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 March 31, 2008
	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 shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £

No T

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at April 15, 2008
Common Stock, No par value		17,316,416 shares

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer £			Accelerated filer T
Non-accelerated filer £ (Do not check if a smaller reporting company)			Smaller reporting company £

Page 1 of 29

INDEX

PART I. FINANCIAL INFORMATION

Forward-Looking Statements

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

Item 1.	Financial Statements (unaudited):	Page
	Condensed consolidated balance sheets – March 31, 2008 and December 31, 2007.	3
	Condensed consolidated statements of income – Three months ended March 31, 2008 and 2007.	4
	Condensed consolidated statements of changes in stockholders' equity – Three months ended March 31, 2008 and 2007.	5
	Condensed consolidated statements of cash flows – Three months ended March 31, 2008 and 2007.	6
	Notes to condensed consolidated financial statements.	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	26
Item 4.	Controls and Procedures.	26
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	27
Item 1A.	Risk Factors.	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27
Item 3.	Defaults Upon Senior Securities.	27
Item 4.	Submission of Matters to a Vote of Security Holders.	27
Item 5.	Other Information.	27
Item 6.	Exhibits.	27
SIGNATURES		28
EXHIBIT INDEX		29

Page 2 of 29

PART I, ITEM 1

CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of March 31, 2008 and December 31, 2007
(in thousands, except share data)

	(Unaudited)
	March 31			December 31
	2008			2007
ASSETS
Cash and due from banks	$	178,401		$	196,083
Money market and interest-bearing deposits		27,263			26,924
Federal funds sold		149,702			129,365
Cash and cash equivalents		355,366			352,372
Loans held for sale		17,221			16,419
Investment securities:
Available for sale, carried at market value		8,996			14,119
Held for long-term investment, carried at
amortized cost which approximates market value		28,902			25,478
Total investment securities		37,898			39,597
Portfolio loans:
Loans secured by real estate:
Commercial		1,968,358			1,917,113
Residential (including multi-family)		748,084			698,960
Construction, land development and other land		867,311			852,595
Total loans secured by real estate		3,583,753			3,468,668
Commercial and other business-purpose loans		802,675			768,473
Consumer		52,556			48,041
Other		28,644			29,519
Total portfolio loans		4,467,628			4,314,701
Less allowance for loan losses		(61,666	)		(58,124	)
Net portfolio loans		4,405,962			4,256,577
Premises and equipment		60,011			60,031
Accrued interest income		19,046			19,417
Goodwill and other intangibles		72,609			72,722
Other assets		98,570			84,628

TOTAL ASSETS	$	5,066,683		$	4,901,763

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	655,647		$	671,688
Interest-bearing		3,290,107			3,173,057
Total deposits		3,945,754			3,844,745
Debt obligations:
Notes payable and short-term borrowings		379,044			320,384
Subordinated debentures		156,153			156,130
Total debt obligations		535,197			476,514
Accrued interest on deposits and other liabilities		33,774			35,161
Total liabilities		4,514,725			4,356,420

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES		164,525			156,198

STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000,000 shares authorized;
issued and outstanding: 2008 - 17,317,065 shares
2007 - 17,316,568 shares		272,574			272,208
Retained earnings		115,381			117,520
Undistributed common stock held by employee-benefit trust		(580	)		(586	)
Market value adjustment (net of tax effect) for
investment securities available for sale (accumulated
other comprehensive income)		58			3
Total stockholders' equity		387,433			389,145

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	5,066,683		$	4,901,763

See notes to condensed consolidated financial statements.

Page 3 of 29

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 2008 and 2007
(in thousands, except per share data)

	2008			2007
Interest income:
Portfolio loans (including fees)	$	77,331		$	73,524
Loans held for sale		300			946
Taxable investment securities		133			208
Federal funds sold		1,213			2,544
Other		526			617
Total interest income		79,503			77,839
Interest expense:
Deposits		30,688			28,329
Debt obligations and other		6,880			4,829
Total interest expense		37,568			33,158
Net interest income		41,935			44,681
Provision for loan losses		8,958			3,932
Net interest income after provision for
loan losses		32,977			40,749
Noninterest income:
Service charges on deposit accounts		1,333			1,105
Trust and wealth-management revenue		1,645			1,037
Fees from origination of non-portfolio residential
mortgage loans		921			1,307
Gain on sales of government-guaranteed loans		580			800
Gain on sales of other non-portfolio commercial loans		317			320
Realized gains on sale of investment securities
available for sale		43
Other		1,726			1,016
Total noninterest income		6,565			5,585
Noninterest expense:
Salaries and employee benefits		25,548			26,072
Occupancy		4,404			3,497
Equipment rent, depreciation and maintenance		2,866			2,642
Other		11,987			9,612
Total noninterest expense		44,805			41,823
Income (loss) before income taxes
and minority interest		(5,263	)		4,511
Income taxes (benefit)		(1,995	)		1,764
Income (loss) before minority interest		(3,268	)		2,747
Minority interest in net losses of consolidated subsidiaries		5,459			3,524

NET INCOME	$	2,191		$	6,271

NET INCOME PER SHARE -- Note E:
Basic	$	0.13		$	0.38

Diluted	$	0.13		$	0.36

See notes to condensed consolidated financial statements.

Page 4 of 29

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2008 and 2007
(in thousands, except share data)

							Undistributed			Accumulated
							Common Stock			Other
	Common			Retained			Held by Employee-			Comprehensive
	Stock			Earnings			Benefit Trust			Income (Loss)			Total

Three Months Ended March 31, 2007

Balances at January 1, 2007	$	249,244		$	112,779					$	(144	)	$	361,879

Issuance of 371,314 shares of common stock
to acquire minority interest in subsidiary		15,927												15,927

Issuance of 37,949 shares of common stock
upon exercise of stock options, net of
common stock surrendered to facilitate exercise		586												586

Surrender of 15,645 shares of common stock to
facilitate vesting of restricted stock		(721	)											(721	)

Recognition of compensation expense relating to
restricted common stock		415												415

Tax benefit from share-based payments		721												721

Issuance of 24,506 shares to employee stock
ownership plan		1,132												1,132

Cash dividends paid ($0.25 per share)					(4,261	)								(4,261	)

Components of comprehensive income:
Net income					6,271									6,271
Market value adjustment for investment securities
available for sale (net of income tax effect)											43			43
Comprehensive income														6,314

BALANCES AT MARCH 31, 2007	$	267,304		$	114,789					$	(101	)	$	381,992

Three Months Ended March 31, 2008

Balances at January 1, 2008	$	272,208		$	117,520		$	(586	)	$	3		$	389,145

Issuance of 3,174 shares of common stock
upon exercise of stock options		54												54

Surrender of 13,489 shares of common stock to
facilitate vesting of restricted stock		(271	)											(271	)

Issuance of 12,812 unvested shares of restricted
common stock, net of related unearned employee
compensation and 2,000 forfeited shares		--												--

Recognition of compensation expense relating to
restricted common stock and stock options		589												589

Tax effect of share-based payments		(4	)											(4	)

Transfer of 250 shares to employee stock
ownership plan		(2	)					6						4

Cash dividends paid ($0.25 per share)					(4,330	)								(4,330	)

Components of comprehensive income:
Net income					2,191									2,191
Market value adjustment for investment securities
available for sale (net of income tax effect)											55			55
Comprehensive income														2,246

BALANCES AT MARCH 31, 2008	$	272,574		$	115,381		$	(580	)	$	58		$	387,433

See notes to condensed consolidated financial statements.

Page 5 of 29

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2008 and 2007
(in thousands)

	2008			2007

OPERATING ACTIVITIES
Net income	$	2,191		$	6,271
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses		8,958			3,932
Depreciation of premises and equipment		2,450			2,164
Amortization of intangibles		113			146
Net amortization of investment security premiums		10
Loss (gain) on sale of premises and equipment		4			(17	)
Minority interest in net losses of consolidated subsidiaries		(5,459	)		(3,524	)
Share-based compensation expense		589			415
Originations and purchases of loans held for sale		(51,216	)		(132,370	)
Proceeds from sales of loans held for sale		50,414			139,101
Decrease (increase) in accrued interest income and other assets		(13,391	)		2,466
Increase (decrease) in accrued interest on deposits and other
liabilities		(1,387	)		1,090

NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES		(6,724	)		19,674


INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale		840
Proceeds from calls, prepayments and maturities of investment
securities		7,862			3,187
Purchases of investment securities		(7,111	)		(1,096	)
Net increase in portfolio loans		(158,343	)		(134,597	)
Proceeds from sales of premises and equipment		6			172
Purchases of premises and equipment		(2,440	)		(3,336	)

NET CASH USED BY INVESTING ACTIVITIES		(159,186	)		(135,670	)


FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts		21,918			16,872
Net increase in certificates of deposit		79,091			116,678
Net borrowings from (payments on) debt obligations		58,660			(18,154	)
Net proceeds from issuance of subordinated debentures					55,000
Resources provided by minority interests		13,786			8,036
Surrender of common stock to facilitate vesting of
restricted stock		(217	)		(135	)
Tax effect of share-based payments		(4	)		721
Cash dividends paid		(4,330	)		(4,261	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		168,904			174,757

INCREASE IN CASH AND CASH EQUIVALENTS		2,994			58,761

Cash and cash equivalents at beginning of period		352,372			348,870


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	355,366		$	407,631

See notes to condensed consolidated financial statements.

Page 6 of 29

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 or the Corporation) 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 period.

The results of operations for the period ended March 31, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008.

The consolidated balance sheet as of December 31, 2007 was derived from audited consolidated financial statements as of that date. Certain 2007 amounts have been reclassified to conform to the 2008 presentation.

Note B – Implementation of New Accounting Standards

In June 2007, the Financial Accounting Standards Board (FASB) ratified an Emerging Issues Task Force (EITF) consensus regarding Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. This new guidance became effective for Capitol on January 1, 2008 and did not have a material effect on Capitol's consolidated financial statements upon implementation.

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. Statement No. 159 is applied prospectively and has been implemented by Capitol effective January 1, 2008. Capitol has not elected the fair value option through March 31, 2008. Statement No. 157 does not require any new fair value measurements and was initially effective for the Corporation beginning January 1, 2008. Capitol's disclosures relating to SFAS No. 157 are set forth in Note C. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2. FSP FAS 157-2 defers the effective date of SFAS No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis. The effect of these new standards' adoption was not material on Capitol's consolidated financial statements in 2008.

Note C – Fair Value

As discussed in Note B, SFAS No. 157 was implemented by Capitol effective January 1, 2008. SFAS No. 157 establishes a hierarchy that prioritizes the use of fair value inputs used in valuation methodologies into the following three levels:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for

identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable

market data by correlation or other means.

Page 7 of 29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Fair Value--Continued

Level 3: Significant unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing

an asset or liability.

The following is a description of Capitol's valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:

Investment securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices,

when available. If quoted prices are not available, fair values are measured using independent pricing models. Level 1 securities include those traded on an active

exchange as well as U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active over-the-counter markets.

Level 2 securities include private collateralized mortgage obligations.

Mortgage loans held for sale: Mortgage loans held for sale are carried at the lower of cost or fair value and are measured on a nonrecurring basis. Mortgage loans

held for sale written down to fair value are included in the table below (none at March 31, 2008). Fair value is based on independent quoted market prices, where

applicable, or the prices for other mortgage whole loans with similar characteristics.

Loans: The Corporation does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent

loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of the collateral.

The balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2008 were as follows (in $1,000s):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)

Securities available for sale	$	8,996	$	8,209	$	787

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2008 were as follows (in $1,000s):

	Total		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)

Impaired loans (1)	$	72,166	$	72,166	$	(2,937	)

(1)	Represents carrying value and related write-downs for which adjustments are based on the appraised value of the collateral.

Capitol will apply the fair value measurement and disclosure provisions of SFAS No. 157 effective January 1, 2009 to nonfinancial assets and liabilities measured on a nonrecurring basis. The Corporation measures the fair value of the following on a nonrecurring basis: (1) long-lived assets, (2) foreclosed assets, (3) the reporting unit under step one of its goodwill impairment test and (4) indefinite lived assets.

Page 8 of 29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Stock Options

Stock option activity for the interim 2008 period is summarized as follows:

	Number of Stock Options Outstanding			Exercise Price Range		Weighted Average Exercise Price

Outstanding at January 1		2,460,082		$	13.50 to $ 46.20	$	27.85
Granted		52,360			20.12 to 20.12		20.12
Exercised		(2,674	)		16.40 to 16.40		16.40
Cancelled or expired		(10,944	)

Outstanding at March 31		2,498,824		$	13.50 to $ 46.20	$	27.76

Stock options were granted in the first quarter of 2007 and 2008, with an aggregate fair value approximating $174,000 and $255,000, respectively. Stock options granted in the interim 2008 period have a vesting date of December 31, 2008, and the stock options granted in the interim 2007 period (18,720) became vested at December 31, 2007. Each stock option expires seven years from date of grant. Share-based compensation expense relating to stock options for the three months ended March 31, 2008 approximated $206,000.

As of March 31, 2008, stock options outstanding had a weighted average remaining contractual life of 3.2 years. The following table summarizes stock options outstanding segregated by exercise price range and summarizes aggregate intrinsic value as of March 31, 2008:

				Weighted Average
Exercise Price Range		Number Outstanding		Exercise Price		Remaining Contractual Life	Aggregate Intrinsic Value

$	10.00 to 14.99		2,866	$	13.50	0.76 years	$	21,896
$	15.00 to 19.99		224,514		16.60	1.93 years		1,019,294
$	20.00 to 24.99		622,089		21.63	3.39 years		0
$	25.00 to 29.99		586,733		27.09	2.40 years		0
$	30.00 to 34.99		695,115		32.10	3.44 years		0
$	35.00 or more		367,507		37.92	4.67 years		0

Total outstanding			2,498,824				$	1,041,190

[The remainder of this page intentionally left blank]

Page 9 of 29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Net Income Per Share

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

	Three Months Ended March 31
	2008		2007

Numerator—net income for the period	$	2,191	$	6,271

Denominator:
Weighted average number of shares outstanding, excluding unvested restricted shares (denominator for basic earnings per share)		17,141		16,695

Effect of dilutive securities:
Unvested restricted shares		25		51
Stock options		23		572
Total effect of dilutive securities		48		623

Denominator for diluted earnings per share—
Weighted average number of shares and potential dilution		17,189		17,318

Number of antidilutive stock options excluded from diluted earnings per share computation		2,271		--

Note F – New Banks and Other Development Activities

Capitol opened two de novo banks during the three months ended March 31, 2008. Adams Dairy Bank, located in Blue Springs, Missouri, opened in January 2008 and Mountain View Bank of Commerce, located in Westminster, Colorado, opened in February 2008. Each is majority owned by bank-development subsidiaries controlled by Capitol.

Bank development efforts were under consideration at March 31, 2008 in several states including pre-development exploratory discussions, lease and employment negotiations and preparation of preliminary regulatory applications for formation and/or acquisition of community banks. As of March 31, 2008, Capitol had 6 applications pending for additional de novo community banks in Arizona, North Carolina, Ohio and Oklahoma.

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.

Note G – Pending Sale of Four Michigan Banks

On March 31, 2008, Capitol announced that it had entered into a definitive agreement to sell four affiliate western Michigan banks to Northstar Financial Group Inc., a Michigan-based, privately-held financial holding company, for cash consideration of approximately $52 million. Total assets of the four banks (Grand Haven Bank, Kent Commerce Bank, Muskegon Commerce Bank and Paragon Bank & Trust) approximated $409.6 million as of March 31, 2008. No material gain or loss is expected to be reported upon completion of the sale, if consummated. The combined operating results of those banks for the three months ended March 31, 2008 was a net loss approximating $733,000. The pending sale is subject to regulatory approval and other contingencies.

Page 10 of 29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note H – Proposed Acquisition of Bank

In March 2008, Capitol announced the formation of a joint venture to acquire 51% of the common stock of Forethought Federal Savings Bank (Forethought), located in Batesville, Indiana, for cash consideration of approximately $5 million. Forethought is engaged in providing trust-related, preneed funeral planning products and services to customers in 28 states. The proposed acquisition is subject to regulatory approval.

Note I – Impact of New Accounting Standards

In December 2007, the FASB issued Statement No. 141(R), Business Combinations, to further enhance the accounting and financial reporting related to business combinations. Statement No. 141(R) establishes principles and requirements for how the acquirer in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase, (3) requires that acquisition-related and restructuring costs be recognized separately from the acquisition, generally charged to expense when incurred and (4) determines information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The effects of the Corporation's adoption of Statement No. 141(R) will depend upon the extent and magnitude of acquisitions after December 31, 2008.

Also in December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, to create accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Statement No. 160 establishes accounting and reporting standards that require (1) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent's equity, (2) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income, (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently, (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be initially measured at fair value and (5) entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Statement No. 160 applies to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and early adoption is prohibited. Management has not completed its review of this new guidance.

In March 2008 the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This new guidance revises the presentation and disclosure of derivatives and hedging activities and will be effective for Capitol on January 1, 2009. Although management has not completed its review of the new standard, implementation is not expected to have a material impact on Capitol's consolidated financial statements.

The FASB has also recently issued several proposals to amend, supersede or interpret existing accounting standards which may impact Capitol's financial statements at a later date, such as a proposed amendment to Statement No. 128, Earnings per Share, among other things.

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.

Page 11 of 29

PART I, ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Financial Condition

Total assets approximated $5.1 billion at March 31, 2008, an increase of $165 million from the December 31, 2007 level of $4.9 billion. The balance sheet includes Capitol and its consolidated subsidiaries:

	Total Assets
	March 31, 2008		December 31, 2007
Arizona Region:
Arrowhead Community Bank	$	94,199	$	89,060
Asian Bank of Arizona		28,292		25,017
Bank of Tucson		186,003		187,468
Camelback Community Bank		88,440		84,671
Mesa Bank		215,039		217,861
Southern Arizona Community Bank		89,690		85,158
Sunrise Bank of Albuquerque		75,512		71,726
Sunrise Bank of Arizona		118,388		116,245
Valley First Community Bank		81,374		77,306
Yuma Community Bank		76,639		78,489
Arizona Region Total		1,053,576		1,033,001

California Region:
Bank of Escondido		95,695		89,557
Bank of Feather River		15,626		17,283
Bank of San Francisco		63,395		68,902
Bank of Santa Barbara		63,077		58,738
Napa Community Bank		128,416		131,457
Point Loma Community Bank		54,067		56,428
Sunrise Bank of San Diego		88,659		81,905
Sunrise Community Bank		24,220		21,113
California Region Total		533,155		525,383

Colorado Region:
Fort Collins Commerce Bank		63,380		61,083
Larimer Bank of Commerce		62,115		51,906
Loveland Bank of Commerce		20,357		15,941
Mountain View Bank of Commerce(2)		11,057
Colorado Region Total		156,909		128,930

Great Lakes Region:
Ann Arbor Commerce Bank		358,745		362,429
Bank of Auburn Hills		45,969		44,767
Bank of Maumee		49,018		35,576
Bank of Michigan		66,991		69,909
Brighton Commerce Bank		110,346		108,664
Capitol National Bank		238,423		228,556
Detroit Commerce Bank		108,265		113,243
Elkhart Community Bank		90,738		89,064
Evansville Commerce Bank		57,033		50,819
Goshen Community Bank		78,136		93,173
Grand Haven Bank		126,163		130,492
Kent Commerce Bank		84,246		87,060
Macomb Community Bank		91,956		93,045
Muskegon Commerce Bank		95,950		98,975
Oakland Commerce Bank		97,700		109,370
Ohio Commerce Bank		42,941		35,690
Paragon Bank & Trust		103,262		103,711
Portage Commerce Bank		204,367		189,944
Great Lakes Region Total		2,050,249		2,044,487

Midwest Region:
Adams Dairy Bank(1)		21,681
Bank of Belleville		59,729		50,485
Community Bank of Lincoln		25,800		12,960
Summit Bank of Kansas City		44,020		50,142
Midwest Region Total		151,230		113,587

Page 12 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of total assets – continued:

	Total Assets
	March 31, 2008		December 31, 2007
Nevada Region:
1st Commerce Bank	$	31,683	$	32,091
Bank of Las Vegas		70,001		72,768
Black Mountain Community Bank		156,135		147,433
Desert Community Bank		103,907		101,840
Red Rock Community Bank		118,271		120,750
Nevada Region Total		479,997		474,882

Northeast Region:
USNY Bank		26,979		17,171

Northwest Region:
Bank of Bellevue		43,182		45,122
Bank of Everett		33,745		28,946
Bank of Tacoma		26,954		24,325
High Desert Bank		16,542		11,501
Issaquah Community Bank		15,400		13,696
Northwest Region Total		135,823		123,590

Southeast Region:
Bank of Valdosta		57,528		43,842
Community Bank of Rowan		119,608		117,495
First Carolina State Bank		116,538		115,243
Peoples State Bank		27,192		26,159
Sunrise Bank of Atlanta		54,199		48,664
Southeast Region Total		375,065		351,403

Texas Region:
Bank of Ford Bend		14,622		9,551
Bank of Las Colinas		19,017		11,383
Texas Region Total		33,639		20,934

Other, net		70,061		68,395

Consolidated Totals	$	5,066,683	$	4,901,763

(1)	Commenced operations in January 2008 and is 51%-owned by Capitol Development Bancorp Limited V, a controlled subsidiary of Capitol.
(2)	Commenced operations in February 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.

Portfolio loans increased during the 2008 period by approximately $153 million, compared to loan growth of about $132 million during the corresponding period of 2007. 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 March 31, 2008, 42% of the consolidated loan portfolio relates to banks located within the Great Lakes Region (43% at December 31, 2007). More importantly at that date, 58% of the consolidated loan portfolio relates to banks located in other regions of the country (57% at December 31, 2007). 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 has been significant in the interim period of 2008, inasmuch as 92% of loan growth occurred in regions outside of the Great Lakes Region. Adding further to geographic balance, Capitol recently announced the pending sale of four Michigan banks which, if consummated, would reduce its Michigan asset concentration by approximately 20%; the pending sale is discussed in further detail later in this narrative.

Page 13 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

The consolidated allowance for loan losses at March 31, 2008 approximated $62 million or 1.38% of total portfolio loans, an increase from the 1.35% 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):

	2008			2007
Allowance for loan losses at January 1	$	58,124		$	45,414

Loans charged-off:
Loans secured by real estate:
Commercial		(672	)		(159	)
Residential (including multi-family)		(2,150	)		(355	)
Construction, land development and other land		(1,359	)		(202	)
Total loans secured by real estate		(4,181	)		(716	)
Commercial and other business-purpose loans		(1,801	)		(1,807	)
Consumer		(134	)		(114	)
Total charge-offs		(6,116	)		(2,637	)
Recoveries:
Loans secured by real estate:
Commercial		118			59
Residential (including multi-family)		84			64
Construction, land development and other land		26			1
Total loans secured by real estate		228			124
Commercial and other business-purpose loans		430			174
Consumer		41			45
Other		1			--
Total recoveries		700			343
Net charge-offs		(5,416	)		(2,294	)
Additions to allowance charged to expense		8,958			3,932

Allowance for loan losses at March 31	$	61,666		$	47,052

Average total portfolio loans for period ended March 31	$	4,402,469		$	3,555,432

Ratio of net charge-offs (annualized) to average portfolio loans outstanding		0.49	%		0.26	%

Page 14 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Interim loan charge-offs for the three-month 2008 period, which increased significantly compared to 2007, are not necessarily indicative of future charge-off levels because of the variability in asset quality and resolution of nonperforming loans. The increase in provision for loan losses in 2008 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:

	March 31, 2008					December 31, 2007
	Amount		Percentage of Total Portfolio Loans			Amount		Percentage of Total Portfolio Loans




Loans secured by real estate:
Commercial	$	22,276		0.50	%	$	21,918		0.51	%
Residential (including multi-family)		11,842		0.26			10,235		0.24
Construction, land development and other land		12,335		0.28			11,278		0.26
Total loans secured by real estate		46,453		1.04			43,431		1.01
Commercial and other business-purpose loans		14,214		0.32			13,727		0.32
Consumer		759		0.02			667		0.01
Other		240		--			299		0.01

Total allowance for loan losses	$	61,666		1.38	%	$	58,124		1.35	%

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Page 15 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

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

	March 31, 2008		December 31, 2007
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	21,497	$	19,016
Residential (including multi-family)		17,094		13,381
Construction, land development and other land		36,704		29,756
Total loans secured by real estate		75,295		62,153
Commercial and other business-purpose loans		7,833		5,782
Consumer		86		66
Other		--		84
Total nonaccrual loans		83,214		68,085

Past due (>90 days) loans:
Loans secured by real estate:
Commercial		503		113
Residential (including multi-family)		3,407		1,116
Construction, land development and other land		214		2,531
Total loans secured by real estate		4,124		3,760
Commercial and other business-purpose loans		1,477		714
Consumer		23		66
Other		--		5
Total past due loans		5,624		4,545

Total nonperforming loans	$	88,838	$	72,630

Real estate owned and other repossessed assets		22,601		16,680

Total nonperforming assets	$	111,439	$	89,310

Nonperforming loans at March 31, 2008 approximated 1.99% of total portfolio loans, an increase from the corresponding 2007 ratio of 1.02% and an increase from the December 31, 2007 ratio of 1.68%. Nonperforming loans increased $16 million or 22% during the interim 2008 three-month period. Of the nonperforming loans at March 31, 2008, about 89% 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 March 31, 2008 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. Due to local and regional economic conditions, there is uncertainty in future real estate values, appraisal results and the resulting potential impact on valuation of collateral-dependent loans. Management cautiously monitors real estate values and related appraisal data when evaluating such valuations.

Page 16 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Total nonperforming loans approximated $89 million at March 31, 2008. Of that total, $61 million (including some loans carried at the parent level) or 68% were originated by banks within the Great Lakes Region, primarily located in Michigan. Within the Great Lakes Region, nonperforming loans approximated 2.9% of total portfolio loans at March 31, 2008. Responsive to the elevated level of nonperforming loans within the Great Lakes Region, higher levels of allowances for loan losses have been established, approximating 1.7% of portfolio loans for the region on a combined basis as of March 31, 2008 and ranging as high as 3% 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 Arizona Region, which had a composite allowance for loan losses ratio as a percentage of portfolio loans of 0.97% as of March 31, 2008.

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 March 31, 2008, potential problem loans (including the previously-mentioned nonperforming loans) approximated $259 million, or about 5.8% of total consolidated portfolio loans, compared to approximately $219 million or about 5.1% at December 31, 2007. 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 three months of 2008.

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Page 17 of 29

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):

					Allowance for								Allowance as a Percentage
	Total Portfolio Loans				Loan Losses				Nonperforming Loans				of Total Portfolio Loans
	March 31, 2008		Dec 31, 2007		March 31, 2008		Dec 31, 2007		March 31, 2008		Dec 31, 2007		March 31, 2008			Dec 31, 2007
Arizona Region:
Arrowhead Community Bank	$	80,283	$	81,836	$	876	$	818	$	317	$	361		1.09	%		1.00	%
Asian Bank of Arizona		25,098		21,514		540		405		314		314		2.15	%		1.88	%
Bank of Tucson		157,919		168,427		1,275		1,385		750		752		0.81	%		0.82	%
Camelback Community Bank		83,196		79,869		735		800		1,132		451		0.88	%		1.00	%
Mesa Bank		197,710		202,511		1,695		1,760		9,519		3,699		0.86	%		0.87	%
Southern Arizona Community Bank		82,360		78,467		810		792				600		0.98	%		1.01	%
Sunrise Bank of Albuquerque		70,197		67,192		862		866		185		183		1.23	%		1.29	%
Sunrise Bank of Arizona		111,641		112,211		1,110		1,125		58		4,250		0.99	%		1.00	%
Valley First Community Bank		72,193		71,689		741		653		1,301				1.03	%		0.91	%
Yuma Community Bank		64,834		66,092		525		525				600		0.81	%		0.79	%
Arizona Region Total		945,431		949,808		9,169		9,129		13,575		11,210		0.97	%		0.96	%

California Region:
Bank of Escondido		55,405		54,707		700		560		958		311		1.26	%		1.02	%
Bank of Feather River		10,766		13,345		159		187						1.48	%		1.40	%
Bank of San Francisco		46,917		44,989		707		695		392		392		1.51	%		1.54	%
Bank of Santa Barbara		54,851		52,340		939		741		650				1.71	%		1.42	%
Napa Community Bank		111,023		100,253		1,127		1,069				1,459		1.02	%		1.07	%
Point Loma Community Bank		50,242		49,607		745		695		46				1.48	%		1.40	%
Sunrise Bank of San Diego		78,441		74,526		945		908		2,097		2,386		1.20	%		1.22	%
Sunrise Community Bank		20,065		17,624		291		255						1.45	%		1.45	%
California Region Total		427,710		407,391		5,613		5,110		4,143		4,548		1.31	%		1.25	%

Colorado Region:
Fort Collins Commerce Bank		59,646		59,388		929		889						1.56	%		1.50	%
Larimer Bank of Commerce		57,432		50,927		835		765						1.45	%		1.50	%
Loveland Bank of Commerce		18,647		15,253		285		229						1.53	%		1.50	%
Mountain View Bank of Commerce(2)		9,700				143								1.47	%
Colorado Region Total		145,425		125,568		2,192		1,883						1.51	%		1.50	%

Great Lakes Region:
Ann Arbor Commerce Bank		328,186		332,624		4,330		4,504		3,897		5,161		1.32	%		1.35	%
Bank of Auburn Hills		41,129		36,586		980		820		1,513		1,293		2.38	%		2.24	%
Bank of Maumee		41,212		32,102		618		482						1.50	%		1.50	%
Bank of Michigan		63,904		63,448		952		952		378		370		1.49	%		1.50	%
Brighton Commerce Bank		103,048		99,627		1,030		1,018		275		18		1.00	%		1.02	%
Capitol National Bank		208,992		206,449		3,595		3,421		5,867		3,449		1.72	%		1.66	%
Detroit Commerce Bank		101,912		108,992		1,562		1,355		3,768		3,948		1.53	%		1.24	%
Elkhart Community Bank		87,262		83,754		1,400		1,282		3,086		2,677		1.60	%		1.53	%
Evansville Commerce Bank		52,891		48,113		782		720		405		80		1.48	%		1.50	%
Goshen Community Bank		71,090		70,799		937		874		105		491		1.32	%		1.23	%
Grand Haven Bank		118,146		122,208		2,671		2,644		8,620		6,970		2.26	%		2.16	%
Kent Commerce Bank		78,370		83,357		1,476		1,527		1,559		2,456		1.88	%		1.83	%
Macomb Community Bank		85,386		87,670		2,784		2,283		11,753		11,846		3.26	%		2.60	%
Muskegon Commerce Bank		84,340		90,031		2,108		1,762		4,289		2,362		2.50	%		1.96	%
Oakland Commerce Bank		92,206		99,770		2,286		1,816		4,465		3,803		2.48	%		1.82	%
Ohio Commerce Bank		36,056		29,110		541		437						1.50	%		1.50	%
Paragon Bank & Trust		90,477		91,481		1,762		1,431		3,618		2,220		1.95	%		1.56	%
Portage Commerce Bank		192,731		179,219		2,007		1,812		1,320		1,127		1.04	%		1.01	%
Great Lakes Region Total		1,877,338		1,865,340		31,821		29,140		54,918		48,271		1.70	%		1.56	%

Midwest Region:
Adams Dairy Bank(1)		19,215				288								1.50	%
Bank of Belleville		52,221		46,951		782		700						1.50	%		1.49	%
Community Bank of Lincoln		22,355		10,501		354		168						1.58	%		1.60	%
Summit Bank of Kansas City		37,471		45,165		641		641						1.71	%		1.42	%
Midwest Region Total		131,262		102,617		2,065		1,509						1.57	%		1.47	%

Page 18 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of loan information – continued:

					Allowance for									Allowance as a Percentage
	Total Portfolio Loans				Loan Losses					Nonperforming Loans				of Total Portfolio Loans
	March 31, 2008		Dec 31, 2007		March 31, 2008			Dec 31, 2007		March 31, 2008		Dec 31, 2007		March 31, 2008			Dec 31, 2007
Nevada Region:
1st Commerce Bank	$	30,078	$	27,030	$	433		$	393	$	901				1.44	%		1.45	%
Bank of Las Vegas		66,197		61,662		807			751						1.22	%		1.22	%
Black Mountain Community Bank		137,461		137,308		1,655			1,415		1,409	$	659		1.20	%		1.03	%
Desert Community Bank		92,448		90,050		801			837		712		356		0.87	%		0.93	%
Red Rock Community Bank		109,993		106,559		1,122			977		2,603		64		1.02	%		0.92	%
Nevada Region Total		436,177		422,609		4,818			4,373		5,625		1,079		1.10	%		1.03	%

Northeast Region:
USNY Bank		19,796		12,421		297			187						1.50	%		1.51	%

Northwest Region:
Bank of Bellevue		37,861		37,364		810			665		1,222		222		2.14	%		1.78	%
Bank of Everett		27,205		24,170		515			418		688				1.89	%		1.73	%
Bank of Tacoma		24,663		19,639		380			285						1.54	%		1.45	%
High Desert Bank		14,739		9,080		195			126						1.32	%		1.39	%
Issaquah Community Bank		13,085		6,598		192			93						1.47	%		1.41	%
Northwest Region Total		117,553		96,851		2,092			1,587		1,910		222		1.78	%		1.64	%

Southeast Region:
Bank of Valdosta		49,213		41,629		731			619		335				1.49	%		1.49	%
Community Bank of Rowan		103,459		96,271		1,567			1,444						1.51	%		1.50	%
First Carolina State Bank		92,884		94,047		1,200			1,157		970		829		1.29	%		1.23	%
Peoples State Bank		19,214		13,609		316			247		322		86		1.64	%		1.81	%
Sunrise Bank of Atlanta		50,242		45,024		1,025			760		1,200				2.04	%		1.69	%
Southeast Region Total		315,012		290,580		4,839			4,227		2,827		915		1.54	%		1.45	%

Texas Region:
Bank of Fort Bend		11,471		3,140		170			46						1.48	%		1.47	%
Bank of Las Colinas		15,184		9,830		225			144						1.48	%		1.46	%
Texas Region Total		26,655		12,970		395			190						1.48	%		1.46	%

Other, net		25,269		28,546		(1,635	)		789		5,840		6,385		(0.65	)%		2.76	%

Consolidated totals	$	4,467,628	$	4,314,701	$	61,666		$	58,124	$	88,838	$	72,630		1.38	%		1.35	%

(1)	Commenced operations in January 2008 and is 51%-owned by Capitol Development Bancorp Limited V, a controlled subsidiary of Capitol.
(2)	Commenced operations in February 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.

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Page 19 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations

Summary

Net income for the three months ended March 31, 2008 was $2.2 million, a decrease of 65% compared to the corresponding period of 2007. Diluted earnings per share were $0.13 for the interim 2008 period, a decrease of 64% compared to $0.36 in the corresponding 2007 period.

The primary reason for the interim 2008 earnings decline was weak bank performance, particularly within the Great Lakes Region. On a combined basis, Capitol's Great Lakes Region banks reported a loss of $829,000 in the 2008 period compared to modest net income of $1 million in the 2007 period. Within this group of banks, Capitol's mature wholly-owned Michigan-based banks reported an earnings decrease of $2.4 million in the 2008 period. Principal reasons for the Michigan banks’ earnings decrease was due to loan loss provisions in the 2008 period.

Analytical Review

Net interest income for the first three months of 2008 totaled $41.9 million, a 6% decrease compared to $44.7 million in 2007. This decrease resulted from net interest margin compression although earning asset growth remained strong during the period.

In a changing interest-rate environment, rates of interest on loans reprice more rapidly than interest rates paid on deposits. In the first quarter of 2008, net interest margins decreased primarily resulting from actions by the Federal Reserve Board of Governors to decrease market rates of interest by 200 basis-points. As the Federal Reserve Board's most recent actions have decreased rates, which results in rapid repricing of prime-rate based loans, interest rate changes on deposits have lagged, reducing net interest margins in the near term. Net interest margin approximated 3.62% for the three months ended March 31, 2008, a 0.55% decrease compared to 4.17% for the three months ended December 31, 2007 and 4.67% for the three months ended March 31, 2007. Several other causal factors impacted the 2008 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 than in earlier periods. It is difficult to speculate on future changes in net interest margin.

Noninterest income for the three months ended March 31, 2008 was $6.6 million, an increase of $1 million, or 18%, over the same period in 2007. The increase for the three-month 2008 period was due to increases of $608,000 in trust and wealth-management revenue and $228,000 from service charges on deposit accounts. Fees from origination of non-portfolio residential mortgage loans totaled $921,000 for the first quarter of 2008, reduced from $1.3 million for the comparable period in 2007, due to lower loan origination volume associated with a soft residential real estate economy.

The provision for loan losses for the three-month period in 2008 was $9 million, compared to $3.9 million for the same period in 2007. Provisions for loan losses increased in the 2008 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 2008 period.

Noninterest expense totaled $44.8 million for the first quarter of 2008, compared to $41.8 million for the comparable period in 2007. The increase in noninterest expense is associated with adding two new banks in 2008 and eleven banks in 2007, growth in the size of previously-existing banks and increases in general operating costs. Increases in occupancy, equipment rent, depreciation and maintenance in 2008 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 de novo banks.

Page 20 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

The largest element of noninterest expense is salaries and employee benefits, which approximated $25.5 million for the three months ended March 31, 2008, a slight decrease of $524,000 from $26 million in the corresponding period of 2007 and a decrease of $690,000 from the fourth quarter of 2007.

The more significant elements of other noninterest expense consisted of the following (in thousands):

	Three months ended March 31
	2008		2007

Preopening and start-up costs	$	952	$	928
FDIC insurance premiums and other regulatory fees		937		571
Costs associated with foreclosed properties and other real estate owned		911		128
Directors' fees		802		683
Advertising		776		736
Paper, printing and supplies		770		652
Travel, lodging and meals		633		585
Bank services (ATMs, telephone banking and Internet banking)		555		557
Loan and collection expense		546		613
Communications		508		405
Professional fees		488		506
Taxes other than income taxes		374		489
Postage		310		263
Courier service		240		236
Dues and memberships		221		227
Insurance expense		147		98
Contracted labor		120		132
Publications		45		35
Other		2,652		1,768
Total	$	11,987	$	9,612

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Page 21 of 29

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:

	Three months ended March 31
	Total Revenues				Net Income						Return on Average Equity(1)						Return on Average Assets(1)
	2008		2007		2008			2007			2008			2007			2008			2007
Arizona Region:
Arrowhead Community Bank	$	1,732	$	2,064	$	29		$	314			1.36	%		11.84	%		0.13	%		1.53	%
Asian Bank of Arizona		455		387		(189	)		(77	)
Bank of Tucson		3,550		4,028		1,218			1,158			27.53	%		28.12	%		2.64	%		2.55	%
Camelback Community Bank		1,516		1,622		273			180			11.94	%		8.32	%		1.26	%		0.85	%
Mesa Bank		4,102		5,000		472			1,059			9.89	%		22.66	%		0.87	%		2.08	%
Southern Arizona Community Bank		1,578		1,688		302			293			13.34	%		13.27	%		1.39	%		1.38	%
Sunrise Bank of Albuquerque		1,342		1,385		57			74			3.16	%		4.75	%		0.31	%		0.49	%
Sunrise Bank of Arizona		2,170		2,394		4			142			0.12	%		4.94	%		0.01	%		0.48	%
Valley First Community Bank		1,341		1,367		(55	)		150						7.74	%					0.85	%
Yuma Community Bank		1,411		1,493		208			239			10.66	%		12.52	%		1.08	%		1.32	%
Arizona Region Total		19,197		21,428		2,319			3,532

California Region:
Bank of Escondido		1,373		1,428		76			157			2.12	%		4.54	%		0.32	%		0.77	%
Bank of Feather River		286				(117	)
Bank of San Francisco		942		549		1			(81	)		0.04	%					0.01	%
Bank of Santa Barbara		1,027		974		(113	)		(81	)
Napa Community Bank		2,035		2,238		146			348			4.15	%		11.19	%		0.48	%		1.28	%
Point Loma Community Bank		960		901		70			6			3.91	%		0.33	%		0.51	%		0.05	%
Sunrise Bank of San Diego		1,431		1,661		146			105			5.54	%		3.99	%		0.67	%		0.53	%
Sunrise Community Bank		376		50		(189	)		(428	)
California Region Total		8,430		7,801		20			26

Colorado Region:
Fort Collins Commerce Bank		1,124		1,183		179			137			7.99	%		6.67	%		1.15	%		0.97	%
Larimer Bank of Commerce		960				80						4.29	%					0.57	%
Loveland Bank of Commerce		306				(61	)
Mountain View Bank of Commerce(3)		94				(472	)
Colorado Region Total		2,484		1,183		(274	)		137

Great Lakes Region:
Ann Arbor Commerce Bank		6,199		6,182		1,019			839			14.35	%		13.35	%		1.14	%		1.07	%
Bank of Auburn Hills		740		757		(281	)		11						0.61	%					0.14	%
Bank of Maumee		662		185		(116	)		(344	)
Bank of Michigan		1,293		1,080		123			(120	)		7.52	%					0.72	%
Brighton Commerce Bank		1,916		1,961		203			142			8.42	%		6.21	%		0.75	%		0.55	%
Capitol National Bank		3,967		4,534		599			484			12.66	%		10.32	%		1.06	%		0.81	%
Detroit Commerce Bank		1,938		2,317		(948	)		240						10.72	%					0.91	%
Elkhart Community Bank		1,472		1,697		130			145			5.87	%		6.72	%		0.57	%		0.69	%
Evansville Commerce Bank		1,005		423		(28	)		(209	)
Goshen Community Bank		1,368		1,487		103			140			5.28	%		7.68	%		0.52	%		0.74	%
Grand Haven Bank		2,170		2,401		(65	)		233						8.51	%					0.75	%
Kent Commerce Bank		1,584		1,777		(56	)		(18	)
Macomb Community Bank		1,503		1,791		(862	)		(257	)
Muskegon Commerce Bank		1,636		1,823		(446	)		(570	)
Oakland Commerce Bank		1,667		2,471		(538	)		(79	)
Ohio Commerce Bank		628		211		(42	)		(184	)
Paragon Bank & Trust		2,066		1,789		(166	)		62						2.26	%					0.26	%
Portage Commerce Bank		3,660		3,753		542			529			13.10	%		13.21	%		1.13	%		1.18	%
Great Lakes Region Total		35,474		36,639		(829	)		1,044

Midwest Region
Adams Dairy Bank(2)		282				(459	)
Bank of Belleville		850		421		(22	)		(157	)
Community Bank of Lincoln		296				(181	)
Summit Bank of Kansas City		760		512		21			(129	)		1.20	%					0.19	%
Midwest Region Total		2,188		933		(641	)		(286	)

Page 22 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Operating results – continued:

	Three months ended March 31
	Total Revenues				Net Income						Return on Average Equity(1)						Return on Average Assets(1)
	2008		2007		2008			2007			2008			2007			2008			2007
Nevada Region:
1st Commerce Bank	$	568	$	331	$	(97	)	$	(116	)
Bank of Las Vegas		1,239		1,445		19			130			0.86	%		5.81	%		0.11	%		0.74	%
Black Mountain Community Bank		2,799		3,097		398			643			10.83	%		19.17	%		1.05	%		1.82	%
Desert Community Bank		1,889		1,941		136			252			5.39	%		11.04	%		0.55	%		1.11	%
Red Rock Community Bank		2,006		2,256		195			438			5.73	%		13.54	%		0.67	%		1.65	%
Nevada Region Total		8,501		9,070		651			1,347

Northeast Region:
USNY Bank		292				(215	)

Northwest Region:
Bank of Bellevue		750		707		(94	)		(89	)
Bank of Everett		491		444		(201	)		(191	)
Bank of Tacoma		476		184		(187	)		(473	)
High Desert Bank		227				(195	)
Issaquah Community Bank		230				(174	)
Northwest Region Total		2,174		1,335		(851	)		(753	)

Southeast Region:
Bank of Valdosta		872		469		(12	)		(123	)
Community Bank of Rowan		1,941		1,131		250			(87	)		10.42	%					0.87	%
First Carolina State Bank		1,783		1,728		112			157			3.60	%		5.40	%		0.39	%		0.68	%
Peoples State Bank		515		584		50			70			3.93	%		5.89	%		0.84	%		1.00	%
Sunrise Bank of Atlanta		1,126		774		(119	)		(64	)
Southeast Region Total		6,237		4,686		281			(47	)

Texas Region:
Bank of Fort Bend		136				(261	)
Bank of Las Colinas		221				(179	)
Texas Region Total		357				(440	)

Other, net		734		349		2,170			1,271

Consolidated totals	$	86,068	$	83,424	$	2,191		$	6,271			2.25	%		6.74	%		0.18	%		0.61	%

(1)	Annualized for periods presented.
(2)	Commenced operations in January 2008 and is 51%-owned by Capitol Development Bancorp Limited V, a controlled subsidiary of Capitol.
(3)	Commenced operations in February 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.

Liquidity and Capital Resources

The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $101 million for the three months ended March 31, 2008, compared to a $133.5 million increase in the corresponding period of 2007. 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 $561 million as of March 31, 2008, or about 14.2% of total deposits, an increase of $28 million during the interim 2008 period, as the banks have sought to add these funds selectively based on maturity and interest-rate opportunities, to aid in matching the repricing of funding sources and assets.

Noninterest-bearing deposits approximated 17% of total deposits at both March 31, 2008 and December 31, 2007, but decreased $16 million compared to a decrease of $35.6 million during the 2007 period. Levels of noninterest-bearing deposits can, however, fluctuate based on customers' transaction activity.

Page 23 of 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

During the 2008 period, interest-bearing accounts increased about $117 million which, coupled with borrowings, served as the primary funding source for loan growth. Because of the growth in interest-bearing deposits, coupled with higher relative rates on those balances (particularly with time deposit accounts) and decreased noninterest-bearing deposits, net interest margins have decreased.

Interim 2008 deposit growth was deployed primarily into commercial loans, consistent with the banks' emphasis on commercial lending activities.

Cash and cash equivalents amounted to $355.4 million or 7% of total assets at March 31, 2008, compared to $352.4 million or 7.2% of total assets at December 31, 2007. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the banks' liquidity position at March 31, 2008 is adequate to fund loan demand and meet depositor needs.

In addition to cash and cash equivalents, a source of long-term liquidity is the banks' marketable investment securities. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements. The banks have not engaged in active trading of their investments. At March 31, 2008, Capitol's banks had approximately $9 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 $352 million and additional borrowing capacity approximated $264 million at March 31, 2008. 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 $379 million at March 31, 2008, including $15 million borrowed by Capitol on a $25 million line of credit from an unrelated financial institution.

Stockholders' equity, as a percentage of total assets, approximated 7.65% at March 31, 2008 and 7.94% at December 31, 2007.

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 March 31, 2008, Capitol’s total capital funds (i.e., the sum of stockholders' equity, minority interests in consolidated subsidiaries and subordinated debentures) approximated $708 million or 13.98% 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 24 of 29

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 is 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 three times during the interim 2008 period by an aggregate 200 basis-point decrease (rates were unchanged during the interim 2007 period). The Board of Governors of the Federal Reserve has also expressed concerns about a variety of economic conditions, as well as possible further reductions of interest rates in future periods. Home mortgage rates have recently fluctuated 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 2008 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.

Media reports raising questions about the health of the domestic economy and the possibility of a national recession have continued in 2008. During the interim 2008 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 2008. They are listed and discussed in Notes B and I of the accompanying condensed consolidated financial statements.

Critical Accounting Policies

Capitol's critical accounting policies are described on pages F-29 – F-30 of the financial section of its 2007 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 goodwill and other intangibles (due to inherent subjectivity in evaluating potential impairment) and its consolidation policy.

Page 25 of 29

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, 2007. 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.

[The remainder of this page intentionally left blank]

Page 26 of 29

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 1A.	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, 2007, during the three months ended March 31, 2008. Refer to that section of Capitol's Form 10-K for disclosures regarding the risks and uncertainties related to Capitol's business.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
	(a) None. (b) Not applicable. (c) None.
Item 3.	Defaults Upon Senior Securities. None.
Item 4.	Submission of Matters to a Vote of Security Holders. None.
Item 5.	Other Information. None.
Item 6.	Exhibits:

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

Page 27 of 29

SIGNATURES

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

CAPITOL BANCORP LTD.

(Registrant)

/s/ Joseph D. Reid

Joseph D. Reid

Chairman and CEO

(duly authorized to sign on behalf of the

registrant)

/s/ Lee W. Hendrickson

Lee W. Hendrickson

Chief Financial Officer

Date: April 30, 2008

Page 28 of 29

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 29 of 29