Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 14, 2013)
  • 10-Q (May 15, 2013)
  • 10-Q (Nov 14, 2012)
  • 10-Q (Aug 9, 2012)
  • 10-Q (May 3, 2012)
  • 10-Q (Nov 14, 2011)

 
8-K

 
Other

Capitol Bancorp 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q.htm




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.






[The remainder of this page intentionally left blank]


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