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-31.1
  5. Ex-31.2
  6. Ex-31.2
form10-q.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 June 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 July 15, 2007
Common Stock, No par value
 
17,255,622 shares


Page 1 of 28


INDEX

PART I.                      FINANCIAL INFORMATION

Forward-Looking Statements
Certain of the statements contained in this document, including Capitol's consolidated financial statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and in documents incorporated into this document by reference that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of Capitol and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements.  The words "intend," "expect," "project," "estimate," "predict," "anticipate," "should," "believe," and similar expressions also are intended to identify forward-looking statements.  Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of Capitol's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting Capitol's banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of Capitol's banks and Capitol's ability to respond to such actions, (ix) the cost of capital, which may depend in part on Capitol's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, and (xi) other risks detailed in Capitol's other filings with the Securities and Exchange Commission.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.  All subsequent written or oral forward-looking statements attributable to Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors.  Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements.  Capitol undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.
 
Item 1.
 
Financial Statements (unaudited):
Page
 
Condensed consolidated balance sheets – June 30, 2007 and December 31, 2006.
3
 
Condensed consolidated statements of income – Three months and six months
ended June 30, 2007 and 2006.
4
 
Condensed consolidated statements of changes in stockholders' equity – Six
months ended June 30, 2007 and 2006.
5
 
Condensed consolidated statements of cash flows – Six months ended June 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.
26
Item 6.
Exhibits.
26
 
SIGNATURES
 
 
27
 
EXHIBIT INDEX
 
 
28
 

Page 2 of 28


PART I, ITEM 1
 
               
CAPITOL BANCORP LIMITED
 
Condensed Consolidated Balance Sheets
 
As of June 30, 2007 and December 31, 2006
 
(in thousands, except share data)
 
               
     
(Unaudited)
       
     
June 30,
   
December 31,
 
     
2007
   
2006
 
ASSETS
             
Cash and due from banks
    $
184,439
    $
169,753
 
Money market and interest-bearing deposits
   
9,389
     
37,204
 
Federal funds sold
     
216,633
     
141,913
 
                                 Cash and cash equivalents    
410,461
     
348,870
 
Loans held for sale
     
21,356
     
34,593
 
Investment securities:
                 
   Available for sale, carried at market value
   
15,377
     
18,904
 
   Held for long-term investment, carried at
               
     amortized cost which approximates market value
   
22,697
     
21,749
 
                                 Total investment securities    
38,074
     
40,653
 
Portfolio loans:
                 
   Commercial
     
3,398,448
     
3,103,125
 
   Real estate mortgage
     
256,845
     
259,604
 
   Installment
     
146,480
     
125,949
 
                                 Total portfolio loans    
3,801,773
     
3,488,678
 
   Less allowance for loan losses
      (49,349 )     (45,414 )
                                 Net portfolio loans    
3,752,424
     
3,443,264
 
Premises and equipment
     
56,869
     
54,295
 
Accrued interest income
     
18,249
     
17,524
 
Goodwill and other intangibles
     
70,539
     
62,215
 
Other assets
     
71,307
     
64,402
 
                   
            TOTAL ASSETS
    $
4,439,279
    $
4,065,816
 
                   
LIABILITIES AND STOCKHOLDERS' EQUITY
               
LIABILITIES:
                 
Deposits:
                 
   Noninterest-bearing
    $
638,173
    $
651,253
 
   Interest-bearing
     
2,885,173
     
2,607,232
 
                                 Total deposits    
3,523,346
     
3,258,485
 
Debt obligations:
                 
   Notes payable and short-term borrowings
   
219,934
     
191,154
 
   Subordinated debentures
     
156,082
     
101,035
 
                                 Total debt obligations    
376,016
     
292,189
 
Accrued interest on deposits and other liabilities
   
27,932
     
26,751
 
                                 Total liabilities    
3,927,294
     
3,577,425
 
                   
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
   
124,068
     
126,512
 
                   
STOCKHOLDERS' EQUITY:
                 
Common stock, no par value,  50,000,000 shares authorized;
               
   issued and outstanding:  2007 - 17,255,622 shares
               
                                    2006 - 16,656,481 shares    
271,292
     
249,244
 
Retained earnings
     
116,804
     
112,779
 
Market value adjustment (net of tax effect) for
               
   investment securities available for sale (accumulated
               
   other comprehensive income/loss)
    (179 )     (144 )
                                 Total stockholders' equity    
387,917
     
361,879
 
                   
            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $
4,439,279
    $
4,065,816
 
                   
See notes to condensed consolidated financial statements.
               
                   

Page 3 of 28


CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months and Six Months Ended June 30, 2007 and 2006
(in thousands, except per share data)
 
   
   
 Three-Month Period
   
  Six-Month Period 
   
2007
   
2006
   
2007
   
2006
Interest income:
                     
   Portfolio loans (including fees)
  $
77,178
    $
64,577
    $
150,702
    $
124,720
   Loans held for sale
   
390
     
739
     
1,336
     
1,262
   Taxable investment securities
   
193
     
244
     
401
     
507
   Federal funds sold
   
3,109
     
2,010
     
5,653
     
3,828
   Other
   
384
     
626
     
1,001
     
976
                                Total interest income
   
81,254
     
68,196
     
159,093
     
131,293
Interest expense:
                             
   Deposits
   
30,267
     
20,397
     
58,596
     
38,179
   Debt obligations and other
   
5,445
     
4,162
     
10,274
     
8,124
                                Total interest expense
   
35,712
     
24,559
     
68,870
     
46,303
                                Net interest income
   
45,542
     
43,637
     
90,223
     
84,990
Provision for loan losses
   
3,990
     
2,815
     
7,922
     
5,271
                                Net interest income after
                             
                                   provision for loan losses
   
41,552
     
40,822
     
82,301
     
79,719
Noninterest income:
                             
   Service charges on deposit accounts
   
1,187
     
1,103
     
2,292
     
2,134
   Trust and wealth-management revenue
   
1,117
     
768
     
2,154
     
1,635
   Fees from origination of non-portfolio residential
                             
     mortgage loans
   
1,305
     
1,440
     
2,612
     
2,729
   Gains on sale of government-guaranteed loans
   
550
     
444
     
1,350
     
804
   Other
   
1,684
     
1,701
     
3,020
     
3,264
                               Total noninterest income
   
5,843
     
5,456
     
11,428
     
10,566
Noninterest expense:
                             
   Salaries and employee benefits
   
26,437
     
21,675
     
52,509
     
43,225
   Occupancy
   
3,552
     
2,918
     
7,049
     
5,596
   Equipment rent, depreciation and maintenance
   
2,590
     
2,047
     
5,232
     
4,013
   Other
   
9,635
     
9,974
     
19,247
     
15,612
                              Total noninterest expense
   
42,214
     
36,614
     
84,037
     
68,446
                              Income before income taxes
                             
                                 and minority interest
   
5,181
     
9,664
     
9,692
     
21,839
Income taxes
   
2,346
     
3,564
     
4,110
     
7,945
                              Income before minority interest
   
2,835
     
6,100
     
5,582
     
13,894
Minority interest in net losses of consolidated
                             
   subsidiaries
   
3,463
     
4,167
     
6,987
     
6,326
                               
      NET INCOME
  $
6,298
    $
10,267
    $
12,569
    $
20,220
                               
      NET INCOME PER SHARE -- Note D:
                             
                               Basic
  $
0.37
    $
0.65
    $
0.75
    $
1.29
                               
                               Diluted
  $
0.37
    $
0.63
    $
0.73
    $
1.24
                               
                               
See notes to condensed consolidated financial statements.
                       

Page 4 of 28


CAPITOL BANCORP LIMITED
 
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
 
For the Six Months Ended June 30, 2007 and 2006
 
(in thousands, except share data)
 
               
Accumulated
       
               
Other
       
 
Common
   
Retained
   
Comprehensive
       
 
Stock
   
Earnings
   
Loss
   
Total
 
                         
Six Months Ended June 30, 2006
                       
                         
Balances at January 1, 2006
  $
216,539
    $
85,553
    $ (226 )   $
301,866
 
                                 
Issuance of 102,134 shares of common stock
                               
   upon exercise of stock options, net of common
                 
   stock surrendered to facilitate exercise
   
1,717
                     
1,717
 
                                 
Issuance of 79,750 unvested shares of restricted
                               
  common stock, net of related unearned employee
                               
  compensation
    --                        --   
                                 
Recognition of compensation expense relating to
                               
   restricted common stock
   
821
                     
821
 
                                 
Tax benefits from share-based payments
   
939
                     
939
 
                                 
Cash dividends paid ($0.45 per share)
            (7,156 )             (7,156 )
                                 
Components of comprehensive income:
                               
   Net income
           
20,220
             
20,220
 
   Market value adjustment for investment
                               
      securities available for sale (net of income
                               
      tax effect)
                    (99 )     (99 )
         Comprehensive income
                           
20,121
 
                                 
    BALANCES AT JUNE 30, 2006
  $
220,016
    $
98,617
    $ (325 )   $
318,308
 
                                 
Six Months Ended June 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 203,321 shares of common stock
                               
   upon exercise of stock options, net of
                               
   common stock surrendered to facilitate exercise
   
2,571
                     
2,571
 
                                 
Recognition of compensation expense relating to
                               
   restricted common stock
   
784
                     
784
 
                                 
Tax benefit from share-based payments
   
1,634
                     
1,634
 
                                 
Issuance of 24,506 shares of common stock to
                               
   employee stock ownership plan
   
1,132
                     
1,132
 
                                 
Cash dividends paid ($0.50 per share)
            (8,544 )             (8,544 )
                                 
Components of comprehensive income:
                               
   Net income
           
12,569
             
12,569
 
   Market value adjustment for investment
                               
      securities available for sale (net of income
                               
      tax effect)
                    (35 )     (35 )
         Comprehensive income
                           
12,534
 
                                 
    BALANCES AT JUNE 30, 2007
  $
271,292
    $
116,804
    $ (179 )   $
387,917
 
                                 
                                 
See notes to condensed consolidated financial statements.
                         

Page 5 of 28



CAPITOL BANCORP LTD.
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
For the Six Months Ended June 30, 2007 and 2006
 
(in thousands)     
 
             
   
2007
   
2006
 
             
OPERATING ACTIVITIES
           
  Net income
  $
12,569
    $
20,220
 
  Adjustments to reconcile net income to net
               
    cash provided by operating activities:
               
      Provision for loan losses
   
7,922
     
5,271
 
      Depreciation of premises and equipment
   
4,434
     
3,426
 
      Amortization of intangibles
   
159
     
292
 
      Net amortization of investment security premiums
   
2
     
1
 
      Loss (gain) on sale of premises and equipment
    (137 )    
16
 
      Minority interest in net losses of consolidated subsidiaries
    (6,987 )     (6,326 )
      Compensation expense relating to restricted common stock
   
784
     
821
 
  Originations and purchases of loans held for sale
    (288,104 )     (242,153 )
  Proceeds from sales of loans held for sale
   
301,341
     
245,764
 
  Decrease (increase) in accrued interest income and other assets
    (6,374 )    
3,536
 
  Increase (decrease) in accrued interest expense on
               
   deposits and other liabilities
   
1,181
      (6,027 )
                 
                NET CASH PROVIDED BY OPERATING ACTIVITIES
   
26,790
     
24,841
 
                 
                 
INVESTING ACTIVITIES
               
  Proceeds from sale of investment securities available for sale
           
443
 
  Proceeds from calls, prepayments and maturities of investment
               
    securities
   
6,382
     
6,220
 
  Purchases of investment securities
    (3,898 )     (5,691 )
  Net increase in portfolio loans
    (317,082 )     (207,539 )
  Proceeds from sales of premises and equipment
   
332
     
721
 
  Purchases of premises and equipment
    (7,203 )     (13,129 )
                 
                NET CASH USED BY INVESTING ACTIVITIES
    (321,469 )     (218,975 )
                 
                 
FINANCING ACTIVITIES
               
  Net increase in demand deposits, NOW accounts and
               
    savings accounts
   
118,949
     
56,458
 
  Net increase in certificates of deposit
   
145,912
     
145,889
 
  Net borrowings from debt obligations
   
28,780
     
1,347
 
  Net proceeds from issuance of subordinated debentures
   
55,000
         
  Resources provided by minority interests
   
11,968
     
39,091
 
  Net proceeds from issuance of common stock
   
2,571
     
1,717
 
  Tax benefit from share-based payments
   
1,634
     
939
 
  Cash dividends paid
    (8,544 )     (7,156 )
                 
                NET CASH PROVIDED BY FINANCING ACTIVITIES
   
356,270
     
238,285
 
                 
                INCREASE IN CASH AND CASH EQUIVALENTS
   
61,591
     
44,151
 
                 
Cash and cash equivalents at beginning of period
   
348,870
     
306,108
 
                 
                 
                CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $
410,461
    $
350,259
 
                 
                 
See notes to condensed consolidated financial statements.
               

Page 6 of 28

 
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 June 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
    (240,897 )  
    
10.81 to    33.01
     
16.51
Granted
   
18,720
     
29.33
     
29.33
Cancelled or expired
    (1,474 )              
                       
Outstanding at June 30
   
2,346,440
    $
11.00 to $ 37.48
    $
27.94


Page 7 of 28

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
 
 
Note C – Stock Options--Continued

18,720 stock options were granted in April 2007 with an aggregate fair value approximating $175,000.  Those stock options become fully vested on December 31, 2007 and expire seven years from date of grant.

As of June 30, 2007, stock options outstanding had a weighted average remaining contractual life of 3.6 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value as of June 30, 2007:

           
Weighted Average
     
Exercise Price
Range
   
Number
Outstanding
   
Exercise
Price
 
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
                       
$10.00 to 14.99
                 9,019     $
12.34
 
     0.70 years
  $
135,195
 
$15.00 to 19.99
   
 249,439
     
16.64
 
     2.52 years
   
2,666,503
 
$20.00 to 24.99
   
 438,267
     
21.60
 
     2.59 years
   
2,511,270
 
$25.00 to 29.99
   
 605,707
     
27.09
 
     3.25 years
   
145,370
 
$30.00 to 34.99
   
 695,221
     
32.10
 
     4.19 years
    (3,316,204 )
$35.00 or more
   
 348,787
     
37.48
 
     5.37 years
    (3,540,188 )
                               
Total outstanding
          2,346,440               $ (1,398,054 )

Note D – Net Income Per Share

The computations of basic and diluted earnings per share were as follows (in 1,000s) for the periods ended June 30:
 
   
Three-Month Period
   
Six-Month Period
 
   
2007
   
2006
   
2007
   
2006
 
                         
Numerator—net income for the period
  $
6,298
    $
10,267
    $
12,569
    $
20,220
 
                                 
Denominator:
                               
Weighted average number of shares
outstanding, excluding unvested
restricted shares (denominator for basic
earnings per share)
   
16,961
     
15,706
     
16,829
     
15,674
 
                                 
Effect of dilutive securities:
                               
Unvested restricted shares
   
15
     
56
     
42
     
56
 
Stock options
   
208
     
650
     
351
     
625
 
Total effect of dilutive securities
   
223
     
706
     
393
     
681
 
                                 
Denominator for diluted earnings per share—
                               
Weighted average number of shares and
potential dilution
   
17,184
     
16,412
     
17,222
     
16,355
 
                                 
Number of antidilutive stock options excluded
  from diluted earnings per share computation
   
1,063
     
--
     
368
     
--
 




Page 8 of 28

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
 
 
Note E – New Banks and Other Development Activities

Capitol opened three de novo banks during the first six months of 2007.  Bank of Tacoma, located in Tacoma, Washington, opened in January 2007, Sunrise Community Bank, located in Palm Desert, California, opened in February 2007 and Larimer Bank of Commerce, located in Fort Collins, Colorado, opened in May 2007.  In early July 2007, an affiliate bank in Issaquah, Washington, was opened.  Each is majority owned by bank-development subsidiaries controlled by Capitol.

Bank development efforts were currently under consideration at June 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 June 30, 2007, Capitol had 11 applications pending for additional de novo community banks in Arizona, California, Colorado, Missouri, Nebraska, New York, North Carolina, Oregon 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 six months ended June 30, 2006 would have been $19.3 million ($1.15 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 28

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED
 
 
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 28


PART I, ITEM 2

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

Financial Condition

Total assets approximated $4.4 billion at June 30, 2007, an increase of $374 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)
   
June 30, 2007
   
December 31, 2006
           
Eastern Regions:
         
Great Lakes Region:
         
Ann Arbor Commerce Bank
  $
335,998
    $
310,407
Bank of Auburn Hills
   
44,493
     
31,559
Bank of Belleville
   
36,385
     
24,948
Bank of Maumee
   
19,726
     
9,915
Bank of Michigan
   
63,844
     
51,287
Brighton Commerce Bank
   
105,453
     
103,909
Capitol National Bank
   
241,785
     
256,741
Detroit Commerce Bank
   
109,573
     
106,233
Elkhart Community Bank
   
82,252
     
86,883
Evansville Commerce Bank
   
34,816
     
20,772
Goshen Community Bank
   
82,957
     
80,137
Grand Haven Bank
   
130,292
     
129,033
Kent Commerce Bank
   
81,503
     
86,916
Macomb Community Bank
   
90,378
     
101,353
Muskegon Commerce Bank
   
92,113
     
95,551
Oakland Commerce Bank
   
122,002
     
134,437
Ohio Commerce Bank
   
29,732
     
14,466
Paragon Bank & Trust
   
92,756
     
98,804
Portage Commerce Bank
   
187,723
     
179,413
Great Lakes Region Total
   
1,983,781
     
1,922,764
               
Southeast Region:
             
Bank of Valdosta
   
31,610
     
21,626
Community Bank of Rowan
   
76,760
     
45,503
First Carolina State Bank
   
103,625
     
93,819
Peoples State Bank
   
28,268
     
32,714
Sunrise Bank of Atlanta
   
36,470
     
16,990
Southeast Region Total
   
276,733
     
210,652
               
Midwest Region:
Summit Bank of Kansas City
   
50,045
     
19,529
               
Eastern Regions Total
  $
2,310,559
    $
2,152,945

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




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Page 11 of 28


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of total assets – continued:

   
Total Assets (in $1,000's)
   
June 30, 2007
   
December 31, 2006
           
Eastern Regions Total (from
preceding page)
  $
2,310,559
    $
2,152,945
               
Western Regions:
             
Southwest Region:
             
1st Commerce Bank
   
18,006
     
14,829
Arrowhead Community Bank
   
84,700
     
79,152
Asian Bank of Arizona
   
22,847
     
20,248
Bank of Las Vegas
   
72,337
     
67,478
Bank of Tucson
   
182,029
     
187,683
Black Mountain Community Bank
   
147,025
     
138,961
Camelback Community Bank
   
88,850
     
83,003
Desert Community Bank
   
97,392
     
93,914
Fort Collins Commerce Bank
   
45,468
     
54,410
Larimer Bank of Commerce(3)
   
36,666
       
Mesa Bank
   
223,951
     
201,776
Red Rock Community Bank
   
108,048
     
108,362
Southern Arizona Community Bank
   
91,919
     
85,912
Sunrise Bank of Albuquerque
   
71,781
     
59,798
Sunrise Bank of Arizona
   
110,199
     
119,785
Valley First Community Bank
   
67,121
     
72,333
Yuma Community Bank
   
74,171
     
74,477
Southwest Region Total
   
1,542,510
     
1,462,121
               
California Region:
             
Bank of Escondido
   
87,402
     
82,412
Bank of San Francisco
   
43,659
     
28,122
Bank of Santa Barbara
   
50,645
     
42,559
Napa Community Bank
   
119,763
     
99,009
Point Loma Community Bank
   
56,053
     
43,715
Sunrise Bank of San Diego
   
86,787
     
71,170
Sunrise Community Bank(2)
   
15,149
       
California Region Total
   
459,458
     
366,987
               
Northwest Region:
             
Bank of Bellevue
   
38,556
     
33,155
Bank of Everett
   
22,943