10-Q 1 form10_q.htm CBC FORM 10-Q CBC Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2006
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from ________________ to ________________
 
Commission file number: 001-31708

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

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

(517) 487-6555
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                    Yes  X  No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer       
 Accelerated filer  X  
 Non-accelerated filer       
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes  X  No    
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
  
Outstanding at July 15, 2006
Common Stock, No par value
  
15,959,076 shares

 
Page 1 of 28

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.
 
Item 1.
 
Financial Statements (unaudited):
 
Page
 
Condensed consolidated balance sheets - June 30, 2006 and December 31, 2005.
3
 
Condensed consolidated statements of income - Three months and six months ended June 30,
2006 and 2005.
Condensed consolidated statements of changes in stockholders’ equity - Six months ended June
30, 2006 and 2005.
Condensed consolidated statements of cash flows - Six months ended June 30, 2006 and 2005.
Notes to condensed consolidated financial statements.
 
4
 
5
 
6
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
12
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
24
Item 4.
Controls and Procedures.
24
 
PART II
 
OTHER INFORMATION
  
 
Item 1.
 
Legal Proceedings.
 
25
Item 1.A.
Risk Factors.
25
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
25
Item 3.
Defaults Upon Senior Securities.
25
Item 4.
Submission of Matters to a Vote of Security Holders.
25
Item 5.
Other Information.
26
Item 6.
Exhibits.
26
 
SIGNATURES
  
 
27
 
EXHIBIT INDEX
  
 
28


 
Page 2 of 28


               
PART I, ITEM I
               
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of June 30, 2006 and December 31, 2005
(in thousands, except share data)
       
(Unaudited)
      
       
June 30,
  
December 31,
  
       
2006
  
2005
  
ASSETS
                    
Cash and due from banks
       
$
158,995
  
$
157,963
  
Money market and interest-bearing deposits
         
30,294
   
19,846
 
Federal funds sold
         
160,970
   
128,299
 
Cash and cash equivalents
         
350,259
   
306,108
 
Loans held for resale
         
18,027
   
21,638
 
Investment securities:
                   
Available for sale, carried at market value
         
20,949
   
25,929
 
Held for long-term investment, carried at amortized cost which
                    
approximates market value
         
21,600
   
17,745
 
Total investment securities
         
42,549
   
43,674
 
Portfolio loans:
                   
Commercial
         
2,868,350
   
2,688,361
 
Real estate mortgage
         
218,032
   
212,142
 
Installment
         
109,827
   
90,686
 
Total portfolio loans
         
3,196,209
   
2,991,189
 
Less allowance for loan losses
         
(43,311
)
  
(40,559
)
Net portfolio loans
         
3,152,898
   
2,950,630
 
Premises and equipment
         
50,595
   
41,629
 
Accrued interest income
         
14,331
   
13,719
 
Goodwill and other intangibles
         
50,086
   
50,378
 
Other assets
         
43,897
   
47,945
 
                     
TOTAL ASSETS
       
$
3,722,642
  
$
3,475,721
  
                     
LIABILITIES AND STOCKHOLDERS' EQUITY
                    
LIABILITIES:
                   
Deposits:
                   
Noninterest-bearing
       
$
625,461
  
$
591,229
  
Interest-bearing
         
2,362,145
   
2,194,030
 
Total deposits
         
2,987,606
   
2,785,259
 
Debt obligations:
                   
Notes payable and short-term borrowings
         
177,076
   
175,729
 
Subordinated debentures
         
100,988
   
100,940
 
Total debt obligations
         
278,064
   
276,669
 
Accrued interest on deposits and other liabilities
         
22,062
   
28,089
 
Total liabilities
         
3,287,732
   
3,090,017
 
                     
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
         
116,602
   
83,838
 
                     
STOCKHOLDERS' EQUITY:
                   
Common stock, no par value, 50,000,000 shares authorized;
                   
issued and outstanding:
2006 - 15,958,076 shares    
 
              
 
2005 - 15,776,192 shares
         
220,016
   
216,539
 
Retained earnings
         
98,617
   
85,553
 
                   
Market value adjustment (net of tax effect) for investment
securities available for sale (accumulated other
 comprehensive income)
           (325 )     (226 ) 
Total stockholders' equity
         
318,308
   
301,866
 
                     
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
       
$
3,722,642
  
$
3,475,721
  
                     
See notes to condensed consolidated financial statements.
                   
Page 3 of 28

CAPITOL BANCORP LIMITED
  
Condensed Consolidated Statements of Income (Unaudited)
  
For the Three Months and Six Months Ended June 30, 2006 and 2005
  
(in thousands, except per share data)
  
                     
   
  Three-Month Period
  
 Six-Month Period
   
 2006
  
 2005
  
 2006
  
 2005
Interest income:
                       
Portfolio loans (including fees)
 
$
64,577
 
$
52,347
 
$
124,720
 
$
100,584
Loans held for resale
   
739
   
636
   
1,262
   
1,273
Taxable investment securities
   
244
   
284
   
507
   
519
Federal funds sold
   
2,010
   
932
   
3,828
   
1,553
Other
   
626
   
292
   
976
   
483
Total interest income
   
68,196
   
54,491
   
131,293
   
104,412
Interest expense:
                       
Deposits
   
20,397
   
12,472
   
38,179
   
23,043
Debt obligations and other
   
4,162
   
3,427
   
8,124
   
6,974
Total interest expense
   
24,559
   
15,899
   
46,303
   
30,017
Net interest income
   
43,637
   
38,592
   
84,990
   
74,395
Provision for loan losses
   
2,815
   
3,039
   
5,271
   
5,062
Net interest income after provision for loan losses
    
40,822
   
35,553
   
79,719
   
69,333
Noninterest income:
                       
Service charges on deposit accounts
   
1,103
   
1,042
   
2,134
   
2,053
Trust fee income
   
768
   
523
   
1,635
   
1,128
Fees from origination of non-portfolio residential mortgage loans
    
1,440
   
1,505
   
2,729
   
2,770
Realized gains on sales of investment securities available for sale
         
1
         
2
Other
   
2,145
   
2,553
   
4,068
   
4,244
Total noninterest income
   
5,456
   
5,624
   
10,566
   
10,197
Noninterest expense:
                       
Salaries and employee benefits
   
21,675
   
18,135
   
43,225
   
35,352
Occupancy
   
2,918
   
2,387
   
5,596
   
4,687
Equipment rent, depreciation and maintenance
   
2,047
   
1,583
   
4,013
   
3,022
Other
   
9,974
   
6,590
   
15,612
   
12,108
Total noninterest expense
   
36,614
   
28,695
   
68,446
   
55,169
Income before income taxes and minority interest
   
9,664
   
12,482
   
21,839
   
24,361
Income taxes
   
3,564
   
4,763
   
7,945
   
9,323
Income before minority interest
   
6,100
   
7,719
   
13,894
   
15,038
Minority interest in net losses of consolidated subsidiaries
   
4,167
   
578
   
6,326
   
1,274
                         
NET INCOME
 
$
10,267
 
$
8,297
 
$
20,220
 
$
16,312
                         
NET INCOME PER SHARE -- Note D:
                       
Basic
 
$
0.65
  
$
0.56
  
$
1.29
  
$
1.11
                         
Diluted
 
$
0.63
  
$
0.54
  
$
1.24
  
$
1.06
Page 4 of 28

CAPITOL BANCORP LIMITED  
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)  
For the Six Months Ended June 30, 2006 and 2005  
(in thousands except share data)
                    
           
Accumulated
       
           
Other
       
   
Common
  
Retained
  
Comprehensive
       
   
Stock
  
Earnings
  
Income
  
 Total
  
Six Months Ended June 30, 2005
                         
                           
Balances at January 1, 2005
  
$
191,719
  
$
60,476
  
$
(36
)
$
252,159
  
                           
Issuance of 165,835 shares of common stock upon
                          
exercise of stock options, net of common stock
                          
surrendered to facilitate exercise
   
2,342
               
2,342
 
                           
Recognition of compensation expense relating to
                         
restricted common stock
    
610
               
610
 
                           
Cash dividends paid ($0.35 per share)
         
(5,217
)
        
(5,217
)
                           
Components of comprehensive income:
                         
Net income for the period
         
16,312
         
16,312
 
Market value adjustment for investment securities
                          
available for sale (net of income tax effect)
                
(123
)
  
(123
)
Comprehensive income for the period
                     
16,189
 
                         
BALANCES AT JUNE 30, 2005
 
$
194,671
  
$
71,571
  
$
(159
)
$
266,083
  
                           
Six Months Ended June 30, 2006
                         
                           
Balances at January 1, 2006
 
$
216,539
  
$
85,553
  
$
(226
)
$
301,866
  
                           
Issuance of 102,134 shares of common stock upon
                          
exercise of stock options, net of common stock
                          
surrendered to facilitate exercise
   
2,656
               
2,656
 
                           
Issuance of 79,750 unvested shares of restricted
                         
common stock, net of related unearned employee
   
--
                
--
  
compensation
                          
                           
Recognition of compensation expense relating to
                         
restricted common stock
    
821
               
821
 
                           
Cash dividends paid ($0.45 per share)
         
(7,156
)
        
(7,156
)
                           
Components of comprehensive income:
                         
Net income for the period
         
20,220
         
20,220
 
Market value adjustment for investment securities
                          
available for sale (net of income tax effect)
                
(99
)
  
(99
)
Comprehensive income for the period
                     
20,121
 
                         
BALANCES AT JUNE 30, 2006
 
$
220,016
  
$
98,617
  
$
(325
)
$
318,308
  
                           
See notes to condensed consolidated financial statements.
                          
Page 5 of 28

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2006 and 2005
           
   
2006
  
2005
  
   
 (in thousands)
  
OPERATING ACTIVITIES
             
Net income
 
$
20,220
  
$
16,312
  
Adjustments to reconcile net income to net cash provided by operating activities:
             
Provision for loan losses
   
5,271
   
5,062
 
Depreciation of premises and equipment
   
3,426
   
2,720
 
Amortization of intangibles
   
292
   
285
 
Net amortization of investment security premiums
   
1
   
17
 
Loss on sale of premises and equipment
   
16
   
15
 
Minority interest in net losses of consolidated subsidiaries
   
(6,326
)
  
(1,274
)
Compensation expense relating to restricted common stock
   
821
   
610
 
Originations and purchases of loans held for resale
   
(242,153
)
  
(318,319
)
Proceeds from sales of loans held for resale
   
245,764
   
327,313
 
Decrease (increase) in accrued interest income and other assets
   
3,536
   
(13,787
)
Increase (decrease) in accrued interest on deposits and other liabilities
   
(6,027
)
  
3,893
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
24,841
   
22,847
 
               
INVESTING ACTIVITIES
             
Cash and cash equivalents of acquired subsidiary
         
1,357
 
Proceeds from sales of investment securities available for sale
   
443
   
122
 
Proceeds from calls, prepayments and maturities of investment securities
    
6,220
   
3,981
 
Purchases of investment securities
   
(5,691
)
  
(9,493
)
Net increase in portfolio loans
   
(207,539
)
  
(154,368
)
Proceeds from sales of premises and equipment
   
721
   
30
 
Purchases of premises and equipment
   
(13,129
)
  
(2,918
)
               
NET CASH USED BY INVESTING ACTIVITIES
   
(218,975
)
  
(161,289
)
               
FINANCING ACTIVITIES
             
Net increase in demand deposits, NOW accounts and savings accounts
   
56,458
   
103,800
 
Net increase in certificates of deposit
   
145,889
   
107,385
 
Net borrowings from (payments on) debt obligations
   
1,347
   
(6,536
)
Resources provided by minority interests
   
39,091
   
28,342
 
Net proceeds from issuance of common stock
   
2,656
   
2,342
 
Cash dividends paid
   
(7,156
)
  
(5,217
)
               
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
238,285
   
230,116
 
               
INCREASE IN CASH AND CASH EQUIVALENTS
   
44,151
   
91,674
 
               
Cash and cash equivalents at beginning of period
   
306,108
   
231,104
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
350,259
  
$
322,778
  
               
See notes to condensed consolidated financial statements.
             
Page 6 of 28

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LTD.

Note A - Basis of Presentation

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

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

The results of operations for the period ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

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

Note B - Implementation of New Accounting Standards

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

The primary effect of the revised standard’s implementation on Capitol will be recognition of compensation expense associated with stock options. During the six months ended June 30, 2006, no stock options were granted by Capitol and, accordingly, no compensation expense related to stock options was recorded for that period. Previously, Capitol used the intrinsic-value method which did not result in expense recognition but, instead, required pro forma presentation of what compensation expense would have been recorded if the fair-value measurement and expense recognition provisions had been applied, which is presented in Note C. An additional change in accounting resulting from the implementation of Statement No. 123(R) is the reclassification of unvested restricted stock to the common stock account on Capitol’s balance sheet at January 1, 2006; such reclassification has also been reflected in the accompanying consolidated balance sheet as of December 31, 2005.

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




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Page 7 of 28

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

Note C - Stock Options

Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, requires the fair value method of accounting for stock options whereby compensation expense will be recognized based on the computed fair value of the options on the grant date for stock options granted on or after the effective date of the standard, January 1, 2006 (see Note B). Certain pro forma disclosures of the expense recognition provisions of Statement No. 123(R) are required for periods prior to implementation of the standard for companies, such as Capitol, which used the intrinsic-value method for accounting for stock options, and are as follows for the six months ended June 30, 2005:

Fair value assumptions:
        
Risk-free interest rate
    
4.1%
 
Dividend yield
    
2.2%
 
Stock price volatility
    
.27
  
Expected option life
    
7 years
  
Aggregate estimated fair value of options granted (in thousands)
  
$
4,781
  
Net income (in thousands):
        
As reported
  
$
16,312
  
Less pro forma compensation expense regarding fair value
        
of stock option awards, net of related income tax effect
    
(3,108
)
Pro forma
  
$
13,204
  
Net income per share:
        
Basic:
        
As reported
  
$
1.11
  
Pro forma
    
0.90
  
Diluted:
        
As reported
    
1.06
  
Pro forma
  
$
0.86
  

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

   
 
 
Number
Outstanding
  
 
Exercise
Price
Range
  
Weighted
Average
Exercise
Price
Outstanding at January 1, 2006
    
2,882,283
  
$
10.81 to $37.48
  
$
26.07
Exercised
    
(140,683
)
  
10.85 to  34.84
    
20.73
Granted
    
--
          
Cancelled or expired
    
--
          
 
                   
Outstanding at June 30, 2006
    
2,741,600
  
$
10.81 to $37.48
  
$
26.35




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Page 8 of 28

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

Note C - Stock Options - Continued

As of June 30, 2006, stock options outstanding had a weighted average remaining contractual life of 4.1 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value as of June 30, 2006:

       
Weighted Average
    
 
Exercise Price
Range
  
 
Number
Outstanding
  
 
Exercise
Price
  
Remaining
Contractual
Life
  
Aggregate
Intrinsic
Value
$10.00 to 14.99
    
   221,096
  
$
11.17
    
0.9 years
  
$
   6,142,047
$15.00 to 19.99
    
   294,504
    
16.61
    
1.6 years
    
   6,579,219
$20.00 to 24.99
    
   470,423
    
21.68
    
4.3 years
    
   8,124,205
$25.00 to 29.99
    
   695,530
    
26.99
    
3.9 years
    
   8,318,539
$30.00 to 34.99
    
   709,949
    
32.08
    
5.2 years
    
   4,877,350
$35.00 or more
    
   350,098
    
37.48
    
6.4 years
    
      514,644
                         
Total outstanding
    
2,741,600
              
$
 34,556,004

Note D - Net Income Per Share

The computations of basic and diluted earnings per share were as follows (in 1,000s) for the periods ended June 30:
 
   
Three-Month Period
  
Six-Month Period
   
2006
  
2005
  
2006
  
2005
                 
Numerator—net income for the period
  
$
10,267
  
$
8,297
  
$
20,220
  
$
16,312
                         
Denominator:
                        
Weighted average number of common shares outstanding, excluding
unvested shares of restricted common stock (denominator for basic
earnings per share)
    
15,706
    
14,739
    
15,674
    
14,694
Weighted average number of unvested shares of restricted common
stock outstanding
    
56
    
208
    
56
    
212
Effect of other dilutive securities—stock options
    
649
    
463
    
625
    
476
Denominator for diluted net income per share—
                        
Weighted average number of common shares and potential dilution
    
16,411
    
15,410
    
16,355
    
15,382
                         
Number of antidilutive stock options excluded from diluted earnings per
 share computation
    
--
    
693
    
--
    
693

Note E - New Banks and Other Development Activities

The first six months of 2006 have been particularly significant for Capitol in terms of development activities. Capitol has begun operations of a wealth management subsidiary, Capitol Wealth, Inc., headquartered in Charlotte, North Carolina, opened six de novo banks and capitalized Capitol Development Bancorp Limited V, which is a controlled subsidiary of Capitol, in June 2006, with approximately $16 million (including approximately $15 million provided by minority interests) to fund future bank development activity.

 
Page 9 of 28

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

Note E - New Banks and Other Development Activities - Continued

Six de novo banks were opened in the first half of 2006:

·  
Community Bank of Rowan, located in Salisbury, North Carolina (February).
·  
Asian Bank of Arizona, located in Phoenix, Arizona (April).
·  
Evansville Commerce Bank, located in Evansville, Indiana (May).
·  
Sunrise Bank of Atlanta, located in Atlanta, Georgia (June).
·  
Bank of Valdosta, located in Valdosta, Georgia (June).
·  
Bank of Everett, located in Everett, Washington (June).

Each of these new banks is majority-owned by bank development subsidiaries controlled by Capitol.
 
Bank development efforts were currently under consideration at June 30, 2006 in several states including pre-development
exploratory discussions, lease and employment negotiations and preparation of preliminary regulatory applications for formation and/or acquisition of community banks. As of June 30, 2006, Capitol had applications pending for additional de novo community banks in Nevada and Ohio.

Note F - Impact of New Accounting Standards

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

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes thresholds and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will become effective January 1, 2007. Capitol’s management has not completed its review of the new guidance; however, the effect of FIN 48’s adoption is not expected to be material.

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

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

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

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

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

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


 
Page 10 of 28

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

Note F - Impact of New Accounting Standards -- Continued

Other proposals, interpretations of existing pronouncements or FASB staff positions have been recently issued which include the following:

·  
FASB FSP to require recalculation of leveraged leases if the timing of tax benefits affect cash flows;

·  
EITF Issue No. 06-4 which addresses accounting for deferred compensation and post retirement benefits of endorsement split-
dollar life insurance; and

·  
EITF Issue No. 06-5 which encompasses accounting for purchases of life insurance and the ramifications of determining the
amount that could be realized in accordance with FASB Technical Bulletin 84-4.

Capitol’s management has not completed its analysis of these (as proposed, where applicable) although it anticipates their potential impact (if finalized, where applicable) would not be material to Capitol’s consolidated financial statements.

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




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Page 11 of 28

PART I, ITEM 2

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

New Banks and Other Development Activities

The first six months of 2006 have been particularly significant for Capitol in terms of development activities. Capitol has begun operations of a wealth management subsidiary, Capitol Wealth, Inc., headquartered in Charlotte, North Carolina, opened six de novo banks and capitalized Capitol Development Bancorp Limited V, which is a controlled subsidiary of Capitol, in June 2006, with approximately $16 million in capital (including approximately $15 million provided by minority interests) to fund future bank development activity.

The six de novo banks that were opened in the first half of 2006 were:

·  
Community Bank of Rowan, located in Salisbury, North Carolina (February).
·  
Asian Bank of Arizona, located in Phoenix, Arizona (April).
·  
Evansville Commerce Bank, located in Evansville, Indiana (May).
·  
Sunrise Bank of Atlanta, located in Atlanta, Georgia (June).
·  
Bank of Valdosta, located in Valdosta, Georgia (June).
·  
Bank of Everett, located in Everett, Washington (June).

Each of the six banks is majority-owned by bank development subsidiaries controlled by Capitol.

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




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Page 12 of 28

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

Financial Condition

Total assets approximated $3.7 billion at June 30, 2006, an increase of $247 million from the December 31, 2005 level of $3.5 billion. The balance sheet includes Capitol and its consolidated subsidiaries:

   
Total Assets (in $1,000’s)
   
June 30, 2006
  
December 31, 2005
Eastern Regions:
        
Great Lakes Region:
        
Ann Arbor Commerce Bank
  
$
308,684
  
$
320,075
Bank of Auburn Hills
    
21,937
    
10,848
Bank of Belleville
    
21,173
    
14,641
Bank of Michigan
    
39,081
    
31,119
Brighton Commerce Bank
    
104,950
    
105,694
Capitol National Bank
    
237,348
    
246,132
Detroit Commerce Bank
    
92,025
    
84,979
Elkhart Community Bank
    
81,941
    
75,648
Evansville Commerce Bank(2)
    
10,205
      
Goshen Community Bank
    
74,250
    
74,545
Grand Haven Bank
    
125,620
    
122,757
Kent Commerce Bank
    
83,157
    
78,939
Macomb Community Bank
    
95,541
    
93,497
Muskegon Commerce Bank
    
97,969
    
96,649
Oakland Commerce Bank
    
128,604
    
115,720
Paragon Bank & Trust
    
99,008
    
106,535
Portage Commerce Bank
    
185,805
    
183,018
Great Lakes Region Total
    
1,807,298
    
1,760,796
Southeast Region:
            
Bank of Valdosta(3)
    
6,382
      
Community Bank of Rowan(1)
    
23,690
      
First Carolina State Bank
    
81,695
    
83,345
Peoples State Bank
    
35,541
    
31,620
Sunrise Bank of Atlanta(4)
    
8,868
    
Southeast Region Total
    
156,176
    
114,965
Midwest Region-Summit Bank of Kansas City
    
10,472
    
9,152
Eastern Regions Total
  
$
1,973,946
  
$
1,884,913

Total assets for Capitol’s other regions and footnotes relating to this table appear on the following page.




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Page 13 of 28

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

Financial Condition - Continued

Summary of total assets - continued:

   
Total Assets (in $1,000’s)
  
   
June 30, 2006
  
December 31, 2005
  
Western Regions:
          
Southwest Region:
          
Arrowhead Community Bank
  
$
87,236
  
$
83,639
  
Asian Bank of Arizona(5)
    
8,586
        
Bank of Las Vegas
    
64,833
    
58,315
  
Bank of Tucson
    
176,527
    
167,638
  
Black Mountain Community Bank
    
124,672
    
128,958
  
Camelback Community Bank
    
80,729
    
82,309
  
Desert Community Bank
    
87,154
    
78,907
  
East Valley Community Bank
    
41,501
    
43,352
  
Fort Collins Commerce Bank
    
39,793
    
27,427
  
Mesa Bank
    
156,629
    
132,775
  
Red Rock Community Bank
    
104,396
    
102,618
  
Southern Arizona Community Bank
    
87,299
    
98,849
  
Sunrise Bank of Albuquerque
    
54,088
    
61,812
  
Sunrise Bank of Arizona
    
124,580
    
111,204
  
Valley First Community Bank
    
72,087
    
72,759
  
Yuma Community Bank
    
75,928
    
61,523
  
Southwest Region Total
    
1,386,038
    
1,312,085
  
California Region:
              
Bank of Escondido
    
76,052
    
70,807
  
Bank of San Francisco
    
21,945
    
13,685
  
Bank of Santa Barbara
    
23,843
    
14,386
  
Napa Community Bank
    
81,326
    
84,512
  
Point Loma Community Bank
    
42,452
    
34,213
  
Sunrise Bank of San Diego
    
68,818
    
66,809
  
California Region Total
    
314,436
    
284,412
  
Northwest Region:
            
Bank of Bellevue
    
28,939
    
19,726
  
Bank of Everett(6)
    
9,336
      
Northwest Region Total
    
38,275
    
19,726
  
Western Regions Total
    
1,738,749
    
1,616,223
  
Other, net
    
9,947
    
(25,415
)
               
Consolidated
  
$
3,722,642
  
$
3,475,721
  
(1) Commenced operations in February 2006 and is 51%-owned by Capitol Development Bancorp Limited III, a
controlled subsidiary of Capitol.
(2) Commenced operations in May 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled
subsidiary of Capitol.
(3) Commenced operations in June 2006 and is 56%-owned by Capitol Development Bancorp Limited IV, a controlled
subsidiary of Capitol.
(4) Commenced operations in April 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled
subsidiary of Capitol.
(5) Commenced operations in June 2006 and is 56%-owned by Capitol Development Bancorp Limited V, a controlled
subsidiary of Capitol. Capitol Development Bancorp Limited V was formed and capitalized in 2006.
(6) Commenced operations in June 2006 and is 51%-owned by Capitol Development Bancorp Limited V, a controlled
subsidiary of Capitol. Capitol Development Bancorp Limited V was formed and capitalized in 2006.



 
Page 14 of 28

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

Financial Condition - Continued

Loan growth has been tempered in 2006 due to a combination of competitive factors and general economic conditions. Much of Capitol’s 2006 loan growth has been the result of the activities of its youngest banks. Portfolio loans increased during the 2006 six-month period by approximately $205 million, compared to net loan growth of about $151 million during the corresponding period of 2005. Second quarter 2006 loan growth approximated $127 million compared to $84 million in 2005. The majority of portfolio loan growth occurred in commercial loans, consistent with the banks’ emphasis on commercial lending activities.

The consolidated allowance for loan losses at June 30, 2006 approximated $43.3 million or 1.36% of total portfolio loans. The allowance ratio is consistent with recent periods while asset quality has remained stable.

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 (dollars in thousands):

   
Periods Ended June 30
  
   
Three-Month Period
  
Six-Month Period
  
   
2006
  
2005
  
2006
  
2005
  
Allowance for loan losses at beginning of period
  
$
41,600
  
$
37,725
  
$
40,559
  
$
37,572
  
Loans charged-off:
                          
Commercial
    
(1,402
)
  
(2,166
)
  
(3,120
)
  
(4,237
)
Real estate mortgage
    
(23
)
  
--
    
(48
)
  
--
  
Installment
    
(121
)
  
(59
)
  
(233
)
  
(311
)
Total charge-offs
    
(1,546
)
  
(2,225
)
  
(3,401
)
  
(4,548
)
Recoveries:
                          
Commercial
    
342
    
307
    
695
    
717
  
Real estate mortgage
    
--
    
1
    
1
    
1
  
Installment
    
100
    
23
    
186
    
66
  
Total recoveries
    
442
    
331
    
882
    
784
  
Net charge-offs
    
(1,104
)
  
(1,894
)
  
(2,519
)
  
(3,764
)
Additions to allowance charged to expense
    
2,815
    
3,039
    
5,271
    
5,062
  
                           
Allowance for loan losses at June 30
  
$
43,311
  
$
38,870
  
$
43,311
  
$
38,870
  
Average total portfolio loans for period ended June 30
  
$
3,121,206
  
$
2,815,983
  
$
3,066,333
  
$
2,771,720
  
Ratio of net charge-offs (annualized) to average portfolio loans
outstanding
    
0.14
%
  
0.27
%
  
0.16
%
  
0.27
%

Interim 2006 loan charge-off ratios, which compare favorably to 2005, are not necessarily indicative of future charge-off levels because of the variability in asset quality and resolution of nonperforming loans.


 
Page 15 of 28

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

Financial Condition - Continued

The amounts of the allowance for loan losses allocated in the following table (dollars in thousands) 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:
   
June 30, 2006
  
December 31, 2005
  
       
Percentage
      
Percentage
  
       
of Total
      
of Total
  
       
Portfolio
      
Portfolio
  
   
Amount
  
Loans
  
Amount
  
Loans
  
                   
Commercial
  
$
39,905
    
1.25
%
$
37,498
    
1.25
%
Real estate mortgage
    
2,058
    
.07
    
1,866
    
.07
  
Installment
    
1,348
    
.04
    
1,195
    
.04
  
                           
Total allowance for loan losses
  
$
43,311
    
1.36
%
$
40,559
    
1.36
%
                           
Total portfolio loans outstanding
  
$
3,196,209
        
$
2,991,189
        

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

   
June 30,
  
December 31,
   
2006
  
2005
Nonaccrual loans:
        
Commercial
  
$
19,652
  
$
19,734
Real estate mortgage
    
2,278
    
1,734
Installment
    
789
    
1,154
Total nonaccrual loans
    
22,719
    
22,622
             
Past due (>90 days) loans:
            
Commercial
    
4,403
    
3,235
Real estate mortgage
    
218
    
592
Installment
    
403
    
283
Total past due loans
    
5,024
    
4,110
             
Total nonperforming loans
  
$
27,743
  
$
26,732
             
Real estate owned and other repossessed assets
    
6,064
    
3,745
             
Total nonperforming assets
  
$
33,807
  
$
30,477

Nonperforming loans at June 30, 2006 were 0.87% of total portfolio loans, an improvement from the corresponding 2005 ratio of 0.94%, although the amount of such loans increased in 2006. Of the nonperforming loans at June 30, 2006, about 80% were real estate secured. Those loans, when originated, had appropriate loan-to-value ratios and, accordingly, have loss exposure which is expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies. Most other nonperforming loans were generally secured by other business assets. Nonperforming loans at June 30, 2006 were in various stages of resolution for which management believes such loans are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses.

 
Page 16 of 28

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

Financial Condition - Continued

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

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

At June 30, 2006, potential problem loans (including the previously-mentioned nonperforming loans) approximated $135 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, despite recent reductions in net loan charge-offs.

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

   
Total
Portfolio Loans
  
Allowance for
Loan Losses
  
Nonperforming
Loans
  
Allowance as a
Percentage of
Total Portfolio Loans
  
   
June 30,
  
Dec 31,
  
June 30,
  
Dec 31,
  
June 30,
  
Dec 31,
  
June 30,
  
Dec 31,
  
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Eastern Regions:
                                  
Great Lakes Region:
                                  
Ann Arbor Commerce Bank
  
$
280,158
  
$
286,146
  
$
4,768
  
$
4,712
  
$
2,757
  
$
3,103
    
1.70
%
  
1.65
%
Bank of Auburn Hills
    
19,159
    
6,058
    
285
    
90
                
1.49
%
  
1.49
%
Bank of Belleville
    
9,059
    
1,534
    
142
    
23
                
1.57
%
  
1.50
%
Bank of Michigan
    
35,532
    
28,062
    
532
    
421
    
         
1.50
%
  
1.50
%
Brighton Commerce Bank
    
97,764
    
93,553
    
994
    
978
    
1,964
    
1,412
    
1.02
%
  
1.05
%
Capitol National Bank
    
203,553
    
197,062
    
3,144
    
3,233
    
5,608
    
4,938
    
1.54
%
  
1.64
%
Detroit Commerce Bank
    
89,868
    
81,533
    
1,172
    
1,104
    
628
    
110
    
1.30
%
  
1.35
%
Elkhart Community Bank
    
77,141
    
70,671
    
924
    
919
    
443
    
908
    
1.20
%
  
1.30
%
Evansville Commerce Bank(2)
    
2,434
          
38
                      
1.56
%
      
Goshen Community Bank
    
56,978
    
53,497
    
729
    
648
    
589
    
443
    
1.28
%
  
1.21
%
Grand Haven Bank
    
119,104
    
117,241
    
2,687
    
2,575
    
2,515
    
3,342
    
2.26
%
  
2.20
%
Kent Commerce Bank
    
79,125
    
74,385
    
1,120
    
1,277
    
819
    
1,751
    
1.42
%
  
1.72
%
Macomb Community Bank
    
90,418
    
90,448
    
1,525
    
1,422
    
1,704
    
2,142
    
1.69
%
  
1.57
%
Muskegon Commerce Bank
    
87,862
    
88,007
    
1,085
    
1,021
    
1,896
    
1,430
    
1.23
%
  
1.16
%
Oakland Commerce Bank
    
115,196
    
101,859
    
1,521
    
1,424
    
2,437
    
948
    
1.32
%
  
1.40
%
Paragon Bank & Trust
    
83,520
    
92,427
    
1,214
    
1,375
    
1,211
    
2,216
    
1.45
%
  
1.49
%
Portage Commerce Bank
    
165,362
    
171,679
    
1,930
    
2,057
    
1,747
    
2,119
    
1.17
%
  
1.20
%
Great Lakes Region Total
    
1,612,233
    
1,554,162
    
23,810
    
23,279
    
24,318
    
24,862
              
Southeast Region:
                                                  
Bank of Valdosta(3)
    
476
          
7
                      
1.47
%
      
Community Bank of Rowan(1)
    
15,418
          
225
                      
1.46
%
      
First Carolina State Bank
    
67,928
    
68,235
    
723
    
690
    
750
    
173
    
1.06
%
  
1.01
%
Peoples State Bank
    
23,042
    
19,909
    
223
    
140
          
16
    
0.97
%
  
0.70
%
Sunrise Bank of Atlanta(4)
    
1,920
          
36
                      
1.88
%
      
Southeast Region Total
    
108,784
    
88,144
    
1,214
    
830
    
750
    
189
              
Midwest Region-Summit Bank of
Kansas City
    
7,031
    
644
    
106
    
10
                
1.51
%
  
1.55
%
Eastern Regions Total
  
$
1,728,048
  
$
1,642,950
  
$
25,130
  
$
24,119
  
$
25,068
  
$
25,051
              

Loan information for Capitol’s other regions and footnotes relating to this table appear on the following page.

 
Page 17 of 28

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

Financial Condition - Continued

Summary of loan information - continued:

   
Total
Portfolio Loans
  
Allowance for
Loan Losses
  
Nonperforming
Loans
  
Allowance as a
Percentage of
Total Portfolio Loans
  
   
June 30,
  
Dec 31,
  
June 30,
  
Dec 31,
  
June 30
  
Dec 31,
  
June 30
  
Dec 31,
  
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Western Regions:
                                  
Southwest Region:
                                  
Arrowhead Community Bank
  
$
  76,354   $ 73,800   $  763   $ 654   $ 109   $  140     1.00 %   0.89 %
Asian Bank of Arizona(5)
    
2,939
           40                       1.36 %      
Bank of Las Vegas
    
55,423
    
50,899
    
560
    
495
    
         
1.01
%
  
0.97
%
Bank of Tucson
    
143,540
    
143,900
    
1,322
    
1,405
    
   
200
    
0.92
%
  
0.98
%
Black Mountain Community Bank
    
110,361
    
103,627
    
1,318
    
1,277
    
1,139
    
131
    
1.19
%
  
1.23
%
Camelback Community Bank
    
72,746
    
73,813
    
872
    
852
    
4
    
41
    
1.20
%
  
1.15
%
Desert Community Bank
    
79,790
    
71,050
    
801
    
830
    
139
    
273
    
1.00
%
  
1.17
%
East Valley Community Bank
    
35,204
    
38,716
    
401
    
497
    
         
1.14
%
  
1.28
%
Fort Collins Commerce Bank
    
36,743
    
22,619
    
515
    
306
                
1.40
%
  
1.35
%
Mesa Bank
    
146,250
    
125,513
    
1,386
    
1,215
    
         
0.95
%
  
0.97
%
Red Rock Community Bank
    
95,436
    
83,259
    
1,275
    
1,300
    
202
    
198
    
1.34
%
  
1.56
%
Southern Arizona Community Bank
    
75,531
    
76,953
    
745
    
720
    
18
    
59
    
0.99
%
  
0.94
%
Sunrise Bank of Albuquerque
    
48,392
    
53,669
    
829
    
693
    
   
300
    
1.71
%
  
1.29
%
Sunrise Bank of Arizona
    
110,340
    
101,846
    
1,100
    
1,253
    
315
    
70
    
1.00
%
  
1.23
%
Valley First Community Bank
    
61,609
    
57,794
    
561
    
526
    
         
0.91
%
  
0.91
%
Yuma Community Bank
    
60,448
    
50,474
    
550
    
485
    
222
    
27
    
0.91
%
  
0.96
%
Southwest Region Total
    
1,211,106
    
1,127,932
    
13,038
    
12,508
    
2,148
    
1,439
              
California Region:
                                                  
Bank of Escondido
    
30,651
    
38,228
    
435
    
460
    
21
    
23
    
1.42
%
  
1.20
%
Bank of San Francisco
    
18,174
    
7,291
    
270
    
102
                
1.49
%
  
1.40
%
Bank of Santa Barbara
    
20,668
    
3,546
    
278
    
54
                
1.35
%
  
1.52
%
Napa Community Bank
    
73,283
    
70,359
    
1,237
    
1,237
    
68
    
19
    
1.69
%
  
1.76
%
Point Loma Community Bank
    
32,754
    
29,759
    
453
    
423
    
         
1.38
%
  
1.42
%
Sunrise Bank of San Diego
    
56,933
    
58,983
    
478
    
588
          
200
    
0.84
%
  
1.00
%
California Region Total
    
232,463
    
208,166
    
3,151
    
2,864
    
89
    
242
              
Northwest Region:
    
         
                               
Bank of Bellevue
    
17,760
    
8,327
    
260
    
120
                
1.46
%
  
1.44
%
Bank of Everett(6)
                                                  
Northwest Region Total
    
17,760
    
8,327
    
260
    
120
                          
Western Regions Total
    
1,461,329
    
1,344,425
    
16,449
    
15,492
    
2,237
    
1,681
              
Other, net
    
6,832
    
3,814
    
1,732
    
948
    
438
                
                                                   
Consolidated
  
$
3,196,209
  
$
2,991,189
  
$
43,311
  
$
40,559
  
$
27,743
  
$
26,732
    
1.36
%
  
1.36
%

(1) Commenced operations in February 2006 and is 51%-owned by Capitol Development Bancorp Limited III, a controlled subsidiary
of Capitol.
(2) Commenced operations in May 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(3) Commenced operations in June 2006 and is 56%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(4) Commenced operations in June 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(5) Commenced operations in April 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(6) Commenced operations in June 2006 and is 51%-owned by Capitol Development Bancorp Limited V, a controlled subsidiary of Capitol.
Capitol Development Bancorp Limited V was formed and capitalized in 2006.
 
Results of Operations

Second quarter 2006 earnings were a record level, $10.3 million, an increase of 24% over the same period in 2005; diluted earnings per share were $0.63 for the 2006 period, an increase of 17% compared to $0.54 in 2005. Net income for the six months ended June 30, 2006 was $20.2 million, also an increase of 24% over the same period in 2005. Diluted earnings per share for the six-month 2006 period were $1.24 compared to $1.06 for the prior year period, also a 17% increase.



 
Page 18 of 28

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

Results of Operations - Continued

Net interest income for the first six months of 2006 totaled $85 million, a 14% increase compared to $74.4 million in 2005. Net interest income for the three months ended June 30, 2006 totaled $43.6 million, a 13% increase, compared to $38.6 million for the corresponding period in 2005. This increase is attributable to the banks’ growth in size, number of affiliate banks and an increasing interest-rate environment. Net interest margin approximated 5.17% for the three months ended June 30, 2006, an increase over the 5.06% for the three months ended March 31, 2006. During the three months ended June 30, 2005, the consolidated net interest margin approximated 5.06%, although the margin increased in later 2005 periods principally due to increases in interest rates largely the result of actions by the Federal Reserve Board of Governors. It is difficult to speculate on future changes in net interest margin.

Noninterest income for the six months ended June 30, 2006 was $10.6 million, an increase of $369,000, or 4%, over the same period in 2005. Noninterest income for the three months ended June 30, 2006 was $5.5 million, a slight decrease from the same period in 2005. The increase for the six-month 2006 period was due primarily to an increase of $507,000 in trust fee income. Fees from origination of nonportfolio residential mortgage loans totaled $1.4 million for the second quarter of 2006, and were $2.7 million for the six-month period, reduced from $1.5 million and $2.8 million for the comparable periods in 2005, respectively, due to lower volume of loan fees derived from reduced levels of residential mortgage loan activity within the banks’ markets. Service charges on deposit accounts in the six-month 2006 period increased slightly compared to 2005. Other noninterest income in the 2006 six-month period includes $804,000 in gains on sale of government-guaranteed loans as compared to $722,000 of such gains in the 2005 six-month period.

The provision for loan losses for the six-month period in 2006 was $5.3 million, compared to $5.1 million for the same period in 2005. The provision for loan losses for the three months ended June 30, 2006 was $2.8 million as compared to $3 million during the corresponding 2005 period. Provisions for loan losses were higher for the six months ended June 30, 2006, due primarily to an increase in portfolio loans and other factors. 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 $68.4 million for the six-month 2006 period and $36.6 million for the three months ended June 30, 2006, compared to $55.2 million and $28.7 million, respectively, for the comparable periods in 2005. The increase in noninterest expense is associated with adding six new banks, growth in the size of previously-existing banks and increases in general operating costs during the 2006 periods. 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 Capitol’s wealth management unit and the addition of six de novo banks in the six-month period of 2006 (compared to the addition of four banks in the six-month 2005 period). The more significant elements of other noninterest expense consisted of the following (in thousands) for the periods ended June 30:

   
Three-Month Period
  
Six-Month Period
   
2006
  
2005
  
2006
  
2005
Preopening and start-up costs of de novo banks, bank-
development subsidiaries and other units
  
$
2,843
  
$
541
  
$
3,439
  
$
702
Advertising
    
748
    
603
    
1,381
    
1,067
Paper, printing and supplies
    
615
    
504
    
1,161
    
986
Professional fees
    
516
    
474
    
1,152
    
927
Directors’ fees
    
565
    
289
    
1,146
    
615
Taxes other than income taxes
    
340
    
351
    
718
    
715
Bank services (ATMs, telephone banking and Internet banking)
    
349
    
280
    
683
    
596
Communications
    
339
    
289
    
649
    
597
Other
    
3,659
    
3,259
    
5,283
    
5.903
Total
  
$
9,974
  
$
6,590
  
$
15,612
  
$
12,108


 
Page 19 of 28

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

Results of Operations - Continued
 
Operating results (dollars in thousands) were as follows:

   
Six months ended June 30
  
           
Return on
  
Return on
  
   
Total Revenues
  
Net Income
  
Average Equity(1)
  
Average Assets(1)
  
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Eastern Regions:
                                                  
Great Lakes Region:
                                                  
Ann Arbor Commerce Bank
  
$
11,671
  
$
11,637
  
$
1,936
  
$
2,097
    
14.57
%
  
15.72
%
  
1.27
%
  
1.28
%
Bank of Auburn Hills
    
602
    
n/a
    
(287
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Bank of Belleville
    
467
    
n/a
    
(359
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Bank of Michigan
    
1,365
    
150
    
(227
)
  
(496
)
  
n/a
    
n/a
    
n/a
    
n/a
  
Brighton Commerce Bank
    
3,817
    
3,532
    
433
    
559
    
9.23
    
12.37
    
0.83
    
1.04
  
Capitol National Bank
    
8,711
    
7,788
    
1,566
    
1,861
    
16.35
    
20.32
    
1.27
    
1.59
  
Detroit Commerce Bank
    
4,315
    
3,000
    
539
    
256
    
13.50
    
7.81
    
1.21
    
0.68
  
Elkhart Community Bank
    
3,047
    
2,443
    
516
    
310
    
12.49
    
8.06
    
1.32
    
0.88
  
Evansville Commerce Bank(3)
    
53
    
n/a
    
(451
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Goshen Community Bank
    
2,471
    
1,825
    
200
    
(38
)
  
5.98
    
n/a
    
0.59
    
n/a
  
Grand Haven Bank
    
4,740
    
4,228
    
646
    
559
    
12.14
    
11.08
    
1.03
    
0.92
  
Kent Commerce Bank
    
3,248
    
3,108
    
239
    
222
    
5.68
    
5.38
    
0.60
    
0.50
  
Macomb Community Bank
    
3,774
    
3,183
    
152
    
255
    
3.58
    
5.80
    
0.32
    
0.53
  
Muskegon Commerce Bank
    
3,753
    
3,559
    
245
    
765
    
5.70
    
15.72
    
0.51
    
1.63
  
Oakland Commerce Bank
    
4,633
    
4,285
    
691
    
959
    
14.43
    
18.59
   
1.17
    
1.50
  
Paragon Bank & Trust
    
3,944
    
4,168
    
575
    
613
    
10.39
    
10.65
    
1.13
    
1.12
  
Portage Commerce Bank
    
7,205
    
6,776
    
1,281
    
1,532
    
15.99
    
19.63
    
1.42
    
1.65
  
Great Lakes Region Total
    
67,816
    
59,682
    
7,695
    
9,454
                          
Southeast Region:
                                                  
Bank of Valdosta(4)
    
8
    
n/a
    
(446
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Community Bank of Rowan(2)
    
484
    
n/a
    
(735
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
First Carolina State Bank
    
3,041
    
2,052
    
457
    
238
    
8.29
    
4.58
    
1.11
    
0.68
  
Peoples State Bank
    
1,216
    
424
    
39
    
36
    
2.24
    
4.46
    
0.23
    
0.61
  
Sunrise Bank of Atlanta(5)
    
56
    
n/a
    
(699
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Southeast Region Total
    
4,805
    
2,476
    
(1,384
)
  
274
                          
Midwest Region-Summit Bank of
Kansas City
    
254
    
n/a
    
(358
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Eastern Regions Total
  
$
72,875
  
$
62,158
  
$
5,953
  
$
9,728
                          


Operating results for Capitol’s other regions and footnotes relating to this table appear on the following page.




[The remainder of this page intentionally left blank]


 
Page 20 of 28

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

Financial Condition - Continued

Operating results - continued:

   
Six months ended June 30
  
           
Return on
  
Return on
  
   
Total Revenues
  
Net Income
  
Average Equity(1)
  
Average Assets(1)
  
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Western Regions:
                                  
Southwest Region:
                                  
Arrowhead Community Bank
   $ 3,871   $ 3,170   $ 544   $ 458     13.69 %   13.38 %   1.26 %   1.20 %
Asian Bank of Arizona(6)
    
97
    
n/a
    
(351
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Bank of Las Vegas
    
2,495
    
1,837
   
368
    
257
    
7.72
    
8.03
    
1.19
    
0.99
  
Bank of Tucson
    
7,197
    
6,029
    
2,192
    
1,811
    
29.65
    
27.87
    
2.55
    
2.13
  
Black Mountain Community Bank
    
5,032
    
4,051
   
1,294
    
992
    
21.70
    
20.00
    
2.05
    
1.74
  
Camelback Community Bank
    
3,048
    
2,865
    
451
    
613
    
11.11
    
14.36
    
1.12
    
1.53
  
Desert Community Bank
    
3,382
    
2,706
    
610
    
505
    
15.00
    
13.10
    
1.51
    
1.43
  
East Valley Bank
    
1,731
    
1,905
    
318
    
104
    
12.12
    
4.36
    
1.51
    
0.43
  
Fort Collins Commerce Bank
    
1,385
    
99
    
(72
)
  
(125
)
  
n/a
    
n/a
    
n/a
    
n/a
  
Mesa Bank
    
7,301
    
4,536
    
1,782
    
1,026
    
31.28
    
24.97
    
2.43
    
2.01
  
Red Rock Community Bank
    
4,115
    
3,281
    
1,058
    
715
   
17.62
    
11.41
    
2.09
    
1.43
  
Southern Arizona Community Bank
    
3,238
    
2,901
    
556
    
615
    
12.75
    
14.04
    
1.30
    
1.42
  
Sunrise Bank of Albuquerque
    
2,267
    
2,591
    
201
    
527
    
6.02
    
15.57
    
0.71
    
1.54
  
Sunrise Bank of Arizona
    
5,176
    
5,072
    
853
    
1,121
    
13.43
    
18.12
    
1.49
    
1.78
  
Valley First Community Bank
    
2,807
    
2,118
    
365
    
338
    
10.25
    
10.54
    
0.99
    
1.06
  
Yuma Community Bank
    
2,807
    
2,169
    
509
    
486
   
15.22
    
15.02
    
1.58
    
1.65
  
Southwest Region Total
    
55,949
    
45,330
    
10,678
    
9,443
                          
California Region:
                                                  
Bank of Escondido
    
2,548
    
1,725
    
441
    
207
    
8.96
    
4.48
    
1.19
    
0.74
  
Bank of San Francisco
    
651
    
n/a
    
(419
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Bank of Santa Barbara
    
760
    
n/a
    
(414
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Napa Community Bank
    
3,307
    
2,698
    
594
    
615
    
10.79
    
12.96
    
1.45
    
1.70
  
Point Loma Community Bank
    
1,519
    
783
    
48
    
(337
)
  
1.38
    
n/a
    
0.25
    
n/a
 
Sunrise Bank of San Diego
    
2,819
    
2,666
   
498
    
481
    
9.25
    
8.97
    
1.45
    
1.56
  
California Region Total
    
11,604
    
7,872
    
748
    
966
                          
Northwest Region
                                                  
Bank of Bellevue
    
848
    
13
    
(237
)
  
(188
)
  
n/a
   
n/a
   
n/a
    
n/a
  
Bank of Everett(7)
    
n/a
    
n/a
    
(212
)
  
n/a
    
n/a
    
n/a
    
n/a
    
n/a
  
Northwest Region Total
    
848
    
13
    
(449
)
  
(188
)
                        
Western Regions Total
    
68,401
    
53,215
    
10,977
    
10,221
                          
Other, net
    
583
    
(764
)
  
3,290
    
(3,637
)
  
n/a
    
n/a
    
n/a
    
n/a
  
                                                   
Consolidated
  
$
141,859
  
$
114,609
  
$
20,220
  
$
16,312
    
13.01
%
  
12.68
%
  
1.13
%
  
1.02
%
                                                   

n/a - Not applicable.

(1)  Annualized for period presented.
(2) Commenced operations in February 2006 and is 51%-owned by Capitol Development Bancorp Limited III, a controlled subsidiary
of Capitol.
(3) Commenced operations in May 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(4) Commenced operations in June 2006 and is 56%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(5) Commenced operations in June 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(6) Commenced operations in April 2006 and is 51%-owned by Capitol Development Bancorp Limited IV, a controlled subsidiary of Capitol.
(7) Commenced operations in June 2006 and is 51%-owned by Capitol Development Bancorp Limited V, a controlled subsidiary of Capitol.
Capitol Development Bancorp Limited V was formed and capitalized in 2006.




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Page 21 of 28

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

Liquidity and Capital Resources

The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $202 million for the six months ended June 30, 2006, compared to a $211 million increase in the corresponding period of 2005. Growth occurred in most interest-bearing deposit categories, with the majority coming from certificate of deposit accounts. The banks generally do not significantly rely on brokered deposits as a key funding source. Brokered deposits approximated $274 million as of June 30, 2006, or about 9% of total deposits, an increase of $36 million during the interim 2006 period, as the banks have sought to add these funds selectively based on maturity and interest-rate opportunities, to aid in matching repricing of funding sources and assets.

Noninterest-bearing deposits approximated 21% of total deposits at June 30, 2006, substantially similar to December 31, 2005. Levels of noninterest-bearing deposits can, however, fluctuate based on customers’ transaction activity.

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

Cash and cash equivalents amounted to $350 million or 9% of total assets at June 30, 2006, compared with $306 million and about the same percentage of total assets as December 31, 2005. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the banks’ liquidity position at June 30, 2006 is adequate to fund loan demand and meet depositor needs.

In addition to cash and cash equivalents, a source of long-term liquidity is the banks’ marketable investment securities. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements. The banks have not engaged in active trading of their investments. At June 30, 2006, the banks had approximately $21 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 $176 million and additional borrowing capacity approximated $221 million at June 30, 2006. These facilities are used from time to time as a lower-cost funding source versus various rates and maturities of time deposits. Total notes payable and short-term borrowings approximated $177 million in the interim period of 2006. At June 30, 2006, Capitol had unused lines of credit from an unrelated financial institution aggregating $25 million.

Stockholders’ equity, as a percentage of total assets, approximated 9% at June 30, 2006 and at December 31, 2005.

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.


 
Page 22 of 28

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

Trends Affecting Operations - Continued

The Board of Governors of the Federal Reserve, which influences interest rates, has increased interbank borrowing rates several times during the interim 2006 period (and 2005) and expressed several concerns about a variety of economic conditions, as well as mixed messages on the direction of future interest rates. 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.

Start-up banks generally incur operating losses during their early periods of operations. Start-up banks formed in 2006 and beyond may similarly negatively impact profitability.

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

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

Impact of New Accounting Standards

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

Critical Accounting Policies

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




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Page 23 of 28

PART I, ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

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


PART I, ITEM 4

CONTROLS AND PROCEDURES

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

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






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Page 24 of 28

PART II. OTHER INFORMATION

Item 1. 
Legal Proceedings.
 
Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on Capitol’s consolidated financial position or results of operations.
 
Item 1.A.
There were no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of Capitol’s Form 10-K for the year ended December 31, 2005, during the six months ended June 30, 2006. Refer to that section of Capitol’s Form 10-K for disclosures regarding the risks and uncertainties related to Capitol’s business.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
 
(a) None.
(b) Not applicable.
(c) None.
 
Item 3.
Defaults Upon Senior Securities.
 
None.
 
Item 4.
Submission of Matters to a Vote of Security Holders.
 
(a) Capitol’s annual meeting of shareholders was held on April 26, 2006.
 
(b) The following matter was voted upon at the annual meeting of shareholders:
 
The election of the nominees for the board of directors who will serve for a term to expire at the 2007
annual meeting was voted on by the shareholders. The nominees, all of whom were elected, are listed below.
The following votes were tabulated:
 
 
 
For
  
Withheld
 Louis G. Allen
 13,014,128
  
 374,455
 Paul R. Ballard
 11,829,937
 
 1,558,645
 David L. Becker
 13,015,159
  
 373,424
 Robert C. Carr
 11,350,644
  
 2,037,938
 Douglas E. Crist
 12,778,508
  
 610,074
 Michael J. Devine
 11,785,801
  
 1,602,781
 Cristin Reid English
 11,817,741
  
 1,570,841
 James C. Epolito
 12,576,336
  
 812,246
 Gary A. Falkenberg
 12,939,968
  
 448,615
 Joel I. Ferguson
 13,058,658
  
 329,924
 Kathleen A. Gaskin
 12,776,956
  
 311,626
 H. Nicholas Genova
 12,777,573
  
 611,009
 Michael F. Hannley
 11,854,601
  
 1,533,981
 Lewis D. Johns
 10,685,910
  
 2,702,672
 Michael L. Kasten
 11,265,402
  
 2,123,180
 John S. Lewis
 11,786,331
  
 1,602,251
 Leonard Maas
 12,773,393
  
 615,190
 Lyle W. Miller
 10,972,689
  
 2,415,893
 Myrl D. Nofziger
 12,862,548
  
 526,034
 David O'Leary
 11,991,298
  
 1,397,284
 Joseph D. Reid
 11,631,987
 
 1,756,595
 Ronald K. Sable
 11,978,833
  
 1,409,749
 
There were no broker non-votes.
    
 
 
 

 
Page 25 of 28

PART II. OTHER INFORMATION - Continued


Item 5.
Other Information.
 
None.
 
Item 6.
Exhibits:


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


 
Page 26 of 28

SIGNATURES

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


CAPITOL BANCORP LTD.
(Registrant)
 
/s/ Joseph D. Reid          
Joseph D. Reid
Chairman and CEO
(duly authorized to sign on behalf of the
registrant)
 
/s/ Lee W. Hendrickson           
Lee W. Hendrickson
Chief Financial Officer


Date: July 31, 2006

 
Page 27 of 28

INDEX TO EXHIBITS

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



 
Page 28 of 28