperous year in 2005 as we deliver the best in business and
personal financial services to the Ann Arbor community. Richard G. DornerPresident & CEO 
 Ann Arbor Commerce Bank | 2950 State Street South | Ann Arbor, MI 48104
734-887-3100 | www.annarborcommerce.com Founded:October 1, 1990
    
    Richard G. Dorner | President & CEO
 
 BOARD OF DIRECTORS Richard G. DornerPresident & CEO
Ann Arbor Commerce Bank
Brian K. EnglishGeneral Counsel
Capitol Bancorp Limited
James A. FajenAttorney at Law
Fajen & Miller, PLLC
James W. FinnChairman & CEO
Finns  JM&J Insurance
Agency, Inc. H. Nicholas GenovaChairman & CEO
Washtenaw News Co. Inc. and
H. N. Genova Development
Richard M. GreeneConsultant
Richard Greene Point
Training
Marilyn D. Katz-PekManaging Partner
Biotechnology Business
Consultants
James C. Keen Sr.CEO
Cliff Keen Athletic
David W. LuttonPresident
Charles Reinhart
Company Realtors
Fritz SeyferthPrincipal
Fritz Seyferth & Associates
Carl Van Appledorn, M.D.President & COO
Urological Surgery
Associates, P.C.
Warren E. WrightChairman & Partner
Renosol CorporationOFFICERS
James A. FajenChairman
Richard G. DornerPresident & CEO
Warren E. WrightSecretary
Clifford G. SheldonExecutive Vice President John J. WilkinsSenior Vice President
Mary HayesFirst Vice President
Mary D. GyorkeVice President Patrick J. McKeonVice President
Louise A. MorseVice President
John Nixon IIIVice President
James J. PlummerVice President Bryan T. SingerVice President
Richard G. TiceVice President 2004ANNUAL
REPORT    |    7




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ARROWHEAD COMMUNITY BANK . . . a relationship you can bank on.
 Focus on what will be In 2004, Arrowhead experienced double-digit growth in assets, deposits and loans. Paralleling
the growth of the West Valley, Arrowheads residential mortgage division led the way with over $40
million in residential loans. Currently, West Valley communities account for 36 percent of the population in Maricopa County. In
five years, it is projected the West Valley will house 40 percent of the countys population. This
growth means new homes will be built and new businesses will be launched. People bank where they
live and businesses prefer to bank locally, boding well for Arrowhead as it is situated in the
heart of the West Valley and well positioned to capitalize on the local growth. The staff understands the banks success depends on the success of the community, and as such, is
committed to providing quality, high-value services and products, while embracing a culture of
service and volunteerism. During the last 12 months, Ive witnessed a maturation of leadership, teamwork and
pride at Arrowhead Community Bank. Our leaders, lenders and client service group are
professional, innovative and responsive to our clients, the community and shareholders.
Im truly proud of everyone and look forward to a great 2005. Dennis Landauer,Bank Director In 2004, Arrowhead Community Bank was named as a recipient of the Governors Volunteer Service
Award. This award recognizes individuals, groups and businesses that have made a significant
contribution to Arizonas communities through service. The purpose of the award is to build an
ethic of service and volunteerism by working in partnership with public and private organizations
to recognize volunteer efforts that strengthen communities and improve the quality of life for
Arizonans. Do not just focus on the present ... focus on what will be. Arlene KulzerPresident & CEO 
 Arrowhead
Community Bank | 17235 North 75th Avenue | Suite B100 | Glendale, AZ 85308
623-776-0800 | www.arrowheadcommunitybank.com Arlene Kulzer |President & CEO
    
    Founded:September 21, 2000
 
 BOARD OF DIRECTORS Shelley L. BadeRPA, Principal
The Bade Companies W. Patrick DaggettCPA
Daggett McConachie
& Moore, CPAs, LLP Michael J. DevineAttorney at Law Richard J. HildeOwner & CEO
EPW, Inc. Michael L. KastenManaging Partner
Kasten Investments, LLC Arlene KulzerPresident & CEO
Arrowhead Community Bank Dennis E. LandauerCPA, Managing Director
American Express Tax
& Business Services James J. McCueAviation Consultant
Sherwin Industries Terrance C. MeadAttorney at Law
Mead & Associates Gloria M. MunozDirector of Housing Programs
NFWSC John C. OgdenCEO
SunCor Development Company Carol A. PooreVice Provost
Arizona State University West Richard A. SheltonExecutive Director
West Valley Symphony Stephen D. ToddDirector of Bank Performance
Western Regions
Capitol Bancorp Limited OFFICERS John C. OgdenChairman Michael L. KastenVice Chairman Dennis E. LandauerChair, Directors Loan Committee Arlene KulzerPresident & CEO James J. McCueSecretary Amy Lou BluntExecutive Vice President & CCO Deborah M. CharlesworthSenior Vice President Barry S. EdwardsSenior Vice President William H. SmithSenior Vice President Belinda Blades-KecklerVice President Ursula L. JacksonVice President Mary Catherine MirelesVice President 8    |    2004ANNUAL REPORT




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BANK OF ESCONDIDO Relationship banking backed
by local experience.
 Long
- term relationships Our main emphasis is on the word relationship. We have built the bank  through the efforts of investors, clients
and employees  on long-term relationships. Although the Bank of Escondido has been open for just one year, we
have employees who have worked together in our community for many years. As a result, we continue to enjoy
customer relationships developed over 25 years. This stability and continuity explains our ability to follow our quick start in the fourth quarter of 2003 with an
excellent year in 2004. Loans, deposits and total assets all grew rapidly over the past year. We achieved net earnings
in our eighth month of operation. Over the past 17 months, the bank has more than met my expectations of what a
true community bank should be. Our business is all about integrity as we serve
our customers in a comfortable and friendly atmosphere. Our veteran staff cares
about our customers. This is the positive environment we were looking for from the
inception of our bank. Ron Guiles,Bank Director We have built
our bank on solid ground and it has quickly become a profitable and
respected financial institution
in the Escondido community. We give generously of our time and resources to several community activities and
charitable organizations. Now our focus is to build on this sound foundation. In 2005, we anticipate continued loan growth with an emphasis
on fee income. We are adding a mortgage banker and a Small Business Administration lender, with continued focus
on our active real estate construction lending market. Our success can be directly attributed to our seasoned staff, loyal customer base and the referral network we have
built over time in Escondido and northern San Diego County. Michael R. PetersPresident & CEO 
 Bank of Escondido | 200 West Grand Avenue | Escondido, CA 92025
760-520-0400 | www.bankescondido.com Founded:October 14, 2003
    
    Michael R. Peters |President & CEO
 
 BOARD OF DIRECTORS Scott R. AndrewsPresident & COO
First California Bancorp Robert M. CahanPresident
Cahan Properties Richard J. FleckPresident
Southland Paving, Inc. Marvin L. GilbertPresident
North County Insurance L. Richard Greenstein, M.D.Medical Director
Escondido Surgery Center Ronald G. GuilesSenior Partner
GEM Educational
Consultants Mark E. HayesOwner
Mark E. Hayes, CPA John S. LewisPresident, Western Regions
Capitol Bancorp Limited Joan M. MeyerD.P.M.
Podiatric Medicine
and Surgery Michael F. MurphyPresident
Computer Protection
Technology, Inc. Michael R. PetersPresident & CEO
Bank of Escondido OFFICERS John S. LewisChairman Michael R. PetersPresident & CEO Christopher S. BurtSecretary & Senior Vice President Glenn MarshallExecutive Vice President & CCO Linda I. BlakleySenior Vice President Rhonda L. MulvanyVice President 2 0 0 4ANNUAL
REPORT    |    9




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BANK OF LAS VEGAS Banking Las Vegas!
 The Best Is Yet To Come The banks performance to date has been outstanding and the future is very bright.
We are located in the hottest market in Nevada and we foresee phenomenal growth in the
coming years. Hundreds of small businesses are moving into the area. The banks
professional staff is well-equipped to capture that market. Leo Durant,Bank Director At Bank of Las Vegas, we are most proud of the banks deposit and loan growth in 2004. Asset
quality remained strong for the year and we posted respectable earnings. We have strengthened our
staff with the addition of key employees in commercial and residential lending. In the coming year, we are poised for strong earnings. We have fortified our loan pipeline and
increased our leads for deposit growth. Through consistently thoughtful customer service, we anticipate more business referrals from our
existing customer base. Our customers are very confident in doing business with us and are
referring their friends and associates our way. Business growth is occurring in the area around our bank, which is adding to the banks name
recognition and awareness levels. The bank is financing several large construction projects, which
further enhances the banks branding. In 2005, our
officers plan to expand involvement in community and nonprofit organizations. We are
financing economic development and we want to be an increasing part of the social fabric of our
community as well. Solid, quality growth has been, and will continue to be, our mantra in 2005. From the beginning, our goal was to be a financially sound and profitable bank. We feel we continue
to accomplish that goal. Yet, we all know, the best is yet to come. Vincent J. CiminisePresident 
 Bank of Las Vegas | 6001 S. Decatur Boulevard | Suite P | Las Vegas, NV 89118 702-939-2400 | www.bankoflasvegas.com Vincent J. Ciminise |President
    
    Founded:February 11, 2002
 
 BOARD OF DIRECTORS Ernest A. Becker VPresident
Becker V Development Vincent J. CiminisePresident
Bank of Las Vegas Darlene CopseySecretary & Treasurer
The Alpha Group Ltd. Michael J. DevineAttorney at Law Leo N. DurantOwner
LND Construction Scott R. GragsonManaging Partner
GKT Acquisitions Donald K. HamrickOwner & Vice President
Accent Auto Body Darryl J. HardyVice President
Hardy Painting & Drywall Alan R. HouldsworthPartner
Houldsworth & Company, CPAs Charles L. LaskyPresident
Lasky, Fifarek & Hogan, P.C. Joseph D. Reid IIICorporate Counsel
Capitol Bancorp Limited Philip T. SaundersRetired Executive
General Motors
Corporation Herman A. Vander VeldtVice President & General Manager
Realty Mortgage Corporation OFFICERS Charles L. LaskyChairman and Secretary Michael J. DevineVice Chairman Vincent J. CiminisePresident Roger S. MelliesExecutive Vice President & CCO Carol A. ClemensSenior Vice President Paul J. DreschlerSenior Vice President William C. RussellSenior Vice President Debbie V. ClarkVice President Jerry R. MorganVice President 10    |   2004ANNUAL REPORT




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BANKofTUCSON Making your life easier.
 Community involvement is the standard The staff at
Bank ofTucson likes to view our bank as the best little
bank in America. We dont talk much about what we do for Tucson, we just quietly do our part and help in many ways. Our officers are active with numerous local organizations that make our city a better place to live
and work. Each year we partner with the Southern Arizona Chapter of the Susan G. Komen Foundation
in the Race for a Cure, which raises money for the Foundations goal of eradicating breast cancer. Yearly, our team members give generously to the United Way and recently I had the honor of being
selected as the chairman of the 2004-05 campaign for the United Way of Tucson and Southern Arizona.
The year-long campaign ends on June 30 and the ambitious goal is to raise $10.8 million to fund 44
partner agencies and over 700 other agencies where donors direct their contributions. On the business side of the ledger, our team continually exceeds expectations through true
common-sense banking in the community. We get involved to resolve the banking needs of our clients.
We take the time to care. We have established a real estate division to take care of residential mortgage needs for our
customers. We also have a loan production office in Nogales, Arizona, which focuses on making loans
to the seasonal produce industry. The Nogales office holds the distinction of being one of the few
banks with delegated authority as an export import bank. Our record
earnings in 2004 reflect the hard work of our staff and the support we receive from
business, industry and the community. We look forward to continued growth in 2005 and setting the
banking standard for all of Southern Arizona. Michael F.
HannleyPresident & CEO 
 Bank ofTucson| 4400 East Broadway Boulevard | Suite 112 | Tucson, AZ 85711 | 520-321-4500
610 N. Morley Ave. | Nogales, AZ 85621 | 520-397-9220 | www.bankoftucson.com Founded:June 27, 1996
    
    Michael F. Hannley |President & CEO
 
 BOARD OF DIRECTORS Bruce I. AshVice President
Paul Ash Management
Company, LLC Slivy Edmonds CottonSenior Managing Director
The Edmonds Group Michael J. DevineAttorney at Law Richard N. FlynnPresident
Flynn & Associates Michael F. HannleyPresident & CEO
Bank ofTucson Michael J. HarrisAssociate Broker
Long Realty Company Richard F. ImwallePresident
University of Arizona
Foundation David JeongCPA
Jeong, Suarez
& Lizardi, P.C. Michael L. KastenManaging Partner
Kasten Investments, LLC Burton J. KinerkAttorney at Law
Kinerk, Beal, Schmidt,
Dyer & Sethi, P.C. Harold H. KitayCommercial Developer & Owner
Whirlygig Properties, LLC Humberto S. LopezPresident
HSL Properties, Inc. Lyn M. PapanikolasRealtor
Long Realty Company OFFICERS Richard F. ImwalleChairman Michael J. DevineVice Chairman Michael F. HannleyPresident & CEO Richard N. FlynnSecretary C. David FoustExecutive Vice President & CCO Sandi L. SmitheExecutive Vice President & COO David A. EsquivelSenior Vice President Catherine C. GarciaVice President Richard K. MullenVice President Patricia A. TaylorVice President 2004ANNUAL REPORT
   |    11




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BLACK MOUNTAIN COMMUNITY BANK . . . banking the way you remember.
 I am impressed with our managements ability to create a bank that is a peer group
leader by all measures. Our team has intelligently granted credit with limited risk. This
prudence will carry our bank well into the future. Phil Ralston,Bank Director Built
on granite After conservative growth during the banks first three years, Black Mountain achieved
significant milestones in total assets and profitability in both 2003 and 2004. We have set the
stage for strong growth and earnings in 2005 and for years to come. We built our bank on a solid foundation to establish long-term stability. Our founding team has
been with banks that were sold or merged and we saw those banks and those jobs disappear with the
consolidations. We believed, if we built a strong, community-focused bank, none of us would
experience that again. Our founding employees, and those who have since joined the team, enjoy
their jobs and want to make their careers here. Additionally, we have a genuine concern for our community. We believe we are obligated to help
ensure that it remains a great place to work and live. We give generously of our time and resources
to activities that benefit the community. Last year, I was honored to be elected to the Nevada Bankers Association board of directors and I
also joined the Henderson Development Association board of trustees. Our officers are active with
many other nonprofit agencies that benefit our residents. We will continue to build on our past achievements. We have staffed our bank with experienced
professionals and we have worked very hard to make this endeavor a success. We pay attention to our
customers and to credit quality for one primary reason  we intend that this institution will
outlast us. Peter M. AtkinsonPresident & CEO 
 Black Mountain Community Bank| 1700 West Horizon Ridge Parkway | Suite 101 | Henderson, NV 89012702-990-5900 | www.blackmountaincommunitybank.com Peter M. Atkinson |President & CEO
    
    Founded:March 27, 2000
 
 BOARD OF DIRECTORS Peter M. AtkinsonPresident & CEO
Black Mountain
Community Bank Michael D. BallardPresident
Ballard Communication, Inc. Michael J. DevineAttorney at Law Betty A. KincaidPresident
Southwest Exchange Corporation Charles L. LaskyPresident
Lasky, Fifarek & Hogan, P.C. Claire M. MacDonaldVice President & Owner
MacDonald Properties Michael J. MixerCorporate Broker
Colliers International Colleen C. OCallaghan-MieleVice President &
Circulations Manager
H.B.C. Publications Phillip N. RalstonChief Financial Officer & Treasurer
American Nevada Company Joseph D. Reid IIICorporate Counsel
Capitol Bancorp Limited Christopher G. SamsonPresident & Owner
FN Investments Inc. OFFICERS Charles L. LaskyChairman & Secretary Michael J. DevineVice Chairman & Treasurer Peter M. AtkinsonPresident & CEO David S. RennickExecutive Vice President & CCO Dennis L. MonsonSenior Vice President Kathy M. LuceroVice President Grenell MartinVice President RaMon McBrideVice President Stephen E. NorrisVice President Shari A. SmithVice President 12    |   2004ANNUAL REPORT




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BRIGHTON COMMERCE BANK 
 Ask us anything, because we do everything!
 It has been a unique privilege to serve on the board of directors as the bank
continues its leadership role in the growth and success of one of the fastest growing
counties in Michigan. The employees are devoted to customer service and community
involvement as illustrated by their support of the annual Livingston County United Way
campaign since the banks inception. Piet W. Lindhout,Bank Director (2005 Campaign Chairperson, Livingston County United
Way) Growing with Livingston County Brighton Commerce Bank achieved record asset levels in 2004 with excellent loan growth and
solid referrals from our board of directors. We are the lender of choice for commercial construction projects in our market and our goal is to
be the lender of choice in the residential arena as well. Our focus now is to further enhance fee income through customer-desired services, such as Internet
banking, cash management, merchant credit card processing and title insurance servicing. We also
want to leverage our Preferred Lender status with additional Small Business Administration lending. Our staff has been enriched with the addition of two homegrown bankers with 30 years of combined
experience  Sandy Radtke-Gerkin, vice president of business development, and Corey Ruthig,
assistant vice president and commercial lender. We have successfully launched Customer Appreciation and Advisory Breakfasts to thank our customers
for their business and get feedback on how we can improve the bank. They are effective and will
continue. Our community commitment is evidenced by our 100-percent employee participation in the United Way.
We are also active in local government (two members of our staff are elected officials) and we
volunteer at local schools. We care about our community and plan to grow our bank right along with it. Gary T. Nickerson Sr. President & CEO
 
 Brighton Commerce Bank | 8700 North Second Street | Brighton, MI 48116
810-220-1199 | www.brightoncommerce.com Founded:January 8, 1997
    
    Gary T. Nickerson Sr. | President & CEO
 
 BOARD OF DIRECTORS Robert C. CarrVice Chairman
Capitol Bancorp Limited John C. CoderePresident
Brighton Block & Concrete Michael B. CorriganPresident
Corrigan Oil
Company, Inc. Scott C. GriffithPresident
ERA Griffith Realty William LaMarraChairman & CEO
Excelda Manufacturing Piet W. LindhoutCEO
Lindhout Associates
Architects, AIA Gary T. Nickerson Sr.President & CEO
Brighton Commerce Bank Candice G. RandolphExecutive Vice President
Randolph Custom Homes Mitchell J. StanleyPresident
Mickey Stanley & Associates James A. WinchelPresident
Colt Park Agency, Inc. OFFICERS Robert C. CarrChairman Michael B. CorriganVice Chairman Gary T. Nickerson Sr.President & CEO Candice G. RandolphSecretary Joseph M. PetrucciSenior Vice President John SzydzikSenior Vice President William R. AndersonVice President Mark R. DuShaneVice President Linda K.LavelyVice President Sandra T. Radtke-GerkinVice President 2004ANNUAL REPORT | 13




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CAMELBACK COMMUNITY BANK 
 Our focus is YOU!
 My business has worked with the Camelback bankers for five years during our rapid
growth and found their personal service to be a real asset. As we continue to build, we
know this relationship will remain of great value. Robert
Lester,Bank Director Our focus is driven by one thing ... our customers As a longtime Phoenix banker, I was pleased and proud to join Camelback Community Bank in
2004. My predecessor, Barbara Ralston, is staying involved as chair of our board and is committed
to help build the bank for years to come. As we successfully grow our loan portfolio and all areas of the bank, our team is committed to
providing a high level of customer service utilizing a full menu of products and services. Our goal
is to maximize the long-term profitability of the bank. The Camelback team is excited
with the banks 2005 ranking as Arizonas No. 1 bank with assets
under $150 million in Ranking Arizona, which each year conducts the largest business opinion poll
in the state. This achievement is a testament to the banks stature and image as epitomizing the
best in community banking. Our staff is dedicated to serving our community as well. We support the United Way and numerous
charities that benefit women, children and all those people who value life and good health.
Professionally, we are involved with such organizations as the Risk Management Association and the
Arizona Bankers Association. Camelback Community Bank is poised for success in 2005. We anticipate growth in all phases of the
business, from commercial and mortgage lending to Internet banking products and services to cash
management and equipment leasing. Gail E. GracePresident & CEO 
 Camelback Community Bank | 2777 East Camelback Road | Suite 100 | Phoenix, AZ 85016
602-224-5800 | www.camelbackbank.com Gail E. Grace| President & CEO
    
    Founded:May 20, 1998
 
 BOARD OF DIRECTORS
Shirley A. AgnosPresident
Arizona Town Hall
Cord D. ArmstrongCPA & Manager
Miller Wagner Business
Services, Inc. Larry E. BrysonReal Estate Investor
Lyn-Lar Investments, Inc. Michael J. DevineAttorney at Law
Gail E. GracePresident & CEO
Camelback Community Bank Michael L. KastenManaging Partner
Kasten Investments, LLC Robert V. LesterPresident
Progressive Financial
Concepts John S. LewisPresident, Western Regions
Capitol Bancorp Limited Tammy A. LinnDeputy Associate Superintendent
Arizona Character
Education Initiative Susan C. MulliganCommunity Volunteer Earl A. PetznickPresident & CEO
Northside Hay Company Barbara J. RalstonChair
Camelback Community Bank Dan A. RobledoPresident & CEO
Lawyers Title of Arizona, Inc. OFFICERS Barbara J. RalstonChair
Michael L. KastenVice Chairman Dan A. RobledoVice Chairman Gail E. GracePresident & CEO Shirley A. AgnosSecretary James A. KlussmanExecutive Vice President & CCO Timothy J. HoekstraSenior Vice President William F. Von HattenVice President Kelly J. WhallonVice President 14 | 2004ANNUAL REPORT




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CAPITOL NATIONAL BANK 
 Smaller Bank. Bigger Service.
 The power of teamwork Our strong 2004 performance was a total team effort involving every employee and each member
of our aggressive and insightful board of directors. Director Richard Henderson, a well-known and respected CPA and business consultant, has been key to
our loan growth accomplishments. During 2004, he played a major role in our performance by
referring a number of new prospects and assisting management in cultivating many solid banking
relationships. Our core deposit achievements have been accomplished with the contributions of our Business
Development Committee, chaired by director Kevin Kelly and coordinated by Ronda Thompson, vice
president of business development and retail banking. We held several networking forums that were
well received and attended by our customers and prospects with more planned in the coming months.
This year, we are covering health care topics, which fit nicely with our recent launch of Health
Savings Accounts. We have completed the renovation of our main office under the supervision of Lori Garcia, vice
president and senior operations officer. We appreciate our new facilities and know they will
facilitate our future growth and operating strategies. This investment is a testament to our
commitment to provide superior financial services to greater Lansing for years to come. Our strategy is to maximize the strengths of management, staff and directors to continue to build a
high performing community bank in which we can all take great pride. We are excited about the prospects for a successful 2005 and our ability to continually expand our
market share by building lasting banking relationships consistent with our long-term business plan. John C. SmythePresident & CEO 
 Capitol
National Bank | 200 Washington Square North | Lansing, MI 48933 | 517-484-5080 | www.capitolnational.comDelta Branch | 644 Migaldi Lane | Lansing, MI 48917 | 517-627-8881Meridian Branch | 4792 Marsh Road | Okemos, MI 48864 | 517-347-1006 Founded:November 22, 1982
    
    John C. Smythe |President & CEO
 
 BOARD OF DIRECTORS Robert C. CarrVice Chairman
Capitol Bancorp Limited Nan Elizabeth CaseyAttorney at Law
Fraser Law Firm Charles J. ClarkPresident
Clark Construction Company Paula D. CunninghamPresident
Lansing Community College David E. FergusonPresident
Ferguson Development, LLC Patrick F. HayesPresident
F. D. Hayes Electric Company Richard A. HendersonPresident
Henderson & Associates, P.C. J. Christopher HolmanPublisher
Greater Lansing Business Monthly Lewis D. Johns IIVice President
Mid-Michigan Investment Company Kevin A. KellyManaging Director
Michigan State Medical Society Charles J. McDonaldCashier - Great Lakes Region
Capitol Bancorp Limited Kelly D. MillerSales, Leasing &
Development Associate
Michigan EquitiesProperty Management, LLC John D. OLearyCo-President
OLeary Paint Company Cristin Reid EnglishChief Operating Officer
Capitol Bancorp Limited Patricia A. ReynoldsDevelopment Consultant
Kolt & Serkaian
Communications, Inc. John C. SmythePresident & CEO
Capitol National Bank OFFICERS Robert C. CarrChairman John C. SmythePresident & CEO Patrick F. HayesSecretary John R. FarquharSenior Vice President David E. FeldpauschVice President Lori M. GarciaVice President Theodore M. TerzianVice President Ronda M. ThompsonVice President 2004 ANNUAL REPORT | 15




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DESERT COMMUNITY BANK 
 Smaller Bank. Bigger Service.
 Hitting our stride Desert Community Bank completed its best year ever and we give all the credit to our
hard-working staff. We are happy to report that we met or exceeded all of the goals we set out to
accomplish in 2004. In marking our fifth year of service last year, we feel our bank has hit its stride. Weve
established Desert Community Banks niche as an urban bank in downtown Las Vegas, providing a full
slate of financial services to small businesses, manufacturers, contractors, builders,
professionals and retailers. We have earned a reputation as a bank with integrity, staying power and innovative and friendly
client services. Our clients are our best advertising. Desert Community Bank financed the $3 million construction of my new dealership,
Norm Baker Motors, in Las Vegas. It was probably the easiest banking transaction Ive ever
experienced. Heath Caldwell,Owner, Norm Baker Motors At Desert Community Bank,s we take the time to find the exact financial services to meet the needs of
our clients. For instance, our bank was ranked ninth in U.S. Small Business Administration (SBA) 7(a) lending in
Nevada for fiscal year 2004, according to the Nevada SBA Office. Government guaranteed loans
provide another opportunity for the bank to help business clients achieve their dreams, while also
reducing the banks exposure to risk. We earned close to $100,000 in 2004 by going the extra distance in making equipment leasing
services available to our clients when appropriate. In the coming years, we plan to keep building on our success and increasing our client base as we
grow our business lines. Desert Community Bank is dedicated to strong client services in the tradition of personal banking. James W. HowardPresident & CEO 
 Desert Community Bank | 3740 South Pecos-McLeod | Las Vegas, NV 89121-4260702-938-0500 |
www.desertcommunity.com James W. Howard| President & CEO
    
    Founded:August 6, 1999
 
 BOARD OF DIRECTORS Robert J. AndrewsChief Financial Officer
Timberline Architectural Openings Tracy R. BouchardPresident
National Title Company Michael J. DevineAttorney at Law Rose M. K. DominguezRealtor
AC Sales Real Estate Services Garry L. HayesPresident
Law Office of Garry L. Hayes James W. HowardPresident & CEO
Desert Community Bank Charles L. LaskyPresident
Lasky, Fifarek & Hogan, P.C. John S. LewisPresident, Western Regions
Capitol Bancorp Limited Leland D. PaceManaging Partner
Stewart, Archibald & Barney, LLP Joseph D. Reid IIICorporate Counsel
Capitol Bancorp Limited Thomas A. SmithPresident & CEO
Group Two, Inc. Stephen D. StiverRetired President
Stiver Car Care OFFICERS Michael J. DevineChairman Garry L. HayesVice Chairman James W. HowardPresident & CEO Charles L. LaskySecretary Al G. Gourrier IIExecutive Vice President & CCO Rodney K. ChaneySenior Vice President Eileen S. HaglerSenior Vice President Marcel M. BakerVice President Troy I. MorrisVice President Michelle ScalzoVice President 16 | 2004 ANNUAL REPORT




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DETROIT COMMERCE BANK 
 Smaller Bank . . . Better Service . . . Experience the Difference.
 Growing for Southeast Michigan We are profitably growing Detroit Commerce Bank as we broaden our services to new markets
throughout southeastern Michigan. Through the hard work of our long-time employees as well as the significant contributions of new
lenders, officers and bank directors, Detroit Commerce Bank achieved record earnings in 2004. The
bank#fs assets have grown significantly. Harold Curry attracted us to Detroit Commerce Bank and the staffs personal touch
and high level of service have exceeded our expectations. Donald McCain,C P Investments, LLC We have expanded our office by 1,200 square feet and enhanced our staff with the addition of
veteran local lenders and support staff. We launched our residential mortgage department last year
with two experienced lenders and we are one of two banks certified to lend to first-time home
buyers in Detroit. We have welcomed four new directors. They are Edward Deeb, Laura Pogue, Ph.D., and most recently
Edward Tinsley and Gregory Kelser. Tinsley, vice president of corporate affairs for the Bing Group,
is a former commercial lender and CEO of a major commercial services provider. Kelser is highly
regarded throughout the state as a businessman, sports broadcaster and Academic All-American
college athlete at Michigan State University, where he was the starting center on the 1979 NCAA
Championship basketball team. We are excited by our prospects. We plan to grow earnings by becoming more efficient while we
increase our penetration into new markets. We will continually enhance our customer service with a
full complement of competitively priced products and services. Meanwhile, we are emphasizing our
community commitment by supporting more activities that benefit low-income home buyers, youth and
other members of our community. Harold G. CurryPresident & CEO 
 Detroit Commerce Bank | 645 Griswold Street | Suite 70 | Detroit, MI 48226-4011
313-967-9700 | www.detroitcommerce.com Founded:December 14, 1998
    
    Harold G. Curry| President & CEO
 
 BOARD OF DIRECTORS Ralph J. BurrellPresident
SymCon Dr. Vivian L. CarpenterPresident
Atwater Entertainment
Associates Harold G. CurryPresident & CEO
Detroit Commerce Bank Donald M. Davis Jr.Vice President & Chief Officer
Human Resources Support
Health Alliance Plan Edward DeebPresident
Michigan Business &
Professional Association Gregory KelserBroadcast Analyst
ESPN, Fox Sports Net Laura A. Pogue, Ph.D.President & CEO
Strategic Marketing &
Financial Resources, Inc. Martha K. RichardsonPresident
Service Marketing
Specialists, Inc. James F. StapletonPresident
B & R Consultants Bruce A. ThomasPresident, Eastern Regions
Capitol Bancorp Limited Edward Tinsley
Vice PresidentThe Bing Group, Inc. Neal F. ZalenkoPresident & CPA
Zalenko & Associates, Inc. OFFICERS Bruce A. ThomasChairman Harold G. CurryPresident & CEO Donald M. Davis Jr.Secretary Mark V. McCullochSenior Vice President Joyce A. SuttonFirst Vice President Valora L. JacksonVice President 2004ANNUAL REPORT | 17




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EAST VALLEY COMMUNITY BANK 
 in a word . . . Quality.
 Springboard to Success East Valley Community Banks staff, directors and clients celebrated the banks fifth
anniversary this past July. We are proud of our status as the only bank headquartered in our
rapidly developing community. Our bank achieved record commercial loan growth and profitability last year. This success is
credited to the hard work of our team members as well as business referrals from our current
customers and bank directors. The customer service at East Valley Community Bank is outstanding! Every time I
call I get the distinct feeling that whoever answers the phone is waiting for my call. It
is my pleasure to refer associates and clients to the bank. Every report I get back has
been quite positive. Carolyn J. Brown,Owner, The Accountants Office, LLC The future is promising as we continue to enhance our staff, board of directors, business referral
sources and products and services. Last year, we expanded our mortgage department to include land loans and construction financing for
custom home builders and home owners. We have also added payroll processing and employee leasing
services to our platform of products and services for business clients. We bolstered our strong board by appointing two more local business leaders as directors, Mark
Moreno and Don Carroll. Our staff was involved in numerous volunteer activities and we improved the banks visibility by
sponsoring several business and community events. In 2005, we plan to increase our business development activities in the East Valley, especially in
Chandler and Gilbert, Arizona. These are two of the fastest growing communities in the nation and
present exceptional opportunities. Were looking for another solid year as we build on our
achievements. Gerry J. SmithPresident East
Valley Community Bank | 1940 North Alma School Road |
Chandler, AZ 85224 
480-726-6500 | www.eastvalleybank.comFounded:June 30,
1999Gerry J. Smith| President
 
 BOARD OF DIRECTORS Mark R. AllenPresident & Attorney
Mark R. Allen, P.C. Blake L. BottlePartner
Innovative Financial Solutions Don CarrollPartner
Lebaron & Carroll, CDI Donna DavisPresident & CEO
DIR Group, Inc. Michael J. DevineAttorney at Law Richard D. FrazierExecutive Director
Chandler Regional
Hospital Foundation Michael L. KastenManaging Partner
Kasten Investments, LLC John S. LewisPresident, Western Regions
Capitol Bancorp Limited Don B. LindnerSenior Consultant
Charon ECA Marcus M. MorenoFinancial Advisor
American Express Darra L. RayndonPrincipal & President
Rayndon & Longfellow, P.C. Gerry J. SmithPresident
East Valley Community Bank James C. StrattonPresident & CEO
Boys & Girls Clubs of Scottsdale Joseph A. TameronCPA & Partner
Skinner, Tameron & Company, LLP Deborah A. WaitkusOwner
Golf for Cause OFFICERS John S. LewisChairman  Vice Chairman
 Michael L. KastenVice Chairman Joseph D. ReidCEO Gerry J. SmithPresident James C. StrattonSecretary Kevin L. SellersExecutive Vice President & CCO James C. LaineSenior Vice President Cliff L. BartholomewVice President Linda M. HartsockVice President James A. McCannVice President Theresa J. MorrisonVice President Joseph M. WoganVice President 18| 2004ANNUAL REPORT




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ELKHART COMMUNITY BANK 
 Elkharts Bank
 Customer service is everything Marking our fifth anniversary in 2004, Elkhart Community Bank experienced record growth in
profitability for the year. We had substantial increases in deposits and loans. Our dedicated staff deserves all the credit. Elkhart employees work hard and truly care about our clients, fellow employees and the community in
which we live and work. When one of our business clients tragically lost two close family members
this past year, our senior operations officer, Lori Faltynski, volunteered to staff the companys
office so the clients business could remain open during the familys crucial time of need. More recently, a client in the real estate business needed a last-minute loan to close a
transaction or the deal would have fallen through. The client visited the bank at 3 p.m. on a
weekday afternoon and we were able to complete the necessary title work, appraisal and other loan
documentation to close the loan by 10 a.m. the following morning. Extra work? Yes. Did we exceed expectations? You bet. At Elkhart Community Bank, Im more than just a number. The staff is friendly,
personal, and genuinely concerned for my business. A.J. Rodino, Owner,Rodino Liquors Elkhart
Community Bank was a finalist in 2004 for Small Business Lender
of the Year in the
state of Indiana, as selected by the Indiana Statewide Certified Development Corporation (CDC).
This award is given to the financial institution that generates the largest volume of Small
Business Administration 504 loans with the CDC as a percentage of deposits. Elkhart Community Bank is growing profitably and our team is excited about the future ahead. Steven L. BrownPresident Elkhart Community Bank | 303 South Third Street | Elkhart, IN 46516574-295-9600 | www.elkhartbank.comFounded:September 9, 1999
    
    Steven L. Brown| President
 BOARD OF DIRECTORS Nancy B. BanksCommunity Volunteer R. Steven BennettPresident
Pilgrim International Kenneth W. BrinkPresident
North American RV, Ltd. Steven L. BrownPresident
Elkhart Community Bank Robert C. CarrVice Chairman
Capitol Bancorp Limited Andrew W. FrechChairman & CEO
Ancon Construction
Company, Inc. Curtis T. Hill Jr.Attorney at Law
Elkhart County Prosecuting
Attorney Office Richard J. JensenRetired Richard L. Max Sr.President & General Manager
Heart City Enterprises -
House of Herbs Myrl D. NofzigerPresident
Hoogenboom Nofziger Brian J. Smith, CPAPresident
The Heritage Group Jack E. WelterPresident
Elkhart Plastics, Inc. OFFICERS Robert C. CarrChairman & CEO Myrl D. NofzigerVice Chairman & Secretary Steven L. BrownPresident Lori A. FaltynskiVice President Duane S. KleinVice President Vincent J. VonDerVellenVice President 2004 ANNUAL REPORT | 19




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FIRST CAROLINA STATE BANK
 
 Our customers are our top priority.
 We know our customers by name The customers are always first at First Carolina State Bank. Our experienced and
dedicated employees are the key to our success. We want to maximize our shareholders
investments with smart loan decisions that are made at our bank. The presidents office is
on the first floor of our building and it is open to the public. Red Kimball,Bank Director We are pleased with our affiliation in 2004 with Capitol Bancorp, a progressive organization whose
philosophy about community banking we share. First Carolina State Bank was launched in 2000 with a mission to provide a unique banking
alternative for the citizens of our local communities. We feel we are accomplishing this by
providing comprehensive and reasonably-priced financial services for our customers. In 2002, we opened a loan production office in nearby Tarboro with veteran banking officer Steve
Cobb as manager. Our success in Tarboro has led to the decision to open a full-service office there
in 2005. We enjoyed a good year in 2004 with meaningful growth in our traditional lines of business. Our
plan is to accelerate this growth in the coming year with the new office and additional staff in
Tarboro. First Carolina provides a positive work environment where our employees can grow and develop along
with our bank. We truly want to make our communities better places to work and live. In all of our dealings with customers, we make it a point to be courteous and friendly. Our staff
is composed of experienced banking professionals who have a personal interest in the communities we
serve. Our goal from the beginning was to provide shareholders with long-term economic rewards and our
affiliation with Capitol Bancorp is consistent with this goal. David A. ParkerPresident & CEO First Carolina State Bank | 171 North Winstead Avenue | Rocky Mount, NC 27804 | 252-937-2152 | www.fcsbank.comTarboro Loan Processing Office | 2102 North Main Street | Tarboro, NC 27886 | 252-823-8230David A. Parker| President & CEO
    
    Founded: November 27, 2000
 BOARD OF DIRECTORS Peggy M. BraswellRetired Richard C. DavenportPresident
Calvin Davenport, Inc. Bruce D. JonesPresident, Southeast Region
Capitol Bancorp Limited Kathe M. HenkeRetired W. H. KimballRetired Vice President of Sales
Kenan Transport Melvin M. MitchellPresident
Melvin Mitchell
Allstate Insurance Agency David A. ParkerPresident & CEO
First Carolina State Bank James E. RabilPresident
Chambliss & Rabil
Contractors, Inc. Joseph D. ReidChairman & CEO
Capitol Bancorp Limited Joseph D. Reid IIICorporate Counsel
Capitol Bancorp Limited Charles D. SmithPresident
First Carolina
Communications, Inc. Dr. Randall C. StewartPresident & Physical Therapist
Carolina Physical
Therapy Contractors, Inc. OFFICERS Joseph D. ReidChairman David A. ParkerPresident & CEO Dr. Randall C. StewartSecretary Ted E. WhitehurstExecutive Vice President & CLO Gail H. CheshireSenior Vice President & CFO Steven M. CobbVice President Edward G. TaylorVice President 20 | 2004 ANNUAL REPORT




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GOSHEN COMMUNITY BANK 
 We make people smile!
 Heightening Presence Goshen Community Bank is growing to meet the banking needs of our community  both literally
and figuratively. We worked hard to achieve strong loan, deposit and asset growth in 2004. At the same time, our
buildings square footage was virtually doubled with the addition of a second floor. The bank
stayed open throughout the construction and the buildings exterior has a whole new look. Adding significantly to the banks visibility and identity as a good neighbor was the community
involvement of our staff. In 2004, our officers and employees donated funds and volunteered time
with 70 different nonprofit agencies. We have created space in the banks lobby so local
nonprofits can promote their agencies and accept donations. For the second year in a row, our community bank was ranked among the top 25 Small Business
Administration (SBA) lenders in Indiana. I recently obtained an SBA loan from Goshen Community Bank to purchase a business
where I worked for 29 years. Their experience with the SBA process was evident and I
really appreciated how easy they made it. Jeff Boomershine,President, Goshen Electric, Inc. We have added three full-time employees, including a veteran mortgage professional. Two commercial
lenders will join us in 2005. While loan growth is strong, we expect it to accelerate this year
with the staff additions. Goshen Community Bank has taken a leadership position in establishing Health Savings Accountsand
offering them to the public. A full slate of financial services makes ours a unique community bank
in our marketplace. We are poised for exceptional growth in 2005. We make people smile! Douglas A. JohnstonPresident Goshen Community Bank | 511 West Lincoln Avenue | Goshen, IN 46526574-533-2006 | www.goshenbank.comFounded: September 29, 2000
    
    Douglas A. Johnston| President
 BOARD OF DIRECTORS Robert C. CarrVice Chairman
Capitol Bancorp Limited David L. CripeDoctor of Optometry
& Senior Partner
Drs. Cripe & Stephens Carol M. EbersoleRetired Vice President,
Corporate Development
Goshen Health Systems Stephen L. FidlerPresident
Kuert Concrete, Inc. Christopher J. GraffPresident & Chairman
Marque, Inc. Richard A. Hetler Jr.Vice President & General Manager
Indiana Wood Products, Inc. Gregory A. HoogenboomVice President of Development
Hoogenboom Nofziger Douglas A. JohnstonPresident
Goshen Community Bank Matthew J. Pletcher, CPAPartner
Whitcraft & Pletcher Fred M. RamserRetired President
Alter-Mar Electronics Dennis L. SorgPresident
Sorg Dodge Inc. Douglas A. StanleyOwner
Douglas A. Stanley, D.D.S. Alan L. WeldyAttorney & Partner
Yoder, Ainlay, Ulmer &
Buckingham, LLP OFFICERS Robert C. CarrChairman & CEO Douglas A. JohnstonPresident Gregory A. HoogenboomSecretary Connie O. HorvathVice President Leah L. StevensVice President 2004 ANNUAL REPORT | 21




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GRAND HAVEN BANK 
 Caring Through Involvement.
 Committed to the Community Grand Haven will celebrate a decade of service to the Grand Haven community in May, 2005. Born
out of a vision to be thecommunity bank in Grand Haven, the bank has been very successful in
providing services to a wide range of customers in our community. From the smallest depositor to
our largest corporate customer, Grand Haven Bank has built its reputation and prides itself on
impeccable customer service. This service is provided by a team of experienced employees that are
committed to providing the best products and services to our customers. Teamwork,
customer service and the employees themselves are the finest attributes we have to offer.
Grand Haven Bank has always been about relationships and we are committed that it always will be.
In 2004, the bank invested over $75,000 in various programs, events and organizations that
positively impacted the community. Employees and board members dedicated countless hours of
volunteer time to making the community a better place in which to live and work. I had always noticed that the bank was involved in our community, but as a board
member I have witnessed first hand the genuine care and concern that the employees and
board members have for their customers and the community as a whole. It takes a great
community to build a great bank, and were building both! Jeff Beswick,Bank Director The hard work in 2004 provides a foundation for increased growth and profitability for the bank in
2005. A comprehensive business plan matched with the professional experience, energy and enthusiasm
of the employees and supported by active board members will continue the banks momentum for the
next 10 years and beyond. Thomas A. CreswellPresident & CEO Grand Haven Bank | 333 Washington Avenue | Grand Haven, MI 49417
616-846-1930 | www.grandhavenbank.comThomas A. Creswell| President & CEO
    
    Founded: May 1, 1995
 BOARD OF DIRECTORS Jill D. BatkaGeneral Manager
Dynamic Conveyor
Corporation Jeff W. BeswickAttorney at Law
Varnum, Riddering,
Schmidt & Howlett Stanley L. BoelkinsAppraiser
Boelkins & Associates Thomas A. CreswellPresident & CEO
Grand Haven Bank Lee W. HendricksonChief Financial Officer
Capitol Bancorp Limited Mark A. KleistAttorney at Law
Scholten and Fant, P.C. Steven L. MaasPresident
Maas Asset Management, Inc. Michael A. McKeoughPresident
McKeough Land Company Inc. Calvin D. MeeusenManaging Partner
Calvin D. Meeusen, CPA Timothy S. ParkerVice President of Operations
Harbor Industries, Inc. James M. Van DykePresident
The Abbit Management Corp. John P. Van EenenaamAttorney at Law
Scholten and Fant, P.C. Bernard J. WadePresident
Advanced Signs, Inc. Gerald A. WitherellAssociate Broker
RE/MAX of Grand Haven OFFICERS John P. Van EenenaamChairman Calvin D. MeeusenVice Chairman Thomas A. CreswellPresident & CEO Steven L. MaasSecretary Karen K. BensonVice President Christopher P. CasslemanVice President Douglas F. JonesVice President Thomas R. LaddVice President Betsy S. LobdellVice President Sherry J. PattersonVice President 22 | 2004 ANNUAL REPORT




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KENT COMMERCE BANKPaying a higher rate of attention.
 Friendly, trustworthy and efficient As a banker of 22 years in the West Michigan market, I am pleased to apply my knowledge of the
financial history of this region and assist Kent Commerce Bank with its plans for growth. This
opportunity to expand on the recent successes created by Bill Young
and Kents excellent staff is
appreciated. The board of directors has created a perfect occasion to launch our strategic plan for
2005. Our team of experienced commercial and mortgage lenders are now poised to expand our strong and
stable customer base while the entire staff upholds the Kent Commerce tradition of supplying
excellent service tailored to meet the specific needs of each customer. Kent Commerce Bank has provided exceptional service to me and my business. Its
the little things that make a big impression: My banker delivers a customers check right
to my office, the staff is always courteous, and my loan officer takes care of all the
details in an efficient manner. The staff is friendly, trustworthy and efficient. They
understand the importance of long-term relationships. Kevin Einfeld,Bank Director Being a community bank is a big plus with small businesses in this vibrant and savvy West Michigan
market because were a small business, too. We sincerely want to help our customers achieve the
American Dream and they understand their business is important to our success as well. So as we expand our share of the West Michigan market, we are going to continue to deliver results
for our customers, while reaching out for new business from those prospects that share our
entrepreneurial spirit. We have a strong professional staff and we
plan to maintain our banks
track record of quality growth for years to come. Mark J. DeWittPresident & CEO 
 Kent Commerce Bank | 4050 Lake Drive SE | Grand Rapids, MI 49546
 616-974-0200 | www.kentcommerce.com Founded: January 12, 1998
    
    Mark J. DeWitt| President & CEO
 BOARD OF DIRECTORS James M. Badaluco, SIORExecutive Vice President
S. J. Wisinski & Company Paul R. BallardRetired President & CEO
Portage Commerce Bank John T. BarbourPresident
Central Michigan
Paper Company Robert E. Bruggink, PEPresident
Moore & Bruggink, Inc. Sharon M. BuursmaRetired Mark J. DeWittPresident & CEO
Kent Commerce Bank Kevin J. EinfeldPresident
BDR Executive
Custom Homes, Inc. Gary D. Hensch, CPAPresident
Redstone Group, Inc. R. Ted HudsonOwner
Prestige Property, Inc. Harold A. Marks, CPAPartner
Prangley Marks, LLP Calvin D. Meeusen, CPAManaging Partner
Calvin Meeusen
Company, CPA, PLLC Valerie R. OverheulPresident & CEO
Summit Training Source, Inc. Bruce A. ThomasPresident, Eastern Regions
Capitol Bancorp Limited Mary L. UrsulVice President
Professionals Direct, Inc. Michael C. WaltonAttorney at Law
Rhoades, McKee, Boer,
Goodrich & Titta William H. YoungExecutive Vice President
Kent Commerce Bank OFFICERS Michael C. WaltonChairman Paul R. BallardVice Chairman Mark J. DeWittPresident & CEO Kevin J. EinfeldSecretary William H. YoungExecutive Vice President Sandra L. BloemVice President Michael P. BoelensVice President John J. CoderVice President Linda S. CrawfordVice President 2004ANNUAL REPORT | 23




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MACOMB COMMUNITY BANKSmaller Bank. Bigger Service.
 Gaining momentum With the momentum gained by business development and community involvement in 2004, the management and
staff at Macomb Community Bank look forward to greater profitability in 2005. We have greatly improved the overall awareness of the bank in all sectors of the Macomb community over the last
few years. Our staff is active in the business and residential segments, as well as with local government, colleges,
public schools and retirees. In 2004, we sponsored community breakfast meetings where local government representatives in Macomb County
were able to communicate directly with constituents and businesses. For the third year in a row, we also sponsored
a popular economic luncheon speaker series, which was well attended by existing and potential clients. Enhancing our community commitment further, we are also offering financial education programs for interested
people in our area, as well as residential mortgage classes for first-time home buyers. We also enhanced our bank board last year by adding two directors who are leaders in their professions: attorney
Peter J. Lucido and hospital executive Barbara W. Rossman. Local
residents, businesses and the media, we find, are receptive to a bank that is based in the heart of their
community. Our staff and members of our board of directors are from the community and have the townships best
interests in mind. We are eager to meet the challenges of growing our bank and increasing earnings through excellent customer service
and traditional banking channels, as well as through government-guaranteed lending, Internet-based products and
services, and trust and investment services. We will also maintain a high level of community involvement because
Macomb is our community too. Timothy J. CuttlePresident
& CEO   Macomb
Community Bank| 16000 Hall Road | Suite 102 | Clinton
Township, MI 48038
586-228-1600 | www.macombcommunity.com Timothy J. Cuttle|President & CEO
    
    Founded: September 18, 1996
   BOARD OF DIRECTORS Robert C. CarrVice Chairman
Capitol Bancorp Limited Timothy J. CuttlePresident & CEO
Macomb Community Bank Christina C. DAlessandroVice President
Villa Custom Homes James R. KayePresident & CEO
Oakland Commerce Bank David F. KeownCertified Building Official
Washington Township Dr. Albert L. LorenzoPresident
Macomb Community College Peter J. LucidoAttorney & Counselor at Law
Law Offices of
Peter J. Lucido Robert PelachykExecutive Vice President &
General Manager
Cross Huller - North America Delia Rendon MartinCo-Owner
Martin Enterprises Barbara W. RossmanPresident & CEO
St. Josephs Mercy of Macomb Alphonse M. Santino, M.D.
Michigan Institute
of Urology, P.C. John A. SerraReal Estate Developer
John Serra and Associates Bruce A. ThomasPresident, Eastern Regions
Capitol Bancorp Limited OFFICERS Robert C. CarrChairman Timothy J. CuttlePresident & CEO Christina C. DAlessandroSecretary Frank J. BuscemiVice President Kenneth O. FlynnVice President Deborah S. MoserVice President 24 | 2004ANNUAL REPORT




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MESA BANKHigh Touch ... Higher Service.
 Exceeding Expectations Mesa Bankers always greet you when you enter the bank and they know your
name. Thats where business development starts and everything falls into place
from there. Ive always appreciated the warm welcome. Stewart Hogue,Chairman of the Board Mesa Bank experienced another record year in 2004. The efforts of our hard-working staff and the community
involvement of our board of directors positioned the bank to exceed all performance targets set in 2004. We
established the Mesa Bank mortgage department in 2004. We also
created the Mesa Bank financial services
division, which provides a wide range of financial planning services and investments for our clients. New products
generated from these efforts enhance our ability to respond to the
diversified financial needs of our clients. For the second year in a row, Mesa Bank was voted Arizonas No. 1 bank with assets under $75 million by
Ranking Arizona, which each year conducts the largest business opinion poll in the state. Our expansion into Mesa Falcon Field in September of 2003 has also exceeded expectations. The community
has responded very favorably to our presence in this dynamic employment hub. Bank staff
members are active in a variety of local, state and national
charitable organizations, sacrificing their
personal time for the betterment of those less fortunate. Again in 2004, Mesa Bank had 100-percent participation
in the Mesa United Way campaign effort. Mesa Bank is committed to providing the best possible working environment for its employees. In turn, Mesa
Bankers are committed to providing superior relationship banking for our clients. Our success speaks volumes. Neil R. BarnaPresident
& CEO    Mesa
Bank | 63 East Main Street | Suite 100 | Mesa, AZ 85201 | 480-649-5100 | www.mesabankers.comMesa Falcon Field Office | 1733 North Greenfield Road | Suite 101 | Mesa, AZ 85205 | 480-324-3500 Founded: October 20, 1998
    
    Neil R. Barna | President & CEO
   BOARD OF DIRECTORS Neil R. BarnaPresident & CEO
Mesa Bank Richard D.Crandall, CPAPresident & Partner
CN Resource, LLC Michael J. DevineAttorney at Law Debra L. DuvallSuperintendent
Mesa Public Schools Brian K. EnglishGeneral Counsel
Capitol Bancorp Limited Robert P. EvansPresident
Baron Resources, Inc. Stewart A. HoguePrincipal
SALK Management, LLC Michael L. KastenManaging Partner
Kasten Investments, LLC Philip S. KellisPartner
Dobson Ranch Inn Ruth L. NesbittCommunity Volunteer Wayne C. PomeroyOwner
Pomeroys Mens Store Daniel P. SkinnerOwner & Manager
LeBaron & Carroll LSI, Inc. Terry D. TurkPresident
Sun American Mortgage Company James K. ZaharisPresident
The Zaharis Group OFFICERS Stewart A. HogueChairman Robert R. EvansChairman Emeritus Michael L. KastenVice Chairman Neil R. BarnaPresident & CEO Rita E. LeafExecutive Vice President & CCO Steven R. MitchellSenior Vice President Sandra S. ZazulaSenior Vice President & Secretary Daniel R. LauxVice President James G. LeCheminantVice President Conrad B. MorinVice President 2004ANNUAL REPORT | 25




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MUSKEGON COMMERCE BANKBanking on Our Community.
 Building a new Muskegon Muskegon Commerce Bank is about to break ground on our new building. Even
though excitement is high, we know the true measure of a banks success is not brick,
mortar and marble ceilings; it is the relationships with customers and employees.
Our new building will last a long time, but it is the relationships with our customers
and employees that we are building to last. Christopher L. Kelly,Chairman of the Board Muskegon Commerce Banks leadership in residential construction and small business lending resulted in record
earnings in 2004. We have been the top residential construction lender in Muskegon for several years, but last year we rose to No. 1
in Small Business Administration (SBA) 7(a) lending as well. Our SBA lending success has resulted in our bank
being authorized as a Preferred Lender, making SBA loan approvals five times faster. Sustained
business growth at our seven-year-old bank has underscored our need
for more office space. We have
obtained the necessary approvals to break ground soon for the construction of a new banking facility. The state has
awarded us a Brownfield Redevelopment credit of approximately $250,000 to help fund the project. In addition
to helping finance local economic development with our banking activities, our employees, officers
and directors are active in dozens of community and nonprofit organizations. We were also the title sponsor of the
recent Muskegon Parade of Homes featuring several of our customers who are builders and developers. Concrete evidence of our business and community achievements will be realized as our new banking facility is
built. Muskegon Commerce Bank is dedicated to financing Muskegons development and were here to stay! Robert J. McCarthyPresident
& CEO   Muskegon
Commerce Bank |255 Seminole Road | Muskegon, MI 49444
231-737-4431 | www.muskegoncommerce.com Robert J. McCarthy |
President & CEO FOUNDED:
 
   BOARD OF DIRECTORS Philip J. AndriePresident
Andrie, Inc. William C. CooperPresident
Great Lakes Jet Thomas F. DeVoursneyPresident
Shape Corporation Ronald A. FranklinPresident
Northshore Construction Edgar W. HuntRetired Bank President
First of America Bank Christopher L. KellyAttorney at Law
Parmenter OToole Daniel J. KuznarOwner
Quality Tool & Stamping
Company, Inc. Donald MartinesPresident
West Michigan Grinding &
Machine Co. - Ace Tooling Robert J. McCarthyPresident & CEO
Muskegon Commerce Bank Bruce A. ThomasPresident, Eastern Regions
Capitol Bancorp Limited James Stanford TylerPresident
Tyler Sales Company, Inc. OFFICERS Christopher L. KellyChairman Daniel J. KuznarVice Chairman Robert J. McCarthyPresident, CEO & Secretary Eric B. SeifertSenior Vice President Terri K. SwartsChief Operating Officer David C. ChristopherVice President Brent A. McCarthyVice President 26 | 2004ANNUAL REPORT




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NAPA COMMUNITY BANKPutting Community Back into Banking.
 Positive and Profitable The past year
was remarkable for Napa Community Bank. We have enhanced our first-class staff with three highly
qualified banking professionals in operations and lending  Joen McDaniel, James Barrett and Vince Goetz. Loyalty is at the core of our values and our team members display it daily. For instance, when a new community
bank opened in our market recently, many of our employees were courted by the newcomer. I am proud to say that
our team is intact. For the second consecutive year, we held an extremely effective strategic planning session with our dedicated bank
directors to identify strengths, challenges and opportunities, and to set goals and objectives for 2005. It is worth
noting that we met or exceeded all of our objectives for 2004. Our mission
statement has three main components. The first is to exceed the service expectations of our clients and
we are constantly striving to do that. At the request of our clients, we have launched a quarterly bulletin mailed to
them with their bank statements. They are real people working with us as partners. Michael Havens,owner of Havens Wine Cellars We receive very personal attention. Norm Alumbaugh,owner of Eagle & Rose Winery The second component of our mission is to enhance shareholder value. In 2004, we exceeded our net income goal
significantly. The third component is to be a valuable addition to the community we serve. Our directors and staff serve on the
boards of some 30 nonprofit organizations. We also volunteer our time for fund-raisers. In addition to fueling the local economy, we are making a difference in the lives of the people who call the Napa
Valley home. Dennis J. PedisichPresident
& CEO   Napa Community Bank
 Founded:
March 1,
2002                        
                        
                                     
                     Dennis
J. Pedisich | President & CEO 
 BOARD OF DIRECTORS Kevin S. AlfaroPartner
G & J Seiberlich & Co., LLP Scott R. AndrewsPresident & COO
First California Bancorp Thomas M. AndrewsOwner & CFO
Andrews & Thornley
Construction, Inc. Geni A. Bennetts, M.D.Medical Consulting Joseph P. CristianoChairman
The MCM Group Charles H. DickensonPartner
Dickenson, Peatman
& Fogarty William H. DoddGeneral Manager
Napa County Board of Supervisors Jeffrey L. EppsPresident
Epps Chevrolet Doug W. HillVineyard Manager
Oak Knoll Farming, Inc. Carlee S. LeftwichFormer Mayor
Yountville, CA Harold D. MorrisonPresident
Bridgeford Flying Service Betty L. OShaughnessyOwner
OShaughnessy Estate Winery John R. Pappas D.D.S., M.D.
Oral & Maxillo-Facial Surgery Dennis J. PedisichPresident & CEO
Napa Community Bank Salvador S. RamosVineyard Supervisor
Jaeger Vineyards ADVISORY DIRECTOR
Paul J. KrsekManaging Partner
K & A Asset Management OFFICERS Betty L. OShaughnessyChair Geni A. Bennetts, M.D.Vice Chair Dennis J. PedisichPresident & CEO Charles H. DickensonSecretary Richard W. HemmingExecutive Vice President & CCO James A. BarrettVice President Vincent R. GoetzVice President Joen M. McDanielVice President Perry I. TeaffVice President 2004ANNUAL REPORT | 27




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##### 



OAKLAND COMMERCE BANK... offering diverse lending solutions for our community.
 What makes Oakland Commerce Bank strong is the loyalty and continuity of our
employee base and the longevity of service by our board of directors. Michael J. Devine,Chairman of the Board Helping businesses grow Oakland Commerce Banks commercial lending staff has been helping businesses grow since 1992. Our brand of
high-touch personalized service has been the hallmark of our bank from the beginning and that will continue as we
focus on new markets. Complementing our core business is residential mortgage lending, trust and investment services and the convenience
of Internet banking products and services. While the
regional economy has been sluggish, we have the benefit of being located in Oakland County, which has
the highest per capita household income in Michigan. As a result of the hard work of a professional and dedicated
banking staff, the bank reported solid earnings in 2004. At the same time, we have also strengthened our staff with the addition of experienced professionals to serve
existing as well as new customers. During 2004, we made the commitment to rededicate ourselves to the community. We are marketing our bank by
sponsoring high-profile charitable events that benefit less fortunate families and children in southeastern Michigan.
We plan to continue these activities as we expand our markets. Oakland
Commerce Banks employees and directors are proud. We have grown
our bank during difficult times.
Our veteran staff is committed to providing outstanding service for our commercial customers and, with the help
of solid referrals from our board of directors, we are excited about
our prospects for increased profitability in 2005
and for the rest of the decade. James R. Kaye President
& CEO
   Oakland Commerce Bank
| 31731 Northwestern Highway | Farmington Hills, MI 48334
248-855-0550 | www.oaklandcommerce.com James R. Kaye |President & CEO
    
    Founded: July 7, 1992
   BOARD OF DIRECTORS Mark A. AielloAttorney at Law
Foley & Lardner Donald A. BoscoPresident
Donald A. Bosco Building, Inc. Mark B. ChurellaPresident & CEO
FDI Group Leon S. CohanCounsel to the Firm
Barris, Scott, Denn & Driker Michael J. DevineAttorney at Law Jeffrey L. HauswirthCPA, CVA, President
Jenkins, Magnus,
Volk & Carroll, P.C. James R. KayePresident & CEO
Oakland Commerce Bank Ihor J. KuczerSenior Vice President
Oakland Commerce Bank David F. Lau
Lau & Lau Associates, LLC Jeffrey M. LeibPresident
Law Offices of Jeffrey M. Leib Akram G. NamouCPA Julius L. PallonePresident
J. L. Pallone Associates Francine PeguesRegional Sales Director
Blue Cross Blue Shield of
Michigan Southeast Region OFFICERS Michael J. DevineChairman James R. KayePresident & CEO Ihor J. KuczerSenior Vice President & Secretary Nicolet B. CassidyVice President James F. MillerVice President Thomas K. PerkinsVice President 28  | 2004ANNUAL REPORT




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##### 



PARAGON BANK & TRUSTProviding Excellence in Relationship Banking.
 Expanding our Influence in Holland With record earnings from our Trust and Investment Department, respectable loan growth, consistent mortgage
volumes and improved fee income, Paragon Bank & Trust reported record net income in 2004. The future is bright as we continue to grow our traditional banking lines, generate additional fee income from trust
services and improve sales from our expanding menu of products and services. The Trust and Investment Departments record year was achieved by leveraging our established presence in the
market and an ongoing effort by all employees to provide clients with
a full range of financial choices. The ability to offer our own trust and investment services to the community provides
us with a competitive advantage. Our clients love the fact that they can call one
location to handle all of their financial needs.Chuck Brower,Bank Director Innovation was key as we were the companys lead bank in establishing and offering Health Savings Accountsto
families in our beautiful West Michigan community. Our genuine passion for our hometown makes our community involvement all the more rewarding. We helped
sponsor the 2004 Tulip Time Celebration. Our innovations in stimulating client and staff participation in the local
United Way campaign won us awards. Additionally, we supported the arts, served meals at a rescue mission, raised
money to battle juvenile diabetes and funded many other great causes. Last fall, we
launched our first television and radio ads designed to increase community awareness and expand our
local client base. The goal is
for record earnings again in 2005 as we increase efficiencies and invest further in our community. Randall R. Smith President
& CEO
   Paragon Bank & Trust | 240 East 8th Street | Holland, MI 49423 | 616-394-9600 | www.paragonbank.comTrust & Investments Division | 616-394-9055 Founded: September 24, 1990
    
    Randall R. Smith |President & CEO
   BOARD OF DIRECTORS Dr. Robert J. BatesDirector Emeritus - Physician
Western Michigan
Urological Assoc., P.C Charles A. BrowerCPA & Partner
DeLong & Brower, P.C. Scott DiepenhorstPrincipal
SD & Associates, Inc. Paul ElzingaCo-Chairman &
Director of Business Development
Elzinga & Volkers, Inc. Michael P. HaverdinkPresident
Ottawa Kent Insurance Agency, Inc. Jeffery K. HelderAttorney at Law
Cunningham Dalman, P.C. Lee W. HendricksonChief Financial Officer
Capitol Bancorp Limited Grant M. KastenPresident
Kasten Insulation Services, Inc. Lawrence D. KerkstraChairman of the Board
Kerkstra Precast, Inc. Scott G. KlingPresident
Trust and Investments
Paragon Bank & Trust Leonard MaasPresident
L & M Maas Investments, LLC Mitchell W. PadnosExecutive Vice President
Louis Padnos Iron &
Metal Company Henri P. PatersonAssociate Broker & Partner
Woodland Realty, Inc. Richard H. RuchDirector Emeritus Randall R. SmithPresident & CEO
Paragon Bank & Trust Richard G. SwaneyAttorney at Law
Swaney & Thomas, P.C. Robert J. TrameriRetired Chairman
Paragon Bank & Trust Barry L. WerkmanVice President of Finance
Hope College OFFICERS Richard G. SwaneyChairman Charles A. BrowerVice Chairman Randall R. SmithPresident & CEO Scott G. KlingPresident
Trust and Investments C. Steven DeLoofVice President M. Jane RiemersmaVice President Dean R. WeerstraVice President 2004ANNUAL REPORT | 29




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##### 



POINT LOMA COMMUNITY BANKLocal People  Local Experience.
 Preserving a rich heritage When Point Loma Community Bank debuted on August 2, 2004, the Point Loma community welcomed something
that had been missing for years  a locally-managed community bank. Our grand opening event this past September
was a huge success and we are off to an excellent start. Our hometown bank will succeed because it has a staff and board dominated by
experienced, local professionals who understand the rich heritage of our citizens
and the businesses that serve our community. Harold O. Grafton,President, Cement Cutting, Inc. We exceeded all of our goals for 2004. We grew both the loan portfolio and deposits to respectable levels. We
expanded our banking services to include mortgage and Small Business Administration (SBA) lending, and have
added experienced loan officers in both areas. Our veteran
staff is composed of Point Loma financial services leaders with over 250 years of collective banking
experience. We live here and understand the community. Our board of directors is made up of business leaders
from the industries that make our community strong. In 2005, we are focused on building our SBA lending and mortgage business as we grow a strong and diverse
commercial loan portfolio. Community commitment is of utmost importance to the staff at Point Loma Community Bank. We are involved
in many organizations created for our Portuguese neighbors and the
sport fishing community. We are active with
the Peninsula Chamber of Commerce, Point Loma Association, Point Loma YMCA, and the Combined Health
Agencies, a federation of 27 health agencies that partners with the United Way. Our board and staff are committed to providing Point Loma and the surrounding areas with the best banking
services possible while supporting many community activities large and small . . . including our local little league
team. Anthony D. Calabrese President
   Point
Loma Community Bank | 1350 Rosecrans Street | San Diego,
CA 92106
619-243-7900 | www.pointlomacommunitybank.com Anthony
D. Calabrese | President
    
    Founded:August 2, 2004
   BOARD OF DIRECTORS Scott R. AndrewsPresident & COO
First California Bancorp Gregg W. BeatyD.M.D. Anthony D. CalabresePresident
Point Loma Community Bank Arthur DeFeverPresident
DeFever Marine Enterprises William T. FiedlerPresident
Fiedler Construction Company Harold O. GraftonPresident
Cement Cutting, Inc. Theodore GriffithPresident
Pacific Tugboat Service
& Pearson Marine Fuel Marcia HaasReal Estate Broker & President
Professional Property Management John S. LewisPresident, Western Regions
Capitol Bancorp Limited Julius S. PaeskePresident
Commercial Facilities, Inc. Mark A. WinklerBroker Associate
Prudential Realty OFFICERS John S. LewisChairman Anthony D. CalabresePresident Gary A. HousmanExecutive Vice President
& Secretary Hector ZatarainExecutive Vice President Millie M. McKibbinVice President Leticia TrujilloVice President 30  | 2004ANNUAL REPORT




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##### 



PORTAGE COMMERCE BANKSmaller Bank. Bigger Service.
 Our team makes the difference Portage Commerce Bank enjoyed excellent growth last year in all areas of the bank. Starting with our outstanding
veteran team of employees and the guidance of an experienced board of directors, we have been able to proactively
identify and secure new business opportunities that fit our model. As a customer and investor, I like the fact that our bank officers know a lot of local
business leaders and the business leaders know them. As a director, I can tell you
we have a strong board that is well-rounded and my colleagues have contributed
heavily to the banks success. Russell M. Rathburn,Bank Director Marking our 17th anniversary in 2005, Portage Commerce Bank enjoys the status of a mature bank in our
marketplace. We have earned a stellar reputation for providing excellent service to the small business customer,
enabling us to attract the highest caliber of employees and business to our bank. As we move ahead, our primary goal is to maintain our outstanding financial performance as we continue to grow
the bank in all phases of the business. We were pleased with the results from our mortgage department during a challenging year. We have expanded
the departments work area, dedicated resources to increase the staff and look forward to solid contributions in the
coming years. In 2004, we launched our Trust and Investment Services department, hiring a highly experienced representative
from our market. This is an area in which we expect to see significant growth. We foresee continued success and profitability as we provide our market with unparalleled service delivered by
experienced banking professionals. Dennis J. Kuhn President
& CEO
   Portage Commerce Bank | 800 East Milham Road | Portage, MI 49002
269-323-2200 | www.portagecommerce.com Founded: May 2, 1988
    
    Dennis J. Kuhn President & CEO
   BOARD OF DIRECTORS Paul R. BallardRetired President & CEO
Portage Commerce Bank David L. BeckerRetired Founder
Becker Insurance Agency, P.C. Thomas R. Berglund, M.D.
Portage Physicians Robert B. BorsosAttorney at Law & Shareholder
Kreis, Enderle,
Callander & Hudgins, P.C. John M. BrinkCPA & Partner
Brink, Key & Chludzinski, P.C. Patricia E. DolanCommunity Volunteer Alan A. Halpern, M.D.
Michigan Orthopedic
Surgery & Rehabilitation, P.C. Robert L. JohnsonRetired Secretary & Treasurer
Medallion Properties, Inc. Michael L. KastenManaging Partner
Kasten Investments, LLC Dennis J. KuhnPresident & CEO
Portage Commerce Bank Paul M. Lane, Ph.D.
Seidman School of Business
Grand Valley State University William J. LongjohnRetired Vice President
Midwest Business Exchange John W. Martens, CPARetired Russell M. RathburnPresident & Owner
Rathco Safety Supply, Inc. OFFICERS Michael L. KastenChairman William J. LongjohnVice Chairman & Secretary Dennis J. KuhnPresident & CEO John M. CrandleSenior Vice President James V. LunardeSenior Vice President Kenneth R. BloughFirst Vice President Cheryl M. GermainFirst Vice President Kimberlee M. FerrisVice President Beth A. WrightVice President Susan M. WrightVice President 2004ANNUAL REPORT | 31




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##### 



RED ROCK COMMUNITY BANK 
 Part of the Summerlin Landscape.
 Emphasis on Community In celebrating our fifth anniversary in the fourth quarter of 2004, Red Rock Community Bank
launched a year-long campaign of quarterly community service projects. In our first project, we
gathered over 700 cans of food and presented them to the Womens Development Center just in time
for Thanksgiving. Our concern for others does not stop there. When we learned that one of our clients, who runs a
dental clinic in Sri Lanka, was leading a relief effort to help the victims of the recent Indian
Ocean tsunami, we decided to get involved. The bank matched a $1,000 donation from our employees
and the money was hand-delivered to our clients local office in late January 2005. I am pleased with the support I have received for several years from Red Rock
Community Bank. They have supported my financial needs and, through the generosity of the
bank and the banks employees, have supported my dental Clinic in Sri Lanka in its efforts
to ease the suffering of the victims of the tsunami. Dawn McClellan,DDS, President, Childrens Dental Care International From a business standpoint, we recently teamed up with CUE Financial to provide a vast array of
financial planning services and products for our customers, including investments and life and
health insurance. Our goal is to grow the fee income from this source by 100 percent in 2005. Additionally, we plan to increase the income gained from other fee-based products, such as
equipment leasing, and we are maximizing potential by taking advantage of the many opportunities in
the robust residential housing market. Red Rock Community Bank is truly growing with our community. Thomas C. MangionePresident & CEO   Red Rock Community Bank | 10000 West Charleston | Suite 100 | Las Vegas, NV 89135
702-948-7500 | www.redrockcommunity.com Thomas C. Mangione | President & CEO
    
    Founded:November 29, 1999
   BOARD OF DIRECTORS Richard H. BowlerPrincipal
Piercy, Bowler, Taylor & Kern Eric L. ColvinPresident
Apex of Nevada Michael J. DevineAttorney at Law Molly K. HamrickVice President & CFO
Coldwell Banker Premier Realty Philip G. Hardy Jr.Vice President & Project Manager
Hardy Painting & Drywall James A.HarrisVice President
Brown and Brown Insurance Charles L. LaskyPresident
Lasky, Fifarek & Hogan, P.C. John S. LewisPresident, Western Regions
Capitol Bancorp Limited Thomas C. MangionePresident & CEO
Red Rock Community Bank Lori A. MarrsOwner
Hansen Marrs Financial
Group, LLC Joseph D. Reid IIICorporate Counsel
Capitol Bancorp Limited John A. StuartPresident
Tartan Consultants, Ltd. Fredrick P. WaidChief Operating Officer
Peccole Nevada Corporation J. Bruce WigginsPresident
Strategic Medical Management OFFICERS John S. LewisChairman Michael J. DevineVice Chairman Thomas C. MangionePresident & CEO Charles L. LaskySecretary Brian W. AstleExecutive Vice President & CCO 32 | 2004ANNUAL REPORT




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SOUTHERN ARIZONA COMMUNITY BANK 
 Banking the way it should be.
 Endless possibilities for growth Looking
back on 2004, were excited about our banks accomplishments. The bank reported record earnings. We feel our disciplined, yet compassionate, approach to
community banking leads to improved efficiencies, increased earnings and a loyal and growing
customer base for years to come. Our leadership with the redevelopment of homes and businesses destroyed in the wildfires on Mount
Lemmon in 2003 has already led to the financing of a new general store in the mountain community of
Summerhaven. Our goal is to stay active in the revitalization, with $5 million in new lending
potential over the next five years. The banking relationship commitment of our bank to the community transfers
directly to our community service commitment. We live here; we work here. Our clients are
our extended family. Bob Elliott,Bank Director The construction of our 1,900-square-foot addition was completed last year. This allowed us to
relocate our commercial lending department from cramped quarters and hire additional employees to
enhance the services we provide new and existing customers. Our staff is involved in 11 nonprofit organizations. Our community sponsorships include three
consecutive years as the official bank of the world-class El Tour de Tucson bicycle event. We also
continue to sponsor events to benefit needy families and deserving youth. We have successfully launched our quarterly newsletter for customers  MONEY TALK$. Distributed
with bank statements and available on our web site, the newsletter publicizes our staff, directors,
products and services. The past year was incredibly successful. The groundwork is laid for future business development and
community participation. We believe the opportunities are endless. Thank you for your continued
support and for believing in our bank. John P. LewisPresident & CEO   Southern Arizona Community Bank | 6400 North Oracle Road | Tucson, AZ 85704
520-219-5000 | www.southernarizonabank.com Founded:August 17, 1998
    
    John P. Lewis | President & CEO
   BOARD OF DIRECTORS William R. AssenmacherPresident
T. A. Caid Industries, Inc. Jody A. Comstock, M.D.Physician & Owner
Skin Spectrum
Michael J. DevineAttorney al Law
Robert A. ElliottPresident & Owner
The Elliott Accounting Group Michael W. FranksPrincipal
Seaver Franks Architects Michael L. KastenManaging Partner
Kasten Investments, LLC Yoram S. LevyPartner
Triangle Ventures, LLC John P. LewisPresident & CEO
Southern Arizona
Community Bank Jim LivengoodDirector of Athletics
University of Arizona
James A. MatherAttorney at Law & CPA Morgan E. NorthPresident & Owner
Borderland Construction
Company, Inc. James M. SakrisonPrincipal & Attorney at Law
Slutes, Sakrison & Hill,P.C. Jean M. TkachykCFO
University Physicians,Inc. Paul A. ZucarelliPrincipal
CBIZ, Gordon, Zucarelli &
Handley Insurance, Ltd.OFFICERS Paul A. ZucarelliChairman Michael L. KastenVice Chairman John P. LewisPresident & CEO Robert A. ElliottSecretary Michael J. TruebaExecutive Vice President & CCO Terri R. GomezSenior Vice President Minette GoldsmithVice President
James G. LoaneVice President Mindy C. WebbVice President 2004ANNUAL REPORT | 33




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##### 



SUNRISE BANK OF ALBUQUERQUE 
 Smaller Bank. Bigger Service.
 Since I have been banking with Sunrise Bank of Albuquerque, I have discovered the
true meaning of customer service. When I visit the bank all of the employees know me by
name and are always very helpful. If there is a concern with my account, I can count on
receiving a phone call, which is very helpful for a small business like mine. I cannot
imagine banking anywhere else. Manny Corrales,VSM Private Patrol Why bank anywhere else? Manny Corrales expresses a sentiment that is typical for our customers and his conclusion is
one we want all of our customers to share. As with good personal relationships, mutual respect and
understanding are the keys to successful business relationships. These successful relationships are how we grew Sunrise Bank of Albuquerque and they are vital to
our sustained profitability and growth. The
banks board of directors, management and staff have worked hard to create a strong community
bank and we are determined to expand our market with quality products and services that our
customers demand and deserve. Our management team was recently enhanced with the additions of Janis K. Wainright as executive
vice president and chief operating officer, and Cecil Irvin as vice president. Janis has 37 years
of banking experience, including the last 11 years in New Mexico, while Cecil is a 30-year New
Mexico banker. In 2005, we are carefully working on building our commercial and consumer loan portfolios. We are
proud of both our deposit and assets growth last year and plan for more success in the coming
years. The focus of our community involvement is supporting curricular activities for youth. Like the
youth of our community, Sunrise Bank is still growing and we intend to be among the future leaders. Jason A. ShafferPresident & CEO   Sunrise Bank of Albuquerque | 225 Gold SW | Albuquerque, NM 87102
505-244-8000 | www.sunrisebankofalbuquerque.com Jason A. Shaffer | President & CEO
    
    Founded:April 6, 2000
   BOARD OF DIRECTORS Thomas BohlmanManaging Partner
Lexus of Albuquerque Turner W. BranchOwner
Branch Law Firm, P. A. Helen A. ElliottCPA
Elliott, Pohlman
& Co., CPAs, P.C. E. Gary FichtnerOwner
Esthetic Dental Arts, Inc. Donald E. Fry, M.D.
School of Medicine
University of New Mexico Ronald K. SablePresident
Concord Solutions Ltd. Todd A. SandovalOwner & President
Sandia Office Supply, Inc. Jason A. ShafferPresident & CEO
Sunrise Bank of Albuquerque Stephen D. ToddDirector of Bank Performance,
Western Regions
Capitol Bancorp Limited Janis K. WainrightExecutive Vice President & COO
Sunrise Bank of Albuquerque OFFICERS Jason A. ShafferPresident & CEO Janis K. WainrightExecutive Vice President & COO Conni L. Nunez-JonesSenior Vice President Antoinette E. CreelVice President Ronald B. Garcia-SmithVice President Cecil R. IrvinVice President 34| 2004ANNUAL REPORT




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##### 



SUNRISE BANK OF ARIZONA 
 Bringing the relationship back to banking.
 Flexibility to endure change The success of Sunrise Bank is attributed to outstanding leadership. We have the
flexibility to endure change while always focusing on enhancing customer relationships.
This has made our bank consistently profitable. Michael R. Allen,Bank Director Sunrise Bank of Arizona experienced a record-setting year in terms of loan growth, profitability
and expansion of customer relationships. Our team of banking professionals is committed to
servicing our customers. We understand that people bank with people and not necessarily a particular financial institution.
Thats why our dedicated and talented staff goes above and beyond the call of duty to deliver the
highest level of customer service to bring the relationship back to banking. We are optimistic
about 2005 and will make every effort to reach each and every client in our market. We continue our focus on serving clients with real estate lending needs. Through residential
lending, conventional commercial lending and Small Business Administration (SBA) lending, Sunrise
Bank of Arizona customers benefit by dealing with a community bank that understands the local
market. Sunrise Bank of Arizona has also been a good steward of the community. Our employees volunteered
time and resources to support the efforts of Junior Achievement and the Arthritis Foundation. In addition
to our fine performance, our highlights include our smooth transition to a new
management team and the expansion of our board of directors. Over the past year the bank welcomed
five new board members. Collectively, the board is composed of individuals from different
disciplines, and this cross-section of the business community helps the bank to respond timely to
various matters, including customer loan inquiries. Michael S. Morano President & CEO
   Sunrise Bank of Arizona | 4350 East Camelback Road | Suite 100A | Phoenix, AZ 85018
602-956-6250 | www.sunrisebankofarizona.comScottsdale Location | 6263 North Scottsdale Road | Suite 100 | Scottsdale, AZ 85250 | 480-624-2600 Founded: December 16, 1998
    
    Michael S. Morano |President & CEO
   BOARD OF DIRECTORS Michael R. AllenPresident
Sureway Properties Thomas W. BealPrincipal & Owner
Beal Insurance Inc. Michael J. DevineAttorney at Law Brian K. EnglishGeneral Counsel
Capitol Bancorp Limited Richard E. GarciaPresident & Designated Broker
Garcia Realty Advisors, Inc. Michael L. KastenManaging Partner
Kasten Investments, LLC John S. LewisPresident, Western Regions
Capitol Bancorp Limited Glen M. LineberryDirector
Bentley Gallery Richard LustigerGeneral Counsel
Harkins Theaters Michael S. MoranoPresident & CEO
Sunrise Bank of Arizona OFFICERS John S. LewisChairman Michael J. DevineVice Chairman Kathleen M. KingSecretary Michael S. MoranoPresident & CEO Tyronne D. CouchVice President Mark C. HandgisVice President Cynthia J. HeapsVice President David W. TracyVice President Mary S. MadisonVice President 2004 ANNUAL
REPORT  |  35




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##### 



SUNRISE BANK OF SAN DIEGO 
 A Brighter Way of Banking.
 Another year of success Our team is proud of our accomplishments in 2004 as Sunrise Bank of San Diego achieved record
profitability. For the third consecutive year Sunrise Bank was recognized in our market as the top ranking
community bank in terms of U.S. Small Business Administration (SBA) 504 lending. Gains in SBA 504
loans contributed significantly to the banks 2004 profitability. Our focus continues to be on excellent client service and careful execution of professionalism as
exemplified by one of many extraordinary Sunrise clients: The level of personal service I receive from Sunrise Bank is phenomenal. The bank
met the needs of our growing company by providing the financing to purchase our new
headquarters. Responsiveness, professionalism and consistency are just a few reasons we
now do all of our banking there. Audrey Miranda,Mentus, Inc. Going forward, the Sunrise Bank team is excited about our plans for continued growth and our
community involvement will remain strong. Our team is optimistic about the prospects for building
core relationships as we continue to grow a sound loan portfolio. We are positioned to elevate our 2005 lending and deposit growth through the recent enhancements to
our team of business development officers . Integrity and loyalty will continue to be the
foundation for building trust with our clients. Our team supports the community through investment of time and money in several local and national
organizations, such as Child Help USA, Autism Society, Boys and Girls Club, and the Leukemia and
Lymphoma Society. This commitment is reflected in the 100-percent employee participation in the
United Way campaign. It is our privilege to serve our clients, shareholders and community while providing a brighter
way of banking in Americas finest city. Randall S. Cundiff President & CEO
   Sunrise Bank of San Diego | 4570 Executive Drive | Suite 110 | San Diego, CA 92121
858-625-9050 | www.sunrisebanksd.com Randall
S. Cundiff | President & CEO
    
    Founded: January 11, 2001
   BOARD OF DIRECTORS Scott R. AndrewsPresident & COO
First California Bancorp Richard A. ByerPresident
Bycor General Contractor Craig V. CastanosOwner
Craig V. Castanos, CPA Randall S. CundiffPresident & CEO
Sunrise Bank of San Diego John D. FragerPresident & CEO
Grubb & Ellis | BRE Commercial Michael R. LabelleSenior Director
Cushman & Wakefeld John S. LewisPresident, Western Regions
Capitol Bancorp Limited Toby T. MacfarlaneSenior Vice President
United Title Company Robert J. MatkovichD.D.S.
Robert J. Matkovich,
D.D.S., Inc. John F. McCollPresident
Trinity Capital Group Ronald D. McMahonPresident
McMahon Development
Group, LLC John M. RooneyCEO
Torrey Financial Group OFFICERS John S. LewisChairman of the Board Randall S. CundiffPresident & CEO Suzanne K. GregoryExecutive Vice President,
CCO & Secretary Gregory S. FletcherVice President Joseph L. KennedyVice President Michael H. MarkieVice President 36  |  2004ANNUAL REPORT




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##### 



VALLEY FIRST COMMUNITY BANK 
 Our business is helping your business grow!
 Setting the stage for greatness Our goals every year are to provide unparalleled service, enhance the skill sets of our
veteran team and increase our community involvement. On the service front, we introduced a total team concept to guarantee that each customer
personally knows three of our experienced bankers and always has access to at least one member of
that team. We also launched a presidential survey so our customers can tell us how were doing. To
date, the response rate is over 50 percent and the comments are changing the way we do business. In professional development, we promoted four team members to new positions and saw banking
services officer Michele Yates selected to the prestigious Scottsdale Leadership Program. To
capitalize on this momentum, each team member created a personal strategic growth plan and were
charting their successes. We also implemented a peer recognition program so team members can
publicly recognize one another for a job well done. For the second consecutive year, we were leaders in the Homeward Bound Diaper Drive. Our customers,
directors and employees contributed $3,300 and 2,700 diapers to needy families during the event.
Last summer it was my honor to chair Camp CEO, a program designed to introduce teenage girls to the
business world. The Scottsdale Area Chamber of Commerce recognized our community involvement by
naming the bank a Sterling Awards finalist last fall. Weve welcomed three new members to our board of directors and were delighted to have their
insight and experience on the Valley First team. The commitment to our customers and our community is strong. It promises to be a fast-paced and
exciting year. Judith R. Egan President
   Valley First Community Bank | 7501 East McCormick Parkway, North Court | Scottsdale, AZ 85258
480-596-0883 | www.valleyfirstbank.com Founded: June 30, 1997
    
    Judith R. Egan
    
    |President
   BOARD OF DIRECTORS Marilyn D. CummingsRealtor
Russ Lyon Realty Company Sam Kathryn CampanaVice President & Executive Director
National Audubon Society, Inc. Michael J. DevineAttorney at Law Judith R. EganPresident
Valley First Community Bank William R. FitzpatrickCPA
Hein & Associates, LLP Steven M. GoldsteinAttorney at Law
Sacks, Tierney, P.A. Lawyers Michael L. KastenManaging Partner
Kasten Investments, LLC Donald J. MahoneyManaging Director
Trammell Crow Company Gordon D. MurphyRetired Executive Vice President
Arizona Bankers Association Harry Rosenzweig Jr.Co-Owner
Harrys Fine Jewelry Patricia B. TernesFirst Vice President
RBC Dain Rauscher Incorporated OFFICERS Gordon D. MurphyChairman Michael J. DevineVice Chairman Harry Rosenzweig Jr.Secretary Joseph D. ReidCEO Judith R. EganPresident J. Patrick BlaineExecutive Vice President & CCO Nancy E. SelbyExecutive Vice President Cheryl L. DeGrootVice President Gail L. HittVice President Daniel R. KlenskeVice President Michele J. YatesVice President 2004ANNUAL REPORT |
37




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##### 



YUMA COMMUNITY BANK 
 Your Community Bank.
 We have a superb staff. From my contacts in the business community, I have never
received anything but the highest praise for the service they received. Our customers
appreciate the quick response time on their loan requests. Their needs are met promptly
and courteously. Pamela Walsma,Secretary of the Board Plans for Growth Growth in the Yuma community is intensifying, so it is natural that Yuma Community Bank is
also enjoying strong growth. The Yuma area is outperforming the national average in long- and short-term job growth by 10
percent and 3.5 percent, respectively. For the second year in a row, the Milken Institute, a
nonprofit independent think tank, ranked Yuma No. 6 among the nations smaller metropolitan areas
on the list of Americas Best Performing Cities. This parallels Yuma Community Banks growth in 2004. Our performance ratios were excellent and we
achieved record earnings for the year as well. Our community commitment is best illustrated by the work business development officer Jeff Byrd has
done in bringing financial education seminars to over 1,000 students at Yuma-area junior and senior
high schools. The Federal Deposit Insurance Corporation (FDIC) recognized our bank as a national
success story on its web site for using FDIC curriculum in this meaningful community outreach
program. We expect more success and improved profitability in 2005. In mid-summer, we plan to relocate the
bank to a new facility that will more than double our office space. Our clients and prospects have
asked for drive-through banking and our new office will have that convenient feature. The new office will solidify our place in the entrepreneurial fabric of the Yuma community. We are
here to stay and grow with Yuma. Katherine M. Brandon President
& CEO
 
 Yuma Community Bank | 454 West Catalina Drive | Yuma, AZ 85364   Katherine
M. Brandon | President & CEO
    
    Founded: December 15, 2000
 
 BOARD OF DIRECTORS Katherine M. BrandonPresident & CEO
Yuma Community Bank Clarence B. CheathamVice President
DPE Construction Raymond R. CoronaOptometrist & President
Corona Optique Lawrence L. DeasonAttorney at Law
Lawrence L. Deason, Ltd.
Ram R. Krishna, M.D.President
Ram R. Krishna, M.D., P.C. John T. OstermanPresident
Osterman Financial Group Ronald K. SablePresident
Concord Solutions Ltd. David S. SellersRetired John R. SternitzkePresident
Sternco Engineers, Inc. Pamela K. WalsmaAttorney at Law
Westover, Shadle, & Walsma, PLC Ronald S. WatsonReal Estate Broker & Owner
ERA Matt Fischer Realtor Robert R. WoodmanOwner
Woodman Realty Leonard C. ZazulaCashier - Western Regions
Capitol Bancorp Limited OFFICERS Ronald S. WatsonChairman Ram R. KrishnaVice Chairman Katherine M. BrandonPresident & CEO Pamela K. WalsmaSecretary Keith L. SimmondsExecutive Vice President & CCO Theresa N. WineSenior Vice President Kari M. ReilyVice President 38  |  2004ANNUAL REPORT




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##### 



AMERA MORTGAGE CORPORATION 
 A home for every loan.
 Partnering in mortgage loan growth In 2004, Amera Mortgage invested in our technological infrastructure to better support the
mortgage loan officers at Capitol Bancorps banks and Ameras offices nationwide. We are fortunate to have a strong support system with Amera Mortgage. Without
Ameras products, pricing, underwriting, document and funding support, we would not be
able to perform at these levels. They have trained, coached and made us a part of a very
elite delivery system. Bill Smith,Senior Vice President/Residential Lending, Arrowhead Community Bank
(CBCs 2004 leader in mortgage loans sold to Amera) At Ameras web site, www.ameramortgage.com, we introduced Mortgage Connection which supplies
lenders with on-line pricing, program finding and underwriting capability. Sharper Agent, a
web-based customer contact and marketing tool for loan officers, aids bankers and our loan
originators. We also introduced a client-relations group to better support our bank affiliates and position
Amera for further growth in Capitol Bancorps network of community banks. Were in the process of a
moderate retail expansion in southeastern Michigan and may be entering the wholesale channel as a
competitor in mid-2005. Financially, we had a solid year in terms of return on equity, despite the increase in rates and
drop in loan refinance volumes. Our business in the Western Regions grew as additional banks entered
the mortgage origination business. We will continue to enhance Mortgage Connection, adding an enhanced program-finding and
quick-pricing capability. We are upgrading our core systems, which will allow lenders real-time
access to more of their loan specific information, which, in turn, will create a more efficient
application and closing process. Mark A. Janssen CEO
  
 Amera Mortgage Corporation | 30201 Orchard Lake Road | Suite 250 | Farmington Hills, MI 48334
248-855-0110 | www.ameramortgage.com Founded: June 9,1983
    
    Mark A. Janssen   |CEO
 
 BOARD OF DIRECTORS Susan L. BowenExecutive Vice President
Amera Mortgage Corporation Melinda F. CainExecutive Vice President
Amera Mortgage Corporation James F. CrawfordDirector of Strategic Products & Services
Capitol Bancorp Limited Lee W. HendricksonChief Financial Officer
Capitol Bancorp Limited Mark A. JanssenCEO
Amera Mortgage Corporation Lyle W. MillerPresident
L. W. Miller Holding Company Jerald H. RockPresident
Amera Mortgage Corporation John C. SmythePresident & CEO
Capitol National Bank OFFICERS John C. SmytheChairman Mark A. JanssenCEO Jerald H. RockPresident Lee W. HendricksonSecretary & Treasurer Susan L. BowenExecutive Vice President Melinda F. CainExecutive Vice President Kathleen M. DeFrancesExecutive Vice President John A. KorchSenior Vice President Sharon A. PastoriSenior Vice President & CFO Nancy J. CarusoVice President Susan GoodVice President Melodie A. HaverkateVice President Paul G. RicherVice President Robert A. RicherVice President James A. SellickVice President James M. ShafferVice President Susan L. ShafferVice President 2004ANNUAL REPORT |
39




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##### 



Financial Information




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##### 



Table of Contents  
 Selected Consolidated Financial Data
    
    
    F-2Information Regarding Capitols Common Stock
    
    
    F-3Availability of Form 10-K and Certain Other Reports
    
    
    F-3Other Corporate and Shareholder Information
    
    
    F-4Cautions Regarding Forward-Looking Statements
    
    
    F-5Managements Discussion and Analysis of Financial Condition and Results of Operations:Preface
    
    
    F-6Capitol Bancorp and its Banking Business
    
    
    F-6Highlights of 2004
    
    
    F-8Critical Accounting Policies Affecting Capitols Financial Statements
    
    
    F-9Capitols Results of Operations
    
    
    F-11Capitols Financial Position
    
    
    F-14Liquidity, Capital Resources and Capital Adequacy
    
    
    F-18Trends Affecting Operations
    
    
    F-22New Accounting Standards
    
    
    F-25Recent Developments
    
    
    F-25Report on Managements Assessment of Internal Control Over Financial Reporting
    
    
    F-26Report of Independent Registered Public Accounting Firm on Managements
Assessment of Internal Control Over Financial Reporting
    
    
    F-27Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    F-29Consolidated Balance Sheets
    
    
    F-30Consolidated Statements of Income
    
    
    F-31Consolidated Statements of Changes in Stockholders Equity
    
    
    F-32Consolidated Statements of Cash Flows
    
    
    F-33Notes to Consolidated Financial Statements
    
    
    F-34
  F-1




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##### 



Selected Consolidated Financial Data
(in $1,000s, except per share data) As of and for the Year Ended December 312004(1)
    
    
    2003(2)
    
    
    2002(3)
    
    
    2001(4)
    
    
    2000(5)For the year:Interest income
    
    $
    179,089
    
    
    $
    164,416
    
    
    $
    156,454
    
    
    $
    153,797
    
    
    $
    132,311Interest expense
    
    
    47,496
    
    
    
    49,490
    
    
    
    55,860
    
    
    
    73,292
    
    
    
    65,912Net interest income
    
    
    131,593
    
    
    
    114,926
    
    
    
    100,594
    
    
    
    80,505
    
    
    
    66,399Provision for loan losses
    
    
    12,708
    
    
    
    9,861
    
    
    
    12,676
    
    
    
    8,167
    
    
    
    7,216Noninterest income
    
    
    19,252
    
    
    
    20,087
    
    
    
    14,982
    
    
    
    9,585
    
    
    
    6,137Noninterest expense
    
    
    97,787
    
    
    
    86,952
    
    
    
    76,538
    
    
    
    63,944
    
    
    
    52,410Net income
    
    
    26,716
    
    
    
    23,380
    
    
    
    16,653
    
    
    
    10,718
    
    
    
    8,035Net income per share:Basic
    
    
    1.88
    
    
    
    1.86
    
    
    
    1.64
    
    
    
    1.38
    
    
    
    1.14Diluted
    
    
    1.79
    
    
    
    1.77
    
    
    
    1.57
    
    
    
    1.35
    
    
    
    1.13Cash dividends paid per share
    
    
    .65
    
    
    
    .51
    
    
    
    .44
    
    
    
    .40
    
    
    
    .36At end of year:Total assets
    
    $
    3,091,418
    
    
    $
    2,737,062
    
    
    $
    2,409,288
    
    
    $
    2,044,006
    
    
    $
    1,630,076Total earning assets
    
    
    2,885,545
    
    
    
    2,521,375
    
    
    
    2,226,969
    
    
    
    1,920,621
    
    
    
    1,517,350Portfolio loans
    
    
    2,692,904
    
    
    
    2,247,440
    
    
    
    1,991,372
    
    
    
    1,734,589
    
    
    
    1,355,798Deposits
    
    
    2,510,072
    
    
    
    2,288,664
    
    
    
    2,062,072
    
    
    
    1,740,385
    
    
    
    1,400,899Notes payable
    
    
    172,534
    
    
    
    92,774
    
    
    
    93,398
    
    
    
    89,911
    
    
    
    58,150Subordinated debentures
    
    
    100,845
    
    
    
    90,816
    
    
    
    51,583
    
    
    
    48,621
    
    
    
    24,327Minority interests in consolidated subsidiaries
    
    
    39,520
    
    
    
    30,946
    
    
    
    28,016
    
    
    
    70,673
    
    
    
    62,575Stockholders equity
    
    
    252,159
    
    
    
    218,897
    
    
    
    160,037
    
    
    
    80,172
    
    
    
    70,404
 Quarterly Results of Operations (unaudited)Total for
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    Firstthe Year
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterYear ended December 31, 2004:(1)Interest income
    
    $
    179,089
    
    
    $
    48,329
    
    
    $
    45,877
    
    
    $
    43,434
    
    
    $
    41,449Interest expense
    
    
    47,496
    
    
    
    12,848
    
    
    
    11,943
    
    
    
    11,486
    
    
    
    11,219Net interest income
    
    
    131,593
    
    
    
    35,481
    
    
    
    33,934
    
    
    
    31,948
    
    
    
    30,230Provision for loan losses
    
    
    12,708
    
    
    
    3,111
    
    
    
    3,553
    
    
    
    2,536
    
    
    
    3,508Net income
    
    
    26,716
    
    
    
    7,950
    
    
    
    7,439
    
    
    
    6,911
    
    
    
    4,416Net income per share:Basic
    
    
    1.88
    
    
    
    .55
    
    
    
    .52
    
    
    
    .49
    
    
    
    .32Diluted
    
    
    1.79
    
    
    
    .52
    
    
    
    .50
    
    
    
    .47
    
    
    
    .30Cash dividends paid per share
    
    
    .65
    
    
    
    .17
    
    
    
    .17
    
    
    
    .16
    
    
    
    .15Year ended December 31, 2003:(2)Interest income
    
    $
    164,416
    
    
    $
    41,859
    
    
    $
    41,484
    
    
    $
    41,087
    
    
    $
    39,986Interest expense
    
    
    49,490
    
    
    
    11,305
    
    
    
    12,065
    
    
    
    13,121
    
    
    
    12,999Net interest income
    
    
    114,926
    
    
    
    30,554
    
    
    
    29,419
    
    
    
    27,966
    
    
    
    26,987Provision for loan losses
    
    
    9,861
    
    
    
    3,253
    
    
    
    2,892
    
    
    
    1,826
    
    
    
    1,890Net income
    
    
    23,380
    
    
    
    6,324
    
    
    
    6,049
    
    
    
    5,694
    
    
    
    5,313Net income per share:Basic
    
    
    1.86
    
    
    
    .47
    
    
    
    .46
    
    
    
    .46
    
    
    
    .45Diluted
    
    
    1.77
    
    
    
    .45
    
    
    
    .44
    
    
    
    .45
    
    
    
    .44Cash dividends paid per share
    
    
    .51
    
    
    
    .15
    
    
    
    .12
    
    
    
    .12
    
    
    
    .12
   (1)
    
    Includes First Carolina State Bank (located in Rocky Mount, North Carolina), acquired April
1, 2004 and Point Loma Community Bank (located in San Diego, California), effective August 2,
2004.(2)
    
    Includes Bank of Escondido (located in Escondido, California), effective October 2003.(3)
    
    Includes Bank of Las Vegas (located in Las Vegas, Nevada), effective February 2002 and Napa
Community Bank (located in Napa, California), effective March 2002.(4)
    
    Includes Sunrise Bank of San Diego (located in San Diego, California), effective January
2001.(5)
    
    Includes Black Mountain Community Bank effective March 2000 (located in Henderson, Nevada),
Sunrise Bank of Albuquerque effective April 2000 (located in Albuquerque, New Mexico),
Arrowhead Community Bank effective September 2000 (located in Glendale, Arizona), Goshen
Community Bank effective September 2000 (located in Goshen, Indiana) and Yuma Community Bank
effective December 2000 (located in Yuma, Arizona). F-2




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##### 



INFORMATION REGARDING CAPITOLS COMMON STOCK On June 24, 2003, Capitols common stock began trading on the New York Stock Exchange (NYSE) under
the symbol CBC. Capitols common stock was previously traded on the National Market System of
The Nasdaq Stock MarketSM under the symbol CBCL. Market quotations regarding the
range of high and low sales prices of Capitols common stock, which reflect inter-dealer prices
without retail mark-up, mark-down or commissions, were as follows: 2004
    
    
    2003Low
    
    
    High
    
    
    Low
    
    
    HighQuarter Ended:March 31
    
    $
    26.47
    
    
    $
    29.70
    
    
    $
    19.00
    
    
    $
    24.25June 30
    
    
    24.05
    
    
    
    28.00
    
    
    
    20.00
    
    
    
    27.88September 30
    
    
    24.15
    
    
    
    29.80
    
    
    
    23.10
    
    
    
    28.49December 31
    
    
    28.51
    
    
    
    36.00
    
    
    
    25.72
    
    
    
    30.10
 During 2004, Capitol paid cash dividends of $0.15 per share in the first quarter, $0.16 per share
in the second quarter and $0.17 per share in the third and fourth quarters. In 2003, Capitol paid
cash dividends of $0.12 per share in the first, second and third quarters and $0.15 per share in
the fourth quarter. As of January 31, 2005, there were 7,561 beneficial holders of Capitols common stock, based on
information supplied to Capitol from its stock transfer agent and other sources. At February 28, 2005, 14,888,400 shares of common stock were outstanding. Capitols stock transfer
agent is UMB Bank, n.a., 928 Grand Ave., P.O. Box 410064, Kansas City, Missouri 64141-0064
(telephone 800/884-4225). The web site for UMB Bank, n.a. is http:\\www.umb.com. Capitol has a direct purchase and dividend reinvestment plan, the Capitol Bancorp Limited Direct
Purchase and Dividend Reinvestment Plan, Capitol Bancorp Direct, which offers a variety of
convenient features including dividend reinvestment, certain fee-free transactions, certificate
safekeeping and other benefits. For a copy of the Plan prospectus, informational brochure and
enrollment materials, contact UMB Bank, n.a. at 800/884-4225 or Capitol at 517/487-6555. In addition to Capitols common stock, trust-preferred securities of Capitol Trust I (a subsidiary
of Capitol) are listed on NYSE under the symbol CBCPrA. Those trust-preferred securities consist
of 2,530,000, 8.5% cumulative preferred securities, with a liquidation amount of $10 per preferred
security. The trust-preferred securities are guaranteed by Capitol and mature in 2027, are
currently callable and may be extended to 2036 if certain conditions are met. 
 AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS A copy of Capitols 2004 report on Form 10-K, without exhibits, is available to holders of its
common stock or trust-preferred securities without charge, upon written request. Form 10-K
includes certain statistical and other information regarding Capitol and its business. Requests to
obtain Form 10-K should be addressed to Investor Relations, Capitol Bancorp Limited, Capitol
Bancorp Center, 200 Washington Square North, Lansing, Michigan 48933. F-3




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##### 



Form 10-K and certain other periodic reports are filed with the Securities and Exchange Commission
(SEC). The SEC maintains an Internet web site that contains reports, proxy and information
statements and other information regarding companies which file electronically (which includes
Capitol). The SECs web site address is http:\\www.sec.gov. Capitols filings with the SEC are
also available at Capitols web site, http:\\www.capitolbancorp.com. 
 OTHER CORPORATE INFORMATION CORPORATE OFFICES Capitol Bancorp Center
    
    2777 East Camelback Road200 Washington Square North
    
    Suite 375Lansing, Michigan 48933
    
    Phoenix, Arizona 85016517/487-6555
    
    602/955-6100www.capitolbancorp.com
    
    www.capitolbancorp.com
 INDEPENDENT AUDITORS BDO Seidman, LLP
Grand Rapids, Michigan SHAREHOLDER INFORMATION ANNUAL MEETING

Capitols Annual Meeting will be held on Thursday, May 5, 2005 at 4:00 p.m. at the Lansing Center,
located at 333 E. Michigan Avenue, Lansing, Michigan. COMMON STOCK TRADING
INFORMATION

Capitols common stock trades on the New York Stock Exchange (NYSE) under the trading symbol CBC. COMMON STOCK TRANSFER AGENT UMB Bank, n.a.
928 Grand Avenue
P.O. Box 410064
Kansas City, Missouri 64141-0064
800/884-4225 DIRECT PURCHASE AND DIVIDEND REINVESTMENT PLAN Capitol offers an easy and affordable way to invest in Capitols common stock through its direct
purchase and dividend reinvestment plan, Capitol Bancorp Direct. The Plans benefits include the
ability to make an initial investment in common stock with as little as $50, reinvestment of
dividends in additional common stock, direct deposit of dividends, ability to purchase common stock
as frequently as once a month, and the option to make transfers or gifts of Capitols common stock
to another person. Participation in the Plan is voluntary and shareholders and prospective
investors are eligible. Purchases under the Plan are not currently subject to any brokerage fees
or commissions. For further information regarding Capitol Bancorp Direct or a copy of the Plans
prospectus, informational brochure and enrollment materials, contact UMB Bank, n.a. at 800/884-4225
or Capitol at 517/487-6555. F-4




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##### 



TRUST-PREFERRED SECURITIES TRADING INFORMATION Preferred securities of Capitol Trust I (a subsidiary of Capitol) trade on NYSE under the trading
symbol CBCPrA. TRUST-PREFERRED SECURITIES TRUSTEE Bank One Investment Management Group  Chicago, Illinois 
 CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this annual report that are not historical facts are
forward-looking statements. Those 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, will, may, believe and similar expressions also 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, (xi) changes in management and (xii) other risks detailed in Capitols other filings with
the Securities and Exchange Commission. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, actual outcomes may vary materially from
those indicated. The preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires management to make certain
estimates and assumptions, many of which are based on assumptions relating to the above-stated
forward-looking statements, that affect the reported amounts of assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results will differ from those estimates because of the inherent
subjectivity and inaccuracy of any estimation. 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. F-5




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##### 



Managements Discussion and Analysis of Financial Condition and
Results of Operations 
 Preface This section of Capitols annual report is a narrative which intends to discuss, through the eyes
of management, the Corporations results of operations, financial condition and other important
related matters. It is not intended to be a line-by-line review of Capitols financial statements,
but rather a review of certain select matters in the financial statements and the Corporations
business. One critical assumption and expectation is made here, and that is that you, the reader,
has read the accompanying consolidated financial statements and footnotes. This section of the annual report includes the use of some forward-looking statements. The
accompanying consolidated financial statements are based on historical information.
Forward-looking statements are those which speak to potential future events or outcomes. Those
forward-looking statements are believed to be reasonably accurate as of the date this narrative was
written but, obviously, future facts and circumstances will change and actual results can differ
materially. Readers are cautioned about those forward-looking statements and Capitol has no
obligation to update those statements at a later date. 
 Capitol Bancorp and its Banking Business Capitol considers itself to be a unique company in the banking business in the United States today.
In legal structure, Capitol is a bank-holding company (which means it has banks as subsidiaries).
Capitol defines itself as a bank developmentcompany. What sets Capitol apart from other
bank-holding companies is its focus on chartered bank development as a core business in an
environment where other bank-holding companies have focused on branch-banking. Big banks focus on
transaction volume. Capitols chartered banks are small and focus on relationships. At December 31, 2004, Capitols banking network consisted of 32 separately-chartered community
banks, operating in 9 states. All of those banks have different names, typically directly
associated with their individual communities. Locally, those banks have a minimally visible
identity with Capitol. The banks individual focus is on their community, their customers, their
business and financial performance. Each bank has its own board of directors, comprised of
business leaders and other professionals drawn from that banks community. Together, all of
Capitols banks had nearly 400 independent local board seats at year-end 2004. Each bank has full,
local decision-making authority in all matters affecting the customer both in lending and deposit
transactions. F-6




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##### 



Capitols role with its banks is as investor, mentor and service provider. As investor, Capitol
closely monitors the financial performance of its bank subsidiaries, providing assistance and
guidance when and where necessary to enhance bank performance. Capitols mentoring role is most
active in its youngest affiliates where guidance is needed through the banks early formative
stages. Capitol provides efficient back-office services to all of its banks, in many areas which
can be done centrally and do not involve a direct interface with the bank customer, such as these:  
    Accounting
    Data processing
    Human resources administration
    Legal support
    Internal audit
    Risk management
    Credit administration
    Capital management Some of these functions are performed nationally from a single location, while others are performed
regionally, where it is more efficient to have personnel located geographically based on their
respective responsibilities in relation to the physical location of the banks. Capitol has an especially unique approach to the formation of de novo, or new, banks. When forming
a start-up bank, Capitol, or one of its bank-development subsidiaries, invests at least 51% of the
initial capital and the remainder of the capital is raised in the community where the de novobank
will be located. This usually involves about 100 or more local investors. When the bank nears its
third anniversary of operation, Capitol has typically offered an exit opportunity regarding the
shares of the bank not owned by Capitol, to exchange those shares for Capitols common stock at a
premium, usually at about 50% over the book value of the bank stock. When Capitol has made these
share exchange proposals, which have been subject to the approval of those minority shareholders,
they have been overwhelmingly approved. Capitol operates from headquarters in Lansing, Michigan (the location of its first bank) and
Phoenix, Arizona. It has executive personnel at both locations. These locations help facilitate
Capitols regional managerial focus whereby the Phoenix headquarters staff includes bank
performance personnel responsible for oversight of Capitols banks in the Western Regions, which at
December 31, 2004 included the Southwestern Region (states of Arizona, Nevada and New Mexico) and
the California Region. The Lansing headquarters staff includes bank performance personnel
responsible for oversight of the Great Lakes Region (states of Michigan and Indiana) and
Southeastern Region (state of North Carolina). F-7




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##### 



The total assets and revenues of each bank and the consolidated totals are summarized below as of
and for the year ended December 31, 2004 and 2003 (in $1,000s): Total Assets
    
    
    Total Revenues2004
    
    
    2003
    
    
    2004
    
    
    2003Eastern Regions:Great Lakes Region:Ann Arbor Commerce Bank
    
    $
    330,488
    
    
    $
    329,191
    
    
    $
    21,663
    
    
    $
    22,722Brighton Commerce Bank
    
    
    105,890
    
    
    
    92,184
    
    
    
    6,259
    
    
    
    5,767Capitol National Bank
    
    
    228,656
    
    
    
    221,426
    
    
    
    13,861
    
    
    
    13,220Detroit Commerce Bank
    
    
    70,036
    
    
    
    44,954
    
    
    
    4,030
    
    
    
    2,329Elkhart Community Bank
    
    
    67,099
    
    
    
    53,586
    
    
    
    3,996
    
    
    
    3,168Goshen Community Bank
    
    
    54,571
    
    
    
    46,751
    
    
    
    3,218
    
    
    
    2,943Grand Haven Bank
    
    
    119,254
    
    
    
    122,076
    
    
    
    6,974
    
    
    
    9,346Kent Commerce Bank
    
    
    89,393
    
    
    
    81,437
    
    
    
    5,439
    
    
    
    5,439Macomb Community Bank
    
    
    94,847
    
    
    
    86,001
    
    
    
    5,786
    
    
    
    5,702Muskegon Commerce Bank
    
    
    94,162
    
    
    
    85,908
    
    
    
    6,301
    
    
    
    6,255Oakland Commerce Bank
    
    
    130,779
    
    
    
    120,059
    
    
    
    7,731
    
    
    
    7,848Paragon Bank & Trust
    
    
    110,128
    
    
    
    104,602
    
    
    
    7,105
    
    
    
    8,238Portage Commerce Bank
    
    
    180,817
    
    
    
    161,028
    
    
    
    11,703
    
    
    
    10,599Great Lakes Region Total
    
    
    1,676,120
    
    
    
    1,549,203
    
    
    
    104,066
    
    
    
    103,576First Carolina State Bank(1)
    
    
    68,598
    
    
    
    
    
    
    
    2,455Western Regions:Southwest Region:Arrowhead Community Bank
    
    
    70,989
    
    
    
    56,192
    
    
    
    5,180
    
    
    
    4,135Bank of Las Vegas
    
    
    47,538
    
    
    
    35,374
    
    
    
    2,963
    
    
    
    2,005Bank of Tucson
    
    
    168,469
    
    
    
    157,717
    
    
    
    10,250
    
    
    
    9,582Black Mountain Community Bank
    
    
    100,415
    
    
    
    83,760
    
    
    
    6,232
    
    
    
    4,849Camelback Community Bank
    
    
    83,414
    
    
    
    81,649
    
    
    
    5,548
    
    
    
    5,736Desert Community Bank
    
    
    63,276
    
    
    
    61,537
    
    
    
    4,218
    
    
    
    3,761East Valley Community Bank
    
    
    46,549
    
    
    
    43,925
    
    
    
    3,261
    
    
    
    2,868Mesa Bank
    
    
    96,158
    
    
    
    70,308
    
    
    
    7,025
    
    
    
    5,549Red Rock Community Bank
    
    
    102,832
    
    
    
    104,944
    
    
    
    6,017
    
    
    
    6,817Southern Arizona Community Bank
    
    
    83,140
    
    
    
    84,374
    
    
    
    5,507
    
    
    
    5,370Sunrise Bank of Albuquerque
    
    
    69,055
    
    
    
    66,359
    
    
    
    5,182
    
    
    
    4,511Sunrise Bank of Arizona
    
    
    128,192
    
    
    
    126,114
    
    
    
    11,676
    
    
    
    10,605Valley First Community Bank
    
    
    54,857
    
    
    
    47,069
    
    
    
    3,263
    
    
    
    3,032Yuma Community Bank
    
    
    59,355
    
    
    
    46,143
    
    
    
    4,015
    
    
    
    3,297Southwest Region Total
    
    
    1,174,239
    
    
    
    1,065,465
    
    
    
    80,337
    
    
    
    72,117California Region:Bank of Escondido
    
    
    50,956
    
    
    
    26,843
    
    
    
    2,054
    
    
    
    136Napa Community Bank
    
    
    79,396
    
    
    
    53,509
    
    
    
    4,101
    
    
    
    2,808Point Loma Community Bank(2)
    
    
    20,857
    
    
    
    
    
    
    
    208Sunrise Bank of San Diego
    
    
    62,672
    
    
    
    67,235
    
    
    
    5,232
    
    
    
    4,431California Region Total
    
    
    213,881
    
    
    
    147,587
    
    
    
    11,595
    
    
    
    7,375Other, net
    
    
    (41,420
    )
    
    
    (25,193
    )
    
    
    (112
    )
    
    
    1,435Consolidated totals
    
    $
    3,091,418
    
    
    $
    2,737,062
    
    
    $
    198,341
    
    
    $
    184,503
   (1)
    
    Acquired effective April 1, 2004.(2)
    
    Commenced operations in August 2004 and is 51%-owned by First California Southern
Bancorp, a majority-owned subsidiary of Capitol. In addition to the regions within the Eastern and Western Regions in which Capitol had banks
at December 31, 2004, a number of bank-development initiatives were underway at the beginning of
2005 in several other locations which are discussed later in this narrative. 
 Highlights of 2004 2004 was another record year for Capitol Bancorp. Earnings for the year exceeded $26.7 million.
2004 earnings surpassed 2003 by 14.3%. Earnings per share in 2004 increased marginally due, in
part, to a 13% increase in the diluted share base. F-8




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2004 also recorded some very significant changes within the Capitol family:  
    An increase in total assets, exceeding $3 billion for the first time in the
Corporations history.
    Acquisition of First Carolina State Bank in Rocky Mount, North Carolina.
    Opening Capitols fourth California bank, Point Loma Community Bank.
    Completion of two share-exchange transactions, resulting in two previously
majority-owned subsidiaries becoming wholly-owned.
    Increases in the Corporations quarterly cash dividend to $.17 per share.
    Expansion of bank-development activities which are anticipated to result in a
significant number of new banks during the next several years. Total consolidated assets approximated $3.1 billion at December 31, 2004, an increase of about
$354.4 million or 12.9% for the year. Capitols largest single asset, loans, neared $2.7 billion.
Capitol continued to maintain a strong allowance for loan losses which, at December 31, 2004,
approximated 1.40% of portfolio loans. Asset quality improved as nonperforming loans, as a
percentage of portfolio loans, decreased compared to year-end 2003. Net loan charge-offs, as a
percentage of average loans, also decreased in 2004. 
 Critical Accounting Policies Affecting Capitols Financial Statements Note B of the notes to the consolidated financial statements is captioned Significant Accounting
Policies. That footnote spans several pages and at least 15 topics, all of which are deemed
significant and required disclosures under generally accepted accounting principles (GAAP). For
purposes of this narrative, current SEC guidance suggests the selection of a few of those, for
discussion, as critical accounting policies. The selection of which few will differ from company
to company, even within a common industry, such as banking. Capitol considers its critical
accounting policies to include the following: Use of estimates in determining the allowance for loan losses. Bank regulatory agencies,
accounting standard setters and the SEC have all issued commentary, guidance and a variety of
rule-making on how financial institutions are to determine the amount of their allowance for loan
losses. Determining the allowance is really a process and methodology which is inherently
judgmental in how and when to recognize and record a loss allowance or reserve for loans. It is
not a process or methodology which can be merely reduced to a strict absolute computation, like a
mathematical formula to compute taxes. The process and methodology will differ from one company to
another and there is no one size fits all format or approach to loss reserving. All of Capitols
banks use a consistent computational template to determine their respective allowances for loan
losses. Management believes its process and methodology for determining the allowance for loan
losses is appropriate and adequate to properly estimate losses inherent in the loan portfolio at
the balance-sheet date; however, actual future losses will differ from amounts considered in the
allowance methodology. Further, bank regulatory agencies may have differing perspectives on the
process, methodology and adequacy of the allowance for loan losses when examining the banks. At
December 31, 2004, Capitols allowance for loan losses approximated 1.40% of portfolio loans
outstanding. Based on portfolio loans outstanding at that F-9




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##### 



date, any 1 basis-point (.01%) change in the allowance would have an approximate $269,000 impact on
the allowance for loan losses and income before income taxes. Accounting for stock options.Like many companies, Capitol has granted stock options to its
officers and directors and, as permitted under existing accounting rules, has not treated stock
options as an element of compensation expense. This is because Capitol has used the so-called
intrinsic-value method for accounting for stock options which ascribes zero value and expense to
stock options at the date granted or over the life of the stock option, because Capitols stock
options have been granted with an exercise price equal to the fair value of CBCs common stock at
the grant date. When using that method, Capitol has been required to disclose what the fair value
of the stock options would be, using a valuation model and a pro forma presentation of what
compensation expense would have been recognized if Capitol used that fair value method and
expensing alternative. In December 2004, the standard-setting body responsible for issuing accounting guidance in this
area issued its long-awaited revision of the prior accounting standard, which had permitted
companies the choice between expense recognition for stock options or Capitols chosen approach of
pro forma disclosure. The new guidance becomes effective for interim periods beginning after June
30, 2005. In 2004, Capitol granted stock options with an aggregate estimated fair value of $6.6 million. If
the stock options granted had been recorded as compensation expense, net income for 2004 would have
been $22.4 million or $1.51 per diluted share. It is important to point out, however, that the pro-forma effect of expensing 2004 stock option
grants does not give effect to whether the accounting rule change would have had any impact on the
level or structure of stock option grant activity. It is also impossible to speculate at the time
of this writing what impact the new accounting rules will have on future stock option grants. While the new rules apply prospectively to stock options granted after the 2005 effective date
mentioned previously, it also applies to any previously granted, but unvested stock options at that
effective date. Effective December 31, 2004, Capitol accelerated the vesting of any previously
unvested stock options in anticipation of implementation of the new accounting rules. The
accelerated vesting of stock options was done for the purpose of avoiding expense recognition
relating to those stock options under the new guidance. Accounting for goodwill and other intangibles.At December 31, 2004, Capitol had $41.9 million of
goodwill and other intangibles on its balance sheet, which consisted principally of goodwill.
Goodwill arises in acquisition accounting. In Capitols transactions, most of this goodwill is the
premium which relates to the share exchange transactions when Capitol has issued its shares of
common stock at a modest premium (usually around 50%) over the book value of the minority interest
of a subsidiary banks shares. In 2004, goodwill and other intangibles increased $7.5 million due
to the purchase of First Carolina State Bank and the F-10




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##### 



premium associated with the share-exchange transactions involving minority interests of two
subsidiaries. Current accounting rules require a periodic review of goodwill for potential
impairment. If any amount of the goodwill is deemed to be impaired, such amount is to be written
off in the period the determination is made. This is an area involving significant judgment.
Based on managements review, no amount of goodwill was deemed to be impaired at December 31, 2004. Classification of trust-preferred securities.Capitol has $103.3 million of trust-preferred
securities outstanding at December 31, 2004. These are a hybrid debt security with a maturity of
30 years (from the date of issue) and are issued by trusts which are wholly-owned by Capitol. New
accounting rules in 2004 required the deconsolidation of the trusts from Capitols financial
statements and, instead, recording the underlying subordinated debentures as debt obligations on
Capitols consolidated balance sheet. One of the key features of these securities is that they are
considered, for regulatory purposes, as an element of capital. 
 Capitols Results of Operations As stated previously, 2004 was another record year of earnings for Capitol with net income of $26.7
million, a 14.3% increase over the $23.4 million earned in 2003. 2003s net income was a 40.4%
increase over the $16.7 million earned in 2002. 2002s earnings exceeded the preceding year by
55.4%. For each of these years, the percentage increase in the amount of earnings per share was
less than the increase in the amount of earnings due to growth in the Corporations share base,
primarily due to share exchange transactions with minority owners of some of its affiliate banks.
The percentage increase in 2004s net income was less than in the preceding two years due to a
lower-than-expected first quarter caused by higher loan loss provisions associated with rapid loan
growth (and one problem loan relationship) and managements risk management decision to exit
certain mutual fund investments at a loss. [The remainder of this page intentionally left blank] F-11




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The following table summarizes for each of Capitols banks, and on a consolidated basis, net income
and the related rates of return on average equity and assets, where applicable
(in $1,000s): Net Income
    
    
    Return on Average Equity
    
    
    Return on Average Assets2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Eastern Regions:Great Lakes Region:Ann Arbor Commerce Bank
    
    $
    4,234
    
    
    $
    4,800
    
    
    $
    5,022
    
    
    
    16.24
    %
    
    
    19.45
    %
    
    
    22.40
    %
    
    
    1.30
    %
    
    
    1.52
    %
    
    
    1.72
    %Brighton Commerce Bank
    
    
    1,091
    
    
    
    1,104
    
    
    
    973
    
    
    
    13.09
    %
    
    
    15.28
    %
    
    
    15.26
    %
    
    
    1.11
    %
    
    
    1.29
    %
    
    
    1.28
    %Capitol National Bank
    
    
    3,602
    
    
    
    3,575
    
    
    
    3,176
    
    
    
    20.77
    %
    
    
    22.84
    %
    
    
    22.68
    %
    
    
    1.59
    %
    
    
    1.71
    %
    
    
    1.69
    %Detroit Commerce Bank
    
    
    163
    
    
    
    (440
    )
    
    
    (517
    )
    
    
    2.91
    %
    
    
    
    
    
    
    
    
    
    
    0.27
    %Elkhart Community Bank
    
    
    703
    
    
    
    422
    
    
    
    257
    
    
    
    9.76
    %
    
    
    7.33
    %
    
    
    5.48
    %
    
    
    1.17
    %
    
    
    0.61
    %
    
    
    0.61
    %Goshen Community Bank
    
    
    405
    
    
    
    386
    
    
    
    125
    
    
    
    6.34
    %
    
    
    8.18
    %
    
    
    2.83
    %
    
    
    0.83
    %
    
    
    0.91
    %
    
    
    0.36
    %Grand Haven Bank
    
    
    (412
    )
    
    
    1,670
    
    
    
    1,924
    
    
    
    
    
    
    
    15.43
    %
    
    
    20.51
    %
    
    
    
    
    
    
    1.29
    %
    
    
    1.67
    %Kent Commerce Bank
    
    
    578
    
    
    
    821
    
    
    
    992
    
    
    
    7.01
    %
    
    
    10.28
    %
    
    
    13.72
    %
    
    
    0.70
    %
    
    
    1.06
    %
    
    
    1.33
    %Macomb Community Bank
    
    
    867
    
    
    
    262
    
    
    
    530
    
    
    
    9.83
    %
    
    
    2.91
    %
    
    
    5.47
    %
    
    
    0.93
    %
    
    
    0.29
    %
    
    
    0.60
    %Muskegon Commerce Bank
    
    
    1,516
    
    
    
    1,427
    
    
    
    1,472
    
    
    
    16.25
    %
    
    
    16.38
    %
    
    
    18.68
    %
    
    
    1.70
    %
    
    
    1.68
    %
    
    
    1.83
    %Oakland Commerce Bank
    
    
    1,014
    
    
    
    1,439
    
    
    
    1,414
    
    
    
    10.14
    %
    
    
    15.14
    %
    
    
    16.01
    %
    
    
    0.77
    %
    
    
    1.16
    %
    
    
    1.32
    %Paragon Bank & Trust
    
    
    1,073
    
    
    
    891
    
    
    
    771
    
    
    
    9.53
    %
    
    
    8.36
    %
    
    
    8.04
    %
    
    
    1.00
    %
    
    
    0.84
    %
    
    
    0.77
    %Portage Commerce Bank
    
    
    2,862
    
    
    
    2,393
    
    
    
    2,005
    
    
    
    20.54
    %
    
    
    20.78
    %
    
    
    18.69
    %
    
    
    1.66
    %
    
    
    1.63
    %
    
    
    1.49
    %Great Lakes Region Total
    
    
    17,696
    
    
    
    18,750
    
    
    
    18,144First Carolina State Bank(1)
    
    
    445
    
    
    
    
    
    
    
    
    
    
    
    4.31
    %
    
    
    
    
    
    
    
    
    
    
    0.66
    %Western Regions:Southwest Region:Arrowhead Community Bank
    
    
    758
    
    
    
    442
    
    
    
    117
    
    
    
    12.53
    %
    
    
    9.77
    %
    
    
    2.70
    %
    
    
    1.14
    %
    
    
    0.85
    %
    
    
    0.27
    %Bank of Las Vegas
    
    
    224
    
    
    
    (8
    )
    
    
    (611
    )
    
    
    3.65
    %
    
    
    
    
    
    
    
    
    
    
    0.41
    %Bank of Tucson
    
    
    2,962
    
    
    
    2,776
    
    
    
    2,312
    
    
    
    24.69
    %
    
    
    25.27
    %
    
    
    21.87
    %
    
    
    1.86
    %
    
    
    1.93
    %
    
    
    1.99
    %Black Mountain Community Bank
    
    
    1,428
    
    
    
    914
    
    
    
    439
    
    
    
    16.20
    %
    
    
    14.23
    %
    
    
    9.26
    %
    
    
    1.50
    %
    
    
    1.32
    %
    
    
    0.81
    %Camelback Community Bank
    
    
    554
    
    
    
    567
    
    
    
    714
    
    
    
    6.24
    %
    
    
    6.73
    %
    
    
    9.74
    %
    
    
    0.68
    %
    
    
    0.65
    %
    
    
    0.90
    %Desert Community Bank
    
    
    634
    
    
    
    389
    
    
    
    209
    
    
    
    8.18
    %
    
    
    6.39
    %
    
    
    4.16
    %
    
    
    1.05
    %
    
    
    0.68
    %
    
    
    0.35
    %East Valley Community Bank
    
    
    219
    
    
    
    (279
    )
    
    
    (336
    )
    
    
    5.12
    %
    
    
    
    
    
    
    
    
    
    
    0.49
    %Mesa Bank
    
    
    1,659
    
    
    
    1,366
    
    
    
    848
    
    
    
    22.83
    %
    
    
    19.48
    %
    
    
    14.51
    %
    
    
    1.91
    %
    
    
    1.98
    %
    
    
    1.44
    %Red Rock Community Bank
    
    
    806
    
    
    
    (69
    )
    
    
    243
    
    
    
    6.47
    %
    
    
    
    
    
    
    2.71
    %
    
    
    0.75
    %
    
    
    
    
    
    
    0.26
    %Southern Arizona Community Bank
    
    
    1,291
    
    
    
    1,152
    
    
    
    668
    
    
    
    15.47
    %
    
    
    15.60
    %
    
    
    10.67
    %
    
    
    1.54
    %
    
    
    1.35
    %
    
    
    0.94
    %Sunrise Bank of Albuquerque
    
    
    770
    
    
    
    664
    
    
    
    (40
    )
    
    
    12.53
    %
    
    
    15.45
    %
    
    
    
    
    
    
    1.09
    %
    
    
    1.14
    %Sunrise Bank of Arizona
    
    
    2,674
    
    
    
    1,138
    
    
    
    (194
    )
    
    
    23.27
    %
    
    
    15.61
    %
    
    
    
    
    
    
    2.03
    %
    
    
    1.15
    %Valley First Community Bank
    
    
    310
    
    
    
    282
    
    
    
    113
    
    
    
    5.11
    %
    
    
    4.85
    %
    
    
    1.99
    %
    
    
    0.60
    %
    
    
    0.64
    %
    
    
    0.23
    %Yuma Community Bank
    
    
    915
    
    
    
    473
    
    
    
    147
    
    
    
    15.59
    %
    
    
    11.96
    %
    
    
    4.05
    %
    
    
    1.74
    %
    
    
    1.11
    %
    
    
    0.43
    %Southwest Region Total
    
    
    15,204
    
    
    
    9,807
    
    
    
    4,629California Region:Bank of Escondido
    
    
    (186
    )
    
    
    (491
    )Napa Community Bank
    
    
    579
    
    
    
    290
    
    
    
    (609
    )
    
    
    6.80
    %
    
    
    3.64
    %
    
    
    
    
    
    
    0.87
    %
    
    
    0.64
    %Point Loma Community Bank(2)
    
    
    (703
    )Sunrise Bank of San Diego
    
    
    1,104
    
    
    
    498
    
    
    
    342
    
    
    
    11.26
    %
    
    
    6.40
    %
    
    
    4.53
    %
    
    
    1.58
    %
    
    
    0.85
    %
    
    
    0.68
    %California Region Total
    
    
    794
    
    
    
    297
    
    
    
    (267
    )Other, net
    
    
    (7,423
    )
    
    
    (5,474
    )
    
    
    (5,853
    )Consolidated totals
    
    $
    26,716
    
    
    $
    23,380
    
    
    $
    16,653
    
    
    
    11.25
    %
    
    
    12.97
    %
    
    
    13.33
    %
    
    
    0.91
    %
    
    
    0.91
    %
    
    
    0.75
    %
   (1)
    
    Acquired effective April 1, 2004.(2)
    
    Commenced operations in August 2004 and is 51%-owned by First California Southern Bancorp,
a majority-owned subsidiary of Capitol. The Eastern Regions performance in 2004 was adversely affected by higher than normal levels
of nonperforming loans, resulting in larger provisions for loan losses. The Western Regions
performance for the periods has increased significantly as its younger banks have reached a level
of maturity which generate higher earnings. F-12




---



##### 



The principal revenue source for the Corporations banks is interest income from loans. Total
interest income or total interest expense is of little significance individually. Net interest
income is the total of all interest income minus all interest expense. This is an important
measure that is used to help determine the amount of net operating revenues for financial
institutions. Net operating revenue is the sum of net interest income and noninterest income. Net interest income totaled $131.6 million in 2004, a 14.5% increase over the $114.9 million
reported in 2003. This increase is a combination of several factors. In total, net interest
income increased $16.7 million, which was comprised of an increase in interest income of about
$14.7 million and a decrease in interest expense of about $2.0 million. These variances can be
analyzed further in terms of their association with changes in interest rates versus changes in
volume of the interest-bearing asset or liability. For example, the net increase in interest
income is the result of approximately $25.6 million of additional interest income from higher
levels of loans outstanding in 2004 (i.e., volume), but that increase was offset by $10.9 million
in lower levels of interest income due to decreased rates as loans repriced or were refinanced at
lower rates in 2004. The decrease in interest expense in 2004 is associated with lower rates paid
on time deposits exceeding the amount of interest paid on higher levels of interest-bearing
accounts. Net interest income increased about $14.3 million in 2003. Most of that net increase came from
decreased interest expense, primarily associated with lowered interest rates on deposits. In 2003,
the net change in interest income compared to 2002 was small, which was the result of income growth
coming from loan portfolio growth largely offset by lower interest rates during that period. With the addition of noninterest income, total net operating revenue approximated $150.8 million in
2004, $135.0 million in 2003 and $115.6 million in 2002. Noninterest income for these periods was
$19.3 million, $20.1 million and $15.0 million, respectively. Noninterest income increased significantly in 2003 and 2002 largely as the result of fees from the
origination of non-portfolio residential mortgage loans, but decreased in 2004 due to lower
revenues from this source. In 2004, 2003 and 2002, this revenue amounted to $5.6 million, $8.7
million and $6.8 million, respectively. A very substantial portion of this mortgage fee revenue
has been derived from mortgage refinancing activity, during periods of record-low interest rates.
The future of interest rates is uncertain and it is reasonable to expect that this revenue source
may decrease, perhaps materially, if there are adverse changes in mortgage interest rates or other
unfavorable conditions impacting the residential housing market. The provision for loan losses approximated $12.7 million, $9.9 million and $12.7 million in 2004,
2003 and 2002, respectively. The amount of the provision for loan losses is determined based on
managements analysis of amounts necessary for the allowance for loan losses; this is discussed in
greater detail later in the Financial Positionsection of this narrative. F-13




---



##### 



Noninterest expense totaled $97.8 million, $87.0 million and $76.5 million in 2004, 2003 and 2002,
respectively. In total, these expenses increased 12.5% in 2004, 13.6% in 2003 and 19.7% in 2002.
The lower rate of increase in 2004 and 2003 is the result of a slower pace of adding new banks
(only three banks were added during 2004 and 2003). Increases in the components of noninterest
expense are primarily associated with added staffing and other costs associated with growing young
banks and adding new banks. The more significant elements of other noninterest expense consisted
of the following: 2004
    
    
    2003
    
    
    2002(In $1,000s)Professional fees
    
    $
    2,046
    
    
    $
    1,549
    
    
    $
    1,431Advertising
    
    
    1,981
    
    
    
    1,756
    
    
    
    1,543Paper, printing and supplies
    
    
    1,697
    
    
    
    1,728
    
    
    
    1,589Bank services (ATMs, telephone
banking and Internet banking)
    
    
    1,123
    
    
    
    1,094
    
    
    
    916Taxes other than income taxes
    
    
    1,010
    
    
    
    909
    
    
    
    713Communications
    
    
    996
    
    
    
    944
    
    
    
    780Other
    
    
    11,368
    
    
    
    11,138
    
    
    
    11,040Total
    
    $
    20,221
    
    
    $
    19,118
    
    
    $
    18,012
 The increase in professional fees in 2004 largely relates to added compliance costs associated
with the Sarbanes-Oxley Act. The Corporations effective tax rate was 36.4% in 2004, 36.7% in 2003 and 35.3% in 2002. The
statutory federal income tax rate applicable to Capitol is currently 35%. The effective tax rate
includes state income taxes, but excludes taxes incurred in states which are based on measures
other than income. 
 Capitols Financial Position Capitol completed 2004, as in years past, in a strong financial position. Total assets grew to
$3.1 billion, from $2.7 billion at the end of 2003 and just over $2.4 billion at the beginning of
2003. Key to the balance-sheet strength of Capitol is its liquidity (cash and cash equivalents of
$231.1 million or 7.5% of total assets) and its total capital position (subordinated debentures,
minority interests in consolidated subsidiaries and stockholders equity totaling approximately
$392.5 million or 12.7% of total assets) at December 31, 2004. Both of those key elements are
discussed in the next section, Liquidity, Capital Resources and Capital Adequacy. When looking at Capitols financial position, as shown in its consolidated balance sheet, it is
clear that the single largest asset category is portfolio loans. Accordingly, the narrative in
this section is devoted primarily to loans. Net portfolio loans (total portfolio loans minus the allowance for loan losses) approximated $2.7
billion at December 31, 2004 and $2.2 billion at December 31, 2003. These amounts approximated 86%
of total consolidated assets at December 31, 2004 and 81% at December 31, 2003. F-14




---



##### 



The banks emphasize commercial loans, consistent with their focus on lending to local
entrepreneurs, professionals and other businesses. All of Capitols banks use an enterprise-wide
credit policy; however, as emphasized earlier, all credit decisions are made at the local level at
each community bank. The utilization of a consistent enterprise-wide credit policy has several key
benefits to Capitol and its banks, such as procedural guidance for:  
    Loan underwriting and documentation.
    Credit granting authorities within the bank.
    Acceptable collateral and loan structuring.
    Loan participations when proposals exceed individual bank limitations.
    Collections and workouts.
    Evaluating and documenting the adequacy of the allowance for loan losses.
    Establishing corporate credit administration resources to aid the banks when
needed. As part of the banks emphasis on commercial lending, commercial real estate is frequently sought
as the primary source of collateral for commercial loans. This emphasis on use of commercial real
estate as collateral has been a consistent practice of Capitol and its banks from their earliest
days of operation, based on the use of conservative loan-to-value ratios, avoidance of aggressively
over-leveraged real estate development projects and that, even in soft economies, commercial real
estate has tended to have substantially less loss potential than other types of business-asset
collateral, such as receivables and inventory. A potentially negative aspect of real estate as a primary source of collateral for commercial loans
is that when some commercial loans develop performance difficulties and reach nonperforming status
(i.e., becoming 90 days past due or being placed on nonaccrual status), the resolution period is
longer because the real estate security will inevitably take an extended period to liquidate. In
contrast, a commercial loan secured by receivables and inventory which becomes nonperforming tends
to have a higher loss potential due to probable dissipation of collateral value prior to reaching
nonaccrual status. Nonperforming loans approximated $28.5 million and $26.9 million at December 31, 2004 and 2003,
respectively. Such amounts approximated 1.06% and 1.20% of portfolio loans and 0.92% and 0.98% of
total assets, respectively. Of the nonperforming loans at December 31, 2004, about 67% were
real-estate secured. Management believes that nonperforming loans have been properly considered in
its evaluation of the adequacy of the allowance for loan losses, which is discussed later in this
narrative. 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 classifications. At inception, all loans are
individually assigned a classification which grade the credits on a risk basis, based on the type
and discounted value of collateral, financial strength of the borrower and F-15




---



##### 



guarantors and other factors such as nature of the borrowers business climate, local economic
conditions and other subjective factors. The loan classification 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 identified for monitoring because of specific performance issues or
other risk factors requiring closer management and development of specific remedial action plans. At December 31, 2004, potential problem loans (including nonperforming loans) approximated $113.2
million or about 4.2% of total consolidated portfolio loans. Such totals typically approximate 4%
to 5% of loans outstanding and are an important part of managements ongoing and augmented loan
review activities which are designed to early-identify loans which warrant close monitoring at the
bank and corporate credit-administration levels. It is important to note that these potential
problem loans do not necessarily have significant loss exposure (nor are they necessarily deemed
impaired), but rather are identified by management in this manner to aid in loan administration
and risk management. Management believes these loans to be adequately considered in its evaluation
of the adequacy of the allowance for loan losses. As was noted in the Critical Accounting Policiessection of this narrative, the discussion
regarding use of estimates in determining the allowance for loan losses is very important to an
understanding of Capitols consolidated financial statements. Simply stated, the allowance for
loan losses is managements estimate of loan losses inherent in the loan portfolio at the
balance-sheet date. The allowance for loan losses is increased by provisions for loan losses which
are charged against operations and reduced by loan write-offs which are charged against the
allowance. There are many ways to estimate losses or loss reserves and, arguably, there is no
one right way. Capitol had 32 separately chartered banks at year-end 2004. Each bank separately documents the
adequacy of its respective allowance for loan losses. As mentioned previously, Capitol has a
uniform, enterprise-wide credit policy which, among other things, provides the banks guidance on
evaluating and documenting the adequacy of the allowance for loan losses. Essentially, a
standardized computational template is used consistently for all of Capitols banks. The template
factors in allowance elements for all portfolio loan categories for performing loans, nonperforming
loans, watch credits and environmental factors. While a standardized template is utilized, no
computational methodology relieves management from applying judgment in determining the amount of
the allowance needed at the bank level. Further, the combined results of the banks separate
analyses are evaluated at the Capitol, or parent, level on a judgmental basis. The process used to
evaluate and determine the adequacy of the allowance for loan losses is labor intensive and
requires significant judgment. F-16




---



##### 



The following table summarizes portfolio loans, the allowance for loan losses and nonperforming
loans for each of the banks, and on a consolidated basis: Allowance as a %Allowance for
    
    
    Nonperforming
    
    
    of Total PortfolioTotal Portfolio Loans
    
    
    Loan Losses
    
    
    Loans
    
    
    Loans2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Eastern Regions:Great Lakes Region:Ann Arbor Commerce Bank
    
    $
    297,936
    
    
    $
    287,766
    
    
    $
    3,907
    
    
    $
    3,912
    
    
    $
    2,460
    
    
    $
    2,926
    
    
    
    1.31
    %
    
    
    1.36
    %Brighton Commerce Bank
    
    
    95,408
    
    
    
    79,554
    
    
    
    969
    
    
    
    795
    
    
    
    1,035
    
    
    
    1,000
    
    
    
    1.02
    %
    
    
    1.00
    %Capitol National Bank
    
    
    196,519
    
    
    
    177,599
    
    
    
    2,723
    
    
    
    2,211
    
    
    
    2,053
    
    
    
    1,440
    
    
    
    1.39
    %
    
    
    1.24
    %Detroit Commerce Bank
    
    
    66,280
    
    
    
    38,363
    
    
    
    806
    
    
    
    595
    
    
    
    338
    
    
    
    633
    
    
    
    1.22
    %
    
    
    1.55
    %Elkhart Community Bank
    
    
    63,987
    
    
    
    48,388
    
    
    
    712
    
    
    
    616
    
    
    
    277
    
    
    
    89
    
    
    
    1.11
    %
    
    
    1.27
    %Goshen Community Bank
    
    
    48,059
    
    
    
    39,810
    
    
    
    644
    
    
    
    578
    
    
    
    703
    
    
    
    101
    
    
    
    1.34
    %
    
    
    1.45
    %Grand Haven Bank
    
    
    109,612
    
    
    
    101,645
    
    
    
    2,522
    
    
    
    1,887
    
    
    
    7,264
    
    
    
    3,178
    
    
    
    2.30
    %
    
    
    1.86
    %Kent Commerce Bank
    
    
    86,090
    
    
    
    76,093
    
    
    
    1,269
    
    
    
    829
    
    
    
    2,445
    
    
    
    651
    
    
    
    1.47
    %
    
    
    1.09
    %Macomb Community Bank
    
    
    91,173
    
    
    
    81,776
    
    
    
    1,327
    
    
    
    1,102
    
    
    
    1,768
    
    
    
    1,973
    
    
    
    1.46
    %
    
    
    1.35
    %Muskegon Commerce Bank
    
    
    88,692
    
    
    
    79,223
    
    
    
    904
    
    
    
    1,026
    
    
    
    1,524
    
    
    
    2,677
    
    
    
    1.02
    %
    
    
    1.30
    %Oakland Commerce Bank
    
    
    107,037
    
    
    
    93,920
    
    
    
    1,850
    
    
    
    1,459
    
    
    
    2,402
    
    
    
    3,022
    
    
    
    1.73
    %
    
    
    1.55
    %Paragon Bank & Trust
    
    
    96,428
    
    
    
    89,499
    
    
    
    1,350
    
    
    
    1,365
    
    
    
    783
    
    
    
    1,446
    
    
    
    1.40
    %
    
    
    1.53
    %Portage Commerce Bank
    
    
    170,479
    
    
    
    150,783
    
    
    
    1,977
    
    
    
    1,915
    
    
    
    2,820
    
    
    
    2,746
    
    
    
    1.16
    %
    
    
    1.27
    %Great Lakes Region Total
    
    
    1,517,700
    
    
    
    1,344,419
    
    
    
    20,960
    
    
    
    18,290
    
    
    
    25,872
    
    
    
    21,882First Carolina State Bank(1)
    
    
    51,867
    
    
    
    
    
    
    
    525
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    1.01
    %Western Regions:Southwest Region:Arrowhead Community Bank
    
    
    62,737
    
    
    
    46,135
    
    
    
    620
    
    
    
    527
    
    
    
    29
    
    
    
    
    
    
    
    0.99
    %
    
    
    1.14
    %Bank of Las Vegas
    
    
    41,134
    
    
    
    27,398
    
    
    
    425
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    1.03
    %
    
    
    1.23
    %Bank of Tucson
    
    
    115,694
    
    
    
    102,244
    
    
    
    1,170
    
    
    
    1,149
    
    
    
    455
    
    
    
    
    
    
    
    1.01
    %
    
    
    1.12
    %Black Mountain Community Bank
    
    
    84,163
    
    
    
    63,184
    
    
    
    1,014
    
    
    
    725
    
    
    
    368
    
    
    
    571
    
    
    
    1.20
    %
    
    
    1.15
    %Camelback Community Bank
    
    
    75,146
    
    
    
    66,260
    
    
    
    1,186
    
    
    
    882
    
    
    
    
    
    
    
    140
    
    
    
    1.58
    %
    
    
    1.33
    %Desert Community Bank
    
    
    58,751
    
    
    
    42,543
    
    
    
    722
    
    
    
    626
    
    
    
    107
    
    
    
    675
    
    
    
    1.23
    %
    
    
    1.47
    %East Valley Community Bank
    
    
    42,614
    
    
    
    31,916
    
    
    
    520
    
    
    
    440
    
    
    
    
    
    
    
    10
    
    
    
    1.22
    %
    
    
    1.38
    %Mesa Bank
    
    
    85,561
    
    
    
    61,714
    
    
    
    800
    
    
    
    664
    
    
    
    
    
    
    
    375
    
    
    
    0.94
    %
    
    
    1.08
    %Red Rock Community Bank
    
    
    72,938
    
    
    
    71,138
    
    
    
    1,714
    
    
    
    1,812
    
    
    
    762
    
    
    
    2,613
    
    
    
    2.35
    %
    
    
    2.55
    %Southern Arizona Community Bank
    
    
    72,226
    
    
    
    69,965
    
    
    
    736
    
    
    
    767
    
    
    
    
    
    
    
    
    
    
    
    1.02
    %
    
    
    1.10
    %Sunrise Bank of Albuquerque
    
    
    59,766
    
    
    
    54,078
    
    
    
    895
    
    
    
    593
    
    
    
    459
    
    
    
    14
    
    
    
    1.50
    %
    
    
    1.10
    %Sunrise Bank of Arizona
    
    
    118,617
    
    
    
    111,148
    
    
    
    1,400
    
    
    
    1,337
    
    
    
    111
    
    
    
    59
    
    
    
    1.18
    %
    
    
    1.20
    %Valley First Community Bank
    
    
    49,518
    
    
    
    34,769
    
    
    
    469
    
    
    
    491
    
    
    
    
    
    
    
    
    
    
    
    0.95
    %
    
    
    1.41
    %Yuma Community Bank
    
    
    41,460
    
    
    
    31,409
    
    
    
    465
    
    
    
    437
    
    
    
    
    
    
    
    
    
    
    
    1.12
    %
    
    
    1.39
    %Southwest Region Total
    
    
    980,325
    
    
    
    813,901
    
    
    
    12,136
    
    
    
    10,787
    
    
    
    2,291
    
    
    
    4,457California Region:Bank of Escondido
    
    
    33,166
    
    
    
    9,273
    
    
    
    350
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    1.06
    %
    
    
    1.29
    %Napa Community Bank
    
    
    53,033
    
    
    
    35,033
    
    
    
    720
    
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    1.36
    %
    
    
    1.40
    %Point Loma Community Bank(2)
    
    
    8,590
    
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.02
    %Sunrise Bank of San Diego
    
    
    46,945
    
    
    
    43,410
    
    
    
    415
    
    
    
    577
    
    
    
    297
    
    
    
    533
    
    
    
    0.88
    %
    
    
    1.33
    %California Region Total
    
    
    141,734
    
    
    
    87,716
    
    
    
    1,573
    
    
    
    1,189
    
    
    
    297
    
    
    
    533Other, net
    
    
    1,278
    
    
    
    1,404
    
    
    
    2,378
    
    
    
    1,138Consolidated totals
    
    $
    2,692,904
    
    
    $
    2,247,440
    
    
    $
    37,572
    
    
    $
    31,404
    
    
    $
    28,471
    
    
    $
    26,872
    
    
    
    1.40
    %
    
    
    1.40
    %
   (1)
    
    Acquired effective April 1, 2004.(2)
    
    Commenced operations in August 2004 and is 51%-owned by First California Southern Bancorp,
a majority-owned subsidiary of Capitol. At December 31, 2004, the consolidated allowance for loan losses approximated $37.6 million or
1.40% of total portfolio loans outstanding, compared with $31.4 million or 1.40% at December 31,
2003 and $29.0 million or 1.45% at the beginning of 2003. The allowance ratio was increased
significantly in 2002 in concert with higher estimated losses which were subsequently recognized as
loan charge-offs. As stated earlier, the allowance is based on managements analysis of inherent
losses in the portfolio at the balance sheet date, after giving effect to those charge-offs and is
deemed adequate as of that date. F-17




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##### 



There are other asset categories, such as loans held for resale ($43.1 million and $43.0 million at
December 31, 2004 and 2003, respectively). Those are loans which are presold to the secondary
market (mainly home mortgages) that generally are collected in 30-60 days. There is also a modest
amount of investment securities on the balance sheet ($42.4 million and $93.2 million at December
31, 2004 and 2003, respectively). All other asset categories are individually less than $50
million at December 31, 2004 and 2003. The primary source of funding of loans is deposits, which is discussed in the next section of this
narrative. 
 Liquidity, Capital Resources and Capital Adequacy Asset liquidity for financial institutions typically consists of cash and cash equivalents, loans
held for resale and investment securities available for sale. These categories totaled $302
million at year-end 2004, or about 10% of total assets. This compares to $410 million or about 15%
of total assets at year-end 2003. Liquidity is important for financial institutions because of
their need to meet loan funding commitments, depositor withdrawal requests and various other
commitments discussed in the accompanying notes to consolidated financial statements. Liquidity
varies significantly daily, based on customer activity. Most of the investment securities portfolio is classified as available for sale, although the banks
generally have not sold investments to meet liquidity needs. Also, to the extent warranted, the
banks may sell loans from time to time. During 2004, sales of investment securities available for
sale approximated $59.6 million, an unusually high level, compared with $25.5 million in 2003 and
$8.7 million in 2002. Proceeds from sales of investment securities available for sale included
about $57 million of mutual fund investments which management decided to liquidate, based on its
first quarter review of those investments from a risk-management perspective, and for which a loss
approximating $500,000 was incurred as of March 31, 2004. Loans held for resale, as previously mentioned, approximated $43.1 million at December 31, 2004.
These loans are residential real estate mortgages originated by the banks, primarily through
Capitols mortgage affiliate, Amera Mortgage Corporation. These loans are subsequently sold into
the secondary market, rather than being held in the banks portfolios, to reduce interest rate
risk. Mortgage loan origination volume in 2004 decreased 43%, to approximately $715.2 million
compared to $1.3 billion in 2003 and $891.5 million in 2002. The decrease in volume was primarily
due to an increase in interest rates in 2004 after record low interest rates in 2003 and 2002.
Future volume will depend on whether interest rates remain low and the strength of residential real
estate market conditions. The primary source of funds for the banks is deposits. The banks emphasize interest-bearing time
deposits as part of their funding strategy. The banks also seek noninterest-bearing deposits, or
checking accounts, which reduce the banks cost of funds. Noninterest-bearing deposits were about
20% of total deposits at year-end 2004 (about 19% at year-end 2003) and increased $68 million, or
16%, during the year. F-18




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##### 



In recent periods, many banks within the industry have experienced some competitive challenges in
obtaining additional deposits to fuel growth. Capitols banks have had similar experiences in
their individual markets. As depositors have wider access to the Internet and other real-time
interest rate monitoring resources, deposit pricing has become more competitive. Deposit growth is
achievable, but at a competitive price, with tight net interest margins, especially during these
most recent periods of low interest rates. The banks do not generally rely on brokered deposits as
a key funding source (approximately $181 million at year-end 2004 or 9% of interest-bearing
deposits compared to 10% in 2003); however, brokered deposits are a ready resource to help meet
urgent funding needs, such as loan commitments (which are discussed in greater detail in Note O of
the consolidated financial statements). To supplement their funding sources, some of the banks have lines of credit from the Federal Home
Loan Bank system. At year-end 2004, a total of approximately $154 million ($93 million at year-end
2003) was borrowed under those facilities and additional borrowing availability approximated $106
million. Some of the banks also have smaller lines of credit with their correspondent banks.
Borrowings under these facilities are generally at short-term market rates of interest and,
although the repayment dates can be extended, are generally outstanding for brief periods of time. Capitol has a credit facility aggregating $25 million from an unaffiliated bank. At year-end 2004
and 2003, no amounts were borrowed under this facility. Capitols longer-term contractual obligations are disclosed in the notes to the consolidated
financial statements. Such obligations consist principally of time deposits of the banks, debt and
lease obligations and trust-preferred securities, summarized as follows (in $1,000s): Payments Due by PeriodWithin
    
    
    Within
    
    
    Within
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsTime deposits
    
    $
    964,374
    
    
    $
    710,590
    
    
    $
    210,268
    
    
    $
    42,479
    
    
    $
    1,037Debt obligations
    
    
    172,534
    
    
    
    85,073
    
    
    
    51,321
    
    
    
    
    
    
    
    36,140Rent commitments under
noncancelable leases
    
    
    35,073
    
    
    
    5,783
    
    
    
    11,275
    
    
    
    8,232
    
    
    
    9,783Trust-preferred securities
    
    
    103,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,300Total
    
    $
    1,275,281
    
    
    $
    801,446
    
    
    $
    272,864
    
    
    $
    50,711
    
    
    $
    150,260
 Loan commitments of Capitols banks (stand-by letters of credit and unfunded loans) generally
expire within one year. Deposit balances other than time accounts and interest payable on deposits
are excluded from the table set forth above; please refer to the later interest-rate sensitivity
table regarding all deposit maturities. Other than the items set forth above, there are no
individually material contractual obligations, such as purchase obligations. A significant source of capital has been investments provided by minority shareholders in the
subsidiaries which are consolidated for financial reporting purposes. Total minority interests in
consolidated subsidiaries amounted to $39.5 million at year-end 2004, a net increase of $8.6
million from the $30.9 million level at year-end 2003. The change in minority interests F-19




---



##### 



in 2004 resulted mainly from Capitols formation of one new bank-development subsidiary less
acquisitions of minority interests of subsidiaries which became wholly-owned in 2004. One majority-owned bank and one majority-owned bank-development subsidiary became wholly-owned in
2004 and resulted in the issuance of about 347,000 shares of Capitols common stock. In each of
these transactions, the shares acquired from the minority shareholders were exchanged for Capitols
common stock according to fixed, but differing, exchange ratios. In 2003, Capitol similarly
completed eight separate share-exchange transactions which resulted in the issuance of
approximately 1.3 million shares of Capitols common stock. While it is likely that similar share exchange transactions, as a strategy to gain full ownership
of some majority-owned affiliates, may occur in the future, any such transactions depend upon
whether Capitol (or one of its subsidiary bank holding companies) offers such an exchange and
whether minority shareholders vote in favor of it on a transaction-by-transaction basis. Effective April 1, 2004, Capitol acquired First Carolina State Bank located in Rocky Mount, North
Carolina, in a purchase transaction with total consideration approximating $10 million.
Approximately half of the consideration was paid in cash and the remainder consisted of
approximately 183,000 previously unissued shares of Capitols common stock. Capitol has rarely
made acquisitions of existing banks. Prior to its acquisition of First Carolina, its most recent
acquisition of an existing bank was in 1994. Total stockholders equity approximated $252 million at year-end 2004, an increase of $33 million
for the year. The 2004 increase in stockholders equity includes earnings (less dividends paid),
the previously-mentioned share-exchange transactions and proceeds from the issuance of common
stock. The book value per share of common stock was $17.00 at year-end 2004, compared with $15.60
at year-end 2003. Cash dividends of $0.65 were paid in 2004, compared to $0.51 in 2003 and $0.44
in 2002. Future payment of dividends is subject to approval by Capitols board of directors,
future operating performance and managements assessment of the consolidated organizations capital
adequacy. Capitols capital structure consists of these primary elements:  
    Trust-preferred securities and related subordinated debentures,
    Minority interests in consolidated subsidiaries, and
    Stockholders equity. In 2004, there was one private placement of pooled trust-preferred securities in the amount of $10
million. In 2003, there were three private placements of pooled trust-preferred securities
totaling $40 million. In June 2002, Capitol participated in the private placement of a pooled
trust-preferred security totaling $3 million. In 2001, Capitol participated in two private
placements of pooled trust-preferred securities totaling $25 million. These securities, along with
Capitol Trust I (a $25 million public offering of trust-preferred securities in 1997), are treated
as elements of capital for regulatory purposes. As noted in the accompanying financial F-20




---



##### 



statements, the trusts relating to Capitols trust-preferred securities are classified as debt
obligations and, as noted in the Critical Accounting Policiesof this narrative, the accounting
treatment changed in 2004. Total capitalization at year-end 2004 amounted to $392.5 million or 12.7% of total assets. This
compares to $340.7 million or 12.4% at year-end 2003. Capitol and each of its banks and bank development subsidiaries are subject to a complex series of
regulatory rules and requirements which require specific levels of capital adequacy at both the
bank level and on a consolidated basis. Under those rules and regulations, banks are categorized
as well capitalized, adequately capitalizedor inadequately capitalizedusing several ratio
measurements, including a risk-weighting approach to assets and financial commitments. Banks
falling into the inadequately capitalizedcategory are subject to the prompt corrective action
provisions of the FDIC Improvement Act, which can result in significant regulatory agency
intervention and other adverse action. Although it is permissible to maintain capital adequacy at
the adequately capitalizedlevel, Capitol operates with the objective of its banks meeting the
well capitalized standard. The well capitalizedbanks benefit from lower FDIC deposit
insurance costs and less restrictive limitations on some banking activities. New banks, as a condition of regulatory charter approval, are required to maintain higher ratios of
capital adequacy. Generally, they are required to keep a specific ratio of
capital-to-average-total-assets of not less than 8% during their first three years of operation. In the opinion of management, all of the affiliated banks met the criteria to be classified as
well capitalized at year-end 2004. [The remainder of this page intentionally left blank] F-21




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##### 



Trends Affecting Operations The most significant trends which can impact the financial condition and results of operations of
financial institutions are changes in market rates of interest and changes in general economic
conditions. 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 an
imbalance 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. This timing
difference between interest rate-sensitive assets and interest rate-sensitive liabilities is
characterized as a gap which is quantified by the distribution of rate-sensitive amounts within
various time periods in which they reprice or mature. The following table summarizes the
consolidated financial position in relation to gap at December 31, 2004 (in $1,000s): Interest Rate Sensitivity0 to 3
    
    
    4 to 12
    
    
    1 to 5
    
    
    Over 5Months
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalASSETSFederal funds sold
    
    $
    96,390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    96,390Money market and interest-bearing deposits
    
    
    8,347
    
    
    $
    2,398
    
    
    
    
    
    
    
    
    
    
    
    10,745Investment securities
    
    
    829
    
    
    
    7,464
    
    
    $
    11,728
    
    
    $
    22,342
    
    
    
    42,363Portfolio loans:Commercial
    
    
    1,323,123
    
    
    
    192,656
    
    
    
    890,741
    
    
    
    37,972
    
    
    
    2,444,492Real estate mortgage
    
    
    131,877
    
    
    
    31,498
    
    
    
    12,179
    
    
    
    1,650
    
    
    
    177,204Installment
    
    
    8,960
    
    
    
    20,026
    
    
    
    39,483
    
    
    
    2,739
    
    
    
    71,208Loans held for resale
    
    
    43,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,143Non-earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205,873Total assets
    
    $
    1,612,669
    
    
    $
    254,042
    
    
    $
    954,131
    
    
    $
    64,703
    
    
    $
    3,091,418LIABILITIES AND STOCKHOLDERS EQUITYInterest-bearing deposits:Time deposits under $100,000
    
    $
    62,606
    
    
    $
    121,793
    
    
    $
    114,390
    
    
    $
    739
    
    
    $
    299,528Time deposits $100,000 and over
    
    
    284,781
    
    
    
    241,410
    
    
    
    138,357
    
    
    
    298
    
    
    
    664,846All other interest-bearing deposits
    
    
    844,249
    
    
    
    193,194
    
    
    
    4,353
    
    
    
    
    
    
    
    1,041,796Total interest-bearing deposits
    
    
    1,191,636
    
    
    
    556,397
    
    
    
    257,100
    
    
    
    1,037
    
    
    
    2,006,170Notes payable and short-term borrowings
    
    
    44,149
    
    
    
    40,924
    
    
    
    51,321
    
    
    
    36,140
    
    
    
    172,534Subordinated debentures (trust-preferred securities)
    
    
    58,000
    
    
    
    
    
    
    
    
    
    
    
    45,300
    
    
    
    103,300Noninterest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    517,735Minority interests in consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,520Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    252,159Total liabilities and stockholders equity
    
    $
    1,293,785
    
    
    $
    597,321
    
    
    $
    308,421
    
    
    $
    82,477
    
    
    $
    3,091,418Interest rate sensitive period gap
    
    $
    318,884
    
    
    $
    (343,279
    )
    
    $
    645,710
    
    
    $
    (17,774
    )Interest rate sensitive cumulative gap
    
    $
    318,884
    
    
    $
    (24,395
    )
    
    $
    621,315
    
    
    $
    603,541Period rate sensitive assets/period rate
sensitive liabilities
    
    
    1.25
    
    
    
    0.43
    
    
    
    3.09
    
    
    
    0.78Cumulative rate sensitive assets/cumulative
rate sensitive liabilities
    
    
    1.25
    
    
    
    0.99
    
    
    
    1.28
    
    
    
    1.26Cumulative gap to total assets
    
    
    10.32
    %
    
    
    (0.79
    )%
    
    
    20.10
    %
    
    
    19.52
    %
 F-22




---



##### 



The gap changes daily based upon changes in the underlying assets and liabilities at the
banks. Analyzing exposure to interest rate risk is prone to imprecision because the gap is
constantly changing, the gap differs at each of the banks and it is difficult to predict the
timing, amount and direction of future changes in market interest rates and the potential
corresponding effect on customer behavior. The banks endeavor to manage and monitor interest rate risk in concert with market conditions and
risk parameters. Management strives to maintain a reasonably balanced position of interest
rate-sensitive assets and liabilities. Capitol and its banks have not engaged in speculative
positions, for example, through the use of derivatives, in anticipation of interest rate movements.
In periods of relatively lower interest rates, the banks emphasize variable rate loans and time
deposits to the extent possible in a competitive environment; however, competitive influences often
result in making fixed rate loans, although the banks seek to limit the duration of such loans.
These most recent periods of record low interest rates have created a huge volume of fixed-rate
mortgage refinancing activity; those loans are sold to the secondary market and are not retained
for the banks loan portfolios. Similarly, low interest rates generally make competition more
intense for deposits, since loan demand will typically increase during periods of lower rates and,
accordingly, result in higher interest costs on deposits as competitors bid-up rates, adversely
impacting interest margins. Future interest rates and the impact on earnings are difficult to
predict. In addition to interest rate risk relating to interest-bearing assets and liabilities,
changes in interest rates also can impact future transaction volume of loans and deposits at the
banks. For activities which are influenced by levels of interest rates for transaction volume (for
example, origination of residential mortgage loans), pricing margins and demand can become impacted
significantly by changes in interest rates. As a means of monitoring and managing exposure to interest rate risk, management uses a
computerized simulation model which is intended to estimate pro forma effects of changes in
interest rates. Using the simulation model, the following table illustrates, on a consolidated
basis, changes which would occur in annual levels of interest income, interest expense and net
interest income (in $1,000s) assuming both one hundred and two hundred basis point (bp) parallel
increases and decreases in interest rates: Pro FormaAssuming No
    
    
    Pro Forma Effect of
    
    
    Pro Forma Effect ofChange in
    
    
    Interest Rate Increases
    
    
    Interest Rate DecreasesInterest Rates
    
    
    +100 bp
    
    
    +200 bp
    
    
    -100 bp
    
    
    -200 bpInterest income
    
    $
    208,382
    
    
    $
    228,737
    
    
    $
    249,142
    
    
    $
    193,831
    
    
    $
    181,928Interest expense
    
    
    57,422
    
    
    
    72,697
    
    
    
    87,972
    
    
    
    42,743
    
    
    
    31,904Net interest income
    
    $
    150,960
    
    
    $
    156,040
    
    
    $
    161,170
    
    
    $
    151,088
    
    
    $
    150,024
 The pro forma analysis above is intended to quantify theoretical changes in interest income
based on stated assumptions. The pro forma analysis excludes the effect of numerous other
variables such as borrowers ability to repay loans, the ability of banks to obtain deposits in a
radically changed interest-rate environment and how management would revise its asset and liability
management priorities in concert with rate changes. F-23




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##### 



While the pro forma analysis above is intended to estimate the impact of an immediate 100 and 200
basis point change in rates, actual results will be different. Those results will differ (and may
be materially different) because a sudden rate change in market rates does not result in an
instantaneous parallel shift in rates on loans and deposits at banks. Further, any financial model
intended to estimate the impact of interest rate changes will not necessarily incorporate other
variables, including managements efforts to manage its asset and liability interest rate
sensitivity, or customer behavior. General economic conditions also have a significant impact on both the results of operations and
the financial condition of financial institutions. Local economic conditions, and to some extent
national economic conditions, have a significant impact on levels of loan demand as well as the
ability of borrowers to repay loans and the availability of funds for customers to make deposits. At the time this narrative was written, uncertainties of domestic economic health and global
stability preclude prediction of near-term trends and their potential effects. Continuing consolidation of the banking industry on a national basis, and in the markets of
Capitols banks, has presented opportunities for growth. As a result of consolidation of the
banking industry and the conversion of customer relationships into perceived commodities by the
larger banks, many customer relationships have been displaced, generating opportunities for
development by Capitols banks. For many retail customers, banking services have become a
commodity in an environment that is dominated by larger mega-bank or mass-merchandising
institutions. For the professional, entrepreneur and other customers seeking a more
service-oriented, customized banking relationship, Capitols banks fill that need through their
focus on single-location banks with full, local decision-making authority. As Capitols banks
focus on service delivery and keeping their size at a manageable level, only a modest market share
of deposits and loan activity is necessary to achieve profitability and investor-oriented earnings
performance. Start-up banks generally incur operating losses during their early periods of operations.
Recently-formed start-up banks will detract from consolidated earnings performance and additional
start-up banks formed in 2005 and beyond will similarly negatively impact short-term profitability.
On a consolidated basis, such operating losses reduce net income by the pro rata share of
Capitols ownership percentage in those banks. Capitol reduces the net income impact of
early-period losses of start-up banks through its unique ownership structure of substantially less
than 100% of those banks either directly or indirectly through bank development subsidiaries. When
those banks become profitable, their operating results will contribute to consolidated earnings to
the extent of Capitols ownership percentage. Commercial banks continue to be subject to significant regulatory requirements which impact current
and future operations. In addition to the extent of regulatory interaction with financial
institutions, extensive rules and regulations governing lending activities, deposit gathering and
capital adequacy (to name a few), translate into a significant cost burden of financial institution
regulation. Such costs include the significant amount of management F-24




---



##### 



time and expense which is incurred in maintaining compliance and developing systems for compliance
with those rules and regulations as well as the cost of examinations, audits and other compliance
activities. The future of financial institution regulation, and its costs, is uncertain and
difficult to predict. Premiums for FDIC insurance have historically been a significant cost of doing business as
financial institutions, but in the last several years, deposit insurance premiums have been
maintained at a stable and modest level. Future deposit insurance premium levels are difficult to
predict inasmuch as deposit insurance premiums will be determined based on general economic
conditions, the relative health of the banking and financial institution industry and other
unpredictable factors. It is reasonable to expect that deposit insurance premiums may increase at
some point in the future. International bank regulatory agencies are currently contemplating revisions to the existing
risk-based capital adequacy framework through the Basel II proposals. As currently proposed,
management does not expect those proposals to have a material impact on Capitol and its banks. 
 New Accounting Standards There were several new accounting standards which were issued or became effective in 2004, in
addition to some which have later effective dates. They are listed and discussed in Note B of the
consolidated financial statements, beginning on page F-40. 
 Recent Developments In late 2003, Capitol formed a new bank-development subsidiary, Capitol Development Bancorp Limited
I (CDBLI). In early 2004, a second bank-development subsidiary was formed, Capitol Development
Bancorp Limited II (CDBLII). Both CDBLI and CDBLII were each capitalized with two classes of
common stock, voting and nonvoting. All of the voting common stock (an aggregate investment of $1
million for each entity) is owned by Capitol. All of the nonvoting common stock (an aggregate
investment of approximately $10.9 million as to CDBLI and $9.9 million as to CDBLII) was sold in
private offerings to accredited investors, some of whom are related parties of Capitol. CDBLI and
CDBLII will be engaged in bank development activities, either on a de novobasis or through
acquisition opportunities. CDBLI and CDBLII were inactive at December 31, 2004 and have been
included as consolidated subsidiaries of Capitol. CDBLI acquired a controlling interest in its first de novobank subsidiary in early January 2005.
Bank of Michigan, located in Farmington Hills, opened on January 10, 2005. In addition to Bank of Michigan, regulatory applications were pending at December 31, 2004 for
additional de novobanks to be formed in the states of Michigan and Washington. Further, in early
2005, applications were filed for the formation of de novobanks in the states of California,
Colorado, Georgia, Illinois and North Carolina, in addition to a proposed acquisition of a small
bank in the state of Georgia. Bank development activities in early 2005 in other regions of the
country were in various stages of progress. F-25




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##### 



Report on
Managements Assessment of Internal Control Over Financial
Reporting Capitol Bancorp Ltd. is responsible for the preparation, integrity, and fair presentation of the
consolidated financial statements included in this annual report. The consolidated financial
statements and notes included in this annual report have been prepared in conformity with United
States generally accepted accounting principles and necessarily include some amounts that are based
on managements best estimates and judgments. We, as management of Capitol Bancorp Ltd., are responsible for establishing and maintaining
effective internal control over financial reporting that is designed to produce reliable financial
statements in conformity with United States generally accepted accounting principles. The system
of internal control over financial reporting as it relates to the financial statements is evaluated
for effectiveness by management and tested for reliability through a program of internal audits.
Actions are taken to correct potential deficiencies as they are identified. Any system of internal
control, no matter how well designed, has inherent limitations, including the possibility that a
control can be circumvented or overridden and misstatements due to error or fraud may occur and not
be detected. Also, because of changes in conditions, internal control effectiveness may vary over
time. Accordingly, even an effective system of internal control will provide only reasonable
assurance with respect to financial statement preparation. Capitols Audit Committee, consisting entirely of independent directors, meets regularly with
management, internal auditors and the independent registered public accounting firm, and reviews
audit plans and results, as well as managements actions taken in discharging responsibilities for
accounting, financial reporting, and internal control. BDO Seidman, LLP, independent registered
public accounting firm, and the internal auditors have direct and confidential access to Capitols
Audit Committee at all times to discuss the results of their examinations. Management assessed Capitols system of internal control over financial reporting as of December
31, 2004, in relation to criteria for effective internal control over financial reporting as
described in Internal Control  Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management concluded that, as
of December 31, 2004, its system of internal control over financial reporting was effective and met
the criteria of the Internal Control  Integrated Framework. BDO Seidman, LLP, independent
registered public accounting firm, has issued an attestation report on managements assessment of
Capitols internal control over financial reporting. -s- Joseph D. Reid
    
    -s- Lee W. HendricksonJoseph D. Reid
    
    Lee W. HendricksonChairman and CEO
    
    Chief Financial OfficerLansing, MichiganMarch 4, 2005
 F-26




---



##### 



(BDO LOGO)
    
    BDO Seidman, LLP
Accountants and Consultants
    
    99 Monroe Avenue N.W., Suite 800
Grand Rapids, Michigan 49503-2654
Telephone: (616) 774-7000
Fax: (616) 776-3680
 
 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders
Capitol Bancorp Ltd. We have audited managements assessment, included in the accompanying Report on Managements
Assessment of Internal Control Over Financial Reporting, that Capitol Bancorp Ltd. maintained
effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Capitol Bancorp Ltd.s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. F-27




---



##### 



Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Capitol Bancorp Ltd. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also in our opinion, Capitol Bancorp Ltd. maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in stockholders equity and cash flows for each
of the three years in the period ended December 31, 2004 of Capitol Bancorp Ltd. and our report
dated March 4, 2005 expressed an unqualified opinion thereon. (BDO SEIDMAN, LLP)Grand Rapids, MichiganMarch 4, 2005
 F-28




---



##### 



(BDO LOGO)
    
    BDO Seidman, LLP
Accountants and Consultants
    
    99 Monroe Avenue N.W., Suite 800
Grand Rapids, Michigan 49503-2654
Telephone: (616) 774-7000
Fax: (616) 776-3680
 
 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders
Capitol Bancorp Ltd. We have audited the accompanying consolidated balance sheets of Capitol Bancorp Ltd. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income,
changes in stockholders equity and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the Corporations
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Capitol Bancorp Ltd. and subsidiaries as of December
31, 2004 and 2003, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Capitol Bancorp Ltd.s internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated March 4, 2005 expressed an unqualified opinion thereon. (BDO SEIDMAN, LLP)Grand Rapids, Michigan
March 4, 2005
 F-29




---



##### 



Consolidated Balance Sheets - December 31 -2004
    
    
    2003(in $1,000s)ASSETSCash and due from banks
    
    $
    123,969
    
    
    $
    145,896Money market and interest-bearing deposits
    
    
    10,745
    
    
    
    13,570Federal funds sold
    
    
    96,390
    
    
    
    124,157Cash and cash equivalents
    
    
    231,104
    
    
    
    283,623Loans held for resale
    
    
    43,143
    
    
    
    43,001Investment securitiesNote C:Available for sale, carried at market value
    
    
    28,172
    
    
    
    83,386Held for long-term investment, carried at amortized cost
which approximates market value
    
    
    14,191
    
    
    
    9,821Total investment securities
    
    
    42,363
    
    
    
    93,207Portfolio loans, less allowance for loan losses of $37,572 in 2004
and $31,404 in 2003Note D
    
    
    2,655,332
    
    
    
    2,216,036Premises and equipmentNote F
    
    
    32,661
    
    
    
    24,793Accrued interest income
    
    
    10,447
    
    
    
    9,533Goodwill and other intangiblesNote B
    
    
    41,943
    
    
    
    34,449Other assets
    
    
    34,425
    
    
    
    32,420TOTAL ASSETS
    
    $
    3,091,418
    
    
    $
    2,737,062LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Noninterest-bearing
    
    $
    503,902
    
    
    $
    435,599Interest-bearingNote G
    
    
    2,006,170
    
    
    
    1,853,065Total deposits
    
    
    2,510,072
    
    
    
    2,288,664Debt obligations:Notes payable and short-term borrowingsNote H
    
    
    172,534
    
    
    
    92,774Subordinated debenturesNote I
    
    
    100,845
    
    
    
    90,816Total debt obligations
    
    
    273,379
    
    
    
    183,590Accrued interest on deposits and other liabilities
    
    
    16,288
    
    
    
    14,965Total liabilities
    
    
    2,799,739
    
    
    
    2,487,219MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIESNote A
    
    
    39,520
    
    
    
    30,946STOCKHOLDERS EQUITYNotes B, J and PCommon stock, no par value, 25,000,000 shares authorized;
issued and outstanding:200414,828,750 shares200314,027,982 shares
    
    
    196,271
    
    
    
    180,957Retained earnings
    
    
    60,476
    
    
    
    43,135Market value adjustment (net of tax effect) for investment securities
available for sale (accumulated other comprehensive income)
    
    
    (36
    )
    
    
    (200
    )256,711
    
    
    
    223,892Less unearned compensation regarding restricted stock and other
    
    
    (4,552
    )
    
    
    (4,995
    )Total stockholders equity
    
    
    252,159
    
    
    
    218,897TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,091,418
    
    
    $
    2,737,062
 See notes to consolidated financial statements. F-30




---



##### 



Consolidated Statements of Income - Year Ended December 31 -2004
    
    
    2003
    
    
    2002(in $1,000s, except per share data)Interest income:Portfolio loans (including fees)
    
    $
    173,376
    
    
    $
    157,114
    
    
    $
    149,785Loans held for resale
    
    
    2,150
    
    
    
    3,299
    
    
    
    2,674Taxable investment securities
    
    
    1,331
    
    
    
    749
    
    
    
    1,422Federal funds sold
    
    
    1,620
    
    
    
    1,344
    
    
    
    1,376Other
    
    
    612
    
    
    
    1,910
    
    
    
    1,197Total interest income
    
    
    179,089
    
    
    
    164,416
    
    
    
    156,454Interest expense:Deposits
    
    
    36,695
    
    
    
    41,260
    
    
    
    47,848Debt obligations and other
    
    
    10,801
    
    
    
    8,230
    
    
    
    8,012Total interest expense
    
    
    47,496
    
    
    
    49,490
    
    
    
    55,860Net interest income
    
    
    131,593
    
    
    
    114,926
    
    
    
    100,594Provision for loan lossesNote D
    
    
    12,708
    
    
    
    9,861
    
    
    
    12,676Net interest income after provision
for loan losses
    
    
    118,885
    
    
    
    105,065
    
    
    
    87,918Noninterest income:Service charges on deposit accounts
    
    
    4,381
    
    
    
    4,319
    
    
    
    4,020Trust fee income
    
    
    3,456
    
    
    
    2,614
    
    
    
    2,434Fees from origination of non-portfolio residential
mortgage loans
    
    
    5,581
    
    
    
    8,710
    
    
    
    6,837Realized gains (losses) on sale of investment
securities available for sale
    
    
    (603
    )
    
    
    4
    
    
    
    24Gains on sale of government-guaranteed loans
    
    
    3,778
    
    
    
    3,635
    
    
    
    1,667Other
    
    
    2,659
    
    
    
    805
    
    
    
    Total noninterest income
    
    
    19,252
    
    
    
    20,087
    
    
    
    14,982Noninterest expense:Salaries and employee benefits
    
    
    63,281
    
    
    
    55,264
    
    
    
    47,454Occupancy
    
    
    8,791
    
    
    
    7,723
    
    
    
    6,528Equipment rent, depreciation and maintenance
    
    
    5,494
    
    
    
    4,847
    
    
    
    4,544Other
    
    
    20,221
    
    
    
    19,118
    
    
    
    18,012Total noninterest expense
    
    
    97,787
    
    
    
    86,952
    
    
    
    76,538Income before income taxes and minority interest
    
    
    40,350
    
    
    
    38,200
    
    
    
    26,362Income taxesNote L
    
    
    14,699
    
    
    
    14,035
    
    
    
    9,314Income before minority interest
    
    
    25,651
    
    
    
    24,165
    
    
    
    17,048Minority interest in net losses (income) of consolidated
subsidiaries
    
    
    1,065
    
    
    
    (785
    )
    
    
    (395
    )NET INCOME
    
    $
    26,716
    
    
    $
    23,380
    
    
    $
    16,653NET INCOME PER SHARENote M:Basic
    
    $
    1.88
    
    
    $
    1.86
    
    
    $
    1.64Diluted
    
    $
    1.79
    
    
    $
    1.77
    
    
    $
    1.57
 See notes to consolidated financial statements. F-31




---



##### 



Consolidated Statements of Changes in Stockholders Equity (in $1,000s, except share and
per-share data) UnearnedAccumulated
    
    
    CompensationOther
    
    
    RegardingCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    Restricted StockStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    and Other
    
    
    TotalBalances at January 1, 2002
    
    $
    67,692
    
    
    $
    14,173
    
    
    $
    158
    
    
    $
    (1,851
    )
    
    $
    80,172Issuance of 3,606,306 shares of common stock to acquire
minority interests of subsidiaries
    
    
    64,801
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,801Issuance of 193,306 shares of common stock upon exercise
of stock options and warrants
    
    
    2,301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,301Issuance of 34,622 shares of common stock in exchange
for investment security
    
    
    440
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440Allocation of shares to ESOP participants accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    145Cash dividends paid ($.44 per share)
    
    
    
    
    
    
    (4,508
    )
    
    
    
    
    
    
    
    
    
    
    (4,508
    )Components of comprehensive income:Net income for 2002
    
    
    
    
    
    
    16,653
    
    
    
    
    
    
    
    
    
    
    
    16,653Market value adjustment for investment securities
available for sale (net of income tax effect)
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    33Comprehensive income for 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,686BALANCES AT DECEMBER 31, 2002
    
    
    135,234
    
    
    
    26,318
    
    
    
    191
    
    
    
    (1,706
    )
    
    
    160,037Issuance of 1,327,378 shares of common stock to acquire
minority interests in bank subsidiaries
    
    
    29,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,134Issuance of 280,842 shares of common stock upon exercise
of stock options, net of common stock surrendered to
facilitate exercise, and exercise of 22,512 warrants
    
    
    2,287
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,287Private placement of 549,000 shares of common stock
    
    
    10,226
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,226Surrender and cancellation of 74,179 shares of common
stock in repayment of note receivable from exercise of
stock options
    
    
    (1,561
    )
    
    
    
    
    
    
    
    
    
    
    1,561
    
    
    
    Issuance of 259,017 shares of restricted common stock
    
    
    5,637
    
    
    
    
    
    
    
    
    
    
    
    (5,637
    )
    
    
    Recognition of compensation expense relating to restricted
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    642
    
    
    
    642Allocation of shares to ESOP participants accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    145Cash dividends paid ($.51 per share)
    
    
    
    
    
    
    (6,563
    )
    
    
    
    
    
    
    
    
    
    
    (6,563
    )Components of comprehensive income:Net income for 2003
    
    
    
    
    
    
    23,380
    
    
    
    
    
    
    
    
    
    
    
    23,380Market value adjustment for investment securities
available for sale (net of income tax effect)
    
    
    
    
    
    
    
    
    
    
    (391
    )
    
    
    
    
    
    
    (391
    )Comprehensive income for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,989BALANCES AT DECEMBER 31, 2003
    
    
    180,957
    
    
    
    43,135
    
    
    
    (200
    )
    
    
    (4,995
    )
    
    
    218,897Issuance of 183,349 shares of common stock in conjunction
with acquisition of First Carolina State Bank
    
    
    4,970
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,970Issuance of 346,947 shares of common stock to acquire
minority interest in subsidiaries
    
    
    8,665
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,665Issuance of 257,409 shares of common stock upon exercise
of stock options, net of common stock surrendered to
facilitate exercise
    
    
    1,302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,302Issuance of 13,063 shares of restricted common stock
    
    
    377
    
    
    
    
    
    
    
    
    
    
    
    (377
    )
    
    
    Recognition of compensation expense relating to restricted
common stock of $1,168 and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    820
    
    
    
    820Cash dividends paid ($.65 per share)
    
    
    
    
    
    
    (9,375
    )
    
    
    
    
    
    
    
    
    
    
    (9,375
    )Components of comprehensive income:Net income for 2004
    
    
    
    
    
    
    26,716
    
    
    
    
    
    
    
    
    
    
    
    26,716Market value adjustment for investment securities
available for sale (net of income tax effect)
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    164Comprehensive income for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,880BALANCES AT DECEMBER 31, 2004
    
    $
    196,271
    
    
    $
    60,476
    
    
    $
    (36
    )
    
    $
    (4,552
    )
    
    $
    252,159
 See notes to consolidated financial statements. F-32




---



##### 



Consolidated Statements of Cash Flows - Year Ended December 31 -2004
    
    
    2003
    
    
    2002(in $1,000s)OPERATING ACTIVITIESNet income
    
    $
    26,716
    
    
    $
    23,380
    
    
    $
    16,653Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    12,708
    
    
    
    9,861
    
    
    
    12,676Depreciation of premises and equipment
    
    
    4,881
    
    
    
    4,102
    
    
    
    3,451Amortization of intangibles
    
    
    549
    
    
    
    532
    
    
    
    399Net amortization (accretion) of investment security
premiums (discounts)
    
    
    87
    
    
    
    74
    
    
    
    (22
    )Loss (gain) on sales of premises and equipment
    
    
    111
    
    
    
    (83
    )
    
    
    64Minority interest in net losses (income) of consolidated
subsidiaries
    
    
    (1,065
    )
    
    
    785
    
    
    
    395Compensation expense relating to restricted common
stock
    
    
    1,168
    
    
    
    642Deferred income taxes
    
    
    (2,282
    )
    
    
    325
    
    
    
    (2,224
    )Originations and purchases of loans held for resale
    
    
    (715,238
    )
    
    
    (1,261,078
    )
    
    
    (891,498
    )Proceeds from sales of loans held for resale
    
    
    715,096
    
    
    
    1,293,497
    
    
    
    878,565Increase in accrued interest income and other assets
    
    
    (5,475
    )
    
    
    (232
    )
    
    
    (2,187
    )Increase (decrease) in accrued interest expense on
deposits and other liabilities
    
    
    347
    
    
    
    783
    
    
    
    (62
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    37,603
    
    
    
    72,588
    
    
    
    16,210INVESTING ACTIVITIESCash and cash equivalents of acquired subsidiary
    
    
    4,202Proceeds from sales of investment securities available
for sale
    
    
    59,574
    
    
    
    25,451
    
    
    
    8,672Proceeds from calls, prepayments and maturities of
investment securities
    
    
    18,254
    
    
    
    16,786
    
    
    
    67,938Purchases of investment securities
    
    
    (19,736
    )
    
    
    (101,971
    )
    
    
    (66,989
    )Net increase in portfolio loans
    
    
    (403,358
    )
    
    
    (263,478
    )
    
    
    (263,744
    )Proceeds from sales of premises and equipment
    
    
    23
    
    
    
    1,733
    
    
    
    60Purchases of premises and equipment
    
    
    (11,139
    )
    
    
    (8,808
    )
    
    
    (8,871
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (352,180
    )
    
    
    (330,287
    )
    
    
    (262,934
    )FINANCING ACTIVITIESNet increase in demand deposits, NOW accounts
and savings accounts
    
    
    151,512
    
    
    
    223,164
    
    
    
    271,571Net increase in certificates of deposit
    
    
    16,354
    
    
    
    3,428
    
    
    
    50,116Net borrowings from (payments on) debt obligations
    
    
    77,900
    
    
    
    (624
    )
    
    
    3,487Net proceeds from issuance of subordinated debentures
    
    
    9,935
    
    
    
    39,160
    
    
    
    2,899Resources provided by minority interest
    
    
    14,778
    
    
    
    19,559
    
    
    
    8,351Net proceeds from issuance of common stock
    
    
    954
    
    
    
    12,014
    
    
    
    2,301Cash dividends paid
    
    
    (9,375
    )
    
    
    (6,563
    )
    
    
    (4,508
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    262,058
    
    
    
    290,138
    
    
    
    334,217INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    (52,519
    )
    
    
    32,439
    
    
    
    87,493Cash and cash equivalents at beginning of year
    
    
    283,623
    
    
    
    251,184
    
    
    
    163,691CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    231,104
    
    
    $
    283,623
    
    
    $
    251,184
 See notes to consolidated financial statements. F-33




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE ANATURE OF OPERATIONS, BASIS OF PRESENTATION AND
PRINCIPLES OF CONSOLIDATION Capitol Bancorp Limited (Capitol or the Corporation) is a multibank holding company.
Consolidated bank subsidiaries consist of the following: PercentageOwned atDecember 31,
    
    Year FormedAffiliate
    
    Location
    
    2004
    
    or AcquiredEastern
RegionsGreat Lakes Region Banks:Ann Arbor Commerce Bank
    
    Ann Arbor, Michigan
    
    100%
    
    1990Brighton Commerce Bank
    
    Brighton, Michigan
    
    100%
    
    1997Capitol National Bank
    
    Lansing, Michigan
    
    100%
    
    1982Detroit Commerce Bank
    
    Detroit, Michigan
    
    100%
    
    1998Elkhart Community Bank
    
    Elkhart, Indiana
    
    100%
    
    1999Goshen Community Bank
    
    Goshen, Indiana
    
    100%
    
    2000Grand Haven Bank
    
    Grand Haven, Michigan
    
    100%
    
    1995Kent Commerce Bank
    
    Grand Rapids, Michigan
    
    100%
    
    1998Macomb Community Bank
    
    Clinton Township, Michigan
    
    100%
    
    1996Muskegon Commerce Bank
    
    Muskegon, Michigan
    
    100%
    
    1997Oakland Commerce Bank
    
    Farmington Hills, Michigan
    
    100%
    
    1992Paragon Bank & Trust
    
    Holland, Michigan
    
    100%
    
    1994Portage Commerce Bank
    
    Portage, Michigan
    
    100%
    
    1988First Carolina State Bank
    
    Rocky Mount, North Carolina
    
    100%
    
    2004Western
RegionsSouthwest Region Banks:Arrowhead Community Bank
    
    Glendale, Arizona
    
    100%
    
    2000Bank of Las Vegas
    
    Las Vegas, Nevada
    
    51%
    
    2002Bank of Tucson
    
    Tucson, Arizona
    
    100%
    
    1996Black Mountain Community Bank
    
    Henderson, Nevada
    
    100%
    
    2000Camelback Community Bank
    
    Phoenix, Arizona
    
    100%
    
    1998Desert Community Bank
    
    Las Vegas, Nevada
    
    100%
    
    1999East Valley Community Bank
    
    Chandler, Arizona
    
    100%
    
    1999Mesa Bank
    
    Mesa, Arizona
    
    100%
    
    1998Red Rock Community Bank
    
    Las Vegas, Nevada
    
    100%
    
    1999Southern Arizona Community Bank
    
    Tucson, Arizona
    
    100%
    
    1998Sunrise Bank of Albuquerque
    
    Albuquerque, New Mexico
    
    100%
    
    2000Sunrise Bank of Arizona
    
    Phoenix, Arizona
    
    100%
    
    1998Valley First Community Bank
    
    Scottsdale, Arizona
    
    100%
    
    1997Yuma Community Bank
    
    Yuma, Arizona
    
    100%
    
    2000California Region Banks:Bank of Escondido
    
    Escondido, California
    
    26%
    
    2003Napa Community Bank
    
    Napa, California
    
    51%
    
    2002Point Loma Community Bank
    
    Point Loma, California
    
    26%
    
    2004Sunrise Bank of San Diego
    
    San Diego, California
    
    100%
    
    2001
 F-34




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE ANATURE OF OPERATIONS, BASIS OF PRESENTATION AND
PRINCIPLES OF CONSOLIDATIONContinued At December 31, 2004, Capitol owned a majority interest in one bank holding company subsidiary,
First California Southern Bancorp, which had two majority-owned bank subsidiaries, Bank of
Escondido and Point Loma Community Bank. In late 2003, Capitol formed a new bank-development subsidiary, Capitol Development Bancorp Limited
I (CDBLI). In early 2004, a second bank-development subsidiary was formed, Capitol Development
Bancorp Limited II (CDBLII). Both CDBLI and CDBLII were each capitalized with two classes of
common stock, voting and nonvoting. All of the voting common stock (an aggregate investment of $1
million for each entity) is owned by Capitol. All of the nonvoting common stock (an aggregate
investment of approximately $10.9 million as to CDBLI and $9.9 million as to CDBLII) was sold in
private offerings to accredited investors, some of whom are related parties of Capitol. CDBLI and
CDBLII will be engaged in bank development activities, either on a de novobasis or through
acquisition opportunities. CDBLI and CDBLII were inactive at December 31, 2004 and have been
included as consolidated subsidiaries of Capitol. CDBLI acquired a controlling interest in its
first de novobank subsidiary in early January 2005. Capitol views itself as a bank-development company. It is engaged in the formation of de novo
banks through majority ownership made directly by Capitol, or through a subsidiary bank-development
company, with the remainder of a banks start-up capital provided by local investors in the
community of that bank. When a de novobank reaches a point of development near its third year of
operation, Capitol has typically offered the banks minority shareholders an opportunity to
exchange their bank shares for shares of Capitol. Capitol has made similar exchange proposals
regarding the minority interests of some of its bank-development-company subsidiaries. In each
instance, however, Capitol is under no obligation to offer such a share exchange and such share
exchange proposals are generally subject to approval by the minority shareholders in each proposed
transaction. Capitol also pursues bank development activities through exploring acquisition
opportunities. Capitol and its subsidiaries are engaged in a single business activitybanking. The bank
affiliates provide a full range of banking services to individuals, businesses and other customers
located in the respective communities of the banks domicile. Most of the banks operate from a
single location and all are commercially-focused (as contrasted to retail or transaction-oriented
banks) on meeting the various credit and other banking needs of entrepreneurs, professionals and
other businesses and individuals. A variety of deposit products are offered, including checking,
savings, money market, individual retirement accounts and certificates of deposit. In addition,
trust and investment services are offered through Paragon Bank & Trust. The principal markets for
the banks financial services are F-35




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE ANATURE OF OPERATIONS, BASIS OF PRESENTATION AND
PRINCIPLES OF CONSOLIDATIONContinued the communities in which the banks are located and the areas immediately surrounding those
communities. In addition to commercial banking units, mortgage banking activities are offered
through Amera Mortgage Corporation, a less than 50%-owned affiliate, which is accounted for under
the equity method. Each bank is viewed by management as being a separately identifiable business or segment from the
perspective of monitoring performance and allocation of financial resources. Although the banks
operate independently and are managed and monitored separately, each bank is substantially similar
in terms of business focus, type of customers, products and services. Further, each of the banks
and the Corporation are subject to substantially similar laws and regulations unique to the banking
industry. Accordingly, the Corporations consolidated financial statements reflect the
presentation of segment information on an aggregated basis. The consolidated financial statements include the accounts of the Corporation and its
majority-owned subsidiaries, after elimination of intercompany accounts and transactions, and after
giving effect to applicable minority interests. Banks formed or acquired during 2002, 2003 and
2004 are included in the consolidated financial statements for periods after joining the
consolidated group. Certain 2003 and 2002 amounts have been reclassified to conform to the 2004
presentation. NOTE BSIGNIFICANT ACCOUNTING POLICIES Estimates:The preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires management to make certain
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results will differ from those estimates because of the inherent
subjectivity and inaccuracy of any estimation. Cash and Cash Equivalents:Cash and cash equivalents include cash on hand, amounts due from banks
(interest-bearing and noninterest-bearing), money-market funds and federal funds sold. Generally,
federal funds transactions are entered into for a one-day period. Loans Held For Resale:Loans held for resale represent residential real estate mortgage loans held
for sale into the secondary market. Loans held for resale are stated at the aggregate lower of
cost or market. Fees from the origination of loans held for resale are recognized in the period
the loans are originated. F-36




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE BSIGNIFICANT ACCOUNTING POLICIESContinued Investment Securities:Investment securities available for sale (generally most debt investment
securities of Capitols banks) are carried at market value with unrealized gains and losses
reported as a separate component of stockholders equity, net of tax effect (accumulated other
comprehensive income). All other investment securities are classified as held for long-term
investment and are carried at amortized cost which approximates market value (see Note C). Investments are classified at the date of purchase based on managements analysis of liquidity and
other factors. The adjusted cost of the specific securities sold is used to compute realized gains
or losses. Premiums and discounts are recognized in interest income using the interest method over
the period to maturity. Loans, Credit Risk and Allowance for Loan Losses:Portfolio loans are carried at their principal
balance based on managements intent and ability to hold such loans for the foreseeable future
until maturity or repayment. Credit risk arises from making loans and loan commitments in the ordinary course of business.
Substantially all portfolio loans are made to borrowers in the banks geographic areas. Consistent
with the banks emphasis on business lending, there are concentrations of credit in loans secured
by commercial real estate, equipment and other business assets. The maximum potential credit risk
to Capitol, without regard to underlying collateral and guarantees, is the total of loans and loan
commitments outstanding. Management reduces Capitols exposure to losses from credit risk by
requiring collateral and/or guarantees for loans granted and by monitoring concentrations of
credit, in addition to recording provisions for loan losses and maintaining an allowance for loan
losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb
estimated losses inherent in the portfolio at the balance sheet date. Managements determination
of the adequacy of the allowance is an estimate 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. Capitol has stand-by letters of credit outstanding that, when issued, commit the banks to make
payments on behalf of customers if certain specified future events occur, generally being
non-payment by the customer. They generally expire within one year and require collateral and/or
personal guarantees based on managements credit assessment. The maximum credit risk F-37




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE BSIGNIFICANT ACCOUNTING POLICIESContinued associated with these instruments equals their contractual amounts, assuming that the counterparty
defaults and the collateral proves to be worthless. The total contractual amounts do not
necessarily represent future cash requirements since many of these guarantees may expire without
being drawn upon. Capitol records a liability, generally equal to the fees received, for these
stand-by letters of credit. Interest and Fees on Loans:Interest income on loans is recognized based upon the principal
balance of loans outstanding. Fees from origination of portfolio loans generally approximate the
direct costs of successful loan originations. The accrual of interest is generally discontinued when a loan becomes 90 days past due as to
interest. When interest accruals are discontinued, interest previously accrued (but unpaid) is
reversed. Management may elect to continue the accrual of interest when the estimated net
realizable value of collateral is sufficient to cover the principal balance and accrued interest
and the loan is in process of collection. Interest Expense:For the periods presented, interest paid on all debt obligations approximates
amounts charged to expense. Premises and Equipment:Premises and equipment are stated on the basis of cost. Depreciation,
which relates primarily to equipment and furniture with estimated useful lives of approximately
three to seven years, is computed principally by the straight-line method. Buildings are generally
depreciated on a straight-line basis with estimated useful lives of approximately 40 years.
Leasehold improvements are generally depreciated over the respective lease term. Goodwill and Other Intangibles:Goodwill is reviewed periodically by management for impairment
and, accordingly, impairment adjustments of goodwill are charged against earnings, when determined.
Other intangibles, which generally consist of core deposit intangibles, are amortized over varying
periods of less than 10 years and are not material. Other Real Estate:Other real estate (included as a component of other assets, and at December 31,
2004 and 2003 approximated $3,855,000 and $4,248,000, respectively) comprises properties acquired
through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties
held for sale are carried at the lower of cost or estimated fair value (net of estimated selling
cost) at the date acquired and are periodically reviewed for subsequent impairment. F-38




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE BSIGNIFICANT ACCOUNTING POLICIESContinued Stock-Based Compensation:No stock-based compensation expense is recorded upon granting of stock
options because such stock options are accounted for under the provisions of Accounting Principles
Board (APB) Opinion 25 (and related interpretations) and are granted at an exercise price equal to
the market price of common stock at grant date. Compensation expense for awards of restricted
stock is recognized ratably over the vesting periods of such awards (generally four years), based
on the fair value of the common stock on the date of grant. 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: 2004
    
    
    2003
    
    
    2002Fair value assumptions:Risk-free interest rate
    
    
    3.9
    %
    
    
    3.6
    %
    
    
    4.5
    %Dividend yield
    
    
    2.3
    %
    
    
    2.1
    %
    
    
    2.5
    %Stock price volatility
    
    
    .25
    
    
    
    .44
    
    
    
    .46Expected option life
    
    6.7 years
    
    7 years
    
    7 yearsAggregate estimated fair value of
options granted (in thousands)
    
    $
    6,581
    
    
    $
    6,117
    
    
    $
    11,548Net income (in thousands):As reported
    
    
    26,716
    
    
    
    23,380
    
    
    
    16,653Pro forma
    
    
    22,438
    
    
    
    19,404
    
    
    
    8,078Net income per share:Basic:As reported
    
    
    1.88
    
    
    
    1.86
    
    
    
    1.64Pro forma
    
    
    1.58
    
    
    
    1.54
    
    
    
    0.80Diluted:As reported
    
    
    1.79
    
    
    
    1.77
    
    
    
    1.57Pro forma
    
    $
    1.51
    
    
    $
    1.47
    
    
    $
    0.76
 Accounting for stock options will change in 2005, upon implementation of new accounting
guidance which will require compensation expense recognition for stock options when granted (see
subsequent disclosures in this Note B under the caption, New Accounting Standards). Trust Assets and Related Income:Customer property, other than funds on deposit, held in a
fiduciary or agency capacity by Capitols banks is not included in the consolidated balance sheet
because it is not an asset of the banks or Capitol. Trust fee income is recorded on the accrual
method. F-39




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE BSIGNIFICANT ACCOUNTING POLICIESContinued Federal Income Taxes:Capitol and subsidiaries owned 80% or more by Capitol file a consolidated
federal income tax return. Deferred federal income taxes are recognized for the tax consequences
of temporary differences by applying enacted tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax laws or rates is recognized in
income in the period that includes the enactment date. Comprehensive Income:Comprehensive income is the sum of net income and certain other items which
are charged or credited to stockholders equity. For the periods presented, Capitols only element
of comprehensive income other than net income was the net change in the market value adjustment for
investment securities available for sale. Accordingly, the elements and total of comprehensive
income are shown within the statement of changes in stockholders equity presented herein. New Accounting Standards:Financial Accounting Standards Board (FASB) 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. As it applies to financial instruments
that were within its scope, the Statement was effective for Capitols consolidated financial
statements beginning July 1, 2003. Implementation of this 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. Such securities continue to be treated as an element of capital for
regulatory purposes. FASB Interpretation No. 46, Consolidation of Variable Interest Entities, (as
revised December 2003FIN 46(R)), clarifies when some entities previously not consolidated under
prior accounting guidance, should be. In some instances, it also requires certain previously
consolidated entities to be deconsolidated. FIN 46(R) is effective for periods ending after
December 15, 2003 for special purpose entities and for periods ending after March 15, 2004 for
other types of variable interest entities that are not defined as special purpose entities.
Implementation of that new guidance required Capitol to deconsolidate its trusts which issued
trust-preferred securities which were classified as debt obligations on Capitols consolidated
balance sheet and then report the underlying subordinated debentures as debt obligations instead of
the trust-preferred securities. These standards had no impact on Capitols results of operations
upon implementation. 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 F-40




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE BSIGNIFICANT ACCOUNTING POLICIESContinued 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. The effects of this new guidance on
Capitols consolidated financial statements will depend on future acquisition activity, thus, its
impact is not readily determinable. In December 2004, 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 becomes effective for interim periods beginning
after June 30, 2005 and may be applied prospectively to stock options granted after the effective
date and any unvested stock options at that date. 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). 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, pending additional deliberation in the future. Because of the inconclusive status
of the EITFs current position 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. F-41




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE BSIGNIFICANT ACCOUNTING POLICIESContinued 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. NOTE CINVESTMENT SECURITIES Investment securities consisted of the following at December 31 (in $1,000s): 2004
    
    
    2003Estimated
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Market
    
    
    Amortized
    
    
    MarketCost
    
    
    Value
    
    
    Cost
    
    
    ValueAvailable for sale:United States Treasury securities
    
    $
    330
    
    
    $
    329
    
    
    $
    832
    
    
    $
    835United
States government agency securities
    
    
    27,897
    
    
    
    27,843
    
    
    
    25,431
    
    
    
    25,597Mutual funds
    
    
    
    
    
    
    
    
    
    
    57,424
    
    
    
    56,95428,227
    
    
    
    28,172
    
    
    
    83,687
    
    
    
    83,386Held for long-term investment:Federal Reserve Bank stock
    
    
    535
    
    
    
    535
    
    
    
    483
    
    
    
    483Federal Home Loan Bank stock
    
    
    10,878
    
    
    
    10,878
    
    
    
    6,732
    
    
    
    6,732Corporate stock
    
    
    1,443
    
    
    
    1,443
    
    
    
    1,271
    
    
    
    1,271Other
    
    
    1,335
    
    
    
    1,335
    
    
    
    1,335
    
    
    
    1,33514,191
    
    
    
    14,191
    
    
    
    9,821
    
    
    
    9,821$
    42,418
    
    
    $
    42,363
    
    
    $
    93,508
    
    
    $
    93,207
 At December 31, 2004, securities with a market value approximating $13 million were pledged to
secure public and trust deposits and for other purposes as required by law. Investments in Federal
Reserve Bank stock and Federal Home Loan Bank stock are restricted and may only be resold to, or
redeemed by, the issuer. Gross unrealized gains and losses on investment securities available for sale, which also include
unrealized gains/losses on mutual funds, were as follows at December 31 (in $1,000s): 2004
    
    
    2003Gains
    
    
    Losses
    
    
    Gains
    
    
    LossesUnited States Treasury securities
    
    $
    
    
    
    $
    1
    
    
    $
    3
    
    
    $
    United States government agency
securities
    
    
    110
    
    
    
    164
    
    
    
    187
    
    
    
    21Mutual funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470$
    110
    
    
    $
    165
    
    
    $
    190
    
    
    $
    491
 F-42




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE CINVESTMENT SECURITIESContinued The fair value of securities available for sale with unrealized losses for maturities in excess of
one year approximated $3.1 million (unrealized loss of $38,000) and the fair value of such
securities with maturities of one year or less approximated $17.6 million (unrealized loss of
$127,000). Management does not believe any individual unrealized loss as of December 31, 2004
represents other-than-temporary losses and has both the intent and ability to hold these securities
for a time period necessary to recover the amortized cost. Gross realized gains and losses from sales and maturities of investment securities were
insignificant for each of the periods presented. Scheduled maturities of investment securities held as of December 31, 2004 were as follows (in
$1,000s): EstimatedAmortized
    
    
    MarketCost
    
    
    ValueDue in one year or less
    
    $
    8,331
    
    
    $
    8,293After one year, through five years
    
    
    11,797
    
    
    
    11,728After five years, through ten years
    
    
    2,624
    
    
    
    2,673After ten years
    
    
    5,475
    
    
    
    5,478Securities held for long-term
investment, without stated maturities
    
    
    14,191
    
    
    
    14,191$
    42,418
    
    
    $
    42,363
 NOTE DLOANS Portfolio loans consisted of the following at December 31 (in $1,000s): 2004
    
    
    2003Commercial
    
    $
    2,444,492
    
    
    $
    2,033,097Real estate mortgage
    
    
    177,204
    
    
    
    143,343Installment
    
    
    71,208
    
    
    
    71,000Total portfolio loans
    
    
    2,692,904
    
    
    
    2,247,440Less allowance for loan losses
    
    
    (37,572
    )
    
    
    (31,404
    )Net portfolio loans
    
    $
    2,655,332
    
    
    $
    2,216,036
 Transactions in the allowance for loan losses are summarized below (in $1,000s): 2004
    
    
    2003
    
    
    2002Balance at January 1
    
    $
    31,404
    
    
    $
    28,953
    
    
    $
    23,238Allowance for loan losses of acquired
bank subsidiary
    
    
    724
    
    
    
    
    
    
    
    Provision charged to operations
    
    
    12,708
    
    
    
    9,861
    
    
    
    12,676Loans charged off (deduction)
    
    
    (8,388
    )
    
    
    (8,791
    )
    
    
    (7,703
    )Recoveries
    
    
    1,124
    
    
    
    1,381
    
    
    
    742Net charge-offs
    
    
    (7,264
    )
    
    
    (7,410
    )
    
    
    (6,961
    )Balance at December 31
    
    $
    37,572
    
    
    $
    31,404
    
    
    $
    28,953
 F-43




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE DLOANSContinued Impaired loans (i.e., loans for which there is a reasonable probability that borrowers would be
unable to repay all principal and interest due under the contractual terms of the loan documents)
were not material. Nonperforming loans (i.e., loans which are 90 days or more past due and loans
on nonaccrual status) are summarized below (in $1,000s): December 312004
    
    
    2003Nonaccrual loans:Commercial
    
    $
    20,618
    
    
    $
    19,852Real estate mortgage
    
    
    2,396
    
    
    
    632Installment
    
    
    195
    
    
    
    376Total nonaccrual loans
    
    
    23,209
    
    
    
    20,860Past due (>90 days) loans:Commercial
    
    
    3,529
    
    
    
    4,544Real estate mortgage
    
    
    1,382
    
    
    
    1,083Installment
    
    
    351
    
    
    
    385Total past due loans
    
    
    5,262
    
    
    
    6,012Total nonperforming loans
    
    $
    28,471
    
    
    $
    26,872
 If nonperforming loans had performed in accordance with their contractual terms during the
year, additional interest income of $1,594,000, $2,046,000 and $1,514,000 would have been recorded
in 2004, 2003 and 2002, respectively. Interest income recognized on loans in nonaccrual status in
2004, 2003 and 2002 operations approximated $714,000, $866,000 and $385,000, respectively. At
December 31, 2004, there were no material amounts of loans which were restructured or otherwise
renegotiated as a concession to troubled borrowers. The amounts of the allowance for loan losses allocated in the following table (in $1,000s) are
based on managements estimate of losses inherent in the portfolio at the balance sheet date, and
should not be interpreted as an indication of future charge-offs: December 31, 2004
    
    
    December 31, 2003Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalPortfolio
    
    
    
    
    
    
    PortfolioAmount
    
    
    Loans
    
    
    Amount
    
    
    LoansCommercial
    
    $
    34,753
    
    
    
    1.29
    %
    
    $
    29,001
    
    
    
    1.29
    %Real estate mortgage
    
    
    1,808
    
    
    
    0.07
    
    
    
    1,408
    
    
    
    0.06Installment
    
    
    1,011
    
    
    
    0.04
    
    
    
    995
    
    
    
    0.05Total allowance for loan losses
    
    $
    37,572
    
    
    
    1.40
    %
    
    $
    31,404
    
    
    
    1.40
    %
 F-44




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE ERELATED PARTIES TRANSACTIONS In the ordinary course of business, Capitols banking subsidiaries make loans to officers and
directors of Capitol and its subsidiaries including their immediate families and companies in which
they are principal owners. At December 31, 2004 and 2003, total loans to these persons were $110
million and $99 million, respectively. During 2004, $86 million of new loans were made to these
persons and repayments totaled $75 million. Such loans are made at the banking subsidiaries
normal credit terms. Officers and directors of Capitol (and their associates, family and/or affiliates) are also
depositors of the banking subsidiaries. Such deposits are similarly made at the banks normal
terms as to interest rate, term and deposit insurance. NOTE FPREMISES AND EQUIPMENT Major classes of premises and equipment consisted of the following at December 31 (in $1,000s): 2004
    
    
    2003Land, buildings and
improvements
    
    $
    14,464
    
    
    $
    8,220Leasehold improvements
    
    
    11,944
    
    
    
    10,066Equipment and furniture
    
    
    26,918
    
    
    
    23,31453,326
    
    
    
    41,600Less accumulated depreciation
    
    
    (20,665
    )
    
    
    (16,807
    )$
    32,661
    
    
    $
    24,793
 Capitol and certain subsidiaries rent office space under operating leases. Rent expense (net
of sublease income) under these lease agreements approximated $5,873,000, $5,313,000 and $4,394,000
(including rent expense of $1,637,000, $1,646,000 and $1,420,000 under leases with related parties)
in 2004, 2003 and 2002, respectively. At December 31, 2004, future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year were as follows (in $1,000s): 2005
    
    $
    5,7832006
    
    
    5,9662007
    
    
    5,3092008
    
    
    4,5442009
    
    
    3,6882010 and thereafter
    
    
    9,783$
    35,073
 F-45




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE GDEPOSITS The aggregate amount of time deposits of $100,000 or more approximated $664.8 million and $584.2
million as of December 31, 2004 and 2003, respectively. At December 31, 2004, the scheduled maturities of such time deposits were as follows (in $1,000s): 2005
    
    $
    526,1912006
    
    
    82,4372007
    
    
    35,9302008
    
    
    10,2042009 and thereafter
    
    
    10,084$
    664,846
 Interest paid approximates amounts charged to operations on an accrual basis for the periods
presented.NOTE HNOTES PAYABLE AND SHORT-TERM BORROWINGS Notes payable and short-term borrowings consisted of the following at December 31 (in $1,000s): 2004
    
    
    2003Borrowings from Federal Home
Loan Bank
    
    $
    154,135
    
    
    $
    92,774Repurchase agreement
    
    
    399
    
    
    
    Federal funds purchased
    
    
    18,000
    
    
    
    $
    172,534
    
    
    $
    92,774
 Borrowings from Federal Home Loan Bank (FHLB) represent advances secured by certain portfolio
residential real estate mortgage loans and other eligible collateral. Such advances become due at
varying dates and bear interest at market short-term rates (approximately 1.51% at December 31,
2004). At December 31, 2004, unused lines of credit under these facilities approximated $106
million. Capitol has a credit facility with an unaffiliated bank. Up to $25 million can be borrowed
pursuant to a one-year revolving credit agreement which bears interest at a variable rate (5.00% at
December 31, 2004), payable monthly, and a quarterly facility fee on the unused portion. There
were no amounts drawn on the line of credit at December 31, 2004. The credit facility is reviewed
annually for continuance and requires Capitol, among other things, to maintain certain minimum
levels of capital, rates of return on assets and other ratios or requirements, and is secured by
the common stock of certain bank subsidiaries. F-46




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE HNOTES PAYABLE AND SHORT-TERM BORROWINGSContinued At December 31, 2004, scheduled debt maturities of notes payable and short-term borrowings were as
follows (in $1,000s): 2005
    
    $
    85,0732006
    
    
    33,3212007
    
    
    18,0002008
    
    
    2009 and thereafter
    
    
    36,140$
    172,534
 In addition to the foregoing, Capitol has guaranteed some obligations of its subsidiaries (see
Note O). NOTE ISUBORDINATED DEBT Subordinated debt relates to trust-preferred securities issued by Capitol which are summarized as
follows: Aggregate
    
    
    Net Carrying AmountInterest Rate at
    
    
    
    
    
    
    Liquidation
    
    
    at December 31December 31,
    
    
    Scheduled
    
    
    Amount
    
    
    (in $1,000s)Description
    
    2004
    
    
    Maturity
    
    
    (in $1,000s)
    
    
    2004
    
    
    2003Capitol Trust I
    
    8.50% fixed
    
    
    2027
    
    
    $
    25,300
    
    
    $
    24,471
    
    
    $
    24,435Capitol Trust II
    
    10.25% fixed
    
    
    2031
    
    
    
    10,000
    
    
    
    9,733
    
    
    
    9,723Capitol Statutory Trust III
    
    5.74% variable
    
    
    2031
    
    
    
    15,000
    
    
    
    14,600
    
    
    
    14,585Capitol Trust IV
    
    5.72% variable
    
    
    2032
    
    
    
    3,000
    
    
    
    2,908
    
    
    
    2,904Capitol Trust VI
    
    5.37% variable
    
    
    2033
    
    
    
    10,000
    
    
    
    9,717
    
    
    
    9,707Capitol Trust VII
    
    7.78% fixed
    
    
    2033
    
    
    
    10,000
    
    
    
    9,856
    
    
    
    9,851Capitol Statutory Trust VIII
    
    5.45% variable
    
    
    2033
    
    
    
    20,000
    
    
    
    19,624
    
    
    
    19,611Capitol Trust IX
    
    7.69% variable
    
    
    2034
    
    
    
    10,000
    
    
    
    9,936$
    103,300
    
    
    $
    100,845
    
    
    $
    90,816
 Securities of Capitol Trust I were issued in a 1997 public offering. Capitol Trust II and
Capitol Statutory Trust III were formed in 2001 in conjunction with private placements of pooled
trust-preferred securities. Capitol Trust IV was formed in 2002, Capitol Trust VI, Capitol Trust
VII and Capitol Statutory Trust VIII were formed in 2003 and Capitol Trust IX was formed in 2004.
Each of these securities have similar terms and, subject to certain provisions, may be called by
the issuer five years after issuance. The liquidation amount of these securities is guaranteed by
Capitol. F-47




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE ISUBORDINATED DEBTContinued Interest paid to the Trusts by Capitol (which is recorded as interest expense in its consolidated
financial statements) is distributed by the Trusts to the holders of the trust-preferred
securities. Under certain conditions, Capitol may defer payment of interest on the subordinated
debentures for periods of up to five years. Under current regulatory guidelines, such
trust-preferred securities are included as capital for purposes of meeting certain ratio
requirements. NOTE JRESTRICTED COMMON STOCK AND STOCK OPTIONS Restricted common stock has been granted to certain officers. Compensation expense relating to the
award of restricted stock is recognized ratably over the vesting periods of such awards (generally
four years). The weighted-average grant-date fair value of restricted stock awards in 2004 was
$28.86 per share. Compensation expense related to restricted stock in 2004 and 2003 approximated
$1,168,000 and $642,000, respectively (none in 2002). Stock options have been granted to certain officers and directors which provide for the purchase of
shares of common stock. Generally, stock options are granted at an exercise price equal to the
fair value of common stock on the grant date. All such stock options expire at varying periods up
to seven years after the date granted. Stock option activity is summarized as follows: Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedStock Options
    
    
    Exercise
    
    
    AverageOutstanding
    
    
    Price Range
    
    
    Exercise PriceOutstanding at January 1, 2002
    
    
    1,203,123
    
    
    $
    4.92
    
    
    to
    
    $
    25.10
    
    
    $
    12.46Granted in 2002
    
    
    1,669,004
    
    
    
    13.50
    
    
    to
    
    
    23.24
    
    
    
    16.39Exercised in 2002
    
    
    (138,447
    )
    
    
    8.17
    
    
    to
    
    
    16.17
    
    
    
    9.68Cancelled or expired in 2002
    
    
    (185,144
    )Outstanding at December 31, 2002
    
    
    2,548,536
    
    
    
    4.92
    
    
    to
    
    
    25.10
    
    
    
    15.23Granted in 2003
    
    
    577,200
    
    
    
    20.36
    
    
    to
    
    
    27.23
    
    
    
    24.45Exercised in 2003
    
    
    (801,448
    )
    
    
    4.92
    
    
    to
    
    
    25.92
    
    
    
    14.41Cancelled or expired in 2003
    
    
    (26,221
    )Outstanding at December 31, 2003
    
    
    2,298,067
    
    
    
    9.88
    
    
    to
    
    
    27.23
    
    
    
    16.95Granted in 2004
    
    
    834,647
    
    
    
    22.43
    
    
    to
    
    
    33.01
    
    
    
    27.77Exercised in 2004
    
    
    (515,836
    )
    
    
    9.88
    
    
    to
    
    
    25.92
    
    
    
    15.93Cancelled or expired in 2004
    
    
    (32,739
    )Outstanding at December 31, 2004
    
    
    2,584,139
    
    
    $
    10.81
    
    
    to
    
    $
    33.01
    
    
    $
    21.06
 F-48




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE JRESTRICTED COMMON STOCK AND STOCK OPTIONSContinued At December 31, 2004, all outstanding stock options are currently exercisable. Effective December
31, 2004, the vesting of any previously unvested stock options was accelerated in anticipation of
implementation of a new accounting standard (see Note B). As of December 31, 2004, stock options
outstanding had a weighted average remaining contractual life of 4.3 years. The following table
summarizes stock options outstanding segregated by exercise price range: Weighted AverageRemainingExercise Price
    
    Number
    
    
    Exercise
    
    
    ContractualRange
    
    Outstanding
    
    
    Price
    
    
    Life$10.00 to 14.99
    
    
    346,088
    
    
    $
    11.32
    
    
    2.5 years$15.00 to 19.99
    
    
    769,986
    
    
    
    16.59
    
    
    3.6 years$20.00 to 24.99
    
    
    553,038
    
    
    
    21.80
    
    
    3.6 years$25.00 to 29.99
    
    
    755,455
    
    
    
    27.01
    
    
    6.0 years$30.00 or more
    
    
    159,572
    
    
    $
    32.98
    
    
    5.7 years2,584,139
 NOTE KEMPLOYEE RETIREMENT PLANS Capitol has a contributory employee retirement savings 401(k) plan which covers substantially all
full-time employees of Capitol and certain subsidiaries over age 21. The Plan provides for
employer contributions in amounts determined annually by Capitols board of directors. Eligible
employees make voluntary contributions to the Plan. Employer contributions to the Plan, which are
a match for employee contributions (50%, subject to certain limitations), charged to expense for
the years ended December 31, 2004, 2003 and 2002 were $1,027,000, $918,000 and $717,000,
respectively. Capitol also has a defined contribution employee stock ownership plan (ESOP) which covers
substantially all employees of Capitol and certain subsidiaries. Certain common stock purchases by
the ESOP were financed by long-term debt. ESOP contributions charged to expense in 2004, 2003 and
2002 approximated $961,000, $642,000 and $405,000, respectively (including ESOP note payable
interest of $12,000 in 2003 and $24,000 in 2002; none in 2004). Certain shares of common stock
held by the ESOP which were not allocated to participants accounts were shown as a reduction of
stockholders equity through interim periods in 2003. As of December 31, 2004, the ESOP held
approximately 265,000 shares of Capitols common stock which have been allocated to participants
accounts; there were no unallocated shares as of that date. F-49




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE LINCOME TAXES Income taxes include the following components (in $1,000s): 2004
    
    
    2003
    
    
    2002Federal current
    
    $
    15,401
    
    
    $
    12,549
    
    
    $
    10,925Federal deferred expense (credit)
    
    
    (2,282
    )
    
    
    325
    
    
    
    (2,224
    )State income taxes
    
    
    1,580
    
    
    
    1,161
    
    
    
    613$

    14,699
    
    
    $
    14,035
    
    
    $
    9,314
 Deferred state income taxes were insignificant for the periods presented. In addition to
state income taxes, certain states in which the banks operate impose taxes based on measures other
than income. Tax expense incurred associated with those jurisdictions approximated $1,010,000,
$909,000 and $713,000 in 2004, 2003 and 2002, respectively, and are excluded from income tax
expense and included in other noninterest expense. Federal income taxes paid in 2004, 2003 and 2002 approximated $17.1 million, $9.7 million and $11.9
million, respectively. State income taxes paid approximated $1.6 million in 2004 ($867,000 in 2003
and $771,000 in 2002). Differences between income tax expense recorded and amounts computed using the statutory tax rate
are reconciled below (in $1,000s): 2004
    
    
    2003
    
    
    2002Federal income tax computed at statutory
rate of 35%
    
    $
    14,122
    
    
    $
    13,370
    
    
    $
    9,227State income taxes
    
    
    1,580
    
    
    
    1,161
    
    
    
    613Federal tax effect of:Amortization of goodwill and
other intangibles
    
    
    192
    
    
    
    186
    
    
    
    139State income taxes
    
    
    (553
    )
    
    
    (406
    )
    
    
    (214
    )Adjustment of deferred income taxes
to effective tax rate of 35%
    
    
    
    
    
    
    
    
    
    
    (221
    )Other
    
    
    (642
    )
    
    
    (276
    )
    
    
    (230
    )$
    14,699
    
    
    $
    14,035
    
    
    $
    9,314
 Net deferred income tax assets consisted of the following at December 31 (in $1,000s): 2004
    
    
    2003Allowance for loan losses
    
    $
    11,596
    
    
    $
    9,493Net operating losses of subsidiaries
    
    
    1,683
    
    
    
    745Deferred compensation
    
    
    2,224
    
    
    
    1,515Market value adjustment for investment
securities available for sale
    
    
    3
    
    
    
    102Other, net
    
    
    (1,358
    )
    
    
    (408
    )$
    14,148
    
    
    $
    11,447
 F-50




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE LINCOME TAXESContinued Certain consolidated subsidiaries have net operating loss carryforwards which may reduce income
taxes payable in future periods. Such carryforwards approximate $4.8 million at December 31, 2004,
have been recognized for financial reporting purposes and expire at the following dates and amounts
(in $1,000s): 2022
    
    $
    393,0002023
    
    
    1,030,0002024
    
    
    3,386,000$
    4,809,000
 NOTE MNET INCOME PER SHARE The computations of basic and diluted net income per share were as follows (in 1,000s): 2004
    
    
    2003
    
    
    2002Numeratornet income
    
    $
    26,716
    
    
    $
    23,380
    
    
    $
    16,653Denominator:Weighted average number of shares outstanding,
excluding unvested restricted shares
(denominator for basic earnings per share)
    
    
    14,183
    
    
    
    12,602
    
    
    
    10,139Effect of dilutive securities:Unvested restricted shares
    
    
    263
    
    
    
    157Warrants
    
    
    
    
    
    
    
    
    
    
    12Stock options
    
    
    445
    
    
    
    416
    
    
    
    449Potential dilution
    
    
    708
    
    
    
    573
    
    
    
    461Denominator
for diluted earnings per shareweighted
average number of shares and potential dilution
    
    
    14,891
    
    
    
    13,175
    
    
    
    10,600Number of antidilutive stock options excluded from
diluted earnings per share computation
    
    
    160
    
    
    
    337
    
    
    
    243
 Additional disclosures regarding restricted shares and stock options are set forth in Note J. F-51




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE NESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values and estimated fair values of financial instruments were as follows at December 31
(in $1,000s): 2004
    
    
    2003Estimated
    
    
    
    
    
    
    EstimatedCarrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    $
    231,104
    
    
    $
    231,104
    
    
    $
    283,623
    
    
    $
    283,623Loans held for resale
    
    
    43,143
    
    
    
    43,143
    
    
    
    43,001
    
    
    
    43,001Investment securities:Available for sale
    
    
    28,172
    
    
    
    28,172
    
    
    
    83,386
    
    
    
    83,386Held for long-term investment
    
    
    14,191
    
    
    
    14,191
    
    
    
    9,821
    
    
    
    9,82142,363
    
    
    
    42,363
    
    
    
    93,207
    
    
    
    93,207Portfolio loans:Commercial
    
    
    2,444,492
    
    
    
    2,444,379
    
    
    
    2,033,097
    
    
    
    2,042,269Real estate mortgage
    
    
    177,204
    
    
    
    177,697
    
    
    
    143,343
    
    
    
    152,444Installment
    
    
    71,208
    
    
    
    71,833
    
    
    
    71,000
    
    
    
    70,919Total portfolio loans
    
    
    2,692,904
    
    
    
    2,693,909
    
    
    
    2,247,440
    
    
    
    2,265,632Less allowance for loan losses
    
    
    (37,572
    )
    
    
    (37,572
    )
    
    
    (31,404
    )
    
    
    (31,404
    )Net portfolio loans
    
    
    2,655,332
    
    
    
    2,656,337
    
    
    
    2,216,036
    
    
    
    2,234,228Financial Liabilities:Deposits:Noninterest-bearing
    
    
    503,902
    
    
    
    503,902
    
    
    
    435,599
    
    
    
    435,599Interest-bearing:Demand accounts
    
    
    1,041,796
    
    
    
    1,027,417
    
    
    
    971,879
    
    
    
    973,042Time certificates of less
than $100,000
    
    
    299,528
    
    
    
    301,347
    
    
    
    296,992
    
    
    
    293,897Time certificates of
$100,000 or more
    
    
    664,846
    
    
    
    668,310
    
    
    
    584,194
    
    
    
    590,374Total interest-bearing
    
    
    2,006,170
    
    
    
    1,997,074
    
    
    
    1,853,065
    
    
    
    1,857,313Total deposits
    
    
    2,510,072
    
    
    
    2,500,976
    
    
    
    2,288,664
    
    
    
    2,292,912Notes payable and short-term
borrowings
    
    
    172,534
    
    
    
    173,305
    
    
    
    92,774
    
    
    
    92,867Subordinated debentures
    
    
    100,845
    
    
    
    103,300
    
    
    
    90,816
    
    
    
    93,300
 Estimated fair values of financial assets and liabilities are based upon a comparison of
current interest rates on financial instruments and the timing of related scheduled cash flows to
the estimated present value of such cash flows using current estimated market rates of interest
(unless quoted market values or other fair value information is more readily available). Such
estimates of fair value are not intended to represent market value or portfolio liquidation value,
and only represent an estimate of fair values based on current financial reporting requirements. F-52




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE OCOMMITMENTS, GUARANTEES AND OTHER CONTINGENCIES In the ordinary course of business, loan commitments are made to accommodate the financial needs of
bank customers. Loan commitments include stand-by letters of credit, lines of credit, and other
commitments for commercial, installment and mortgage loans. Stand-by letters of credit, when
issued, commit the bank to make payments on behalf of customers if certain specified future events
occur and are used infrequently by the banks ($23.3 million and $25.4 million outstanding at
December 31, 2004 and 2003, respectively). Other loan commitments outstanding consist of unused
lines of credit and approved, but unfunded, specific loan commitments ($637.1 million and $510.9
million at December 31, 2004 and 2003, respectively). These loan commitments (stand-by letters of
credit and unfunded loans) generally expire within one year and are reviewed periodically for
continuance or renewal. All loan commitments have credit risk essentially the same as that involved in routinely making
loans to customers and are made subject to the banks normal credit policies. In making these loan
commitments, collateral and/or personal guarantees of the borrowers are generally obtained based on
managements credit assessment. The banking subsidiaries are required to maintain average reserve balances in the form of cash on
hand and balances due from the Federal Reserve Bank and correspondent banks. The amount of reserve
balances required as of December 31, 2004 and 2003 were $6.1 million and $4.5 million,
respectively. Deposits at each of the banks are insured up to the maximum amount covered by FDIC insurance. Some
of the banks have municipal government deposits which are guaranteed by Capitol ($17.7 million at
December 31, 2004). Capitol has guaranteed up to $7.5 million of secured borrowings by Amera Mortgage Corporation, a
less than 50%-owned affiliate. [The remainder of this page intentionally left blank] F-53




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE PDIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTS Current banking regulations restrict the ability to transfer funds from subsidiaries to their
parent in the form of cash dividends, loans or advances. Subject to various regulatory capital
requirements, bank subsidiaries current and retained earnings are available for distribution as
dividends to Capitol (and other bank shareholders, as applicable) without prior approval from
regulatory authorities. Substantially all of the remaining net assets of the subsidiaries are
restricted as to payments to Capitol. Each bank and Capitol are subject to certain other capital requirements. Federal financial
institution regulatory agencies have established certain risk-based capital guidelines for banks
and bank holding companies. Those guidelines require all banks and bank holding companies to
maintain certain minimum ratios and related amounts based on Tier 1 and Tier 2 capital and
risk-weighted assets as defined and periodically prescribed by the respective regulatory
agencies. Failure to meet these capital requirements can result in severe regulatory enforcement
action or other adverse consequences for a depository institution and, accordingly, could have a
material impact on Capitols consolidated financial statements. Under the regulatory capital adequacy guidelines and related framework for prompt corrective
action, the specific capital requirements involve quantitative measures of assets, liabilities and
certain off-balance-sheet items calculated under regulatory accounting practices. The capital
amounts and classifications are also subject to qualitative judgements by regulatory agencies with
regard to components, risk weighting and other factors. As a condition of their charter approval, de novobanks are generally required to maintain a core
capital (Tier 1) to average assets ratio of not less than 8% (4% for other banks) and an allowance
for loan losses of not less than 1% for the first three years of operations. As of December 31, 2004, the most recent notifications received by the banks from regulatory
agencies have advised that the banks are classified as well capitalized as defined by the
applicable agencies. There are no conditions or events since those notifications that management
believes would change the regulatory classification of the banks. Management believes, as of December 31, 2004, that Capitol and the banks meet all capital adequacy
requirements to which the entities are subject. F-54




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE PDIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL
REQUIREMENTSContinued The following table summarizes the amounts (in $1,000s) and related ratios of the individually significant subsidiaries
(assets of $200 million or more) and consolidated regulatory capital position as of December 31, 2004 and 2003: Ann Arbor
    
    
    CapitolCommerce
    
    
    NationalBank
    
    
    Bank
    
    
    ConsolidatedDecember 31, 2004Tier 1 capital to average adjusted total assets:Minimum required amount
    3
    $
    13,190
    
    3
    $
    9,165
    
    3
    $
    121,911Actual amount
    
    $
    26,496
    
    
    $
    18,007
    
    
    $
    333,049Ratio
    
    
    8.03
    %
    
    
    7.86
    %
    
    
    10.93
    %Tier 1 capital to risk-weighted assets:Minimum required amount(1)
    3
    $
    11,894
    
    3
    $
    7,924
    
    3
    $
    110,778Actual amount
    
    $
    26,496
    
    
    $
    18,007
    
    
    $
    333,049Ratio
    
    
    8.91
    %
    
    
    9.09
    %
    
    
    12.03
    %Combined Tier 1 and Tier 2 capital to risk-weighted assets:Minimum required amount(2)
    3
    $
    23,788
    
    3
    $
    15,847
    
    3
    $
    221,555Amount required to meet Well-Capitalized
category(3)
    
    $
    29,735
    
    
    $
    19,809
    
    
    $
    276,944Actual amount
    
    $
    30,215
    
    
    $
    20,486
    
    
    $
    385,273Ratio
    
    
    10.16
    %
    
    
    10.34
    %
    
    
    13.91
    %December 31, 2003Tier 1 capital to average adjusted total assets:Minimum required amount
    3
    $
    12,531
    
    3
    $
    8,543
    
    3
    $
    104,133Actual amount
    
    $
    25,262
    
    
    $
    16,405
    
    
    $
    287,071Ratio
    
    
    8.06
    %
    
    
    7.68
    %
    
    
    11.03
    %Tier 1 capital to risk-weighted assets:Minimum required amount(1)
    3
    $
    11,502
    
    3
    $
    7,415
    
    3
    $
    93,751Actual amount
    
    $
    25,262
    
    
    $
    16,405
    
    
    $
    287,071Ratio
    
    
    8.79
    %
    
    
    8.85
    %
    
    
    12.25
    %Combined Tier 1 and Tier 2 capital to risk-weighted assets:Minimum required amount(2)
    3
    $
    23,003
    
    3
    $
    14,829
    
    3
    $
    187,503Amount required to meet Well-Capitalized
category(3)
    
    $
    28,754
    
    
    $
    18,537
    
    
    $
    234,379Actual amount
    
    $
    28,860
    
    
    $
    18,616
    
    
    $
    335,429Ratio
    
    
    10.04
    %
    
    
    10.04
    %
    
    
    14.31
    %
   (1)
    The minimum required ratio of Tier 1 capital to risk-weighted assets is 4%.(2)
    The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted assets is
8%.(3)
    In order to be classified as a well-capitalized institution, the ratio of Tier 1
and Tier 2 capital to risk-weighted assets must be 10% or more. F-55




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE Q  PARENT COMPANY FINANCIAL INFORMATION Condensed Balance Sheets - December 31 -2004
    
    
    2003(in $1,000s)AssetsCash on deposit principally with subsidiary banks
    
    $
    1,618
    
    
    $
    2,228Money market funds on deposit principally with subsidiary
banks
    
    
    8,907
    
    
    
    15,194Time deposits principally with subsidiary banks
    
    
    21,277
    
    
    
    20,116Investments in and amounts due from subsidiaries
    
    
    302,628
    
    
    
    256,741Notes receivable, net
    
    
    1,230
    
    
    
    1,556Investment in and advances to Amera Mortgage Corporation
    
    
    797
    
    
    
    859Equipment and furniture, net
    
    
    1,850
    
    
    
    1,853Goodwill and other intangibles
    
    
    17,209
    
    
    
    15,703Other assets
    
    
    10,471
    
    
    
    7,417Total assets
    
    $
    365,987
    
    
    $
    321,667Liabilities and Stockholders EquityAccounts payable, accrued expenses and other liabilities
    
    $
    9,784
    
    
    $
    9,066Subordinated debentures
    
    
    104,044
    
    
    
    93,704Total liabilities
    
    
    113,828
    
    
    
    102,770Stockholders equity
    
    
    252,159
    
    
    
    218,897Total liabilities and stockholders equity
    
    $
    365,987
    
    
    $
    321,667
 Condensed Statements Of Income - Year Ended December 31 -2004
    
    
    2003
    
    
    2002(in $1,000s)Income:Dividends from subsidiaries
    
    $
    16,075
    
    
    $
    13,675
    
    
    $
    10,755Intercompany fees
    
    
    16,561
    
    
    
    14,752
    
    
    
    9,722Interest
    
    
    468
    
    
    
    118
    
    
    
    253Other
    
    
    99
    
    
    
    2,047
    
    
    
    51Total income
    
    
    33,203
    
    
    
    30,592
    
    
    
    20,781Expenses:Interest
    
    
    6,931
    
    
    
    4,874
    
    
    
    5,016Salaries and employee benefits
    
    
    13,370
    
    
    
    11,950
    
    
    
    7,662Occupancy
    
    
    1,138
    
    
    
    963
    
    
    
    590Amortization, equipment rent and depreciation
    
    
    1,225
    
    
    
    1,483
    
    
    
    963Other
    
    
    5,252
    
    
    
    3,131
    
    
    
    2,224Total expenses
    
    
    27,916
    
    
    
    22,401
    
    
    
    16,455Income before equity in undistributed net
earnings of consolidated subsidiaries and
income tax credit
    
    
    5,287
    
    
    
    8,191
    
    
    
    4,326Equity in undistributed net earnings of
consolidated subsidiaries
    
    
    17,665
    
    
    
    13,494
    
    
    
    9,861Income before income tax credit
    
    
    22,952
    
    
    
    21,685
    
    
    
    14,187Income tax credit
    
    
    (3,764
    )
    
    
    (1,695
    )
    
    
    (2,466
    )Net income
    
    $
    26,716
    
    
    $
    23,380
    
    
    $
    16,653
 F-56




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE QPARENT COMPANY
FINANCIAL INFORMATIONContinued Condensed Statements of Cash Flows - Year Ended December 31 -2004
    
    
    2003
    
    
    2002(in $1,000s)OPERATING ACTIVITIESNet income
    
    $
    26,716
    
    
    $
    23,380
    
    
    $
    16,653Adjustments to reconcile net income to net cash provided
by operating activities:Equity in undistributed net earnings of subsidiaries
    
    
    (17,665
    )
    
    
    (13,494
    )
    
    
    (9,861
    )Depreciation and amortization of intangibles
    
    
    1,197
    
    
    
    996
    
    
    
    889Loss on sale of premises and equipment
    
    

    
    
    
    
    
    
    
    
    50Decrease in amounts due from subsidiaries and other
assets
    
    
    10,271
    
    
    
    31,438
    
    
    
    48,978Increase in accounts payable, accrued expenses and other
liabilities
    
    
    718
    
    
    
    2,426
    
    
    
    2,908NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    21,237
    
    
    
    44,746
    
    
    
    59,617INVESTING ACTIVITIESNet cash investments in subsidiaries
    
    
    (27,887
    )
    
    
    (45,396
    )
    
    
    (47,543
    )Net payments from Amera Mortgage Corporation
    
    
    62
    
    
    
    30
    
    
    
    570Purchases of investment securities
    
    
    
    
    
    
    
    
    
    
    (440
    )Proceeds from sales and maturities of securities
    
    

    
    
    
    
    
    
    
    
    838Proceeds from sales of equipment and furniture
    
    

    
    
    
    
    
    
    
    
    100Purchases of equipment and furniture
    
    
    (662
    )
    
    
    (977
    )
    
    
    (1,318
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (28,487
    )
    
    
    (46,343
    )
    
    
    (47,793
    )FINANCING ACTIVITIESNet payments on debt obligations
    
    
    
    
    
    

    (12,500
    )
    
    
    (6,500
    )Net proceeds from issuance of common stock
    
    
    954
    
    
    
    12,014
    
    
    
    2,301Net proceeds from issuance of subordinated debentures
    
    
    9,935
    
    
    
    39,160
    
    
    
    2,899Cash dividends paid
    
    
    (9,375
    )
    
    
    (6,563
    )
    
    
    (4,508
    )NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES
    
    
    1,514
    
    
    
    32,111
    
    
    
    (5,808
    )INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    (5,736
    )
    
    
    30,514
    
    
    
    6,016Cash and cash equivalents at beginning of year
    
    
    37,538
    
    
    
    7,024
    
    
    
    1,008CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    31,802
    
    
    $
    37,538
    
    
    $
    7,024
 F-57




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE RACQUISITION OF MINORITY INTERESTS AND ACQUISITION OF BANK During 2004, two share-exchange transactions were completed, whereby certain previously
majority-owned consolidated subsidiaries became wholly-owned. These share exchange transactions
involved the issuance of previously unissued shares of Capitols common stock for the minority
interests of the following subsidiaries: Number of CommonEntity
    
    Effective Date
    
    Shares IssuedSunrise Bank of San Diego
    

May 31,
2004
    
    
    206,999First California Northern Bancorp
    

August 31,
2004
    
    
    139,948
 Had these acquisitions occurred at the beginning of 2004, consolidated net income would have
approximated $26.9 million and diluted earnings per share would have been $1.79. Each of these
acquisitions have been accounted for under the purchase method of accounting. The carrying value
of assets and liabilities of the entities closely approximated fair value at the date of the share
exchanges. Total consideration for these transactions approximated $8.7 million which resulted in
the recording of goodwill of approximately $3.7 million and acquisition of minority interests
approximating $3.5 million. Effective April 1, 2004, Capitol acquired First Carolina State Bank (First Carolina) located in
Rocky Mount, North Carolina, in a purchase transaction with total consideration approximating $10
million. Approximately half of the consideration was paid in cash and the remainder consisted of
approximately 183,000 previously unissued shares of Capitols common stock. At March 31, 2004,
First Carolinas total assets approximated $61.7 million. Capitols acquisition of First Carolina
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. Goodwill of approximately $4 million was recorded in conjunction with this
transaction and will not be amortized, but will be reviewed at least annually for impairment. Had
this transaction occurred at the beginning of 2004, net income would have approximated $26.3
million ($1.76 per diluted share). F-58




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capitol Bancorp Limited NOTE RACQUISITION OF MINORITY INTERESTS AND ACQUISITION OF BANKContinued During 2003, several share-exchange transactions were also completed, whereby certain previously
majority-owned consolidated subsidiaries similarly became wholly-owned: Number of CommonEntity
    
    Effective Date
    
    Shares IssuedBlack Mountain Community Bank
    

July
31, 2003
    
    
    223,287Desert Community Bank
    

July
31, 2003
    
    
    209,203Elkhart Community Bank
    

July
31, 2003
    
    
    197,927Red Rock Community Bank
    

July
31, 2003
    
    
    351,778Arrowhead Community Bank
    

December
31, 2003
    
    
    44,452Goshen Community Bank
    

December
31, 2003
    
    
    137,312Sunrise Bank of Albuquerque
    

December
31, 2003
    
    
    43,325Yuma Community Bank
    

December
31, 2003
    
    
    120,094
 Had the 2003 acquisitions of minority interests occurred at the beginning of 2003,
consolidated net income would have approximated $24.4 million and diluted earnings per share would
have been $1.73. [The remainder of this page intentionally left blank] F-59