Capitol Bancorp (CBCRQ) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2007
	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 T 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 T 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 £ No T

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 April 15, 2007
Common Stock, No par value	17,078,457 shares

Page 1 of 26

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 - March 31, 2007 and December 31, 2006.	3
	Condensed consolidated statements of income - Three months ended March 31, 2007 and 2006.	4
	Condensed consolidated statements of changes in stockholders' equity - Three months ended March 31, 2007 and 2006.	5
	Condensed consolidated statements of cash flows - Three months ended March 31, 2007 and 2006.	6
	Notes to condensed consolidated financial statements.	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	23
Item 4.	Controls and Procedures.	23
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings.	24
Item 1.A.	Risk Factors.	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	24
Item 3.	Defaults Upon Senior Securities.	24
Item 4.	Submission of Matters to a Vote of Security Holders.	24
Item 5.	Other Information.	24
Item 6.	Exhibits.	24
SIGNATURES		25
EXHIBIT INDEX		26

Page 2 of 26

PART I, ITEM 1
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of March 31, 2007 and December 31, 2006
(in thousands, except share data)
		(Unaudited)
		March 31			December 31
		2007			2006
ASSETS
Cash and due from banks	$	135,538		$	169,753
Money market and interest-bearing deposits		19,730			37,204
Federal funds sold		252,363			141,913
Cash and cash equivalents		407,631			348,870
Loans held for sale		27,862			34,593
Investment securities:
Available for sale, carried at market value		15,980			18,904
Held for long-term investment, carried at amortized cost which approximates market value		22,696			21,749
Total investment securities		38,676			40,653
Portfolio loans:
Commercial		3,238,411			3,103,125
Real estate mortgage		247,371			259,604
Installment		135,199			125,949
Total portfolio loans		3,620,981			3,488,678
Less allowance for loan losses		(47,052	)		(45,414	)
Net portfolio loans		3,573,929			3,443,264
Premises and equipment		55,312			54,295
Accrued interest income		17,466			17,524
Goodwill and other intangibles		70,590			62,215
Other assets		63,060			64,402
TOTAL ASSETS	$	4,254,526		$	4,065,816
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	615,644		$	651,253
Interest-bearing		2,776,391			2,607,232
Total deposits		3,392,035			3,258,485
Debt obligations:
Notes payable and short-term borrowings		173,000			191,154
Subordinated debentures		156,058			101,035
Total debt obligations		329,058			292,189
Accrued interest on deposits and other liabilities		27,841			26,751
Total liabilities		3,748,934			3,577,425
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES		123,600			126,512
STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000,000 shares authorized; issued and outstanding:   2007 - 17,074,605 shares                                                   2006 - 16,656,481 shares		267,304			249,244
Retained earnings		114,789			112,779
Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income/loss)		(101	)		(144	)
Total stockholders' equity		381,992			361,879
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	4,254,526		$	4,065,816

See notes to condensed consolidated financial statements.

Page 3 of 26

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 2007 and 2006
(in thousands, except per share data)
	2007		2006
Interest income:
Portfolio loans (including fees)	$	73,524	$	60,143
Loans held for sale		946		523
Taxable investment securities		208		263
Federal funds sold		2,544		1,818
Other		617		350
Total interest income		77,839		63,097
Interest expense:
Deposits		28,329		17,782
Debt obligations and other		4,829		3,962
Total interest expense		33,158		21,744
Net interest income		44,681		41,353
Provision for loan losses		3,932		2,456
Net interest income after provision for loan losses		40,749		38,897
Noninterest income:
Service charges on deposit accounts		1,105		1,031
Trust and wealth-management revenue		1,037		867
Fees from origination of non-portfolio residential mortgage loans		1,307		1,289
Gains on sale of government-guaranteed loans		800		360
Other		1,336		1,563
Total noninterest income		5,585		5,110
Noninterest expense:
Salaries and employee benefits		26,072		21,550
Occupancy		3,497		2,678
Equipment rent, depreciation and maintenance		2,642		1,966
Other		9,612		5,638
Total noninterest expense		41,823		31,832
Income before income taxes and minority interest		4,511		12,175
Income taxes		1,764		4,381
Income before minority interest		2,747		7,794
Minority interest in net losses of consolidated subsidiaries		3,524		2,159
NET INCOME	$	6,271	$	9,953
NET INCOME PER SHARE--Note D:
Basic	$	0.38	$	0.64
Diluted	$	0.36	$	0.61

See notes to condensed consolidated financial statements.

Page 4 of 26

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2007 and 2006
(in thousands, except share data)
							Accumulated
							Other
	Common			Retained			Comprehensive
	Stock			Earnings			Income (Loss)			Total
Three Months Ended March 31, 2006
Balances at January 1, 2006	$	216,539		$	85,553		$	(226	)	$	301,866
Issuance of 55,352 shares of common stock upon exercise of stock options, net of common stock surrendered to facilitate exercise		931									931
Issuance of 65,750 unvested shares of restricted common stock, net of related unearned employee  compensation		--									--
Recognition of compensation expense relating to restricted common stock		384									384
Tax benefit from share-based payments		518									518
Cash dividends paid ($0.20 per share)					(3,173	)					(3,173	)
Components of comprehensive income:
Net income for the period					9,953						9,953
Market value adjustment for investment securities available for sale (net of income tax effect)								(60	)		(60	)
Comprehensive income for the period											9,893
BALANCES AT MARCH 31, 2006	$	218,372		$	92,333		$	(286	)	$	310,419
Three Months Ended March 31, 2007
Balances at January 1, 2007	$	249,244		$	112,779		$	(144	)	$	361,879
Issuance of 371,314 shares of common stock to acquire minority interest in subsidiaries		15,927									15,927
Issuance of 22,304 shares of common stock upon exercise of stock options, net of common stock surrendered to facilitate exercise		(135	)								(135	)
Recognition of compensation expense relating to restricted common stock		415									415
Tax benefit from share-based payments		721									721
Issuance of 24,506 shares to employee stock ownership plan		1,132									1,132
Cash dividends paid ($0.25 per share)					(4,261	)					(4,261	)
Components of comprehensive income:
Net income for the period					6,271						6,271
Market value adjustment for investment securities available for sale (net of income tax effect)								43			43
Comprehensive income for the period											6,314
BALANCES AT MARCH 31, 2007	$	267,304		$	114,789		$	(101	)	$	381,992

See notes to condensed consolidated financial statements.

Page 5 of 26

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2007 and 2006
(in thousands)
	2007			2006
OPERATING ACTIVITIES
Net income	$	6,271		$	9,953
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,932			2,456
Depreciation of premises and equipment		2,164			1,660
Amortization of intangibles		146			146
Net accretion of investment security discounts					(1	)
Loss (gain) on sale of premises and equipment		(17	)		12
Minority interest in net losses of consolidated subsidiaries		(3,524	)		(2,159	)
Compensation expense relating to restricted common stock		415			384
Originations and purchases of loans held for sale		(132,370	)		(114,117	)
Proceeds from sales of loans held for sale		139,101			113,646
Decrease in accrued interest income and other assets		2,466			3,699
Increase (decrease) in accrued interest expense on deposits and other liabilities		1,090			(5,915	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		19,674			9,764
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale					12
Proceeds from calls, prepayments and maturities of investment securities		3,187			1,517
Purchases of investment securities		(1,096	)		(3,907	)
Net increase in portfolio loans		(134,597	)		(79,826	)
Proceeds from sales of premises and equipment		172			23
Purchases of premises and equipment		(3,336	)		(5,301	)
NET CASH USED BY INVESTING ACTIVITIES		(135,670	)		(87,482	)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		16,872			58,300
Net increase in certificates of deposit		116,678			94,789
Net payments on debt obligations		(18,154	)		(8,461	)
Net proceeds from issuance of subordinated debentures		55,000
Resources provided by minority interests		8,036			6,272
Net proceeds from issuance of common stock		(135	)		931
Tax benefit from share-based payments		721			518
Cash dividends paid		(4,261	)		(3,173	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		174,757			149,176
INCREASE IN CASH AND CASH EQUIVALENTS		58,761			71,458
Cash and cash equivalents at beginning of period		348,870			306,108
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	407,631		$	377,566

See notes to condensed consolidated financial statements.

Page 6 of 26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

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, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

The consolidated balance sheet as of December 31, 2006 was derived from audited consolidated financial statements as of that date. Certain 2006 amounts have been reclassified to conform to the 2007 presentation.

Note B - Implementation of New Accounting Standards

In March 2006, the Financial Accounting Standards Board (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. The effect of the standard's adoption effective January 1, 2007 did not have a material effect on Capitol's consolidated financial statements.

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 a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken in a tax return. Under FIN 48, tax positions are recognized in the financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities. Such tax positions will be measured initially and thereafter as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement, presuming the tax authority has full knowledge of the position and all relevant facts. FIN 48 also revises disclosure requirements to include disclosure of unrecognized tax benefits. FIN 48 did not have a material effect on Capitol's consolidated financial statements upon implementation effective January 1, 2007.

Note C - Stock Options

Stock option activity for the interim 2007 period is summarized as follows:

	Number of Stock Options Outstanding			Exercise Price Range		Weighted Average Exercise Price
Outstanding at January 1		2,570,091		$	10.81 to $ 37.48	$	26.86
Exercised		(41,518	)		10.81 to    10.21		17.64
Granted		--
Cancelled or expired		--
Outstanding at March 31		2,528,573		$	11.00 to $ 37.48	$	27.01

Page 7 of 26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED - Continued

Note C - Stock Options--Continued

As of March 31, 2007, stock options outstanding had a weighted average remaining contractual life of 3.6 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value as of March 31, 2007:

			Weighted Average
Exercise Price Range	Number Outstanding		Exercise Price		Remaining Contractual Life		Aggregate Intrinsic Value
$10.00 to 14.99		119,692	$	11.22		0.34 years	$	3,067,706
$15.00 to 19.99		279,169		16.62		2.58 years		5,647,589
$20.00 to 24.99		452,562		21.67		2.87 years		6,869,891
$25.00 to 29.99		630,857		27.02		3.20 years		6,201,324
$30.00 to 34.99		697,506		32.11		4.44 years		3,306,178
$35.00 or more		348,787		37.48		5.62 years		(219,736	)
Total outstanding		2,528,573					$	24,872,952

Note D - Net Income Per Share

The computations of basic and diluted earnings per share were as follows (in 1,000s):

	Three Months Ended March 31
	2007		2006
Numerator—net income for the period	$	6,271	$	9,953
Denominator:
Weighted average number of shares outstanding, excluding unvested restricted shares (denominator for basic earnings per share)		16,695		15,642
Effect of dilutive securities:
Unvested restricted shares		51		61
Stock options		572		689
Total effect of dilutive securities		623		750
Denominator for diluted earnings per share—
Weighted average number of shares and potential dilution		17,318		16,392
Number of antidilutive stock options excluded from diluted earnings per share computation		--		--

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Page 8 of 26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED - Continued

Note E - New Banks and Other Development Activities

Capitol opened two de novo banks during the first three months of 2007. Bank of Tacoma, located in Tacoma, Washington, opened in January 2007, and Sunrise Community Bank, located in Palm Desert, California, opened in February 2007. Each is majority owned by bank-development subsidiaries controlled by Capitol.

Bank development efforts were currently under consideration at March 31, 2007 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 March 31, 2007, Capitol had applications pending for additional de novo community banks in California, Colorado, New York, Oregon and Washington.

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.

Note F - Acquisition of Minority Interests

Effective February 9, 2007, Capitol completed a share exchange transaction which involved the issuance of approximately 371,000 shares of previously unissued common stock in exchange for the nonvoting shares of Capitol Development Bancorp Limited II. Total consideration for this transaction approximated $15.9 million with related goodwill approximating $8.5 million. If this transaction had occurred at the beginning of 2006, net income for the three months ended March 31, 2006 would have been $9.2 million ($0.56 per diluted share).

Note G - Impact of New Accounting Standards

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, which provides a definition of fair value for accounting purposes, establishes a framework for measuring fair value, expands related financial statement disclosures and will be effective for Capitol in 2008. Capitol's management has not completed its review of this new standard.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. Statement No. 159 will be applied prospectively and implemented by Capitol effective January 1, 2008. Management has not completed its analysis of this new standard.

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 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.

Page 9 of 26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED - Continued

Note G - 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; and

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

Capitol's management has not completed its analysis of this new guidance (as proposed, where applicable) although it anticipates the 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 10 of 26

PART I, ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Financial Condition

Total assets approximated $4.3 billion at March 31, 2007, an increase of $188.7 million from the December 31, 2006 level of $4.1 billion. The balance sheet includes Capitol and its consolidated subsidiaries:

	Total Assets (in $1,000's)
	March 31, 2007		December 31, 2006
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	322,415	$	310,407
Bank of Auburn Hills		34,721		31,559
Bank of Belleville		31,613		24,948
Bank of Maumee		12,524		9,915
Bank of Michigan		58,592		51,287
Brighton Commerce Bank		104,613		103,909
Capitol National Bank		239,389		256,741
Detroit Commerce Bank		110,130		106,233
Elkhart Community Bank		85,285		86,883
Evansville Commerce Bank		22,973		20,772
Goshen Community Bank		75,816		80,137
Grand Haven Bank		126,435		129,033
Kent Commerce Bank		81,291		86,916
Macomb Community Bank		94,428		101,353
Muskegon Commerce Bank		92,498		95,551
Oakland Commerce Bank		127,751		134,437
Ohio Commerce Bank		17,074		14,466
Paragon Bank & Trust		93,943		98,804
Portage Commerce Bank		183,448		179,413
Great Lakes Region Total		1,914,939		1,922,764
Southeast Region:
Bank of Valdosta		24,502		21,626
Community Bank of Rowan		57,801		45,503
First Carolina State Bank		95,181		93,819
Peoples State Bank		28,598		32,714
Sunrise Bank of Atlanta		24,297		16,990
Southeast Region Total		230,379		210,652
Midwest Region: Summit Bank of Kansas City		31,884		19,529
Eastern Regions Total	$	2,177,202	$	2,152,945

Total assets for Capitol's western regions, consolidated totals and footnotes relating to this table appear on the following page.

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Page 11 of 26

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)
	March 31, 2007		December 31, 2006
Eastern Regions Total (from preceding page)	$	2,177,202	$	2,152,945
Western Regions:
Southwest Region:
1st Commerce Bank		17,062		14,829
Arrowhead Community Bank		89,413		79,152
Asian Bank of Arizona		19,225		20,248
Bank of Las Vegas		75,135		67,478
Bank of Tucson		189,445		187,683
Black Mountain Community Bank		150,079		138,961
Camelback Community Bank		86,905		83,003
Desert Community Bank		93,994		93,914
Fort Collins Commerce Bank		60,148		54,410
Mesa Bank		206,561		201,776
Red Rock Community Bank		109,102		108,362
Southern Arizona Community Bank		87,618		85,912
Sunrise Bank of Albuquerque		63,469		59,798
Sunrise Bank of Arizona		117,188		119,785
Valley First Community Bank		69,739		72,333
Yuma Community Bank		72,126		74,477
Southwest Region Total		1,507,209		1,462,121
California Region:
Bank of Escondido		88,000		82,412
Bank of San Francisco		28,659		28,122
Bank of Santa Barbara		47,815		42,559
Napa Community Bank		120,147		99,009
Point Loma Community Bank		48,227		43,715
Sunrise Bank of San Diego		83,055		71,170
Sunrise Community Bank(2)		11,148
California Region Total		427,051		366,987
Northwest Region:
Bank of Bellevue		36,424		33,155
Bank of Everett		21,365		20,061
Bank of Tacoma(1)		16,113
Northwest Region Total		73,902		53,216
Western Regions Total		2,008,162		1,882,324
Other, net		69,162		30,547
Consolidated Totals	$	4,254,526	$	4,065,816

(1)	Commenced operations in January 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.
(2)	Commenced operations in February 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.

Page 12 of 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

Portfolio loans increased during the 2007 period by approximately $132 million, compared to net loan growth of about $78 million during the corresponding period of 2006. 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 March 31, 2007 approximated $47 million or 1.30% of total portfolio loans, consistent with the ratio at the beginning of the year, as asset quality ratios were stable in the first quarter of 2007.

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 periods ended March 31 (in thousands):

	2007			2006
Allowance for loan losses at January 1	$	45,414		$	40,559
Loans charged-off:
Commercial		(2,444	)		(1,718	)
Real estate mortgage					(25	)
Installment		(193	)		(112	)
Total charge-offs		(2,637	)		(1,855	)
Recoveries:
Commercial		242			353
Real estate mortgage		1			1
Installment		100			86
Total recoveries		343			440
Net charge-offs		(2,294	)		(1,415	)
Additions to allowance charged to expense		3,932			2,456
Allowance for loan losses at March 31	$	47,052		$	41,600
Average total portfolio loans for period ended March 31	$	3,555,432		$	3,010,849
Ratio of net charge-offs (annualized) to average portfolio loans outstanding		0.26	%		0.19	%

Interim 2007 loan charge-offs, which increased compared to 2006, are not necessarily indicative of future charge-off levels because of the variability in asset quality and resolution of nonperforming loans. The increase in loan charge-offs and provision for loan losses in 2007 was associated primarily with Michigan banks, due to a challenging economic environment.

Page 13 of 26

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:

	March 31, 2007					December 31, 2006
			Percentage					Percentage
			of Total					of Total
			Portfolio					Portfolio
	Amount		Loans			Amount		Loans
Commercial	$	42,354		1.17	%	$	41,178		1.18	%
Real estate mortgage		2,443		0.07			2,675		0.08
Installment		2,255		0.06			1,561		0.04
Total allowance for loan losses	$	47,052		1.30	%	$	45,414		1.30	%
Total portfolio loans outstanding	$	3,620,981				$	3,488,678

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,		December 31,
	2007		2006
Nonaccrual loans:
Commercial	$	27,764	$	25,219
Real estate mortgage		3,225		3,609
Installment		1,003		898
Total nonaccrual loans		31,992		29,726
Past due (>90 days) loans:
Commercial		4,376		3,860
Real estate mortgage		314		523
Installment		77		165
Total past due loans		4,767		4,548
Total nonperforming loans	$	36,759	$	34,274
Real estate owned and other repossessed assets		9,114		9,478
Total nonperforming assets	$	45,873	$	43,752

Nonperforming loans at March 31, 2007 were 1.02% of total portfolio loans, an increase from the corresponding 2006 ratio of 0.87% and a slight increase from the December 31, 2006 ratio of 0.98%. The substantial majority of nonperforming loans at those dates were located in Michigan. Of the nonperforming loans at March 31, 2007, about 70% 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, 2007 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 14 of 26

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 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, 2007, potential problem loans (including the previously-mentioned nonperforming loans) approximated $156 million, or about 4.3% of total consolidated portfolio loans, compared to approximately $146 million or about 4.2% at December 31, 2006. 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 has considered these loans in its evaluation of the adequacy of the allowance for loan losses. Management believes, however, that current general economic conditions in some markets may result in higher levels of future loan losses in comparison to previous years, as noted in the first three months of 2007.

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Page 15 of 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

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

	Total				Allowance for				Nonperforming				Allowance as a Percentage
	Portfolio Loans				Loan Losses				Loans				of Total Portfolio Loans
	March 31,		Dec 31,		March 31,		Dec 31,		March 31,		Dec 31,		March 31,		Dec 31,
	2007		2006		2007		2006		2007		2006		2007		2006
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	297,711	$	288,408	$	4,496	$	4,393	$	3,913	$	4,441	1.51	%	1.52	%
Bank of Auburn Hills		30,670		26,432		460		410		946		629	1.50	%	1.55	%
Bank of Belleville		21,359		17,410		320		260					1.50	%	1.49	%
Bank of Maumee		8,653		3,327		131		50					1.51	%	1.50	%
Bank of Michigan		53,024		44,630		798		669					1.50	%	1.50	%
Brighton Commerce Bank		93,740		94,987		950		995				522	1.01	%	1.05	%
Capitol National Bank		199,866		196,074		3,217		2,833		4,775		3,365	1.61	%	1.44	%
Detroit Commerce Bank		102,497		103,153		1,315		1,335		1,283		1,328	1.28	%	1.29	%
Elkhart Community Bank		77,149		77,515		1,058		1,010		1,573		676	1.37	%	1.30	%
Evansville Commerce Bank		21,266		14,711		319		232					1.50	%	1.58	%
Goshen Community Bank		64,440		63,653		879		862				233	1.36	%	1.35	%
Grand Haven Bank		120,656		120,025		2,646		2,643		3,157		2,682	2.19	%	2.20	%
Kent Commerce Bank		75,725		83,065		1,283		1,237		881		2,256	1.69	%	1.49	%
Macomb Community Bank		87,541		87,737		1,895		1,670		6,075		3,738	2.16	%	1.90	%
Muskegon Commerce Bank		83,305		81,799		1,143		1,231		1,282		3,906	1.37	%	1.50	%
Oakland Commerce Bank		113,165		114,876		1,780		1,636		1,851		2,862	1.57	%	1.42	%
Ohio Commerce Bank		3,260		739		46		11					1.41	%	1.49	%
Paragon Bank & Trust		82,956		82,259		1,362		1,298		2,428		2,132	1.64	%	1.58	%
Portage Commerce Bank		173,104		167,005		1,784		1,729		1,396		1,380	1.03	%	1.04	%
Great Lakes Region Total		1,710,087		1,667,805		25,882		24,504		29,560		30,150	1.51	%	1.47	%
Southeast Region:
Bank of Valdosta		22,383		18,870		335		283					1.50	%	1.50	%
Community Bank of Rowan		48,177		36,534		704		534					1.46	%	1.46	%
First Carolina State Bank		73,922		73,884		822		800		266		150	1.11	%	1.08	%
Peoples State Bank		13,160		15,154		262		263					1.99	%	1.74	%
Sunrise Bank of Atlanta		21,555		14,553		327		215					1.52	%	1.48	%
Southeast Region Total		179,197		158,995		2,450		2,095		266		150	1.37	%	1.32	%
Midwest Region: Summit Bank of Kansas City		22,757		15,645		329		235					1.45	%	1.50	%
Eastern Regions Total	$	1,912,041	$	1,842,445	$	28,661	$	26,834	$	29,826	$	30,300	1.50	%	1.46	%

Loan information for Capitol's western regions, consolidated totals and footnotes relating to this table appear on the following page.

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Page 16 of 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

Summary of loan information - continued:

	Total				Allowance for				Nonperforming				Allowance as a Percentage
	Portfolio Loans				Loan Losses				Loans				of Total Portfolio Loans
	March 31,		Dec 31,		March 31,		Dec 31,		March 31,		Dec 31,		March 31,		Dec 31,
	2007		2006		2007		2006		2007		2006		2007		2006
Eastern Regions Total (from preceding page)	$	1,912,041	$	1,842,445	$	28,661	$	26,834	$	29,826	$	30,300	1.50	%	1.46	%
Western Regions:
Southwest Region:
1st Commerce Bank		12,094		9,588		157		125					1.30	%	1.30	%
Arrowhead Community Bank		73,514		71,252		680		720		193		855	0.92	%	1.01	%
Asian Bank of Arizona		16,494		14,499		220		200					1.33	%	1.38	%
Bank of Las Vegas		63,770		62,818		715		705					1.12	%	1.12	%
Bank of Tucson		155,990		160,009		1,485		1,472		195		199	0.95	%	0.92	%
Black Mountain Community Bank		131,231		127,844		1,570		1,529					1.20	%	1.20	%
Camelback Community Bank		81,107		78,922		800		733		11		46	0.99	%	0.93	%
Desert Community Bank		85,400		83,284		850		830		69		137	1.00	%	1.00	%
Fort Collins Commerce Bank		57,233		52,147		744		695					1.30	%	1.33	%
Mesa Bank		191,730		189,863		1,805		1,794		346			0.94	%	0.94	%
Red Rock Community Bank		99,100		100,010		998		1,084		125		151	1.01	%	1.08	%
Southern Arizona Community Bank		75,552		77,845		765		775				16	1.01	%	1.00	%
Sunrise Bank of Albuquerque		60,836		53,027		869		778					1.43	%	1.47	%
Sunrise Bank of Arizona		108,241		112,720		1,115		1,126				246	1.03	%	1.00	%
Valley First Community Bank		64,301		66,256		560		611					0.87	%	0.92	%
Yuma Community Bank		60,281		58,577		520		500					0.86	%	0.85	%
Southwest Region Total		1,336,874		1,318,661		13,853		13,677		939		1,650	1.04	%	1.04	%
California Region:
Bank of Escondido		41,975		37,398		420		370		18		19	1.00	%	0.99	%
Bank of San Francisco		26,068		26,415		378		375					1.45	%	1.42	%
Bank of Santa Barbara		42,877		40,198		600		533					1.40	%	1.33	%
Napa Community Bank		77,912		78,467		1,005		1,020		1,503			1.29	%	1.30	%
Point Loma Community Bank		39,887		38,018		547		510					1.37	%	1.34	%
Sunrise Bank of San Diego		62,930		65,250		520		540					0.83	%	0.83	%
Sunrise Community Bank(2)		3,303				45							1.36	%
California Region Total		294,952		285,746		3,515		3,348		1,521		19	1.19	%	1.17	%
Northwest Region:
Bank of Bellevue		34,501		28,037		488		370					1.41	%	1.32	%
Bank of Everett		18,052		8,269		255		122					1.41	%	1.48	%
Bank of Tacoma(1)		8,605				118							1.37	%
Northwest Region Total		61,158		36,306		861		492					1.41	%	1.36	%
Western Regions Total		1,692,984		1,640,713		18,229		17,517		2,460		1,669	1.08	%	1.07	%
Other, net		15,956		5,520		162		1,063		4,473		2,305
Consolidated Totals	$	3,620,981	$	3,488,678	$	47,052	$	45,414	$	36,759	$	34,274	1.30	%	1.30	%

(1)	Commenced operations in January 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.
(2)	Commenced operations in February 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.

Results of Operations

Net income for the three months ended March 31, 2007 was $6.3 million, a decrease of 37% over the same period in 2006. Diluted earnings per share for the three-month 2007 period were $0.36 compared to $0.61 for the prior year period, a 41% decrease. Decreased earnings resulted from muted bank performance in each of Capitol’s regions, resulting from margin compression and the continuing challenging economic environment for its Michigan banks.

Page 17 of 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Results of Operations - Continued

Net interest income for the first three months of 2007 totaled $44.7 million, an 8% increase compared to $41.4 million in 2006. This increase is attributable to the banks' growth in size and the increased number of affiliate banks.

In a changing interest-rate environment, rates of interest on loans reprice more rapidly than interest rates paid on deposits. In 2006, net interest margins increased in concert with actions by the Federal Reserve Board of Governors to increase market rates of interest. As the Federal Reserve Board's most recent actions have held rates steady, interest rates on deposits have increased (again, as a lagging impact of earlier Federal Reserve Board action), reducing net interest margins. Net interest margin approximated 4.67% for the first three months of 2007, a decrease compared to 4.82% for the three months ended December 31, 2006. During the three months ended March 31, 2006, the consolidated net interest margin approximated 5.06%, although the margin briefly increased in later 2006. It is difficult to speculate on future changes in net interest margin. Compression in net interest margin has resulted not only from higher rates of interest paid on deposits and competitive rates on loans, but a shift from noninterest-bearing deposits to interest-bearing deposits.

Noninterest income for the three months ended March 31, 2007 was $5.6 million, an increase of $475,000, or 9%, over the same period in 2006. The increase for the three-month 2007 period was due primarily to higher levels of gains on sale of government-guaranteed loans. Fees from origination of non-portfolio residential mortgage loans totaled $1.3 million for the first quarter of 2007 and 2006. Service charges on deposit accounts in the three-month 2007 period increased slightly compared to 2006.

The provision for loan losses for the three-month period in 2007 was $3.9 million, compared to $2.5 million for the same period in 2006. Provisions for loan losses increased in the 2007 period in response to higher levels of loan charge-offs and portfolio growth. 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 $41.8 million for the first quarter of 2007, as compared to $31.8 million for the comparable period in 2006. The increase in noninterest expense is associated with adding two new banks in early 2007 and eight banks which were added in 2006 after March, growth in the size of previously-existing 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 the mature banks within the consolidated group, the development of Capitol's wealth management unit and the addition of ten de novo banks. The more significant elements of other noninterest expense consisted of the following (in thousands):

	Three months ended March 31
	2007		2006
Preopening and start-up costs	$	928	$	596
Advertising		736		633
Directors' fees		683		581
Paper, printing and supplies		652		546
Loan and collection expense		613		268
Travel, lodging and meals		585		424
Regulatory fees		571		194
Bank services (ATMs, telephone banking and Internet banking)		557		334
Professional fees		506		636
Taxes other than income taxes		489		378
Communications		405		310
Postage		263		243
Courier service		236		194
Other		2,388		301
Total	$	9,612	$	5,638

Page 18 of 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Results of Operations - Continued

On a linked-quarter basis (i.e., comparison of first quarter 2007 to fourth quarter 2006), salaries and employee benefits increased about 7% and total noninterest expense increased about 2.5%, exclusive of adjustments to year-end accruals which reduced compensation expense primarily relating to loan origination costs.

Operating results (dollars in thousands) were as follows:

	Three months ended March 31
											Return on						Return on
	Total Revenues				Net Income						Average Equity(1)						Average Assets(1)
	2007		2006		2007			2006			2007			2006			2007			2006
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	6,182	$	5,791	$	839		$	926			13.35	%		13.99	%		1.07	%		1.21	%
Bank of Auburn Hills		757		235		11			(151	)		0.61			n/a			0.14			n/a
Bank of Belleville		421		198		(157	)		(188	)		n/a			n/a			n/a			n/a
Bank of Maumee		185		n/a		(344	)		n/a			n/a			n/a			n/a			n/a
Bank of Michigan		1,080		644		(120	)		(150	)		n/a			n/a			n/a			n/a
Brighton Commerce Bank		1,961		1,892		142			211			6.21			8.96			0.55			0.80
Capitol National Bank		4,534		4,282		484			777			10.32			16.29			0.81			1.28
Detroit Commerce Bank		2,317		2,093		240			135			10.72			7.00			0.91			0.63
Elkhart Community Bank		1,697		1,472		145			264			6.72			12.96			0.69			1.39
Evansville Commerce Bank		423		n/a		(209	)		n/a			n/a			n/a			n/a			n/a
Goshen Community Bank		1,487		1,219		140			82			7.68			4.96			0.74			0.49
Grand Haven Bank		2,401		2,290		233			285			8.51			11.04			0.75			0.93
Kent Commerce Bank		1,777		1,495		(18	)		58			n/a			2.83			n/a			0.30
Macomb Community Bank		1,791		1,770		(257	)		(28	)		n/a			n/a			n/a			n/a
Muskegon Commerce Bank		1,823		1,792		(570	)		153			n/a			7.10			n/a			0.64
Oakland Commerce Bank		2,471		2,112		(79	)		332			n/a			14.09			n/a			1.17
Ohio Commerce Bank		211		n/a		(184	)		n/a			n/a			n/a			n/a			n/a
Paragon Bank & Trust		1,789		1,957		62			269			2.26			9.79			0.26			1.05
Portage Commerce Bank		3,753		3,577		529			645			13.21			16.14			1.18			1.44
Great Lakes Region Total		37,060		32,819		887			3,620
Southeast Region:
Bank of Valdosta		469		n/a		(123	)		n/a			n/a			n/a			n/a			n/a
Community Bank of Rowan		1,131		99		(87	)		(563	)		n/a			n/a			n/a			n/a
First Carolina State Bank		1,728		1,513		157			219			5.40			8.20			0.68			1.07
Peoples State Bank		584		579		70			18			5.89			2.12			1.00			0.24
Sunrise Bank of Atlanta		774		n/a		(64	)		n/a			n/a			n/a			n/a			n/a
Southeast Region Total		4,686		2,191		(47	)		(326	)
Midwest Region: Summit Bank of Kansas City		512		107		(129	)		(174	)		n/a			n/a			n/a			n/a
Eastern Regions Total	$	42,258	$	35,117	$	711		$	3,120

Operating results for Capitol's western regions, consolidated totals and footnotes relating to this table appear on the following page.

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Page 19 of 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Results of Operations - Continued

Operating results - continued:

	Three months ended March 31
											Return on						Return on
	Total Revenues				Net Income						Average Equity(1)						Average Assets(1)
	2007		2006		2007			2006			2007			2006			2007			2006
Eastern Regions Total (from preceding page)	$	42,258	$	35,117	$	711		$	3,120
Western Regions:
Southwest Region:
1st Commerce Bank		331		n/a		(116	)		n/a			n/a			n/a			n/a			n/a
Arrowhead Community Bank		2,064		1,869		314			226			14.84	%		11.59	%		1.53	%		1.05	%
Asian Bank of Arizona		387		n/a		(77	)		n/a			n/a			n/a			n/a			n/a
Bank of Las Vegas		1,445		1,167		130			113			5.81			4.82			.0.74			.77
Bank of Tucson		4,028		3,438		1,158			1,058			28.12			29.34			2.55			2.52
Black Mountain Community Bank		3,097		2,474		643			634			19.17			21.81			1.82			1.99
Camelback Community Bank		1,622		1,468		180			207			8.32			10.31			0.85			1.04
Desert Community Bank		1,941		1,608		252			297			11.04			14.90			1.11			1.50
Fort Collins Commerce Bank		1,183		639		137			(32	)		6.67			n/a			0.97			n/a
Mesa Bank		5,000		4,373		1,059			1,037			22.66			25.69			2.08			2.27
Red Rock Community Bank		2,256		1,980		438			465			13.54			15.76			1.65			1.88
Southern Arizona Community Bank		1,688		1,586		293			290			13.27			13.46			1.38			1.37
Sunrise Bank of Albuquerque		1,385		1,123		74			120			4.75			7.17			0.49			.83
Sunrise Bank of Arizona		2,394		2,532		142			413			4.94			13.25			0.48			1.47
Valley First Community Bank		1,367		1,402		150			161			7.74			9.24			0.85			.86
Yuma Community Bank		1,493		1,278		239			188			12.52			11.48			1.32			1.24
Southwest Region Total		31,681		26,937		5,016			5,177
California Region:
Bank of Escondido		1,428		1,238		157			199			4.54			8.21			0.77			1.09
Bank of San Francisco		549		269		(81	)		(237	)		n/a			n/a			n/a			n/a
Bank of Santa Barbara		974		316		(81	)		(223	)		n/a			n/a			n/a			n/a
Napa Community Bank		2,238		1,630		348			276			11.19			10.27			1.28			1.33
Point Loma Community Bank		901		774		6			18			0.33			1.05			0.05			.19
Sunrise Bank of San Diego		1,661		1,366		105			231			3.99			8.61			0.53			1.34
Sunrise Community Bank(3)		50		n/a		(428	)		n/a			n/a			n/a			n/a			n/a
California Region Total		7,801		5,593		26			264
Northwest Region
Bank of Bellevue		707		366		(89	)		(141	)		n/a			n/a			n/a			n/a
Bank of Everett		444		n/a		(191	)		n/a			n/a			n/a			n/a			n/a
Bank of Tacoma(2)		184		n/a		(473	)		n/a			n/a			n/a			n/a			n/a
Northwest Region Total		1,335		366		(753	)		(141	)
Western Regions Total		40,817		32,896		4,289			5,300
Other, net		349		195		1,271			1,533
Consolidated Totals	$	83,424	$	68,207	$	6,271		$	9,953			6.74	%		13.12	%		0.61	%		1.13	%

n/a - Not applicable.

(1)	Annualized for period presented.
(2)	Commenced operations in January 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.
(3)	Commenced operations in February 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.

Page 20 of 26

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 $133.5 million for the three months ended March 31, 2007, compared to a $153 million increase in the corresponding period of 2006. Growth occurred in most interest-bearing deposit categories, with the majority coming from certificate of deposit accounts. Capitol's banks generally do not significantly rely on brokered deposits as a key funding source. Brokered deposits approximated $411 million as of March 31, 2007, or about 12% of total deposits, an increase of $58 million during the interim 2007 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 18% of total deposits at March 31, 2007, a slight decrease from 20% at December 31, 2006. Levels of noninterest-bearing deposits can, however, fluctuate based on customers' transaction activity. The change in noninterest-bearing deposits was particularly significant during the three months ended March 31, 2007. During this period, noninterest-bearing deposits decreased $35.6 million and remained relatively unchanged during the 2006 period. Also during the 2007 period, interest-bearing accounts increased about $169.2 million, resulting in net deposit growth of approximately $133.5 million, which closely paralleled loan growth for the period. Because of the larger growth in interest-bearing deposits, coupled with higher rates on those balances, net interest margins have been reduced.

Interim 2007 deposit growth was deployed primarily into commercial loans, consistent with the banks' emphasis on commercial lending activities.

Cash and cash equivalents amounted to $407.6 million or 10% of total assets at March 31, 2007, compared with $349 million, or 9% of total assets at December 31, 2006. 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, 2007 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, 2007, Capitol's banks had approximately $16 million of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise.

Several of Capitol's banks have secured lines of credit with regional Federal Home Loan Banks. Borrowings thereunder approximated $172 million and additional borrowing capacity approximated $401 million at March 31, 2007. 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 were $173 million at March 31, 2007. At March 31, 2007, 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 March 31, 2007 and December 31, 2006.

During March 2007, Capitol participated in two private placement offerings of pooled trust preferred securities, aggregating $55 million. Proceeds from this additional capital will be used for bank development and other corporate purposes. As of March 31, 2007, Capitol’s total capital funds approximated $661.7 million or 15.6% of total assets.

Capitol and its banks are subject to complex regulatory capital requirements, which require maintaining certain minimum capital ratios. These ratio measurements, in addition to certain other requirements, are used by regulatory agencies to determine the level of regulatory intervention and enforcement applied to financial institutions. Management believes Capitol and each of its banks are in compliance with regulatory requirements and are expected to maintain such compliance.

Page 21 of 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

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 not changed interbank borrowing rates during the interim 2007 period (rates were increased twice in 2006) and expressed 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 compared to recent years and residential real estate markets have cooled in various regions, which adversely impacts fee income from the origination of residential mortgages. Many of Capitol's banks' commercial loans are variable-rate and, accordingly, rate increases may 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 2007 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. As mentioned previously, general economic conditions within the state of Michigan continue to have an effect on Capitol’s banks and their customers in what has been described in the media as a one-state recession. It is likely that, absent significant catalysts, Michigan’s economic recovery may take an extended period of time.

Media reports raising questions about the health of the domestic economy have continued in 2007. During the interim 2007 period, nonperforming assets have increased; however, it is difficult to predict future movements in levels of nonperforming assets 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 2007. They are listed and discussed in Notes B and G of the accompanying condensed consolidated financial statements.

Critical Accounting Policies

 Capitol's critical accounting policies are described on pages F-29 - F-31 of the financial section of its 2006 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 22 of 26

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, 2006. 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 23 of 26

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.	Risk Factors. 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, 2006, during the three months ended March 31, 2007. 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. None.
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 24 of 26

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: April 27, 2007

Page 25 of 26

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 26 of 26