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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended March 31, 2005
  o TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
 Commission file number 001-31708 CAPITOL BANCORP LTD.  Michigan
(State or other jurisdiction
of incorporation or
organization)
    
    38-2761672
(I.R.S. Employer
Identification
Number)
 Capitol Bancorp Center
200 Washington Square North, Lansing, Michigan
(Address of principal executive offices)48933
(Zip Code)(517) 487-6555
(Registrants telephone number) Not Applicable
(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
þ No o Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule
12b of the Act). Yes þ No o APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: Common stock, No par value: 14,922,284 shares outstanding as of April 15, 2005.   Page 1 of 25




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INDEX PART I. FINANCIAL INFORMATION Forward-Looking Statements Certain of the statements contained in this document, including Capitols consolidated financial
statements, Managements Discussion and Analysis of Financial Condition and Results of Operations
and in documents incorporated into this document by reference that are not historical facts,
including, without limitation, statements of future expectations, projections of results of
operations and financial condition, statements of future economic performance and other
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, are subject to known and unknown risks, uncertainties and other factors which may cause the
actual future results, performance or achievements of Capitol and/or its subsidiaries and other
operating units to differ materially from those contemplated in such forward-looking statements.
The words intend, expect, project, estimate, predict, anticipate, should, believe,
and similar expressions also are intended to identify forward-looking statements. Important
factors which may cause actual results to differ from those contemplated in such forward-looking
statements include, but are not limited to: (i) the results of Capitols efforts to implement its
business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements
adversely impacting Capitols banking business and/or expansion strategy, (iv) adverse changes in
business conditions or inflation, (v) general economic conditions, either nationally or regionally,
which are less favorable than expected and that result in, among other things, a deterioration in
credit quality and/or loan performance and collectability, (vi) competitive pressures among
financial institutions, (vii) changes in securities markets, (viii) actions of competitors of
Capitols banks and Capitols ability to respond to such actions, (ix) the cost of capital, which
may depend in part on Capitols asset quality, prospects and outlook, (x) changes in governmental
regulation, tax rates and similar matters, and (xi) other risks detailed in Capitols other filings
with the Securities and Exchange Commission. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially
from those indicated. All subsequent written or oral forward-looking statements attributable to
Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing
factors. Investors and other interested parties are cautioned not to place undue reliance on such
statements, which speak as of the date of such statements. Capitol undertakes no obligation to
release publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of unanticipated
events.  
 PageItem 1. Financial Statements (unaudited):Condensed consolidated balance sheets  March 31, 2005 and December 31, 2004.
    
    
    3Condensed consolidated statements of income  Three months ended March 31, 2005 and 2004.
    
    
    4Condensed consolidated statements of changes in stockholders equity  Three months ended March 31, 2005 and 2004.
    
    
    5Condensed consolidated statements of cash flows  Three months ended March 31, 2005 and 2004.
    
    
    6Notes to condensed consolidated financial statements.
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    22Item 4. Controls and Procedures.
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings.
    
    
    23Item 2. Unregistered Sales of Securities and Use of Proceeds.
    
    
    23Item 3. Defaults Upon Senior Securities.
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders.
    
    
    23Item 5. Other Information.
    
    
    23Item 6. Exhibits.
    
    
    23SIGNATURES
    
    
    24EXHIBIT INDEX
    
    
    25Certification of Chief Executive Officer, Joseph D. Reid, Pursuant to Section 302Certification of Chief Financial Officer, Lee W. Hendrickson, Pursuant to Section 302Certification of Chief Financial Officer, Joseph D. Reid, Pursuant to Section 906Certification of Chief Financial Officer, Lee W. Hendrickson, Pursuant to Section 906
 Page 2 of 25




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PART I. ITEM I

CAPITOL BANCORP LIMITED 
    (Unaudited)March 31
    
    
    December 312005
    
    
    2004ASSETSCash and due from banks
    
    $
    161,052
    
    
    $
    123,969Money market and interest-bearing deposits
    
    
    13,273
    
    
    
    10,745Federal funds sold
    
    
    115,114
    
    
    
    96,390Cash and cash equivalents
    
    
    289,439
    
    
    
    231,104Loans held for resale
    
    
    34,846
    
    
    
    43,143Investment securities:Available for sale, carried at market value
    
    
    28,807
    
    
    
    28,172Held for long-term investment, carried at
amortized cost which approximates market value
    
    
    15,327
    
    
    
    14,191Total investment securities
    
    
    44,134
    
    
    
    42,363Portfolio loans:Commercial
    
    
    2,516,999
    
    
    
    2,444,492Real estate mortgage
    
    
    171,728
    
    
    
    177,204Installment
    
    
    70,717
    
    
    
    71,208Total portfolio loans
    
    
    2,759,444
    
    
    
    2,692,904Less allowance for loan losses
    
    
    (37,725
    )
    
    
    (37,572
    )Net portfolio loans
    
    
    2,721,719
    
    
    
    2,655,332Premises and equipment
    
    
    32,600
    
    
    
    32,661Accrued interest income
    
    
    11,229
    
    
    
    10,447Goodwill and other intangibles
    
    
    41,804
    
    
    
    41,943Other assets
    
    
    39,422
    
    
    
    34,425TOTAL ASSETS
    
    $
    3,215,193
    
    
    $
    3,091,418LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing
    
    $
    529,673
    
    
    $
    503,902Interest-bearing
    
    
    2,075,191
    
    
    
    2,006,170Total deposits
    
    
    2,604,864
    
    
    
    2,510,072Debt obligations:Notes payable and short-term borrowings
    
    
    187,142
    
    
    
    172,534Subordinated debentures
    
    
    100,869
    
    
    
    100,845Total debt obligations
    
    
    288,011
    
    
    
    273,379Accrued interest on deposits and other liabilities
    
    
    20,381
    
    
    
    16,288Total liabilities
    
    
    2,913,256
    
    
    
    2,799,739MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
    
    
    43,299
    
    
    
    39,520STOCKHOLDERS EQUITY:Common stock, no par value, 25,000,000 shares authorized;
issued and outstanding: 2005 - 14,921,183 shares
2004 - 14,828,750 shares
    
    
    197,113
    
    
    
    196,271Retained earnings
    
    
    65,960
    
    
    
    60,476Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income)
    
    
    (188
    )
    
    
    (36
    )262,885
    
    
    
    256,711Less unearned compensation regarding restricted stock and other
    
    
    (4,247
    )
    
    
    (4,552
    )Total stockholders equity
    
    
    258,638
    
    
    
    252,159TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,215,193
    
    
    $
    3,091,418
 See notes to condensed consolidated financial statements. Page 3 of 25




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CAPITOL BANCORP LIMITED 
    Three Months Ended March 312005
    
    
    2004Interest income:Portfolio loans (including fees)
    
    $
    48,237
    
    
    $
    40,030Loans held for resale
    
    
    637
    
    
    
    423Taxable investment securities
    
    
    235
    
    
    
    530Federal funds sold
    
    
    621
    
    
    
    292Other
    
    
    191
    
    
    
    174Total interest income
    
    
    49,921
    
    
    
    41,449Interest expense:Deposits
    
    
    10,571
    
    
    
    8,790Debt obligations and other
    
    
    3,547
    
    
    
    2,429Total interest expense
    
    
    14,118
    
    
    
    11,219Net interest income
    
    
    35,803
    
    
    
    30,230Provision for loan losses
    
    
    2,023
    
    
    
    3,508Net interest income after provision
for loan losses
    
    
    33,780
    
    
    
    26,722Noninterest income:Service charges on deposit accounts
    
    
    1,011
    
    
    
    1,083Trust fee income
    
    
    605
    
    
    
    881Fees from origination of non-portfolio
residential mortgage loans
    
    
    1,265
    
    
    
    1,272Gain (loss) on sale of investment securities
available for sale
    
    
    1
    
    
    
    (444
    )Other
    
    
    1,691
    
    
    
    1,346Total noninterest income
    
    
    4,573
    
    
    
    4,138Noninterest expense:Salaries and employee benefits
    
    
    17,217
    
    
    
    15,387Occupancy
    
    
    2,300
    
    
    
    2,133Equipment rent, depreciation and maintenance
    
    
    1,439
    
    
    
    1,367Other
    
    
    5,518
    
    
    
    4,677Total noninterest expense
    
    
    26,474
    
    
    
    23,564Income before income taxes and minority interest
    
    
    11,879
    
    
    
    7,296Income taxes
    
    
    4,560
    
    
    
    2,890Income before minority interest
    
    
    7,319
    
    
    
    4,406Minority interest in net losses
of consolidated subsidiaries
    
    
    696
    
    
    
    10NET INCOME
    
    $
    8,015
    
    
    $
    4,416NET INCOME PER SHARENote D:Basic
    
    $
    0.55
    
    
    $
    0.32Diluted
    
    $
    0.52
    
    
    $
    0.30
 See notes to condensed consolidated financial statements. Page 4 of 25




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CAPITOL BANCORP LTD. 
    UnearnedAccumulated
    
    
    CompensationOther
    
    
    RegardingCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    Restricted StockStock
    
    
    Earnings
    
    
    Income
    
    
    and Other
    
    
    TotalThree Months Ended March 31, 2004Balances at January 1, 2004
    
    $
    180,957
    
    
    $
    43,135
    
    
    $
    (200
    )
    
    $
    (4,995
    )
    
    $
    218,897Issuance of 53,812 shares of common stock
upon exercise of stock options, net of
common stock surrendered to
facilitate exercise
    
    
    1,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,081Issuance of 11,681 shares of restricted common stock
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    (337
    )
    
    
    0Recognition of compensation expense relating to
restricted common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319
    
    
    
    319Cash dividends paid ($.15 per share)
    
    
    
    
    
    
    (2,109
    )
    
    
    
    
    
    
    
    
    
    
    (2,109
    )Components of comprehensive income:Net income for the period
    
    
    
    
    
    
    4,416
    
    
    
    
    
    
    
    
    
    
    
    4,416Market value adjustment for investment
securities available for sale (net of
income tax effect)
    
    
    
    
    
    
    
    
    
    
    312
    
    
    
    
    
    
    
    312Comprehensive income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,728BALANCES AT MARCH 31, 2005
    
    $
    182,375
    
    
    $
    45,442
    
    
    $
    112
    
    
    $
    (5,013
    )
    
    $
    222,916Three Months Ended March 31, 2005Balances at January 1, 2005
    
    $
    196,271
    
    
    $
    60,476
    
    
    $
    (36
    )
    
    $
    (4,552
    )
    
    $
    252,159Issuance of 92,433 shares of common stock
upon exercise of stock options, net of
common stock surrendered to
facilitate exercise
    
    
    842
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    842Recognition of compensation expense relating to
restricted common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305
    
    
    
    305Cash dividends paid ($.17 per share)
    
    
    
    
    
    
    (2,531
    )
    
    
    
    
    
    
    
    
    
    
    (2,531
    )Components of comprehensive income:Net income for the period
    
    
    
    
    
    
    8,015
    
    
    
    
    
    
    
    
    
    
    
    8,015Market value adjustment for investment
securities available for sale (net of
income tax effect)
    
    
    
    
    
    
    
    
    
    
    (152
    )
    
    
    
    
    
    
    (152
    )Comprehensive income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,863BALANCES AT MARCH 31, 2005
    
    $
    197,113
    
    
    $
    65,960
    
    
    $
    (188
    )
    
    $
    (4,247
    )
    
    $
    258,638
 See notes to condensed consolidated financial statements. Page 5 of 25




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CAPITOL BANCORP LTD. 
   Three Months Ended March 312005
    
    
    2004(in thousands)OPERATING ACTIVITIESNet income
    
    $
    8,015
    
    
    $
    4,416Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    2,023
    
    
    
    3,508Depreciation of premises and equipment
    
    
    1,363
    
    
    
    1,096Amortization of intangibles
    
    
    139
    
    
    
    133Net amortization (accretion) of investment security
premiums (discounts)
    
    
    11
    
    
    
    (20
    )Loss on sale of premises and equipment
    
    
    1
    
    
    
    9Minority interest in net losses of consolidated subsidiaries
    
    
    (696
    )
    
    
    (10
    )Compensation expense relating to restricted common stock
    
    
    305
    
    
    
    319Originations and purchases of loans held for resale
    
    
    (152,231
    )
    
    
    (178,877
    )Proceeds from sales of loans held for resale
    
    
    160,528
    
    
    
    171,150Increase in accrued interest income and other assets
    
    
    (5,677
    )
    
    
    (1,176
    )Increase (decrease) in accrued interest expense on
deposits and other liabilities
    
    
    4,093
    
    
    
    (6
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    17,874
    
    
    
    542INVESTING ACTIVITIESProceeds from sales of investment securities available
for sale
    
    
    
    
    
    
    18,950Proceeds from calls, prepayments and maturities of
investment securities
    
    
    961
    
    
    
    1,662Purchases of investment securities
    
    
    (2,972
    )
    
    
    (4,406
    )Net increase in portfolio loans
    
    
    (68,410
    )
    
    
    (101,331
    )Proceeds from sales of premises and equipment
    
    
    4
    
    
    
    2Purchases of premises and equipment
    
    
    (1,308
    )
    
    
    (601
    )NET CASH USED BY INVESTING ACTIVITIES
    
    
    (71,725
    )
    
    
    (85,724
    )FINANCING ACTIVITIESNet increase in demand deposits, NOW accounts and
savings accounts
    
    
    42,948
    
    
    
    87,779Net increase (decrease) in certificates of deposit
    
    
    51,844
    
    
    
    (592
    )Net borrowings from debt obligations
    
    
    14,608
    
    
    
    18,900Net proceeds from issuance of subordinated debentures
    
    
    
    
    
    
    9,935Resources provided by minority interest
    
    
    4,475
    
    
    
    10,690Net proceeds from issuance of common stock
    
    
    842
    
    
    
    1,400Cash dividends paid
    
    
    (2,531
    )
    
    
    (2,109
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    112,186
    
    
    
    126,003INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    58,335
    
    
    
    40,821Cash and cash equivalents at beginning of period
    
    
    231,104
    
    
    
    283,623CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    289,439
    
    
    $
    324,444
 See notes to condensed consolidated financial statements. Page 6 of 25




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. Note A  Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Ltd.
(Capitol) have been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q. Accordingly, they do not
include all information and footnotes necessary for a fair presentation of consolidated financial
position, results of operations and cash flows in conformity with generally accepted accounting
principles. The statements do, however, include all adjustments of a normal recurring nature (in
accordance with Rule 10-01(b)(8) of Regulation S-X) which Capitol considers necessary for a fair
presentation of the interim periods. The results of operations for the period ended March 31, 2005 are not necessarily indicative
of the results to be expected for the year ending December 31, 2005. The consolidated balance sheet as of December 31, 2004 was derived from audited consolidated
financial statements as of that date. Certain 2004 amounts have been reclassified to conform to
the 2005 presentation. Note B  Implementation of New Accounting Standard AICPA Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer(SOP 03-3), addresses the accounting for differences between contractual cash flows and
cash flows expected to be collected from the initial investment in loans acquired in a transfer if
those differences are attributable, at least in part, to credit quality. It includes such loans
acquired in purchase business combinations and does not apply to loans originated by the entity.
The SOP prohibits carrying over or creation of valuation allowances in the initial accounting for
loans acquired in a transfer. It is effective for loans acquired in fiscal years beginning after
December 15, 2004. This new guidance had no effect on Capitols consolidated financial statements
upon implementation. [The remainder of this page intentionally left blank] Page 7 of 25




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - Continued Note C  Stock Options Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
establishes an alternative fair value method of accounting for stock options whereby compensation
expense would be recognized based on the computed fair value of the options on the grant date. By
not electing this alternative, certain pro forma disclosures of the expense recognition provisions
of Statement No. 123 are required, which are as follows: Three Months EndedMarch 312005
    
    
    2004Fair value assumptions:Risk-free interest rate
    
    
    4.1
    %
    
    
    3.5
    %Dividend yield
    
    
    2.1
    %
    
    
    2.1
    %Stock price volatility
    
    
    .25
    
    
    
    .29Expected option life
    
    7 years
    
    6 yearsAggregate estimated fair value of
options granted (in thousands)
    
    $
    362
    
    
    $
    2,346Net income (in thousands):As reported
    
    $
    8,015
    
    
    $
    4,416Less pro forma compensation
expense regarding fair value
of stock option awards, net
of related income tax effect
    
    
    (223
    )
    
    
    (1,525
    )Pro forma
    
    $
    7,792
    
    
    $
    2,891Net income per share:Basic:As reported
    
    $
    0.55
    
    
    $
    0.32Pro forma
    
    
    0.53
    
    
    
    0.21Diluted:As reported
    
    
    0.52
    
    
    
    0.30Pro forma
    
    $
    0.51
    
    
    $
    0.20
 Stock option activity for the interim 2005 period is summarized as follows: WeightedNumber of
    
    
    Exercise
    
    AverageStock Options
    
    
    Price
    
    ExerciseOutstanding
    
    
    Range
    
    PriceOutstanding at January 1
    
    
    2,584,139
    
    
    $10.81 to $33.01
    
    $
    21.06Exercised
    
    
    (194,462
    )
    

11.00 to   27.05
    
    
    16.09Granted
    
    
    46,470
    
    
    34.31 to   34.84
    
    
    34.50Cancelled or expired
    
    
    (2,362
    )
    
    29.10Outstanding at March 31
    
    
    2,433,785
    
    
    $10.81  to  $34.84
    
    $
    21.73
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - Continued Note C  Stock Options  Continued As of March 31, 2005, 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
    
    
    
    
    
    
    327,813
    
    
    $
    11.31
    
    
    2.3 years$15.00 to 19.99
    
    
    
    
    
    
    598,840
    
    
    
    16.64
    
    
    3.5 years$20.00 to 24.99
    
    
    
    
    
    
    550,964
    
    
    
    21.93
    
    
    5.0 years$25.00 to 29.99
    
    
    
    
    
    
    750,126
    
    
    
    27.01
    
    
    5.0 years$30.00 or more
    
    
    
    
    
    
    206,042
    
    
    $
    33.32
    
    
    5.8 yearsTotal outstanding
    
    
    
    
    
    
    2,433,785
 Note D  Net Income Per Share The computations of basic and diluted earnings per share were as follows: Three Months EndedMarch 312005
    
    
    2004Numeratornet income for the period
    
    $
    8,015,000
    
    
    $
    4,416,000Denominator:Weighted average number of common
shares outstanding, excluding unvested
shares of restricted common stock
(denominator for basic earnings per share)
    
    
    14,648,473
    
    
    
    13,795,195Weighted average number of unvested shares
of restricted common stock outstanding
    
    
    215,489
    
    
    
    267,226Effect of other dilutive securities (stock
options)
    
    
    549,430
    
    
    
    569,121Denominator for diluted net income per shareWeighted average number of common
shares and potential dilution
    
    
    15,413,392
    
    
    
    14,631,542Number of antidilutive stock options excluded
from diluted earnings per share computation
    
    
    206,042
    
    
    
    
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - Continued Note E  New Bank and Bank Development Activities Bank of Michigan, located in Farmington Hills, Michigan, opened in January 2005. It is
majority-owned by Capitol Development Bancorp Limited I, which is a controlled subsidiary of
Capitol. Bank development efforts are currently under consideration at March 31, 2005 in several states
including pre-development exploratory discussions, lease and employment negotiations and
preparation of preliminary regulatory applications for formation and/or acquisition of community
banks. Currently, Capitol Bancorp has applications pending for additional de novocommunity banks
in California, Colorado, Michigan and Washington. Note F  Pending Share Exchange Proposal As of March 31, 2005, a potential share exchange transaction was in the proposal stage
regarding Napa Community Bank which, if completed, would result in Capitol issuing approximately
280,000 additional shares of common stock and the bank becoming wholly-owned if all of the banks
shareholders, other than Capitol, elect to exchange their shares of the banks common stock for
shares of Capitol. Capitol anticipates concluding the proposed share exchange mid-year, 2005. Note G  Subsequent Acquisition of Bank In early April 2005, Capitol acquired a 51% interest in Peoples State Bank (Peoples) located
in Jeffersonville, Georgia, in a purchase transaction with total consideration approximating $2.2
million. At March 31, 2005, Peoples total assets approximated $21.2 million. Capitols
acquisition of Peoples will be accounted for under the purchase method of accounting and its
results of operations will be included in Capitols consolidated financial statements for periods
after the effective date of the acquisition. Note H  Impact of New Accounting Standards In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of
Statement No. 123. Statement No. 123(R), Share-Based Payment, is broader in scope than the
original statement, which was more narrowly focused on stock-based compensation, and makes
significant changes to accounting for payments involving employee compensation and shares or
securities, in the form of stock options, restricted stock or other arrangements settled in the
reporting entitys securities. Most significant in the standard is the requirement that all stock
options be measured at estimated fair value at the grant date and recorded as compensation expense
over the requisite service period associated with the option, usually the vesting period. The
revised standard was to become effective for interim periods beginning after June 30, 2005 and be
applied prospectively to stock options granted after the effective date and any unvested stock
options at that date; however, the SEC superseded the FASBs implementation timetable in April
2005, changing the effective date to the beginning of 2006 for calendar-year public companies. Page 10 of 25




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD. - Continued Note H  Impact of New Accounting Standards  Continued 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. 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. [The remainder of this page intentionally left blank] Page 11 of 25




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PART I. ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS Financial Condition Total assets approximated $3.2 billion at March 31, 2005, an increase of $124 million from the
December 31, 2004 level of $3.1 billion. The balance sheet includes Capitol and its consolidated
subsidiaries: Total Assets(in $1,000s)March 31
    
    
    Dec 312005
    
    
    2004Eastern Regions:Great Lakes Region:Ann Arbor Commerce Bank
    
    $
    332,697
    
    
    $
    330,488Bank of Michigan(1)
    
    
    10,373
    
    
    
    n/aBrighton Commerce Bank
    
    
    105,417
    
    
    
    105,890Capitol National Bank
    
    
    234,996
    
    
    
    228,656Detroit Commerce Bank
    
    
    77,326
    
    
    
    70,036Elkhart Community Bank
    
    
    71,226
    
    
    
    67,099Goshen Community Bank
    
    
    55,321
    
    
    
    54,571Grand Haven Bank
    
    
    121,042
    
    
    
    119,254Kent Commerce Bank
    
    
    89,768
    
    
    
    89,393Macomb Community Bank
    
    
    97,753
    
    
    
    94,847Muskegon Commerce Bank
    
    
    93,856
    
    
    
    94,162Oakland Commerce Bank
    
    
    129,576
    
    
    
    130,779Paragon Bank & Trust
    
    
    109,885
    
    
    
    110,128Portage Commerce Bank
    
    
    184,304
    
    
    
    180,817Great Lakes Region Total
    
    
    1,713,540
    
    
    
    1,676,120First Carolina State Bank
    
    
    69,941
    
    
    
    68,598Eastern Regions Total
    
    
    1,783,481
    
    
    
    1,744,718Western Regions:Southwest Region:Arrowhead Community Bank
    
    
    75,871
    
    
    
    70,989Bank of Las Vegas
    
    
    50,927
    
    
    
    47,538Bank of Tucson
    
    
    170,429
    
    
    
    168,469Black Mountain Community Bank
    
    
    109,483
    
    
    
    100,415Camelback Community Bank
    
    
    81,406
    
    
    
    83,414Desert Community Bank
    
    
    70,890
    
    
    
    63,276East Valley Community Bank
    
    
    48,656
    
    
    
    46,549Mesa Bank
    
    
    102,406
    
    
    
    96,158Red Rock Community Bank
    
    
    102,962
    
    
    
    102,832Southern Arizona Community Bank
    
    
    90,456
    
    
    
    83,140Sunrise Bank of Albuquerque
    
    
    71,934
    
    
    
    69,055Sunrise Bank of Arizona
    
    
    129,816
    
    
    
    128,192Valley First Community Bank
    
    
    62,609
    
    
    
    54,857Yuma Community Bank
    
    
    59,577
    
    
    
    59,355Southwest Region Total
    
    
    1,227,422
    
    
    
    1,174,239California Region:Bank of Escondido
    
    
    58,169
    
    
    
    50,956Napa Community Bank
    
    
    73,014
    
    
    
    79,396Point Loma Community Bank
    
    
    32,018
    
    
    
    20,857Sunrise Bank of San Diego
    
    
    65,975
    
    
    
    62,672California Region Total
    
    
    229,176
    
    
    
    213,881Western Regions Total
    
    
    1,456,598
    
    
    
    1,388,120Other, net
    
    
    (24,886
    )
    
    
    (41,420
    )Consolidated
    
    $
    3,215,193
    
    
    $
    3,091,418
   (1)
    
    Commenced operations in January 2005 and is 51%-owned
by Capitol Development Bancorp
Limited I, a controlled subsidiary of Capitol. Page 12 of 25




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Portfolio loans increased during the three-month 2005 period by approximately $67
million, compared to net loan growth of about $100 million during the corresponding period of 2004.
2005 loan growth represented a continuation of prior-period demand
and growth at many of
Capitols younger banks. The majority of portfolio loan growth occurred in commercial loans,
consistent with the banks emphasis on commercial lending activities. The allowance for loan losses at March 31, 2005 approximated $38 million or 1.37% of total
portfolio loans, which was slightly less than the year-end 2004 ratio of 1.40%. The allowance
ratio at March 31, 2005 is lower than the beginning of the year, consistent with asset quality
improvements discussed later in this narrative. The allowance for loan losses is maintained at a level believed adequate by management to
absorb potential losses inherent in the loan portfolio at the balance sheet date. Managements
determination of the adequacy of the allowance is based on evaluation of the portfolio (including
potential impairment of individual loans and concentrations of credit), past loss experience,
current economic conditions, volume, amount and composition of the loan portfolio and other
factors. The allowance is increased by provisions charged to operations and reduced by net
charge-offs. The table below summarizes portfolio loan balances and activity in the allowance for
loan losses for the interim periods (in thousands): 2005
    
    
    2004Allowance for loan losses at January 1
    
    $
    37,572
    
    
    $
    31,404Loans charged-off:Commercial
    
    
    (2,071
    )
    
    
    (1,942
    )Real estate mortgage
    
    
    
    
    
    
    (2
    )Installment
    
    
    (252
    )
    
    
    (55
    )Total charge-offs
    
    
    (2,323
    )
    
    
    (1,999
    )Recoveries:Commercial
    
    
    410
    
    
    
    191Real estate mortgage
    
    
    
    
    
    
    Installment
    
    
    43
    
    
    
    15Total recoveries
    
    
    453
    
    
    
    206Net charge-offs
    
    
    (1,870
    )
    
    
    (1,793
    )Additions to allowance charged to expense
    
    
    2,023
    
    
    
    3,508Allowance for loan losses at March 31
    
    $
    37,725
    
    
    $
    33,119Average total portfolio loans for period ended March 31
    
    $
    2,726,965
    
    
    $
    2,302,115Ratio of net charge-offs (annualized) to average
portfolio loans outstanding
    
    
    0.27
    %
    
    
    0.31
    %
 The
interim 2004 provision for loan losses was at a higher level due to unexpectedly
strong loan growth in the first quarter of 2004 and a special provision of $1 million recorded for
estimated losses on one lending relationship. Page 13 of 25




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Net charge-offs of loans in the interim 2005 period increased marginally in amount compared
to the corresponding 2004 period, however, the ratio of net charge-offs as a percentage of average
loans decreased to .27% in 2005, compared to .31% in the 2004 period. The amounts of the allowance for loan losses allocated in the following table (in thousands)
are based on managements estimate of losses inherent in the portfolio at the balance-sheet date,
include all loans for which, based on Capitols loan rating system, management has concerns, and
should not be interpreted as an indication of future charge-offs. March 31, 2005
    
    
    December 31, 2004Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of TotalPortfolio
    
    
    
    
    
    
    PortfolioAmount
    
    
    Loans
    
    
    Amount
    
    
    LoansCommercial
    
    $
    35,078
    
    
    
    1.27
    %
    
    $
    34,753
    
    
    
    1.29
    %Real estate mortgage
    
    
    1,683
    
    
    
    0.06
    
    
    
    1,808
    
    
    
    0.07Installment
    
    
    964
    
    
    
    0.04
    
    
    
    1,011
    
    
    
    0.04Total allowance for loan losses
    
    $
    37,725
    
    
    
    1.37
    %
    
    $
    37,572
    
    
    
    1.40
    %Total portfolio loans outstanding
    
    $
    2,759,444
    
    
    
    
    
    
    $
    2,692,904
 Nonperforming loans (i.e., loans which are 90 days or more past due and loans on
nonaccrual status) and other nonperforming assets are summarized below (in thousands): March 31
    
    
    Dec 312005
    
    
    2004Nonaccrual loans:Commercial
    
    $
    16,886
    
    
    $
    20,618Real estate mortgage
    
    
    1,149
    
    
    
    2,396Installment
    
    
    749
    
    
    
    195Total nonaccrual loans
    
    
    18,784
    
    
    
    23,209Past due
(390 days) loans:Commercial
    
    
    4,372
    
    
    
    3,529Real estate mortgage
    
    
    692
    
    
    
    1,382Installment
    
    
    557
    
    
    
    351Total past due loans
    
    
    5,621
    
    
    
    5,262Total nonperforming loans
    
    $
    24,405
    
    
    $
    28,471Real estate owned and other
repossessed assets
    
    
    5,626
    
    
    
    3,907Total nonperforming assets
    
    $
    30,031
    
    
    $
    32,378
 Page 14 of 25




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Nonperforming loans decreased 14% or $4 million during the three-month period ended
March 31, 2005. Nonperforming loans as a percentage of portfolio loans outstanding at March 31,
2005 were 0.88%, a reduction from the beginning of year level of 1.06%. The significant early 2005
reduction in nonperforming loans came as a result of collection efforts and other resolution
activities, such as charge-offs. Of the nonperforming loans at March 31, 2005, about 59% were real
estate secured. Those loans, when originated, had appropriate loan-to-value ratios and,
accordingly, have loss exposure which is expected to be minimal; however, underlying real estate
values depend upon current economic conditions and liquidation strategies. Most other
nonperforming loans were generally secured by other business assets. Nonperforming loans at March
31, 2005 were in various stages of resolution and management believes such loans are adequately
collateralized or otherwise appropriately considered in its determination of the adequacy of the
allowance for loan losses. In addition to the identification of nonperforming loans involving borrowers with payment
performance difficulties (i.e., nonaccrual loans and loans past-due 90 days or more), management
utilizes an internal loan review process to identify other potential problem loans which may
warrant additional monitoring or other attention. This loan review process is a continuous
activity which periodically updates internal loan ratings. At inception, all loans are
individually assigned a rating which grades the credits on a risk basis, based on the type and
discounted value of collateral, financial strength of the borrower and guarantors and other factors
such as nature of the borrowers business climate, local economic conditions and other subjective
factors. The loan rating process is fluid and subjective. Potential problem loans include loans which are generally performing as agreed; however,
because of internal loan reviews and/or lending staffs risk assessment, increased monitoring is
deemed appropriate. In addition, some loans are assigned a more adverse classification, with
specific performance issues or other risk factors requiring close management and development of
specific remedial action plans. At March 31, 2005, potential problem loans (including the previously mentioned nonperforming
loans) approximated $108 million, or about 4% of total consolidated portfolio loans. These
potential problem loans do not necessarily have significant loss exposure (nor are they necessarily
deemed impaired), but rather are identified by management in this manner to aid in loan
administration and risk management. Management believes such loans to be adequately considered in
its evaluation of the adequacy of the allowance for loan losses. Management believes, however,
that current general economic conditions may result in higher levels of future loan losses, in
comparison to previous years, as evidenced by higher provisions for loan losses in recent periods. Page 15 of 25




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The following comparative analysis summarizes each banks total portfolio loans, allowance for
loan losses, nonperforming loans and ratio of the allowance as a percentage of portfolio loans
(dollars in thousands): Total
    
    
    Allowance for
    
    
    Nonperforming
    
    
    Allowance as a PercentagePortfolio Loans
    
    
    Loan Losses
    
    
    Loans
    
    
    of Total Portfolio LoansMarch 31
    
    
    Dec 31
    
    
    March 31
    
    
    Dec 31
    
    
    March 31
    
    
    Dec 31
    
    
    March 31
    
    
    Dec 312005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Eastern Regions:Great Lakes Region:Ann Arbor Commerce Bank
    
    $
    301,836
    
    
    $
    297,936
    
    
    $
    4,043
    
    
    $
    3,907
    
    
    $
    2,877
    
    
    $
    2,460
    
    
    
    1.34
    %
    
    
    1.31
    %Bank of Michigan(1)
    
    
    965
    
    
    
    n/a
    
    
    
    15
    
    
    
    n/a
    
    
    
    
    
    
    
    n/a
    
    
    
    1.55
    
    
    
    n/aBrighton Commerce Bank
    
    
    96,094
    
    
    
    95,408
    
    
    
    989
    
    
    
    969
    
    
    
    28
    
    
    
    1,035
    
    
    
    1.03
    
    
    
    1.02Capitol National Bank
    
    
    196,765
    
    
    
    196,519
    
    
    
    2,599
    
    
    
    2,723
    
    
    
    1,549
    
    
    
    2,053
    
    
    
    1.32
    
    
    
    1.39Detroit Commerce Bank
    
    
    71,719
    
    
    
    66,280
    
    
    
    851
    
    
    
    806
    
    
    
    329
    
    
    
    338
    
    
    
    1.19
    
    
    
    1.22Elkhart Community Bank
    
    
    66,286
    
    
    
    63,987
    
    
    
    777
    
    
    
    712
    
    
    
    342
    
    
    
    277
    
    
    
    1.17
    
    
    
    1.11Goshen Community Bank
    
    
    50,836
    
    
    
    48,059
    
    
    
    673
    
    
    
    644
    
    
    
    809
    
    
    
    703
    
    
    
    1.32
    
    
    
    1.34Grand Haven Bank
    
    
    111,093
    
    
    
    109,612
    
    
    
    2,484
    
    
    
    2,522
    
    
    
    4,556
    
    
    
    7,264
    
    
    
    2.24
    
    
    
    2.30Kent Commerce Bank
    
    
    86,184
    
    
    
    86,090
    
    
    
    1,392
    
    
    
    1,269
    

    
    
    2,900
    
    
    
    2,445
    
    
    
    1.62
    
    
    
    1.47Macomb Community Bank
    
    
    93,275
    
    
    
    91,173
    
    
    
    1,178
    
    
    
    1,327
    
    
    
    2,420
    
    
    
    1,768
    
    
    
    1.26
    
    
    
    1.46Muskegon Commerce Bank
    
    
    88,317
    
    
    
    88,692
    
    
    
    885
    
    
    
    904
    
    
    
    1,432
    
    
    
    1,524
    
    
    
    1.00
    
    
    
    1.02Oakland Commerce Bank
    
    
    102,901
    
    
    
    107,037
    
    
    
    1,474
    
    
    
    1,850
    
    
    
    330
    
    
    
    2,402
    
    
    
    1.43
    
    
    
    1.73Paragon Bank & Trust
    
    
    95,638
    
    
    
    96,428
    
    
    
    1,439
    
    
    
    1,350
    
    
    
    611
    
    
    
    783
    
    
    
    1.50
    
    
    
    1.40Portage Commerce Bank
    
    
    173,225
    
    
    
    170,479
    
    
    
    2,089
    
    
    
    1,977
    
    
    
    3,792
    
    
    
    2,820
    
    
    
    1.21
    
    
    
    1.16Great Lakes Region Total
    
    
    1,535,134
    
    
    
    1,517,700
    
    
    
    20,888
    
    
    
    20,960
    
    
    
    21,975
    
    
    
    25,872First Carolina State Bank
    
    
    54,417
    
    
    
    51,867
    
    
    
    554
    
    
    
    525
    
    
    
    4
    
    
    
    11
    
    
    
    1.02
    
    
    
    1.01Eastern Regions Total
    
    
    1,589,551
    
    
    
    1,569,567
    
    
    
    21,442
    
    
    
    21,485
    
    
    
    21,979
    
    
    
    25,883Western Regions:Southwest Region:Arrowhead Community Bank
    
    
    66,714
    
    
    
    62,737
    
    
    
    650
    
    
    
    620
    
    
    
    29
    
    
    
    29
    
    
    
    0.97
    
    
    
    0.99Bank of Las Vegas
    
    
    43,871
    
    
    
    41,134
    
    
    
    374
    
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    0.85
    
    
    
    1.03Bank of Tucson
    
    
    120,046
    
    
    
    115,694
    
    
    
    1,195
    
    
    
    1,170
    
    
    
    
    
    
    
    455
    
    
    
    1.00
    
    
    
    1.01Black Mountain Community Bank
    
    
    86,485
    
    
    
    84,163
    
    
    
    1,101
    
    
    
    1,014
    
    
    
    439
    
    
    
    368
    
    
    
    1.27
    
    
    
    1.20Camelback Community Bank
    
    
    72,633
    
    
    
    75,146
    
    
    
    1,100
    
    
    
    1,186
    
    
    
    
    
    
    
    
    
    
    
    1.51
    
    
    
    1.58Desert Community Bank
    
    
    64,921
    
    
    
    58,751
    
    
    
    783
    
    
    
    722
    
    
    
    107
    
    
    
    107
    
    
    
    1.21
    
    
    
    1.23East Valley Community Bank
    
    
    43,030
    
    
    
    42,614
    
    
    
    545
    
    
    
    520
    
    
    
    
    
    
    
    
    
    
    
    1.27
    
    
    
    1.22Mesa Bank
    
    
    93,713
    
    
    
    85,561
    
    
    
    873
    
    
    
    800
    
    
    
    
    
    
    
    
    
    
    
    0.93
    
    
    
    0.94Red Rock Community Bank
    
    
    76,063
    
    
    
    72,938
    
    
    
    1,600
    
    
    
    1,714
    
    
    
    439
    
    
    
    762
    
    
    
    2.10
    
    
    
    2.35Southern Arizona Community Bank
    
    
    74,360
    
    
    
    72,226
    
    
    
    725
    
    
    
    736
    
    
    
    
    
    
    
    
    
    
    
    0.97
    
    
    
    1.02Sunrise Bank of Albuquerque
    
    
    60,339
    
    
    
    59,766
    
    
    
    943
    
    
    
    895
    
    
    
    265
    
    
    
    459
    
    
    
    1.56
    
    
    
    1.50Sunrise Bank of Arizona
    
    
    114,906
    
    
    
    118,617
    
    
    
    1,401
    
    
    
    1,400
    
    
    
    11
    
    
    
    111
    
    
    
    1.22
    
    
    
    1.18Valley First Community Bank
    
    
    50,199
    
    
    
    49,518
    
    
    
    475
    
    
    
    469
    
    
    
    
    
    
    
    
    
    
    
    0.95
    
    
    
    0.95Yuma Community Bank
    
    
    42,840
    
    
    
    41,460
    
    
    
    430
    
    
    
    465
    
    
    
    
    
    
    
    
    
    
    
    1.00
    
    
    
    1.12Southwest Region Total
    
    
    1,010,120
    
    
    
    980,325
    
    
    
    12,195
    
    
    
    12,136
    
    
    
    1,290
    
    
    
    2,291California Region:Bank of Escondido
    
    
    35,220
    
    
    
    33,166
    
    
    
    375
    
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    1.06
    
    
    
    1.06Napa Community Bank
    
    
    55,584
    
    
    
    53,033
    
    
    
    720
    
    
    
    720
    
    
    
    
    
    
    
    
    
    
    
    1.30
    
    
    
    1.36Point Loma Community Bank
    
    
    14,321
    
    
    
    8,590
    
    
    
    150
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    1.05
    
    
    
    1.02Sunrise Bank of San Diego
    
    
    52,450
    
    
    
    46,945
    
    
    
    465
    
    
    
    415
    
    
    
    316
    
    
    
    297
    
    
    
    0.89
    
    
    
    0.88California Region Total
    
    
    157,575
    
    
    
    141,734
    
    
    
    1,710
    
    
    
    1,573
    
    
    
    316
    
    
    
    297Western Regions Total
    
    
    1,167,695
    
    
    
    1,122,059
    
    
    
    13,905
    
    
    
    13,709
    
    
    
    1,606
    
    
    
    2,588Other, net
    
    
    2,198
    
    
    
    1,278
    
    
    
    2,378
    
    
    
    2,378
    
    
    
    820
    
    
    
    
    
    
    
    
    
    
    
    Consolidated
    
    $
    2,759,444
    
    
    $
    2,692,904
    
    
    $
    37,725
    
    
    $
    37,572
    
    
    $
    24,405
    
    
    $
    28,471
    
    
    
    1.37
    %
    
    
    1.40
    %
   (1)
    
    Commenced operations in January 2005 and is 51%-owned by Capitol DevelopmentBancorp Limited I, a controlled subsidiary of Capitol. Page 16 of 25




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##### Table of Contents



Results of Operations Net income for the three months ended March 31, 2005 was $8 million, an increase of $3.6
million or 81% over the same period in 2004. Diluted earnings per share for the three-month 2005
period were $0.52 compared to $0.30 for the prior year period. Net interest income for the first three months of 2005 totaled $35.8 million, an 18% increase
compared to $30.2 million in 2004. This increase is attributable to the banks growth in size and
a continued strong net interest margin despite an increasing interest rate environment. Noninterest income for the three months ended March 31, 2005 was $4.6 million, an increase of
$435,000, or 11%, over the same period in 2004. The increase is due primarily to a nonrecurring
loss on sale of investment securities available for sale accrued in the 2004 period as a result of
managements decision to exit mutual fund investments on an enterprise-wide basis. Other
noninterest income in the 2005 period includes $456,000 of gains on sale of government guaranteed
loans. The provision for loan losses for the three-month period in 2005 was $2 million, as compared
to $3.5 million for the same period in 2004. Provisions for loan losses were lower than in the
prior year due to a decrease in nonperforming loans in the first quarter of 2005. The interim 2004
provision for loan losses was at a higher level due to unexpectedly strong loan growth in the first
quarter of 2004 and a special provision of $1 million recorded for estimated losses on one lending
relationship. The provisions for loan losses are based upon managements analysis of the adequacy
of the allowance for loan losses, as previously discussed. Noninterest expense totaled $26.5 million for the first quarter in 2005, as compared to $23.6
million for the comparable period in 2004. The increase in noninterest expense is associated with
growth in the size of the banks and increases in general operating costs. Increases in both
occupancy and salaries and employee benefits relate primarily to the growth in the size of banks
within the consolidated group, the addition of a bank in the first quarter of 2005 (none in the
first quarter of 2004), and added regional bank development executives as part of Capitols 2005
expansion campaign. [The remainder of this page intentionally left blank] Page 17 of 25




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##### Table of Contents



Operating results (dollars in thousands) were as follows: Three months ended March 31Return on
    
    
    Return onTotal Revenues
    
    
    Net Income
    
    
    Average Equity(1)
    
    
    Average Assets(1)2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Eastern Regions:Great Lakes Region:Ann Arbor Commerce Bank
    
    $
    5,767
    
    
    $
    5,403
    
    
    $
    910
    
    
    $
    1,194
    
    
    
    14.22
    %
    
    
    18.65
    %
    
    
    1.15
    
    
    
    1.49
    %Bank of Michigan(2)
    
    
    54
    
    
    
    n/a
    
    
    
    (276
    )
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aBrighton Commerce Bank
    
    
    1,700
    
    
    
    1,454
    
    
    
    275
    
    
    
    222
    
    
    
    12.39
    
    
    
    11.15
    
    
    
    1.04
    
    
    
    .95Capitol National Bank
    
    
    3,735
    
    
    
    3,381
    
    
    
    888
    
    
    
    866
    
    
    
    19.88
    
    
    
    20.68
    
    
    
    1.58
    
    
    
    1.56Detroit Commerce Bank
    
    
    1,413
    
    
    
    767
    
    
    
    145
    
    
    
    9
    
    
    
    9.38
    
    
    
    .79
    
    
    
    .81
    
    
    
    .07Elkhart Community Bank
    
    
    1,163
    
    
    
    921
    
    
    
    171
    
    
    
    186
    
    
    
    9.28
    
    
    
    10.66
    
    
    
    1.03
    
    
    
    .61Goshen Community Bank
    
    
    865
    
    
    
    695
    
    
    
    87
    
    
    
    151
    
    
    
    5.31
    
    
    
    9.59
    
    
    
    .66
    
    
    
    1.30Grand Haven Bank
    
    
    2,051
    
    
    
    1,752
    
    
    
    270
    
    
    
    (276
    )
    
    
    11.08
    
    
    
    n/a
    
    
    
    .94
    
    
    
    n/aKent Commerce Bank
    
    
    1,444
    
    
    
    1,275
    
    
    
    104
    
    
    
    57
    
    
    
    5.29
    
    
    
    2.76
    
    
    
    .49
    
    
    
    .28Macomb Community Bank
    
    
    1,625
    
    
    
    1,428
    
    
    
    271
    
    
    
    204
    
    
    
    12.60
    
    
    
    9.23
    
    
    
    1.15
    
    
    
    .90Muskegon Commerce Bank
    
    
    1,644
    
    
    
    1,432
    
    
    
    295
    
    
    
    303
    
    
    
    12.38
    
    
    
    13.37
    
    
    
    1.27
    
    
    
    1.44Oakland Commerce Bank
    
    
    2,111
    
    
    
    1,822
    
    
    
    468
    
    
    
    (317
    )
    
    
    18.62
    
    
    
    n/a
    
    
    
    1.47
    
    
    
    n/aParagon Bank & Trust
    
    
    2,087
    
    
    
    1,735
    
    
    
    372
    
    
    
    265
    
    
    
    13.01
    
    
    
    9.51
    
    
    
    1.39
    
    
    
    1.00Portage Commerce Bank
    
    
    3,280
    
    
    
    2,679
    
    
    
    746
    
    
    
    575
    
    
    
    19.74
    
    
    
    17.92
    
    
    
    1.66
    
    
    
    1.41Great Lakes Region Total
    
    
    28,939
    
    
    
    24,744
    
    
    
    4,726
    
    
    
    3,439First Carolina State Bank
    
    
    948
    
    
    
    n/a
    
    
    
    119
    
    
    
    n/a
    
    
    
    4.63
    
    
    
    n/a
    
    
    
    .72
    
    
    
    n/aEastern Regions Total
    
    
    29,887
    
    
    
    24,744
    
    
    
    4,845
    
    
    
    3,439Western Regions:Southwest Region:Arrowhead Community Bank
    
    
    1,506
    
    
    
    1,113
    
    
    
    204
    
    
    
    120
    
    
    
    12.35
    
    
    
    8.91
    
    
    
    1.14
    
    
    
    .78Bank of Las Vegas
    
    
    872
    
    
    
    595
    
    
    
    142
    
    
    
    (28
    )
    
    
    9.25
    
    
    
    n/a
    
    
    
    1.13
    
    
    
    n/aBank of Tucson
    
    
    2,774
    
    
    
    2,499
    
    
    
    792
    
    
    
    789
    
    
    
    25.25
    
    
    
    27.27
    
    
    
    1.93
    
    
    
    2.04Black Mountain Community Bank
    
    
    1,882
    
    
    
    1,358
    
    
    
    445
    
    
    
    295
    
    
    
    18.51
    
    
    
    14.34
    
    
    
    1.73
    
    
    
    1.39Camelback Community Bank
    
    
    1,395
    
    
    
    1,380
    
    
    
    307
    
    
    
    20
    
    
    
    14.42
    
    
    
    .94
    
    
    
    1.55
    
    
    
    .10Desert Community Bank
    
    
    1,289
    
    
    
    943
    
    
    
    215
    
    
    
    157
    
    
    
    10.86
    
    
    
    8.40
    
    
    
    1.28
    
    
    
    1.05East Valley Community Bank
    
    
    895
    
    
    
    750
    
    
    
    37
    
    
    
    40
    
    
    
    3.13
    
    
    
    4.04
    
    
    
    .32
    
    
    
    .38Mesa Bank
    
    
    2,049
    
    
    
    1,522
    
    
    
    448
    
    
    
    307
    
    
    
    22.46
    
    
    
    17.65
    
    
    
    1.87
    
    
    
    1.66Red Rock Community Bank
    
    
    1,544
    
    
    
    1,478
    
    
    
    337
    
    
    
    (60
    )
    
    
    10.50
    
    
    
    n/a
    
    
    
    1.33
    
    
    
    n/aSouthern Arizona Community Bank
    
    
    1,431
    
    
    
    1,367
    
    
    
    316
    
    
    
    350
    
    
    
    14.73
    
    
    
    17.38
    
    
    
    1.52
    
    
    
    1.67Sunrise Bank of Albuquerque
    
    
    1,275
    
    
    
    1,312
    
    
    
    260
    
    
    
    226
    
    
    
    15.73
    
    
    
    15.53
    
    
    
    1.54
    
    
    
    1.33Sunrise Bank of Arizona
    
    
    2,529
    
    
    
    2,766
    
    
    
    519
    
    
    
    412
    
    
    
    16.21
    
    
    
    15.88
    
    
    
    1.64
    
    
    
    1.31Valley First Community Bank
    
    
    971
    
    
    
    729
    
    
    
    180
    
    
    
    101
    
    
    
    11.49
    
    
    
    6.76
    
    
    
    1.34
    
    
    
    .84Yuma Community Bank
    
    
    1,048
    
    
    
    854
    
    
    
    228
    
    
    
    129
    
    
    
    14.45
    
    
    
    9.41
    
    
    
    1.59
    
    
    
    1.10Southwest Region Total
    
    
    21,460
    
    
    
    18,666
    
    
    
    4,430
    
    
    
    2,858California Region:Bank of Escondido
    
    
    805
    
    
    
    276
    
    
    
    71
    
    
    
    (172
    )
    
    
    3.10
    
    
    
    n/a
    
    
    
    .51
    
    
    
    n/aNapa Community Bank
    
    
    1,167
    
    
    
    858
    
    
    
    228
    
    
    
    68
    
    
    
    10.11
    
    
    
    3.30
    
    
    
    1.31
    
    
    
    .48Point Loma Community Bank
    
    
    297
    
    
    
    n/a
    
    
    
    (206
    )
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aSunrise Bank of San Diego
    
    
    1,131
    
    
    
    1,219
    
    
    
    134
    
    
    
    213
    
    
    
    4.81
    
    
    
    10.35
    
    
    
    .89
    
    
    
    1.24California Region Total
    
    
    3,400
    
    
    
    2,353
    
    
    
    227
    
    
    
    109Western Regions Total
    
    
    24,860
    
    
    
    21,019
    
    
    
    4,657
    
    
    
    2,967Other, net
    
    
    (253
    )
    
    
    (176
    )
    
    
    (1,487
    )
    
    
    (1,990
    )
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/aConsolidated
    
    $
    54,494
    
    
    $
    45,587
    
    
    $
    8,015
    
    
    $
    4,416
    
    
    
    12.55
    %
    
    
    7.97
    %
    
    
    1.02
    %
    
    
    .64
    %
   n/a Not applicable(1)
    
    Annualized for period presented.(2)
    
    Commenced operations in January 2005 and is 51%-owned by Capitol DevelopmentBancorp Limited I, a controlled subsidiary of Capitol. Liquidity and Capital Resources The principal funding source for asset growth and loan origination activities is deposits.
Total deposits increased $94.8 million for the three months ended March 31, 2005, slightly more
than the $87.2 million increase in the corresponding period of 2004. Growth occurred in most
interest-bearing deposit categories, with the majority coming from certificate of deposit accounts. Page 18 of 25




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The banks generally do not significantly rely on brokered deposits as a key funding source.
Brokered deposits approximated $216 million as of March 31, 2005, or about 8% of total deposits, an
increase of $35 million during the interim 2005 period, as the banks have sought to add these funds
selectively based on maturity and interest-rate opportunities, to aid in matching repricing of
funding sources and assets. Noninterest-bearing deposits approximated 20% of total deposits at March 31, 2005 and at
December 31, 2004. Levels of noninterest-bearing deposits can, however, fluctuate based on
customers transaction activity. Interim 2005 deposit growth was deployed primarily into commercial loans, consistent with the
banks emphasis on commercial lending activities. Cash and cash equivalents amounted to $289 million or 9% of total assets at March 31, 2005,
compared with $231 million or 7% of total assets at December 31, 2004. As liquidity levels vary
continuously based on customer activities, amounts of cash and cash equivalents can vary widely at
any given point in time. Management believes the banks liquidity position at March 31, 2005 is
adequate to fund loan demand and meet depositor needs. In addition to cash and cash equivalents, a source of long-term liquidity is the banks
marketable investment securities. Liquidity needs have not historically necessitated the sale of
investments in order to meet funding requirements. The banks have not engaged in active trading of
their investments. At March 31, 2005, the banks had approximately $29 million of investment
securities classified as available for sale, which can be utilized to meet various liquidity needs
as they arise. Several of the banks have secured lines of credit with regional Federal Home Loan Banks.
Borrowings thereunder approximated $169 million and additional borrowing capacity approximated $103
million at March 31, 2005. They are used from time to time as a lower-cost funding source versus
various rates and maturities of time deposits. Total notes payable borrowings increased $14.6
million in the interim period of 2005. At March 31, 2005, Capitol had unused lines of credit from
an unrelated financial institution aggregating $25 million. Trust-preferred securities, approximating $100.9 million ($103.3 million principal amount),
augment Capitols existing capital base, which totaled $402.8 million (subordinated
debenturesformerly trust-preferred securities, minority interests in consolidated subsidiaries
and stockholders equity) or 12.53% of total assets at March 31, 2005. Stockholders equity, as a percentage of total assets, approximated 8.04% at March 31, 2005
and 8.16% at December 31, 2004. Bank of Michigan, located in Farmington Hills, Michigan, opened in January 2005. It is
majority-owned by Capitol Development Bancorp Limited I, which is a controlled subsidiary of
Capitol. Bank development efforts are under consideration at March 31, 2005 in several states including
pre-development exploratory discussions, lease and employment negotiations and preparation of
preliminary regulatory applications for formation and/or acquisition of community Page 19 of 25




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banks. Capitol Bancorp has applications pending for additional de novocommunity banks in
California, Colorado, Michigan and Washington. As of March 31, 2005, a potential share exchange transaction was in the proposal stage
regarding Napa Community Bank which, if completed, would result in Capitol issuing approximately
280,000 additional shares of common stock and the bank becoming wholly-owned if all of the banks
shareholders, other than Capitol, elect to exchange their shares of the banks common stock for
shares of Capitol. Capitol anticipates concluding the proposed share exchange mid-year 2005. Capitols operating strategy continues to be focused on the ongoing growth and maturity of its
existing banks, coupled with new bank expansion in selected markets as opportunities arise.
Accordingly, Capitol may invest in, acquire or otherwise develop additional banks in future
periods, subject to economic conditions and other factors, although the timing of such additional
banking units, if any, is uncertain. Such future new banks and/or additions of other operating
units could be either wholly-owned, majority-owned or otherwise controlled by Capitol. Most
recently, Capitol has recruited several regional bank development executives to pursue de novoand
other bank development opportunities in certain regions of the United States where it seeks to
expand in future periods. Capitol and its banks are subject to complex regulatory capital requirements, which require
maintaining certain minimum capital ratios. These ratio measurements, in addition to certain other
requirements, are used by regulatory agencies to determine the level of regulatory intervention and
enforcement applied to financial institutions. Management believes Capitol and each of its banks
are in compliance with regulatory requirements and are expected to maintain such compliance. Trends Affecting Operations One of the most significant trends which can impact the financial condition and results of
operations of financial institutions are changes in market rates of interest. Changes in interest rates, either up or down, have an impact on net interest income (plus or
minus), depending on the direction and timing of such changes. At any point in time, there is a
difference between interest rate-sensitive assets and interest rate-sensitive liabilities. This
means that when interest rates change, the timing and magnitude of the effect of such interest rate
changes can alter the relationship between asset yields and the cost of funds. The Board of Governors of the Federal Reserve, which influences interest rates, has increased
interbank borrowing rates in early 2005 and expressed several concerns about economic conditions.
Home mortgage rates have recently increased, which has adversely impacted fee income from the
origination of residential mortgages, particularly from refinancing activities. Many of Capitols
loans are variable-rate and, accordingly, such rate increases should result in higher interest
income to Capitol in the near term; however, depositors will similarly expect higher rates of
interest on their accounts, potentially offsetting much of the benefit of rising interest rates.
The future outlook on interest rates and their impact on Capitols interest income, interest
expense and net interest income is uncertain. Page 20 of 25




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Start-up banks generally incur operating losses during their early periods of operations.
Recently-formed start-up banks are expected to detract from consolidated earnings performance and
start-up banks formed in 2005 and beyond will similarly negatively impact short-term profitability. General economic conditions also have a significant impact on both the results of operations
and the financial condition of financial institutions. Media reports raising questions about the health of the domestic economy have continued in
2005. During this early interim period of 2005, the amount of nonperforming loans has decreased,
however, it is difficult to predict future movements in levels of nonperforming loans and related
loan losses may increase as economic conditions, locally and nationally, evolve. Impact of New Accounting Standards There are several new accounting standards either becoming effective or being issued in 2005.
They are listed and discussed in Notes B and H of the accompanying condensed consolidated financial
statements. Critical Accounting Policies Capitols critical accounting policies are described on pages F-9, F-10 and F-11 of the
financial information section of its 2004 Annual Report. In the circumstances of Capitol, management believes
its critical accounting policies are those which encompass the use of estimates in determining
the allowance for loan losses (because of inherent subjectivity), accounting for stock options,
goodwill and other intangibles (due to inherent subjectivity in evaluating potential impairment)
and classification of trust-preferred securities. [The remainder of this page intentionally left blank] Page 21 of 25




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PART I. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK Information about Capitols quantitative and qualitative disclosures about market risk were
included in Capitols annual report on Form 10-K for the year ended December 31, 2004. Capitol
does not believe that there has been a material change in the nature or categories of market risk
exposure, except as noted in the Managements Discussion and Analysis of Financial Condition and
Results of Operations section herein (Part I, Item 2), under the caption, Trends Affecting
Operations. 
 PART I. ITEM 4 CONTROLS AND PROCEDURES Capitol maintains disclosure controls and procedures designed to provide reasonable assurance that
the information Capitol must disclose in its filings with the Securities and Exchange Commission is
recorded, processed, summarized and reported on a timely basis. Capitols Chief Executive Officer
and Chief Financial Officer have reviewed and evaluated Capitols disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act) as of the end of the period covered by this report (the Evaluation
Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date,
Capitols disclosure controls and procedures, in all material respects, are effective in bringing
to their attention on a timely basis material information relating to Capitol required to be
included in Capitols periodic filings under the Exchange Act. No change in Capitols internal control over financial reporting occurred during Capitols most
recent fiscal quarter that has materially affected or is reasonably likely to materially affect
Capitols internal control over financial reporting. [The remainder of this page intentionally left blank] Page 22 of 25




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PART II. OTHER INFORMATION 
  Item 1.
    Legal Proceedings.Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to
their business. In the opinion of management, liabilities arising from such litigation would
not have a material effect on Capitols consolidated financial position or results of
operations. 
  Item 2.
    Unregistered Sales of Securities and Use of Proceeds.  (a)
    None.(b)
    Not applicable.(c)
    None. 
  Item 3.
    Defaults Upon Senior Securities.None. 
  Item 4.
    Submission of Matters to a Vote of Security Holders.None. 
  Item 5.
    Other Information.None. 
  Item 6.
    Exhibits.  (a)
    Exhibits: Exhibit No.
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Page 23 of 25




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITOL BANCORP LTD.(Registrant)/s/ Joseph D. ReidJoseph D. ReidChairman and CEO(duly authorized to sign on behalf of the registrant)/s/ Lee W. HendricksonLee W. HendricksonChief Financial Officer
 Date: April 29, 2005 Page 24 of 25




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INDEX TO EXHIBITS Exhibit No.
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Page 25 of 25