Capitol Bancorp (CBCRQ) 10-Q 2007 Q3 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 September 30, 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 October 15, 2007
Common Stock, No par value	17,310,409 shares

Page 1 of 27

INDEX

PART I.                      FINANCIAL INFORMATION

Forward-Looking Statements

Certain of the statements contained in this document, including Capitol's consolidated financial statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and in documents incorporated into this document by reference that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of Capitol and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements.  The words "intend," "expect," "project," "estimate," "predict," "anticipate," "should," "believe," and similar expressions also are intended to identify forward-looking statements.  Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of Capitol's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol's banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of Capitol's banks and Capitol's ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, and (xi) other risks detailed in Capitol's other filings with the Securities and Exchange Commission.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.  All subsequent written or oral forward-looking statements attributable to Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors.  Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements.  Capitol undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.

Item 1.	Financial Statements (unaudited):	Page
	Condensed consolidated balance sheets – September 30, 2007 and December 31, 2006.	3
	Condensed consolidated statements of income – Three months and nine months ended September 30, 2007 and 2006.	4
	Condensed consolidated statements of changes in stockholders' equity – Nine months ended September 30, 2007 and 2006.	5
	Condensed consolidated statements of cash flows – Nine months ended September 30, 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.	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.	25
Item 6.	Exhibits.	25
SIGNATURES		26
EXHIBIT INDEX		27

Page 2 of 27

PART I, ITEM 1
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of September 30, 2007 and December 31, 2006
(in thousands, except share data)
	(Unaudited)
	September 30,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	162,375		$	169,753
Money market and interest-bearing deposits		26,095			37,204
Federal funds sold		194,445			141,913
Cash and cash equivalents		382,915			348,870
Loans held for sale		25,980			34,593
Investment securities:
Available for sale, carried at market value		15,379			18,904
Held for long-term investment, carried at
amortized cost which approximates market value		24,136			21,749
Total investment securities		39,515			40,653
Portfolio loans:
Commercial		3,605,794			3,103,125
Real estate mortgage		263,590			259,604
Installment		161,000			125,949
Total portfolio loans		4,030,384			3,488,678
Less allowance for loan losses		(52,851	)		(45,414	)
Net portfolio loans		3,977,533			3,443,264
Premises and equipment		57,802			54,295
Accrued interest income		19,657			17,524
Goodwill and other intangibles		70,859			62,215
Other assets		79,751			64,402
TOTAL ASSETS	$	4,654,012		$	4,065,816
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	636,534		$	651,253
Interest-bearing		3,037,416			2,607,232
Total deposits		3,673,950			3,258,485
Debt obligations:
Notes payable and short-term borrowings		259,885			191,154
Subordinated debentures		156,106			101,035
Total debt obligations		415,991			292,189
Accrued interest on deposits and other liabilities		30,534			26,751
Total liabilities		4,120,475			3,577,425
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES		143,071			126,512
STOCKHOLDERS' EQUITY:
Common stock, no par value,  50,000,000 shares authorized;
issued and outstanding:   2007 - 17,310,409 shares
2006 - 16,656,481 shares		272,078			249,244
Retained earnings		118,455			112,779
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income/loss)		(67	)		(144	)
Total stockholders' equity		390,466			361,879
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	4,654,012		$	4,065,816
See notes to condensed consolidated financial statements.

Page 3 of 27

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months and Nine Months Ended September 30, 2007 and 2006
(in thousands, except per share data)
	Three-Month Period				Nine-Month Period
	2007		2006		2007		2006
Interest income:
Portfolio loans (including fees)	$	81,117	$	69,159	$	231,819	$	193,879
Loans held for sale		429		748		1,765		2,010
Taxable investment securities		188		223		589		730
Federal funds sold		2,916		2,341		8,569		6,169
Other		386		611		1,387		1,587
Total interest income		85,036		73,082		244,129		204,375
Interest expense:
Deposits		32,359		23,946		90,955		62,125
Debt obligations and other		6,009		4,441		16,283		12,565
Total interest expense		38,368		28,387		107,238		74,690
Net interest income		46,668		44,695		136,891		129,685
Provision for loan losses		7,890		3,441		15,812		8,712
Net interest income after
provision for loan losses		38,778		41,254		121,079		120,973
Noninterest income:
Service charges on deposit accounts		1,232		1,083		3,524		3,217
Trust and wealth-management revenue		1,371		689		3,525		2,324
Fees from origination of non-portfolio residential
mortgage loans		1,142		1,362		3,754		4,091
Gains on sale of government-guaranteed loans		946		390		2,296		1,194
Other		2,420		1,382		5,440		4,646
Total noninterest income		7,111		4,906		18,539		15,472
Noninterest expense:
Salaries and employee benefits		27,816		21,615		80,325		64,840
Occupancy		3,831		3,172		10,880		8,768
Equipment rent, depreciation and maintenance		2,239		2,143		7,471		6,156
Other		10,588		7,180		29,835		22,792
Total noninterest expense		44,474		34,110		128,511		102,556
Income before income taxes
and minority interest		1,415		12,050		11,107		33,889
Income taxes		586		4,184		4,696		12,129
Income before minority interest		829		7,866		6,411		21,760
Minority interest in net losses of consolidated
subsidiaries		5,145		2,923		12,132		9,249
NET INCOME	$	5,974	$	10,789	$	18,543	$	31,009
NET INCOME PER SHARE -- Note D:
Basic	$	0.35	$	0.68	$	1.10	$	1.97
Diluted	$	0.35	$	0.66	$	1.08	$	1.89
See notes to condensed consolidated financial statements.

Page 4 of 27

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
(in thousands, except share data)
							Accumulated
							Other
	Common			Retained			Comprehensive
	Stock			Earnings			Loss			Total
Nine Months Ended September 30, 2006
Balances at January 1, 2006		$	216,539	$	85,553		$	(226	)	$	301,866
Issuance of 207,959 shares of common stock
upon exercise of stock options, net of common
stock surrendered to facilitate exercise			2,991								2,991
Issuance of 80,750 unvested shares of restricted
common stock, net of related unearned employee
compensation			--								--
Recognition of compensation expense relating to
restricted common stock			1,255								1,255
Tax benefit from share-based payments			1,762								1,762
Cash dividends paid ($0.70 per share)					(11,148	)					(11,148	)
Components of comprehensive income:
Net income					31,009						31,009
Market value adjustment for investment
securities available for sale (net of income
tax effect)								56			56
Comprehensive income											31,065
BALANCES AT SEPTEMBER 30, 2006		$	222,547	$	105,414		$	(170	)	$	327,791
Nine Months Ended September 30, 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 220,636 shares of common stock
upon exercise of stock options, net of
common stock surrendered to facilitate exercise			2,814								2,814
Recognition of compensation expense relating to
stock options			116								116
Issuance of 37,472 unvested shares of restricted
common stock, net of related unearned employee
compensation			--								--
Recognition of compensation expense relating to
restricted common stock			1,174								1,174
Tax benefit from share-based payments			1,671								1,671
Issuance of 24,506 shares of common stock to
employee stock ownership plan			1,132								1,132
Cash dividends paid ($0.75 per share)					(12,867	)					(12,867	)
Components of comprehensive income:
Net income					18,543						18,543
Market value adjustment for investment
securities available for sale (net of income
tax effect)								77			77
Comprehensive income											18,620
BALANCES AT SEPTEMBER 30, 2007		$	272,078	$	118,455		$	(67	)	$	390,466
See notes to condensed consolidated financial statements.

Page 5 of 27

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
(in thousands)
	2007			2006
OPERATING ACTIVITIES
Net income	$	18,543		$	31,009
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		15,812			8,712
Depreciation of premises and equipment		6,641			5,273
Amortization of intangibles		201			439
Net amortization (accretion) of investment security
premiums (discounts)		4			(9	)
Loss (gain) on sale of premises and equipment		(118	)		10
Share-based compensation expense		1,290			1,255
Minority interest in net losses of consolidated subsidiaries		(12,132	)		(9,249	)
Originations and purchases of loans held for resale		(418,857	)		(363,704	)
Proceeds from sales of loans held for resale		427,470			367,081
Increase in accrued interest income and other assets		(16,631	)		(4,830	)
Increase (decrease) in accrued interest on deposits and other
liabilities		3,783			(4,766	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		26,006			31,221
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale		287
Proceeds from calls, prepayments and maturities of investment
securities		7,731			10,893
Purchases of investment securities		(6,797	)		(8,301	)
Net increase in portfolio loans		(550,081	)		(320,130	)
Proceeds from sales of premises and equipment		396			723
Purchases of premises and equipment		(10,426	)		(15,848	)
NET CASH USED BY INVESTING ACTIVITIES		(558,890	)		(332,663	)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts		184,655			53,169
Net increase in certificates of deposit		230,810			275,778
Net borrowings from (payments on) debt obligations		68,731			(359	)
Net proceeds from issuance of subordinated debentures		55,000
Resources provided by minority interests		36,115			39,343
Net proceeds from issuance of common stock		2,814			2,991
Tax benefit from share-based payments		1,671			1,762
Cash dividends paid		(12,867	)		(11,148	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		566,929			361,536
INCREASE IN CASH AND CASH EQUIVALENTS		34,045			60,094
Cash and cash equivalents at beginning of period		348,870			306,108
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	382,915		$	366,202
See notes to condensed consolidated financial statements.

Page 6 of 27

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 condensed consolidated financial 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 periods ended September 30, 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 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		(274,841	)		10.81 to    33.01		16.98
Granted		168,720			22.46 to    46.20		25.09
Cancelled or expired		(1,474	)
Outstanding at September 30		2,462,496		$	13.50 to $ 46.20	$	27.84

Page 7 of 27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Stock Options--Continued

168,720 stock options were granted in 2007 with an aggregate fair value approximating $1,103,000.  These stock options have varying vesting dates from December 31, 2007 through August 2010.  Each of the options expires seven years from date of grant.  Share-based compensation expense relating to such stock options for the nine months ended September 30, 2007 approximated $116,000.

As of September 30, 2007, stock options outstanding had a weighted average remaining contractual life of 3.63 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value as of September 30, 2007:

				Weighted Average
Exercise Price Range		Number Outstanding		Exercise Price		Remaining Contractual Life	Aggregate Intrinsic Value
$	10.00 to 14.99		7,587	$	12.12	0.32 years	$	96,431
$	15.00 to 19.99		234,996		16.59	2.33 years		1,936,367
$	20.00 to 24.99		570,198		21.78	3.59 years		1,739,104
$	25.00 to 29.99		586,987		27.09	2.90 years		(1,326,591	)
$	30.00 to 34.99		695,221		32.10	3.94 years		(5,054,257	)
$	35.00 or more		367,507		37.92	5.18 years		(4,810,667	)
Total outstanding			2,462,496				$	(7,419,613	)

Note D – Net Income Per Share

The computations of basic and diluted earnings per share were based on the following (in 1,000s) for the periods ended September 30:

	Three-Month Period				Nine-Month Period
	2007		2006		2007		2006
Numerator—net income for the period	$	5,974	$	10,789	$	18,543	$	31,009
Denominator:
Weighted average number of shares outstanding, excluding unvested restricted shares (denominator for basic earnings per share)		17,096		15,757		16,919		15,702
Effect of dilutive securities:
Unvested restricted shares		--		68		11		68
Stock options		102		606		266		611
Total effect of dilutive securities		102		674		277		679
Denominator for diluted earnings per share—
Weighted average number of shares and potential dilution		17,198		16,431		17,196		16,381
Number of antidilutive stock options excluded   from diluted earnings per share computation		1,650		--		368		--

Page 8 of 27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – New Banks and Other Development Activities

Capitol opened six de novo banks during the nine months ended September 30, 2007.  Bank of Tacoma, located in Tacoma, Washington, opened in January 2007; Sunrise Community Bank, located in Palm Desert, California, opened in February 2007; Larimer Bank of Commerce, located in Fort Collins, Colorado, opened in May 2007; Issaquah Community Bank, located in Issaquah, Washington and USNY Bank, located in Geneva, New York, each opened in July 2007 and High Desert Bank, located in Bend, Oregon, opened in September 2007.  Each is majority owned by bank-development subsidiaries controlled by Capitol.

Bank development efforts were currently under consideration at September 30, 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 September 30, 2007, Capitol had 12 applications pending for additional de novo community banks in Arizona, California, Colorado, Missouri, Nebraska, North Carolina, Oklahoma and Texas.

Capitol's operating strategy focuses 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 nine months ended September 30, 2006 would have been $30 million ($1.79 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 and expands related financial statement disclosures.  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.  Statements No. 157 and 159 will be applied prospectively and implemented by Capitol effective January 1, 2008.  Management has not completed its analysis of these new fair-value related standards.

In June 2007, the FASB ratified an Emerging Issues Task Force (EITF) consensus regarding Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, which becomes effective for Capitol January 1, 2008.  Management has not completed its review of this new guidance, but expects the effect upon implementation will not be material to Capitol’s consolidated financial statements.

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  

Page 9 of 27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note G – Impact of New Accounting Standards--Continued

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

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 27

PART I, ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Financial Condition

Total assets approximated $4.7 billion at September 30, 2007, an increase of $588 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)
	September 30, 2007		December 31, 2006
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	348,156	$	310,407
Bank of Auburn Hills		49,426		31,559
Bank of Belleville		40,328		24,948
Bank of Maumee		27,700		9,915
Bank of Michigan		67,810		51,287
Brighton Commerce Bank		110,335		103,909
Capitol National Bank		218,840		256,741
Detroit Commerce Bank		111,414		106,233
Elkhart Community Bank		84,693		86,883
Evansville Commerce Bank		45,238		20,772
Goshen Community Bank		85,823		80,137
Grand Haven Bank		133,854		129,033
Kent Commerce Bank		80,704		86,916
Macomb Community Bank		96,992		101,353
Muskegon Commerce Bank		92,865		95,551
Oakland Commerce Bank		109,722		134,437
Ohio Commerce Bank		28,750		14,466
Paragon Bank & Trust		95,839		98,804
Portage Commerce Bank		191,695		179,413
Great Lakes Region Total		2,020,184		1,922,764
Southeast Region:
Bank of Valdosta		38,949		21,626
Community Bank of Rowan		94,637		45,503
First Carolina State Bank		111,742		93,819
Peoples State Bank		26,493		32,714
Sunrise Bank of Atlanta		41,414		16,990
Southeast Region Total		313,235		210,652
Midwest Region: Summit Bank of Kansas City		51,461		19,529
Northeast Region: USNY Bank(4)		14,813
Eastern Regions Total	$	2,399,693	$	2,152,945

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

[The remainder of this page intentionally left blank]

Page 11 of 27

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)
	September 30, 2007		December 31, 2006
Eastern Regions Total (from preceding page)	$	2,399,693	$	2,152,945
Western Regions:
Southwest Region:
1st Commerce Bank		27,120		14,829
Arrowhead Community Bank		84,037		79,152
Asian Bank of Arizona		24,535		20,248
Bank of Las Vegas		76,253		67,478
Bank of Tucson		174,492		187,683
Black Mountain Community Bank		146,110		138,961
Camelback Community Bank		87,724		83,003
Desert Community Bank		97,780		93,914
Fort Collins Commerce Bank		56,872		54,410
Larimer Bank of Commerce(3)		43,365
Mesa Bank		210,683		201,776
Red Rock Community Bank		131,154		108,362
Southern Arizona Community Bank		86,330		85,912
Sunrise Bank of Albuquerque		78,530		59,798
Sunrise Bank of Arizona		114,392		119,785
Valley First Community Bank		72,816		72,333
Yuma Community Bank		75,123		74,477
Southwest Region Total		1,587,316		1,462,121
California Region:
Bank of Escondido		91,995		82,412
Bank of San Francisco		51,417		28,122
Bank of Santa Barbara		66,832		42,559
Napa Community Bank		131,880		99,009
Point Loma Community Bank		58,945		43,715
Sunrise Bank of San Diego		89,487		71,170
Sunrise Community Bank(2)		18,799
California Region Total		509,355		366,987
Northwest Region:
Bank of Bellevue		40,905		33,155
Bank of Everett		23,709		20,061
Bank of Tacoma(1)		20,514
High Desert Bank(5)		8,193
Issaquah Community Bank(4)		12,538
Northwest Region Total		105,859		53,216
Western Regions Total		2,202,530		1,882,324
Other, net		51,789		30,547
Consolidated Totals	$	4,654,012	$	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.
(3)	Commenced operations in May 2007 and is 51%-owned by Capitol Bancorp Colorado Ltd. II, a controlled subsidiary of Capitol.
(4)	Commenced operations in July 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.
(5)	Commenced operations in September 2007 and is 55%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.

Page 12 of 27

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 $542 million, compared to loan growth of about $316 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.

Geographic diversification of Capitol’s balance sheet has become increasingly important.  Prior to 1996, all of Capitol’s banking operations were located in Michigan.  As of September 30, 2007, 45.5% of the consolidated loan portfolio relates to banks located within the Great Lakes Region (47.8% at December 31, 2006).  More importantly at that date, 54.5% of the consolidated loan portfolio relates to banks located in other regions of the country (52.2% at December 31, 2006).  The reason why this is important is that Capitol’s diversification efforts will add stability to earnings by further reducing a disproportionate geographic concentration within a specific region.  The pace of asset growth in Capitol’s multi-state regions which have multiple banks has been significant in the interim periods of 2007.

The consolidated allowance for loan losses at September 30, 2007 approximated $52.9 million or 1.31% of total portfolio loans, an increase from the 1.30% ratio at the beginning of the year.

The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio at the balance sheet date.  Management's determination of the adequacy of the allowance is based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio and other factors.  The allowance is increased by provisions charged to operations and reduced by net charge-offs.  The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands):

	Periods Ended September 30
	Three-Month Period						Nine-Month Period
	2007			2006			2007			2006
Allowance for loan losses at beginning of period	$	49,349		$	43,311		$	45,414		$	40,559
Loans charged-off:
Commercial		(4,162	)		(1,766	)		(8,268	)		(4,886	)
Real estate mortgage		(278	)		(11	)		(574	)		(59	)
Installment		(182	)		(90	)		(485	)		(323	)
Total charge-offs		(4,622	)		(1,867	)		(9,327	)		(5,268	)
Recoveries:
Commercial		128			192			695			887
Real estate mortgage		--			2			3			3
Installment		106			95			254			281
Total recoveries		234			289			952			1,171
Net charge-offs		(4,388	)		(1,578	)		(8,375	)		(4,097	)
Additions to allowance charged to expense		7,890			3,441			15,812			8,712
Allowance for loan losses at September 30	$	52,851		$	45,174		$	52,851		$	45,174
Average total portfolio loans for period ended September 30	$	3,908,625		$	3,244,387		$	3,726,654		$	3,131,358
Ratio of net charge-offs (annualized) to average portfolio loans outstanding		0.45	%		0.19	%		0.30	%		0.17	%

Page 13 of 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Interim loan charge-offs for the nine month 2007 period, which increased significantly 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 provisions for loan losses in 2007 was associated primarily with Michigan banks, due to growth in nonperforming loans and a sustained difficult and uncertain economic climate in Michigan.

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:

	September 30, 2007				December 31, 2006
			Percentage				Percentage
			of Total				of Total
			Portfolio				Portfolio
	Amount		Loans		Amount		Loans
Commercial	$	47,598		1.18%	$	41,178		1.18%
Real estate mortgage		2,687		0.07		2,675		0.08
Installment		2,566		0.06		1,561		0.04
Total allowance for loan losses	$	52,851		1.31%	$	45,414		1.30%
Total portfolio loans outstanding	$	4,030,384			$	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):

	September 30,		December 31,
	2007		2006
Nonaccrual loans:
Commercial	$	44,455	$	25,219
Real estate mortgage		3,549		3,609
Installment		1,531		898
Total nonaccrual loans		49,535		29,726
Past due (>90 days) loans:
Commercial		2,643		3,860
Real estate mortgage		394		523
Installment		166		165
Total past due loans		3,203		4,548
Total nonperforming loans	$	52,738	$	34,274
Real estate owned and other repossessed assets		13,161		9,478
Total nonperforming assets	$	65,899	$	43,752

Page 14 of 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Nonperforming loans at September 30, 2007 approximated 1.31% of total portfolio loans, an increase from the corresponding 2006 ratio of 0.90% and an increase from the December 31, 2006 ratio of 0.98%.  Nonperforming loans increased $18.5 million or 54% during the interim 2007 nine-month period.  Of this increase, $11 million occurred during the three months ended September 30, 2007.  Of the nonperforming loans at September 30, 2007, about 90% were real estate secured.  Those loans, when originated, had appropriate loan-to-value ratios based upon real estate market conditions at that time and, accordingly, have loss exposure which would be 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 September 30, 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.

Total nonperforming loans approximated $52.7 million at September 30, 2007.  Of that total, $46 million (including some loans carried at the parent level) or 87% were originated by banks within the Great Lakes Region, primarily located in Michigan.  Within the Great Lakes Region, nonperforming loans approximated 2.06% of total portfolio loans at September 30, 2007.  Responsive to the elevated level of nonperforming loans within the Great Lakes Region, higher levels of allowances for loan losses have been established, approximating 1.47% of portfolio loans for the region on a combined basis as of September 30, 2007 and ranging as high as 2% or more at certain banks.  Those ratios can be contrasted with other geographic regions within the Corporation with substantially lower levels of nonperforming loans, such as the Southwest Region, which had a composite allowance for loan losses ratio as a percentage of portfolio loans of 1.04% as of September 30, 2007.

Foreclosure laws in Michigan generally favor borrowers rather than lenders and, accordingly, foreclosure and redemption periods (i.e., the number of months it takes for a financial institution to obtain clear title to freely market the real estate) takes much longer than many other states.  Further, once the property is available to the bank for sale or liquidation, market conditions, as they are currently (particularly in Michigan), may not be conducive to rapid marketing of the properties.

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 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 September 30, 2007, potential problem loans (including the previously-mentioned nonperforming loans) approximated $191 million, or about 4.7% 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 experienced in the first nine months of 2007.

Page 15 of 27

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
	Sept 30,		Dec 31,		Sept 30,		Dec 31,		Sept 30,		Dec 31,		Sept 30,			Dec 31,
	2007		2006		2007		2006		2007		2006		2007			2006
Eastern Regions:
Great Lakes Region:
Ann Arbor Commerce Bank	$	329,047	$	288,408	$	4,537	$	4,393	$	4,603	$	4,441		1.38	%		1.52	%
Bank of Auburn Hills		33,878		26,432		717		410		1,517		629		2.12	%		1.55	%
Bank of Belleville		36,398		17,410		540		260						1.48	%		1.49	%
Bank of Maumee		21,528		3,327		342		50						1.59	%		1.50	%
Bank of Michigan		60,242		44,630		904		669		627				1.50	%		1.50	%
Brighton Commerce Bank		103,318		94,987		1,018		995		18		522		0.99	%		1.05	%
Capitol National Bank		191,022		196,074		2,824		2,833		2,300		3,365		1.48	%		1.44	%
Detroit Commerce Bank		108,340		103,153		1,150		1,335		1,954		1,328		1.06	%		1.29	%
Elkhart Community Bank		80,259		77,515		1,112		1,010		1,568		676		1.39	%		1.30	%
Evansville Commerce Bank		39,617		14,711		582		232						1.47	%		1.58	%
Goshen Community Bank		69,846		63,653		887		862		24		233		1.27	%		1.35	%
Grand Haven Bank		125,526		120,025		2,463		2,643		5,762		2,682		1.96	%		2.20	%
Kent Commerce Bank		77,429		83,065		1,356		1,237		1,140		2,256		1.75	%		1.49	%
Macomb Community Bank		92,454		87,737		2,022		1,670		11,574		3,738		2.19	%		1.90	%
Muskegon Commerce Bank		82,783		81,799		1,355		1,231		1,417		3,906		1.64	%		1.50	%
Oakland Commerce Bank		101,288		114,876		1,874		1,636		2,873		2,862		1.85	%		1.42	%
Ohio Commerce Bank		16,899		739		254		11						1.50	%		1.49	%
Paragon Bank & Trust		83,380		82,259		1,286		1,298		1,634		2,132		1.54	%		1.58	%
Portage Commerce Bank		180,097		167,005		1,769		1,729		811		1,380		0.98	%		1.04	%
Great Lakes Region Total		1,833,351		1,667,805		26,992		24,504		37,822		30,150		1.47	%		1.47	%
Southeast Region:
Bank of Valdosta		34,356		18,870		515		283						1.50	%		1.50	%
Community Bank of Rowan		81,306		36,534		1,220		534						1.50	%		1.46	%
First Carolina State Bank		91,876		73,884		1,052		800		997		150		1.15	%		1.08	%
Peoples State Bank		12,788		15,154		224		263		45				1.75	%		1.74	%
Sunrise Bank of Atlanta		38,426		14,553		581		215						1.51	%		1.48	%
Southeast Region Total		258,752		158,995		3,592		2,095		1,042		150		1.39	%		1.32	%
Midwest Region:
Summit Bank of Kansas City		34,911		15,645		597		235						1.71	%		1.50	%
Northeast Region:
USNY Bank(4)		8,520				127								1.49	%
Eastern Regions Total	$	2,135,534	$	1,842,445	$	31,308	$	26,834	$	38,864	$	30,300		1.47	%		1.46	%

Information for Capitol's various western regions and consolidated totals relating to this table appear on the following page.

[The remainder of this page intentionally left blank]

Page 16 of 27

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
	Sept 30,		Dec 31,		Sept 30,		Dec 31,			Sept 30,		Dec 31,		Sept 30,			Dec 31,
	2007		2006		2007		2006			2007		2006		2007			2006
Eastern Regions Total (from preceding page)	$	2,135,534	$	1,842,445	$	31,308	$	26,834		$	38,864	$	30,300		1.47	%		1.46	%
Western Regions:
Southwest Region:
1st Commerce Bank		20,658		9,588		300		125							1.45	%		1.30	%
Arrowhead Community Bank		74,681		71,252		751		720			435		855		1.01	%		1.01	%
Asian Bank of Arizona		20,062		14,499		375		200							1.87	%		1.38	%
Bank of Las Vegas		62,006		62,818		751		705							1.21	%		1.12	%
Bank of Tucson		151,616		160,009		1,300		1,472			192		199		0.86	%		0.92	%
Black Mountain Community Bank		135,050		127,844		1,545		1,529							1.14	%		1.20	%
Camelback Community Bank		79,455		78,922		765		733					46		0.96	%		0.93	%
Desert Community Bank		87,876		83,284		824		830			35		137		0.94	%		1.00	%
Fort Collins Commerce Bank		54,135		52,147		813		695							1.50	%		1.33	%
Larimer Bank of Commerce(3)		40,359				615									1.52	%
Mesa Bank		199,228		189,863		1,805		1,794			2,864				0.91	%		0.94	%
Red Rock Community Bank		100,416		100,010		988		1,084			81		151		0.98	%		1.08	%
Southern Arizona Community   Bank		75,802		77,845		740		775	��				16		0.98	%		1.00	%
Sunrise Bank of Albuquerque		70,876		53,027		922		778							1.30	%		1.47	%
Sunrise Bank of Arizona		105,563		112,720		1,081		1,126			299		246		1.02	%		1.00	%
Valley First Community Bank		68,157		66,256		578		611							0.85	%		0.92	%
Yuma Community Bank		61,594		58,577		480		500			65				0.78	%		0.85	%
Southwest Region Total		1,407,534		1,318,661		14,633		13,677			3,971		1,650		1.04	%		1.04	%
California Region:
Bank of Escondido		51,670		37,398		500		370			153		19		0.97	%		0.99	%
Bank of San Francisco		40,824		26,415		612		375							1.50	%		1.42	%
Bank of Santa Barbara		52,280		40,198		732		533							1.40	%		1.33	%
Napa Community Bank		99,092		78,467		1,052		1,020			1,460				1.06	%		1.30	%
Point Loma Community Bank		47,144		38,018		658		510							1.40	%		1.34	%
Sunrise Bank of San Diego		77,489		65,250		725		540			69				0.94	%		0.83	%
Sunrise Community Bank(2)		14,549				202									1.39	%
California Region Total		383,048		285,746		4,481		3,348			1,682		19		1.17	%		1.17	%
Northwest Region:
Bank of Bellevue		34,027		28,037		580		370							1.70	%		1.32	%
Bank of Everett		20,260		8,269		290		122							1.43	%		1.48	%
Bank of Tacoma(1)		14,857				215									1.45	%
High Desert Bank(5)		4,140				60									1.45	%
Issaquah Community Bank(4)		2,105				30									1.43	%
Northwest Region Total		75,389		36,306		1,175		492							1.56	%		1.36	%
Western Region Total		1,865,971		1,640,713		20,289		17,517			5,653		1,669		1.08	%		1.07	%
Other, net		28,879		5,520		1,254		1,063			8,221		2,305
Consolidated Totals	$	4,030,384	$	3,488,678	$	52,851	$	45,414		$	52,738	$	34,274		1.31	%		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.
(3)	Commenced operations in May 2007 and is 51%-owned by Capitol Bancorp Colorado Ltd. II, a controlled subsidiary of Capitol.
(4)	Commenced operations in July 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.
(5)	Commenced operations in September 2007 and is 55%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.

Page 17 of 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations

Summary

Third quarter 2007 earnings were $6 million, a decrease of 45% compared to the corresponding period of 2006; diluted earnings per share were $0.35 for the 2007 period, a decrease of 47% compared to $0.66 in 2006.  In comparison to the preceding quarterly period, third quarter earnings represented a decrease of $324,000 or $0.02 per basic and diluted share.  Net income for the nine months ended September 30, 2007 was $18.5 million, a decrease of 40% compared to the same period in 2006.  Diluted earnings per share for the nine-month 2007 period were $1.08 compared to $1.89 for the prior year period, a 43% decrease.

The primary reason for the interim 2007 earnings decline was weak bank performance, particularly within the Great Lakes Region.  On a combined basis, Great Lakes Region banks in existence for both the 2007 and 2006 nine-month periods reported results $5.5 million lower or about 49% of their results in the 2006 nine-month period.  Within this group of banks, Capitol’s mature wholly-owned Michigan-based banks reported an earnings decrease of $6 million in the 2007 period, or about 50% of their earnings in the nine-month 2006 period.  In Capitol’s Southwest Region, which has consistently reported earnings growth through 2006, its banks (excluding banks added in 2007) reported a 4% decrease in combined 2007 earnings results.  The regional distribution of Capitol’s bank performance and related earnings contribution underscores the importance of the previously-discussed emphasis on geographic diversification.

Analytical Review

Net interest income for the first nine months of 2007 totaled $136.9 million, a 6% increase compared to $129.7 million in 2006.  Net interest income for the three months ended September 30, 2007 totaled $46.7 million, a 4% increase compared to $44.7 million in 2006.  This increased only slightly due to decreased net interest margins during periods of strong asset growth which has been 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 generally 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 4.42% for the three months ended September 30, 2007, a decrease compared to 4.53% for the three months ended June 30, 2007.  Of this 0.11% decrease, about 0.04% was associated with the growth in nonperforming loans.  During the three months ended September 30, 2006, the consolidated net interest margin approximated 5.08%.  Several other causal factors impacted the 2007 margin, including competitive pressures at the bank level in pricing of loans and deposits, impact of the flat yield curve, migration of noninterest-bearing deposits to interest-bearing accounts, higher interest costs associated with subordinated debt securities added near the end of the first quarter of 2007 and elevated levels of nonperforming loans in earlier periods.  It is difficult to speculate on future changes in net interest margin.

Noninterest income for the nine months ended September 30, 2007 was $18.5 million, an increase of $3.1 million, or 20%, over the same period in 2006.  Noninterest income for the three months ended September 30, 2007 was $7.1 million, a 45% increase from the same period in 2006.  The increase for the nine-month 2007 period was due to increases of $1.2 million in trust and wealth-management revenue and $1.1 million from gains on sale of government-guaranteed loans.  Fees from origination of non-portfolio residential mortgage loans totaled $1.1 million for the third quarter of 2007 and were $3.8 million for the nine-month period, reduced from $1.4 million and $4.1 million for the comparable periods in 2006.  Service charges on deposit accounts in the nine-month 2007 period increased slightly compared to 2006.  Other noninterest income for the three months ended September 30, 2007 included nonrecurring tax-exempt life insurance proceeds of approximately $565,000.

Page 18 of 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

The provision for loan losses for the nine-month period in 2007 was $15.8 million, compared to $8.7 million for the same period in 2006.  The provision for loan losses for the three months ended September 30, 2007 was $7.9 million as compared to $3.4 million during the corresponding 2006 period.  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.  The significant increase in the provision for loan losses compared to the preceding year had a material adverse effect on operating results for the interim 2007 periods presented.

Noninterest expense totaled $128.5 million for the nine-month 2007 period and $44.5 million for the third quarter of 2007, compared to $102.6 million and $34.1 million, respectively, for the comparable periods in 2006.  The increase in noninterest expense is associated with adding six new banks in 2007 and six banks which were added in 2006, growth in the size of previously-existing banks and increases in general operating costs.  Increases in both occupancy and salaries and employee benefits in 2007 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 six de novo banks.

The largest element of noninterest expense is salaries and employee benefits, which approximated $80.3 million for the nine months ended September 30, 2007, compared to $64.8 million for the corresponding period of 2006, an increase of $15.5 million.  Of that increase, $4.4 million related to banks opened after September 30, 2006, $8.3 million related to all other banks within the consolidated group and the remainder consisted of added labor costs at corporate and Capitol’s wealth management unit.

The more significant elements of other noninterest expense consisted of the following (in thousands) for the periods ended September 30:

	Three-Month Period				Nine-Month Period
	2007		2006		2007		2006
Preopening and start-up costs	$	1,602	$	--	$	2,898	$	3,063
Advertising		792		752		2,454		2,133
Directors' fees		725		515		2,084		1,661
Travel, lodging and meals		706		608		2,049		1,599
Paper, printing and supplies		643		560		2,010		1,721
FDIC insurance premiums and other regulatory fees		696		237		1,917		641
Professional fees		551		572		1,671		1,724
Bank services (ATMs, telephone banking and Internet banking)		517		406		1,578		1,089
Loan and collection expense		392		315		1,436		857
Taxes other than income taxes		448		385		1,376		1,103
Communications		432		354		1,265		1,003
Postage		283		252		825		752
Courier service		253		230		729		641
Dues and memberships		203		195		649		578
Contracted labor		98		140		364		404
Insurance expense		119		138		333		347
Other		2,128		1,521		6,197		3,476
Total	$	10,588	$	7,180	$	29,835	$	22,792

Page 19 of 27

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:

	Nine months ended September 30
											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	$	19,058	$	17,675	$	2,790		$	2,947			14.25	%		14.82	%		1.13	%		1.28	%
Bank of Auburn Hills		2,418		1,194		(215	)		(348	)		n/a			n/a			n/a			n/a
Bank of Belleville		1,648		816		(434	)		(477	)		n/a			n/a			n/a			n/a
Bank of Maumee		946		n/a		(856	)		n/a			n/a			n/a			n/a			n/a
Bank of Michigan		3,603		2,160		(38	)		(277	)		n/a			n/a			n/a			n/a
Brighton Commerce Bank		6,166		5,848		455			643			6.60			9.08			0.57			0.82
Capitol National Bank		13,499		13,127		1,587			2,103			11.20			14.57			0.89			1.16
Detroit Commerce Bank		6,786		6,453		413			795			5.96			12.90			0.51			1.16
Elkhart Community Bank		5,149		4,744		650			774			9.88			12.29			1.03			1.28
Evansville Commerce Bank		1,851		276		(540	)		(708	)		n/a			n/a			n/a			n/a
Goshen Community Bank		4,490		3,846		330			319			5.90			6.25			0.58			0.62
Grand Haven Bank		7,248		7,251		500			987			6.10			12.17			0.52			1.04
Kent Commerce Bank		5,045		5,033		100			355			2.27			5.55			0.16			0.58
Macomb Community Bank		5,088		5,779		(842	)		252			n/a			3.86			n/a			0.35
Muskegon Commerce Bank		5,427		5,652		(746	)		175			n/a			2.75			n/a			0.24
Oakland Commerce Bank		7,234		7,154		(102	)		883			n/a			11.98			n/a			0.98
Ohio Commerce Bank		1,031		n/a		(568	)		n/a			n/a			n/a			n/a			n/a
Paragon Bank & Trust		6,157		5,945		(25	)		687			n/a			8.24			n/a			0.91
Portage Commerce Bank		11,580		11,022		1,740			2,021			14.36			16.69			1.26			1.50
Great Lakes Region Total		114,424		103,975		4,199			11,131
Southeast Region:
Bank of Valdosta		1,802		206		(326	)		(649	)		n/a			n/a			n/a			n/a
Community Bank of Rowan		4,228		1,052		(229	)		(950	)		n/a			n/a			n/a			n/a
First Carolina State Bank		5,517		4,621		404			621			4.57			7.36			0.55			1.00
Peoples State Bank		1,705		1,808		226			84			6.15			5.68			1.08			0.43
Sunrise Bank of Atlanta		2,757		335		(260	)		(733	)		n/a			n/a			n/a			n/a
Southeast Region Total		16,009		8,022		(185	)		(1,627	)
Midwest Region:
Summit Bank of Kansas City		2,408		488		(352	)		(553	)		n/a			n/a			n/a			n/a
Northeast Region:
USNY Bank(5)		149				(743	)					n/a			n/a			n/a			n/a
Eastern Regions Total	$	132,990	$	112,485	$	2,919		$	8,951

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

[The remainder of this page intentionally left blank]

Page 20 of 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Operating results – continued:

	Nine months ended September 30
											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)	$	132,990	$	112,485	$	2,919		$	8,951
Western Regions:
Southwest Region:
1st Commerce Bank		1,188		n/a		(423	)		n/a			n/a			n/a			n/a			n/a
Arrowhead Community Bank		6,231		6,057		774			917			12.48	%		15.10	%		1.22	%		1.39	%
Asian Bank of Arizona		1,301		374		(404	)		(519	)		n/a			n/a			n/a			n/a
Bank of Las Vegas		4,542		3,920		493			517			7.30			7.12			0.90			1.09
Bank of Tucson		11,972		11,220		3,496			3,386			27.52			29.68			2.60			2.59
Black Mountain Community Bank		9,233		7,920		1,976			1,989			18.83			21.67			1.85			2.08
Camelback Community Bank		5,129		4,686		722			819			10.90			13.42			1.09			1.33
Desert Community Bank		6,076		5,375		891			946			12.60			15.16			1.25			1.50
Fort Collins Commerce Bank		3,517		2,386		495			(37	)		7.74			n/a			1.23			n/a
Larimer Bank of Commerce(4)		1,201		n/a		(586	)		n/a			n/a			n/a			n/a			n/a
Mesa Bank		14,979		14,014		3,109			3,322			22.60			25.71			1.99			1.31
Red Rock Community Bank		6,990		6,310		1,266			1,630			12.72			17.76			1.51			2.12
Southern Arizona Community   Bank		5,197		4,928		823			833			12.25			12.65			1.23			1.29
Sunrise Bank of Albuquerque		4,605		3,481		470			337			9.61			6.79			0.92			0.80
Sunrise Bank of Arizona		7,111		7,781		444			1,076			5.11			11.26			0.52			1.23
Valley First Community Bank		4,006		4,247		259			542			4.36			9.93			0.50			0.97
Yuma Community Bank		4,498		4,389		746			830			12.92			16.03			1.38			1.63
Southwest Region Total		97,776		87,088		14,551			16,588
California Region:
Bank of Escondido		4,326		3,791		369			606			3.48			8.09			0.58			1.08
Bank of San Francisco		2,195		1,108		(358	)		(552	)		n/a			n/a			n/a			n/a
Bank of Santa Barbara		3,090		1,333		(205	)		(616	)		n/a			n/a			n/a			n/a
Napa Community Bank		7,032		5,127		1,066			1,054			11.02			12.48			1.21			1.70
Point Loma Community Bank		3,071		2,315		69			63			1.30			1.21			0.18			0.21
Sunrise Bank of San Diego		5,358		4,187		372			676			4.68			8.33			0.59			1.31
Sunrise Community Bank(3)		726		n/a		(805	)		n/a			n/a			n/a			n/a			n/a
California Region Total		25,798		17,861		508			1,231
Northwest Region
Bank of Bellevue		2,410		1,418		(66	)		(320	)		n/a			n/a			n/a			n/a
Bank of Everett		1,403		188		(433	)		(481	)		n/a			n/a			n/a			n/a
Bank of Tacoma(2)		868		n/a		(884	)		n/a			n/a			n/a			n/a			n/a
High Desert Bank(6)		4				(330	)		n/a			n/a			n/a			n/a			n/a
Issaquah Community Bank(5)		125		n/a		(394	)		n/a			n/a			n/a			n/a			n/a
Northwest Region Total		4,810		1,606		(2,107	)		(801	)
Western Regions Total		128,384		106,555		12,952			17,018
Other, net		1,294		807		2,672			5,040
Consolidated Totals	$	262,668	$	219,847	$	18,543		$	31,009			6.48	%		13.13	%		0.57	%		1.06	%

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.
(4)	Commenced operations in May 2007 and is 51%-owned by Capitol Bancorp Colorado Ltd. II, a controlled subsidiary of Capitol.
(5)	Commenced operations in July 2007 and is 51%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.
(6)	Commenced operations in September 2007 and is 55%-owned by Capitol Development Bancorp Limited VI, a controlled subsidiary of Capitol.

Page 21 of 27

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 $415 million for the nine months ended September 30, 2007, compared to a $329 million increase in the corresponding period of 2006.  Growth occurred in most interest-bearing deposit categories, with the majority coming from time deposit accounts.  Capitol's banks generally do not significantly rely on brokered deposits as a key funding source.  Brokered deposits approximated $408 million as of September 30, 2007, or about 11% of total deposits, an increase of $55 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 17% of total deposits at September 30, 2007, a decrease from 20% at December 31, 2006.  Levels of noninterest-bearing deposits can, however, fluctuate based on customers' transaction activity.  The interim 2007 change in noninterest-bearing deposits is somewhat significant from the impact it has on the cost of funds and net interest margin.  The lower ratio of noninterest-bearing deposits to total deposits and resulting higher funding cost was estimated to adversely impact the 2007 net interest margin by 0.09% and 0.08% for the three months and nine months ended September 30, 2007, respectively.  During the 2007 nine month period, noninterest-bearing deposits decreased $15 million compared to an increase of $9.9 million during the 2006 period.

Also during the 2007 period, interest-bearing accounts increased about $430 million, resulting in net deposit growth of approximately $415 million, which, coupled with borrowings, served as the primary funding source for loan growth.  Because of the larger growth in interest-bearing deposits, coupled with higher rates on those balances and decreased noninterest-bearing deposits, net interest margins have decreased.

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 $383 million or 8% of total assets at September 30, 2007, compared to $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 September 30, 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 September 30, 2007, Capitol's banks had approximately $15 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 $245 million and additional borrowing capacity approximated $512 million at September 30, 2007.  These facilities are used from time to time as a lower-cost funding source versus various rates and maturities of time deposits available within banks’ individual communities.  Total notes payable and short-term borrowings were $260 million at September 30, 2007.  At September 30, 2007, Capitol had an unused line of credit from an unrelated financial institution of $25 million.

Stockholders' equity, as a percentage of total assets, approximated 8.4% at September 30, 2007 and 8.9% at 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 are being used for bank development and other corporate purposes.  As of September 30, 2007, Capitol’s total capital funds (i.e., the sum of stockholders’ equity, minority interests in consolidated subsidiaries and subordinated debentures) approximated $690 million or 14.82% 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 22 of 27

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 changed interbank borrowing rates once during the interim 2007 period through a 50 basis-point decrease during the third quarter of 2007 (rates were increased several times during 2006).  The Board of Governors of the Federal Reserve have also expressed concerns about a variety of economic conditions, as well as mixed messages on the timing and direction of future interest rate changes.  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.  There has been widespread media coverage of subprime and other residential mortgage “meltdown” issues; Capitol believes its exposure to the residential real estate crisis to be minimal due to its practice of selling residential mortgage loan production to the secondary market.  Many of Capitol's banks' commercial loans are variable-rate and, accordingly, rate decreases may result in lower interest income to Capitol in the near term; however, depositors will continue to expect reasonable rates of interest on their accounts, potentially compressing net interest margins further.  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, however, the effect may be muted due to Capitol’s utilization of a tiered ownership structure which reduces the effect of those losses on Capitol’s consolidated results of operations.

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 are uncertain and are likely to 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.

The state of Michigan has recently enacted the Michigan Business Tax (MBT), to replace the Michigan Single Business Tax (which will be repealed effective December 31, 2007, based on current legislation), which will become effective for Capitol’s Michigan banks in 2008.  Based on management’s preliminary review of the MBT legislation, it does not expect the impact of this newly-enacted tax to have a material effect on Capitol’s consolidated financial statements in comparison to the previous level of taxation under the Michigan Single Business Tax.

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.

Page 23 of 27

PART I, ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

MARKET RISK

Information about Capitol's quantitative and qualitative disclosures about market risk were included in Capitol's annual report on Form 10-K for the year ended December 31, 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 24 of 27

PART II.  OTHER INFORMATION

Item 1.	Legal Proceedings. Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business.  In the opinion of management, liabilities arising from such litigation would not have a material effect on Capitol's consolidated financial position or results of operations.
Item 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 nine months ended September 30, 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.
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 25 of 27

SIGNATURES

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

 CAPITOL BANCORP LTD.

 (Registrant)

 /s/ Joseph D. Reid                                                                                                     

 Joseph D. Reid

 Chairman and CEO

 (duly authorized to sign on behalf of the

                                            & #160;                  registrant)

 /s/ Lee W. Hendrickson                                                                                                    

 Lee W. Hendrickson

 Chief Financial Officer

Date:  October 31, 2007

Page 26 of 27

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 27 of 27