form10q.htm

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 periods.

The results of operations for the periods ended June 30, 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 June 30, 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 to 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 31

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 June 30, 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 June 30, 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	$	13,219	$	12,439	$	780

The balances of assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2008 were as follows (in $1,000s):

	Total		Significant Other Observable Inputs (Level 2)		Total Gains (Losses)

Impaired loans (1)	$	52,244	$	52,244	$	(2,760	)

(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 31

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		(13,113	)

Outstanding at June 30		2,496,655		$	13.50 to $ 46.20	$	27.76

Stock options were granted in the first six months 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 six months ended June 30, 2008 approximated $411,000.

As of June 30, 2008, stock options outstanding had a weighted average remaining contractual life of 2.98 years and no aggregate intrinsic value. The following table summarizes stock options outstanding segregated by exercise price range as of June 30, 2008:

				Weighted Average
Exercise Price Range		Number Outstanding		Exercise Price		Remaining Contractual Life

$	10.00 to 14.99		2,866	$	13.50	0.51 years
$	15.00 to 19.99		224,476		16.60	1.68 years
$	20.00 to 24.99		621,276		21.63	3.14 years
$	25.00 to 29.99		585,415		27.09	2.15 years
$	30.00 to 34.99		695,115		32.10	3.19 years
$	35.00 or more		367,507		37.92	4.42 years

Total outstanding			2,496,655

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Page 9 of 31

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) for the periods ended June 30:

	Three Month Period				Six Month Period
	2008		2007		2008		2007

Numerator—net income for the period	$	623	$	6,298	$	2,814	$	12,569

Denominator:
Weighted average number of shares outstanding, excluding unvested restricted shares (denominator for basic earnings per share)		17,144		16,961		17,143		16,829

Effect of dilutive securities:
Unvested restricted shares		33		15		27		42
Stock options		--		208		9		351
Total effect of dilutive securities		33		223		36		393

Denominator for diluted earnings per share—
Weighted average number of shares and potential dilution		17,177		17,184		17,179		17,222

Number of antidilutive stock options excluded from diluted earnings per share computation		2,494		1,063		2,269		368

Note F – New Banks and Other Development Activities

Capitol opened four de novo banks during the six months ended June 30, 2008. Adams Dairy Bank, located in Blue Springs, Missouri, opened in January, Mountain View Bank of Commerce, located in Westminster, Colorado, opened in February, Colonia Bank, located in Phoenix, Arizona, opened in April and Pisgah Community Bank, located in Asheville, North Carolina, opened in May. Each is majority owned by bank-development subsidiaries controlled by Capitol.

Bank development efforts were under consideration at June 30, 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 June 30, 2008, Capitol had 4 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, regulatory approval 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 $417.6 million as of June 30, 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 six months ended June 30, 2008 was a net loss approximating $1.2 million. The pending sale is subject to regulatory approval and other contingencies.

Page 10 of 31

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.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, to clarify the sources of accounting principles used in the preparation of financial statements in the United States. This new guidance is expected to become effective in 2008 and is not expected to have a material effect on Capitol's consolidated financial statements upon implementation.

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 such 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 31

PART I, ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Financial Condition

Total assets approximated $5.3 billion at June 30, 2008, an increase of $439 million from the December 31, 2007 level of $4.9 billion. The balance sheet includes Capitol and its consolidated subsidiaries:

	Total Assets
	June 30, 2008		December 31, 2007
Arizona Region:
Arrowhead Community Bank	$	87,561	$	89,060
Asian Bank of Arizona		33,034		25,017
Bank of Tucson		179,728		187,468
Camelback Community Bank		90,884		84,671
Colonia Bank(3)		8,865
Mesa Bank		227,105		217,861
Southern Arizona Community Bank		90,854		85,158
Sunrise Bank of Albuquerque		78,634		71,726
Sunrise Bank of Arizona		126,690		116,245
Valley First Community Bank		73,744		77,306
Yuma Community Bank		73,831		78,489
Arizona Region Total		1,070,930		1,033,001

California Region:
Bank of Escondido		99,591		89,557
Bank of Feather River		20,716		17,283
Bank of San Francisco		63,940		68,902
Bank of Santa Barbara		69,193		58,738
Napa Community Bank		136,220		131,457
Point Loma Community Bank		56,733		56,428
Sunrise Bank of San Diego		94,838		81,905
Sunrise Community Bank		27,602		21,113
California Region Total		568,833		525,383

Colorado Region:
Fort Collins Commerce Bank		70,595		61,083
Larimer Bank of Commerce		74,202		51,906
Loveland Bank of Commerce		26,343		15,941
Mountain View Bank of Commerce(2)		22,891
Colorado Region Total		194,031		128,930

Great Lakes Region:
Ann Arbor Commerce Bank		361,630		362,429
Bank of Auburn Hills		47,117		44,767
Bank of Maumee		51,622		35,576
Bank of Michigan		70,002		69,909
Brighton Commerce Bank		110,375		108,664
Capitol National Bank		230,182		228,556
Detroit Commerce Bank		105,206		113,243
Elkhart Community Bank		90,028		89,064
Evansville Commerce Bank		66,026		50,819
Goshen Community Bank		79,996		93,173
Grand Haven Bank		129,660		130,492
Kent Commerce Bank		87,965		87,060
Macomb Community Bank		94,125		93,045
Muskegon Commerce Bank		95,502		98,975
Oakland Commerce Bank		108,110		109,370
Ohio Commerce Bank		49,446		35,690
Paragon Bank & Trust		104,519		103,711
Portage Commerce Bank		212,858		189,944
Great Lakes Region Total		2,094,369		2,044,487

Midwest Region:
Adams Dairy Bank(1)		26,642
Bank of Belleville		64,726		50,485
Community Bank of Lincoln		34,871		12,960
Summit Bank of Kansas City		45,908		50,142
Midwest Region Total		172,147		113,587

Page 12 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of total assets – continued:

	Total Assets
	June 30, 2008		December 31, 2007
Nevada Region:
1st Commerce Bank	$	38,042	$	32,091
Bank of Las Vegas		72,729		72,768
Black Mountain Community Bank		155,281		147,433
Desert Community Bank		106,879		101,840
Red Rock Community Bank		121,637		120,750
Nevada Region Total		494,568		474,882

Northeast Region:
USNY Bank		34,436		17,171

Northwest Region:
Bank of Bellevue		49,653		45,122
Bank of Everett		33,192		28,946
Bank of Tacoma		33,969		24,325
High Desert Bank		26,214		11,501
Issaquah Community Bank		18,489		13,696
Northwest Region Total		161,517		123,590

Southeast Region:
Bank of Valdosta		58,449		43,842
Community Bank of Rowan		130,516		117,495
First Carolina State Bank		111,681		115,243
Peoples State Bank		30,033		26,159
Pisgah Community Bank(4)		19,653
Sunrise Bank of Atlanta		60,256		48,664
Southeast Region Total		410,588		351,403

Texas Region:
Bank of Fort Bend		19,858		9,551
Bank of Las Colinas		28,502		11,383
Texas Region Total		48,360		20,934

Other, net		90,621		68,395

Consolidated Totals	$	5,340,400	$	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.
(3)	Commenced operations in April 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.
(4)	Commenced operations in May 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.

Portfolio loans, the single largest asset category, increased during the 2008 period by approximately $250 million, compared to loan growth of about $313 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 June 30, 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 96% of loan growth occurred in regions outside of the Great Lakes Region. Adding further to geographic balance, Capitol announced earlier 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 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

The consolidated allowance for loan losses at June 30, 2008 approximated $64 million or 1.40% 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):

	Periods Ended June 30
	Three Month Period						Six Month Period
	2008			2007			2008			2007
Allowance for loan losses at January 1	$	61,666		$	47,052		$	58,124		$	45,414

Loans charged-off:
Loans secured by real estate:
Commercial		(2,772	)		(137	)		(3,444	)		(296	)
Residential (including multi-family)		(1,013	)		(338	)		(3,163	)		(693	)
Construction, land development and other land		(1,761	)		(114	)		(3,120	)		(316	)
Total loans secured by real estate		(5,546	)		(589	)		(9,727	)		(1,305	)
Commercial and other business-purpose loans		(2,496	)		(1,382	)		(4,297	)		(3,189	)
Consumer		(55	)		(97	)		(189	)		(211	)
Other		(34	)		--			(34	)		--
Total charge-offs		(8,131	)		(2,068	)		(14,247	)		(4,705	)
Recoveries:
Loans secured by real estate:
Commercial		600			7			718			66
Residential (including multi-family)		376			64			460			128
Construction, land development and other land		197			13			223			14
Total loans secured by real estate		1,173			84			1,401			208
Commercial and other business-purpose loans		153			257			583			431
Consumer		24			27			65			72
Other		--			7			1			7
Total recoveries		1,350			375			2,050			718
Net charge-offs		(6,781	)		(1,693	)		(12,197	)		(3,987	)
Additions to allowance charged to expense		9,019			3,990			17,977			7,922

Allowance for loan losses at June 30	$	63,904		$	49,349		$	63,904		$	49,349

Average total portfolio loans for period ended June 30	$	4,541,327		$	3,708,267		$	4,472,508		$	3,633,402

Ratio of net charge-offs (annualized) to average portfolio loans outstanding		0.60	%		0.18	%		0.55	%		0.22	%

Page 14 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Interim loan charge-offs for the six-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:

	June 30, 2008					December 31, 2007
	Amount		Percentage of Total Portfolio Loans			Amount		Percentage of Total Portfolio Loans




Loans secured by real estate:
Commercial	$	22,114		0.48	%	$	21,918		0.51	%
Residential (including multi-family)		12,586		0.28	%		10,235		0.24	%
Construction, land development and other land		12,885		0.28	%		11,278		0.26	%
Total loans secured by real estate		47,585		1.04	%		43,431		1.01	%
Commercial and other business-purpose loans		15,159		0.33	%		13,727		0.32	%
Consumer		788		0.02	%		667		0.01	%
Other		372		0.01	%		299		0.01	%

Total allowance for loan losses	$	63,904		1.40	%	$	58,124		1.35	%

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Page 15 of 31

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):

	June 30, 2008		December 31, 2007
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	23,379	$	19,016
Residential (including multi-family)		17,293		13,381
Construction, land development and other land		40,790		29,756
Total loans secured by real estate		81,462		62,153
Commercial and other business-purpose loans		8,716		5,782
Consumer		137		66
Other		18		84
Total nonaccrual loans		90,333		68,085

Past due (>90 days) loans:
Loans secured by real estate:
Commercial		--		113
Residential (including multi-family)		1,409		1,116
Construction, land development and other land		3,613		2,531
Total loans secured by real estate		5,022		3,760
Commercial and other business-purpose loans		346		714
Consumer		10		66
Other		--		5
Total past due loans		5,378		4,545

Total nonperforming loans	$	95,711	$	72,630

Real estate owned and other repossessed assets		44,991		16,680

Total nonperforming assets	$	140,702	$	89,310

Nonperforming loans at June 30, 2008 approximated 2.10% of total portfolio loans, an increase from the December 31, 2007 ratio of 1.68%. Nonperforming loans increased

$23 million or 32% during the interim 2008 six-month period. Of the nonperforming loans at June 30, 2008, about 90% were real estate secured. Those loans, when originated, had appropriate loan-to-value ratios based upon real estate market conditions at that time and, accordingly, have loss exposure which would be expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies. Most other nonperforming loans were generally secured by other business assets. Nonperforming loans at June 30, 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 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Total nonperforming loans approximated $96 million at June 30, 2008. Of that total, $65 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 3.20% of total portfolio loans at June 30, 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 1.80% of portfolio loans for the region on a combined basis as of June 30, 2008 and ranging as high as 3% or more at certain banks. Those ratios can be contrasted with other banks and geographic regions within the Corporation with substantially lower levels of nonperforming loans.

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 June 30, 2008, potential problem loans (including the previously-mentioned nonperforming loans) approximated $316 million, or about 6.9% 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 six months of 2008.

Real estate owned and other repossessed assets increased $28.3 million to $45.0 million during the six months ended June 30, 2008. Most of this increase related to residential construction loans in the Arizona Region.

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.

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Page 17 of 31

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
	June 30, 2008		Dec 31, 2007		June 30, 2008		Dec 31, 2007		June 30, 2008		Dec 31, 2007		June 30, 2008			Dec 31, 2007
Arizona Region:
Arrowhead Community Bank	$	80,455	$	81,836	$	1,379	$	818	$	1,403	$	361		1.71	%		1.00	%
Asian Bank of Arizona		28,882		21,514		650		405		689		314		2.25	%		1.88	%
Bank of Tucson		154,487		168,427		1,406		1,385		1,401		752		0.91	%		0.82	%
Camelback Community Bank		83,216		79,869		744		800		1,160		451		0.89	%		1.00	%
Colonia Bank(3)		1,920				29								1.51	%
Mesa Bank		169,170		202,511		1,945		1,760		8,947		3,699		1.15	%		0.87	%
Southern Arizona Community Bank		83,606		78,467		830		792				600		0.99	%		1.01	%
Sunrise Bank of Albuquerque		70,078		67,192		775		866		289		183		1.11	%		1.29	%
Sunrise Bank of Arizona		114,683		112,211		1,135		1,125				4,250		0.99	%		1.00	%
Valley First Community Bank		66,292		71,689		1,017		653		1,379				1.53	%		0.91	%
Yuma Community Bank		66,233		66,092		525		525		427		600		0.79	%		0.79	%
Arizona Region Total		919,022		949,808		10,435		9,129		15,695		11,210		1.14	%		0.96	%

California Region:
Bank of Escondido		57,674		54,707		633		560		882		311		1.10	%		1.02	%
Bank of Feather River		17,221		13,345		241		187						1.40	%		1.40	%
Bank of San Francisco		52,178		44,989		730		695		339		392		1.40	%		1.54	%
Bank of Santa Barbara		59,106		52,340		1,006		741		614				1.70	%		1.42	%
Napa Community Bank		118,506		100,253		1,485		1,069				1,459		1.25	%		1.07	%
Point Loma Community Bank		50,599		49,607		790		695		167				1.56	%		1.40	%
Sunrise Bank of San Diego		76,831		74,526		940		908		1,623		2,386		1.22	%		1.22	%
Sunrise Community Bank		23,023		17,624		345		255						1.50	%		1.45	%
California Region Total		455,138		407,391		6,170		5,110		3,625		4,548		1.36	%		1.25	%

Colorado Region:
Fort Collins Commerce Bank		63,774		59,388		954		889						1.50	%		1.50	%
Larimer Bank of Commerce		68,749		50,927		1,000		765						1.45	%		1.50	%
Loveland Bank of Commerce		22,589		15,253		339		229						1.50	%		1.50	%
Mountain View Bank of Commerce(2)		19,569				286								1.46	%
Colorado Region Total		174,681		125,568		2,579		1,883						1.48	%		1.50	%

Great Lakes Region:
Ann Arbor Commerce Bank		324,962		332,624		4,054		4,504		2,933		5,161		1.25	%		1.35	%
Bank of Auburn Hills		40,190		36,586		1,050		820		1,834		1,293		2.61	%		2.24	%
Bank of Maumee		45,402		32,102		688		482		50				1.52	%		1.50	%
Bank of Michigan		64,830		63,448		980		952				370		1.51	%		1.50	%
Brighton Commerce Bank		101,280		99,627		1,015		1,018		254		18		1.00	%		1.02	%
Capitol National Bank		207,968		206,449		4,408		3,421		6,204		3,449		2.12	%		1.66	%
Detroit Commerce Bank		96,734		108,992		1,914		1,355		2,934		3,948		1.98	%		1.24	%
Elkhart Community Bank		89,338		83,754		1,467		1,282		3,132		2,677		1.64	%		1.53	%
Evansville Commerce Bank		58,563		48,113		885		720		243		80		1.51	%		1.50	%
Goshen Community Bank		73,233		70,799		995		874		253		491		1.36	%		1.23	%
Grand Haven Bank		115,149		122,208		2,336		2,644		8,070		6,970		2.03	%		2.16	%
Kent Commerce Bank		78,065		83,357		1,365		1,527		800		2,456		1.75	%		1.83	%
Macomb Community Bank		88,503		87,670		3,418		2,283		12,819		11,846		3.86	%		2.60	%
Muskegon Commerce Bank		79,689		90,031		2,020		1,762		3,946		2,362		2.53	%		1.96	%
Oakland Commerce Bank		86,197		99,770		2,530		1,816		10,421		3,803		2.94	%		1.82	%
Ohio Commerce Bank		41,844		29,110		629		437						1.50	%		1.50	%
Paragon Bank & Trust		93,359		91,481		1,913		1,431		5,031		2,220		2.05	%		1.56	%
Portage Commerce Bank		191,045		179,219		2,129		1,812		1,074		1,127		1.11	%		1.01	%
Great Lakes Region Total		1,876,351		1,865,340		33,796		29,140		59,998		48,271		1.80	%		1.56	%

Midwest Region:
Adams Dairy Bank(1)		23,667				357								1.51	%
Bank of Belleville		56,894		46,951		827		700						1.45	%		1.49	%
Community Bank of Lincoln		28,348		10,501		448		168						1.58	%		1.60	%
Summit Bank of Kansas City		40,928		45,165		620		641						1.51	%		1.42	%
Midwest Region Total		149,837		102,617		2,252		1,509						1.50	%		1.47	%

Page 18 of 31

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
	June 30, 2008		Dec 31, 2007		June 30, 2008			Dec 31, 2007		June 30, 2008		Dec 31, 2007		June 30, 2008			Dec 31, 2007
Nevada Region:
1st Commerce Bank	$	32,642	$	27,030	$	524		$	393	$	1,456				1.61	%		1.45	%
Bank of Las Vegas		63,444		61,662		900			751		1,241				1.42	%		1.22	%
Black Mountain Community Bank		138,976		137,308		1,770			1,415		2,626	$	659		1.27	%		1.03	%
Desert Community Bank		91,026		90,050		1,190			837		712		356		1.31	%		0.93	%
Red Rock Community Bank		106,642		106,559		1,205			977		3,052		64		1.13	%		0.92	%
Nevada Region Total		432,730		422,609		5,589			4,373		9,087		1,079		1.29	%		1.03	%

Northeast Region:
USNY Bank		30,195		12,421		455			187						1.51	%		1.51	%

Northwest Region:
Bank of Bellevue		41,031		37,364		955			665		192		222		2.33	%		1.78	%
Bank of Everett		28,033		24,170		475			418						1.69	%		1.73	%
Bank of Tacoma		29,711		19,639		475			285						1.60	%		1.45	%
High Desert Bank		20,321		9,080		277			126						1.36	%		1.39	%
Issaquah Community Bank		15,759		6,598		237			93						1.50	%		1.41	%
Northwest Region Total		134,855		96,851		2,419			1,587		192		222		1.79	%		1.64	%

Southeast Region:
Bank of Valdosta		49,661		41,629		734			619						1.48	%		1.49	%
Community Bank of Rowan		106,105		96,271		1,592			1,444						1.50	%		1.50	%
First Carolina State Bank		91,055		94,047		1,100			1,157		858		829		1.21	%		1.23	%
Peoples State Bank		19,450		13,609		320			247		337		86		1.65	%		1.81	%
Pisgah Community Bank(4)		14,077				211									1.50	%
Sunrise Bank of Atlanta		51,869		45,024		859			760		876				1.66	%		1.69	%
Southeast Region Total		332,217		290,580		4,816			4,227		2,071		915		1.45	%		1.45	%

Texas Region:
Bank of Fort Bend		14,692		3,140		214			46						1.46	%		1.47	%
Bank of Las Colinas		21,649		9,830		300			144						1.39	%		1.46	%
Texas Region Total		36,341		12,970		514			190						1.41	%		1.46	%

Other, net		23,156		28,546		(5,121	)		789		5,043		6,385

Consolidated totals	$	4,564,523	$	4,314,701	$	63,904		$	58,124	$	95,711	$	72,630		1.40	%		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.
(3)	Commenced operations in April 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.
(4)	Commenced operations in May 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.

Page 19 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations

Summary

Second quarter 2008 earnings were $623,000, a decrease of 90% compared to the corresponding period of 2007. Diluted earnings per share were $0.04 for the three months ended June 30, 2008, a decrease of 89% compared to $0.37 in 2007. Net income for the six months ended June 30, 2008 was $2.8 million, a decrease of 78% compared to the corresponding period of 2007. Diluted earnings per share were $0.16 for the six months ended June 30, 2008, a decrease of 78% compared to $0.73 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 $986,000 for the six month 2008 period compared to modest net income of $3.2 million in the 2007 period. Within this group of banks, Capitol's mature wholly-owned Michigan-based banks reported an earnings decrease of $4.7 million from the corresponding 2007 period. The principal reason for the Michigan banks' earnings decrease was due to loan loss provisions.

Analytical Review

The provision for loan losses for the six-month period in 2008 was $18 million, compared to $7.9 million for the same period in 2007. The provision for loan losses for the three months ended June 30, 2008 was $9 million as compared to $4 million during the corresponding 2007 period. Provisions for loan losses increased significantly in the 2008 period in response to higher levels of loan charge-offs and in concert with growth in nonperforming loans. 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 periods.

Net interest income for the first six months of 2008 totaled $84.1 million, a 7% decrease compared to $90.2 million in 2007. Net interest income for the three months ended June 30, 2008 totaled $42.2 million, a 7% decrease compared to $45.5 million in 2007. This decrease resulted from net interest margin compression, although earning asset growth remained strong during the interim 2008 periods.

In a changing interest-rate environment, rates of interest on loans reprice more rapidly than interest rates paid on deposits. In the first half of 2008, net interest margins decreased primarily as a result of actions by the Federal Reserve Board of Governors to decrease market rates of interest by 225 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. The net interest margin approximated 3.50% for the three months ended June 30, 2008, a 0.12% decrease compared to 3.62% for the three months ended March 31, 2008 and a 1.03% decrease compared to 4.53% for the three months ended June 30, 2007. Several other causal factors impacted the 2008 margin, including elevated levels of nonperforming loans, competitive pressures at the bank level in pricing of loans and deposits, impact of a steepening yield curve, migration of noninterest-bearing deposits to interest-bearing accounts and higher interest costs related to debt obligations. It is difficult to speculate on future changes in net interest margin.

Noninterest income for the six months ended June 30, 2008 was $13 million, an increase of $1.6 million, or 14%, over the same period in 2007. Noninterest income for the three months ended June 30, 2008 was $6.5 million, an 11% increase from the same period in 2007. The increase for the six-month 2008 period was due to increases of $1.1 million in trust and wealth-management revenue and $498,000 from service charges on deposit accounts. Fees from origination of non-portfolio residential mortgage loans totaled $1.1 million for the second quarter of 2008 and $2 million for the six-month period, reduced from $1.3 million and $2.6 million for the comparable periods in 2007, respectively, due to lower loan origination volume associated with a weak residential real estate economy.

Page 20 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Noninterest expense totaled $92.6 million for the six-month 2008 period and $47.8 million for the second quarter of 2008, compared to $84 million and $42.2 million, respectively, for the comparable periods in 2007. The increase in noninterest expense is associated with adding four 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.

The largest element of noninterest expense is salaries and employee benefits, which approximated $53.3 million for the six months ended June 30, 2008, a slight increase from $52.5 million in the corresponding period of 2007.

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

	Three Month Period				Six Month Period
	2008		2007		2008		2007

Costs associated with foreclosed properties and other real estate owned	$	1,181	$	115	$	2,092	$	243
Preopening and start-up costs		1,086		368		2,038		1,296
FDIC insurance premiums and other regulatory fees		933		650		1,870		1,221
Advertising		857		926		1,633		1,662
Directors' fees		756		676		1,558		1,359
Paper, printing and supplies		782		715		1,552		1,367
Travel, lodging and meals		853		758		1,486		1,343
Professional fees		784		614		1,272		1,120
Bank services (ATMs, telephone banking and Internet banking)		626		504		1,181		1,061
Loan and collection expense		487		431		1,033		1,044
Communications		541		428		1,049		833
Postage		348		279		658		542
Taxes other than income taxes		137		439		511		928
Courier service		232		240		472		476
Dues and memberships		238		219		459		446
Insurance expense		146		116		293		214
Contracted labor		124		134		244		266
Publications		45		34		90		69
Other		2,394		1,989		5,046		3,757
Total	$	12,550	$	9,635	$	24,537	$	19,247

[The remainder of this page intentionally left blank]

Page 21 of 31

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:

	Six Months Ended June 30
	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	$	3,303	$	4,267	$	(222	)	$	649						15.62	%					1.56	%
Asian Bank of Arizona		953		818		(535	)		(326	)
Bank of Tucson		6,783		7,984		1,978			2,368			22.17	%		28.42	%		2.15	%		2.64	%
Camelback Community Bank		3,012		3,417		509			448			11.07	%		10.28	%		1.15	%		1.03	%
Colonia Bank(4)		25				(376	)
Mesa Bank		7,985		10,046		744			2,076			7.84	%		22.86	%		0.69	%		2.02	%
Southern Arizona Community Bank		3,041		3,435		582			581			12.84	%		12.98	%		1.34	%		1.32	%
Sunrise Bank of Albuquerque		2,640		2,983		171			245			4.69	%		7.75	%		0.46	%		0.75	%
Sunrise Bank of Arizona		4,177		4,845		(180	)		374						6.50	%					0.64	%
Valley First Community Bank		2,559		2,669		(646	)		256						6.53	%					0.74	%
Yuma Community Bank		2,745		2,999		365			532			9.39	%		13.88	%		0.96	%		1.48	%
Arizona Region Total		37,223		43,463		2,390			7,203

California Region:
Bank of Escondido		2,564		2,847		175			310			2.42	%		4.42	%		0.37	%		0.75	%
Bank of Feather River		584				(326	)
Bank of San Francisco		1,880		1,248		12			(204	)		0.28	%					0.04	%
Bank of Santa Barbara		2,080		1,988		(170	)		(146	)
Napa Community Bank		4,240		4,487		467			626			6.59	%		9.89	%		0.74	%		1.10	%
Point Loma Community Bank		1,872		1,984		114			34			3.16	%		0.99	%		0.42	%		0.14	%
Sunrise Bank of San Diego		2,847		3,458		168			163			3.17	%		3.09	%		0.38	%		0.40	%
Sunrise Community Bank		753		346		(377	)		(657	)
California Region Total		16,820		16,358		63			126

Colorado Region:
Fort Collins Commerce Bank		2,275		2,375		364			369			8.06	%		8.80	%		1.13	%		1.33	%
Larimer Bank of Commerce		2,055		363		140			(544	)		3.76	%					0.46	%
Loveland Bank of Commerce		646				(116	)
Mountain View Bank of Commerce(3)		358				(611	)
Colorado Region Total		5,334		2,738		(223	)		(175	)

Great Lakes Region:
Ann Arbor Commerce Bank		11,918		12,488		1,746			1,756			12.20	%		13.70	%		0.98	%		1.09	%
Bank of Auburn Hills		1,459		1,573		(459	)		(31	)
Bank of Maumee		1,373		473		(507	)		(627	)
Bank of Michigan		2,477		2,327		268			(94	)		8.05	%					0.78	%
Brighton Commerce Bank		3,792		4,069		434			309			8.89	%		6.80	%		0.80	%		0.59	%
Capitol National Bank		7,723		9,040		954			1,126			9.98	%		12.00	%		0.84	%		0.94	%
Detroit Commerce Bank		3,768		4,542		(1,130	)		443						9.72	%					0.83	%
Elkhart Community Bank		2,870		3,378		272			375			6.18	%		8.64	%		0.60	%		0.90	%
Evansville Commerce Bank		1,997		1,051		(174	)		(385	)
Goshen Community Bank		2,675		2,949		261			216			6.64	%		5.87	%		0.66	%		0.58	%
Grand Haven Bank		4,048		4,788		176			367			3.35	%		6.71	%		0.27	%		0.58	%
Kent Commerce Bank		2,943		3,411		(407	)		69						1.63	%					0.17	%
Macomb Community Bank		2,665		3,386		(1,512	)		(515	)
Muskegon Commerce Bank		2,885		3,608		(760	)		(565	)
Oakland Commerce Bank		3,139		4,881		(956	)		54						1.08	%					0.09	%
Ohio Commerce Bank		1,272		556		(111	)		(402	)
Paragon Bank & Trust		3,624		3,530		(185	)		21						0.38	%					0.04	%
Portage Commerce Bank		7,278		7,623		1,104			1,112			12.85	%		13.86	%		1.10	%		1.23	%
Great Lakes Region Total		67,906		73,673		(986	)		3,229

Midwest Region
Adams Dairy Bank(2)		672				(511	)
Bank of Belleville		1,743		962		4			(321	)		0.11	%					0.01	%
Community Bank of Lincoln		816				(326	)
Summit Bank of Kansas City		1,547		1,404		40			(252	)		1.14	%					0.18	%
Midwest Region Total		4,778		2,366		(793	)		(573	)

Page 22 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Operating results – continued:

	Six Months Ended June 30
	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	$	1,141	$	690	$	(291	)	$	(270	)
Bank of Las Vegas		2,437		2,997		37			329			0.86	%		7.33	%		0.10	%		0.92	%
Black Mountain Community Bank		5,433		6,136		881			1,300			11.95	%		18.94	%		1.16	%		1.83	%
Desert Community Bank		3,765		3,969		176			583			3.50	%		12.59	%		0.35	%		1.26	%
Red Rock Community Bank		3,971		4,622		480			873			7.06	%		13.31	%		0.82	%		1.62	%
Nevada Region Total		16,747		18,414		1,283			2,815

Northeast Region:
USNY Bank		712				(409	)

Northwest Region:
Bank of Bellevue		1,432		1,510		(196	)		(125	)
Bank of Everett		993		917		(656	)		(304	)
Bank of Tacoma		931		480		(399	)		(663	)
High Desert Bank		574				(380	)
Issaquah Community Bank		536				(326	)
Northwest Region Total		4,466		2,907		(1,957	)		(1,092	)

Southeast Region:
Bank of Valdosta		1,640		1,051		(43	)		(227	)
Community Bank of Rowan		3,726		2,503		427			(177	)		8.75	%					0.72	%
First Carolina State Bank		3,319		3,527		208			262			4.09	%		4.48	%		0.38	%		0.56	%
Peoples State Bank		916		1,142		27			144			1.06	%		5.97	%		0.21	%		1.03	%
Pisgah Community Bank(5)		69				(560	)
Sunrise Bank of Atlanta		2,305		1,786		(200	)		(110	)
Southeast Region Total		11,975		10,009		(141	)		(108	)

Texas Region:
Bank of Fort Bend		353				(462	)
Bank of Las Colinas		511				(339	)
Texas Region Total		864				(801	)

Other, net		1,857		593		4,388			1,144

Consolidated totals	$	168,682	$	170,521	$	2,814		$	12,569			1.45	%		6.65	%		0.11	%		0.59	%

(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.
(4)	Commenced operations in April 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.
(5)	Commenced operations in May 2008 and is 51%-owned by Capitol Development Bancorp Limited VII, a controlled subsidiary of Capitol.

Page 23 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources

The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $313 million for the six months ended June 30, 2008, compared to a $265 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 $682 million as of June 30, 2008, or about 16% of total deposits, an increase of $149 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 16% of total deposits at June 30, 2008, a slight decrease from 17% at December 31, 2007, and a decrease of $2.2 million in the 2008 interim period compared to a decrease of $13 million during the 2007 period. Levels of noninterest-bearing deposits can, however, fluctuate based on customers' transaction activity.

During the 2008 period, interest-bearing accounts increased about $315 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 $500.3 million or 9% of total assets at June 30, 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 June 30, 2008 is adequate to fund loan demand and meet depositor needs.

In addition to cash and cash equivalents, an additional 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 and the banks have not engaged in active trading of their investments. At June 30, 2008, Capitol's banks had approximately $13 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 $411 million and additional borrowing capacity approximated $216 million at June 30, 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 $440 million at June 30, 2008, including $15 million borrowed by Capitol on a line of credit from an unrelated financial institution which was repaid in early July 2008.

Stockholders' equity, as a percentage of total assets, approximated 7.23% at June 30, 2008 and 7.94% at December 31, 2007. As of June 30, 2008, Capitol’s total capital funds (i.e., the sum of stockholders' equity, minority interests in consolidated subsidiaries and subordinated debentures) approximated $707 million or 13.24% of total assets.

Page 24 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

In July 2008, Capitol completed a public offering of $38.1 million of 10.5% trust preferred securities issued by Capitol Trust XII. Several of Capitol's bank subsidiaries purchased securities in this offering. Net proceeds from the offering approximated $14 million. Capitol also completed a private placement of 9% senior notes in June 2008 approximating $14 million.

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.

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 four times during the first half of 2008 by an aggregate 225 basis-point decrease (rates were unchanged during the corresponding 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.

Page 25 of 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Trends Affecting Operations – Continued

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 periods, 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.

[The remainder of this page intentionally left blank]

Page 26 of 31

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 27 of 31

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 six months ended June 30, 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) On June 30, 2008 Capitol completed a private offering of Series A Subordinated 9% Promissory Notes, bearing interest at 9%, with a maturity of five years totaling $14 million, pursuant to an exemption under Regulation D. Such offering was made solely to “accredited investors” who are affiliated with or associates of Capitol or its subsidiaries. Proceeds from the offering will be used for bank development and other corporate purposes. (b) Not applicable. (c) None.
Item 3.	Defaults Upon Senior Securities. None.
Item 4.	Submission of Matters to a Vote of Security Holders. (a) Capitol's annual meeting of shareholders was held on April 23, 2008. (b) The following matters were voted upon at the annual meeting of shareholders: (1) The election of the nominees for the board of directors was voted on by the shareholders. The nominees, all of whom were elected, are listed below. The following votes were tabulated:

	For	Against

Class I Directors (nominees to serve until 2011 annual meeting)
Paul R. Ballard	13,727,828	502,152
Michael F. Hannley	13,783,773	446,206
Richard A. Henderson	13,781,970	448,010
Lewis D. Johns	12,753,666	1,476,313
Lyle W. Miller	13,761,314	468,666
Cristin K. Reid	13,758,852	471,128

(2) Shareholders voted on ratifying the appointment of BDO Seidman, LLP as independent auditors for the year ending December 31, 2008. The following votes were tabulated:

For	Against	Abstain

14,173,831	27,874	28,272

Page 28 of 31

PART II. OTHER INFORMATION – Continued

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 29 of 31

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: July 31, 2008

Page 30 of 31

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 31 of 31

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2008
	OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ________________ to ________________

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)

Class		Outstanding at July 15, 2008
Common Stock, No par value		17,317,094 shares

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

PART I, ITEM 1

CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of June 30, 2008 and December 31, 2007
(in thousands, except share data)

	(Unaudited)
	June 30,				December 31,
	2008				2007
ASSETS
Cash and due from banks		$	215,686		$	196,083
Money market and interest-bearing deposits			26,414			26,924
Federal funds sold			258,179			129,365
Cash and cash equivalents			500,279			352,372
Loans held for sale			11,314			16,419
Investment securities:
Available for sale, carried at market value			13,219			14,119
Held for long-term investment, carried at
amortized cost which approximates market value			30,165			25,478
Total investment securities			43,384			39,597
Portfolio loans:
Loans secured by real estate:
Commercial			2,022,820			1,917,113
Residential (including multi-family)			805,924			698,960
Construction, land development and other land			840,820			852,595
Total loans secured by real estate			3,669,564			3,468,668
Commercial and other business-purpose loans			811,290			768,473
Consumer			53,775			48,041
Other			29,893			29,519
Total portfolio loans			4,564,522			4,314,701
Less allowance for loan losses			(63,904	)		(58,124	)
Net portfolio loans			4,500,618			4,256,577
Premises and equipment			61,393			60,031
Accrued interest income			18,621			19,417
Goodwill and other intangibles			73,496			72,722
Other assets			131,295			84,628

TOTAL ASSETS		$	5,340,400		$	4,901,763

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing		$	669,516		$	671,688
Interest-bearing			3,488,118			3,173,057
Total deposits			4,157,634			3,844,745
Debt obligations:
Notes payable and short-term borrowings			440,485			320,384
Subordinated debentures			154,177			156,130
Total debt obligations			594,662			476,514
Accrued interest on deposits and other liabilities			35,049			35,161
Total liabilities			4,787,345			4,356,420

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES			167,090			156,198

STOCKHOLDERS' EQUITY:
Common stock, no par value, 50,000,000 shares authorized;
issued and outstanding: 2008 - 17,317,094 shares
2007 - 17,316,568 shares			273,149			272,208
Retained earnings			113,407			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)			(11	)		3
Total stockholders' equity			385,965			389,145

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	5,340,400		$	4,901,763

Item 1.	Financial Statements (unaudited):	Page
	Condensed consolidated balance sheets – June 30, 2008 and December 31, 2007.	3
	Condensed consolidated statements of income – Three months and six months ended June 30, 2008 and 2007.	4
	Condensed consolidated statements of changes in stockholders' equity – Six months ended June 30, 2008 and 2007.	5
	Condensed consolidated statements of cash flows – Six months ended June 30, 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.	27
Item 4.	Controls and Procedures.	27
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	28
Item 1A.	Risk Factors.	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	28
Item 3.	Defaults Upon Senior Securities.	28
Item 4.	Submission of Matters to a Vote of Security Holders.	28
Item 5.	Other Information.	29
Item 6.	Exhibits.	29
SIGNATURES		30
EXHIBIT INDEX		31

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months and Six Months Ended June 30, 2008 and 2007
(in thousands, except per share data)

	Three-Month Period						Six-Month Period
	2008				2007		2008			2007
Interest income:
Portfolio loans (including fees)		$	74,238		$	77,178	$	151,569		$	150,702
Loans held for sale			236			390		536			1,336
Taxable investment securities			102			193		235			401
Federal funds sold			1,008			3,109		2,221			5,653
Other			553			384		1,079			1,001
Total interest income			76,137			81,254		155,640			159,093
Interest expense:
Deposits			26,989			30,267		57,677			58,596
Debt obligations and other			6,956			5,445		13,836			10,274
Total interest expense			33,945			35,712		71,513			68,870
Net interest income			42,192			45,542		84,127			90,223
Provision for loan losses			9,019			3,990		17,977			7,922
Net interest income after provision
for loan losses			33,173			41,552		66,150			82,301
Noninterest income:
Service charges on deposit accounts			1,457			1,187		2,790			2,292
Trust and wealth-management revenue			1,563			1,117		3,208			2,154
Fees from origination of non-portfolio residential
mortgage loans			1,063			1,305		1,984			2,612
Gain on sales of government-guaranteed loans			643			550		1,223			1,350
Gain on sales of other non-portfolio commercial loans			343			309		660			629
Realized gains on sale of investment securities
available for sale			2			-		45			-
Other			1,406			1,375		3,132			2,391
Total noninterest income			6,477			5,843		13,042			11,428
Noninterest expense:
Salaries and employee benefits			27,730			26,437		53,278			52,509
Occupancy			4,500			3,552		8,904			7,049
Equipment rent, depreciation and maintenance			3,008			2,590		5,874			5,232
Other			12,550			9,635		24,537			19,247
Total noninterest expense			47,788			42,214		92,593			84,037
Income (loss) before income taxes
(benefit) and minority interest			(8,138	)		5,181		(13,401	)		9,692
Income taxes (benefit)			(2,701	)		2,346		(4,696	)		4,110
Income (loss) before minority interest			(5,437	)		2,835		(8,705	)		5,582
Minority interest in net losses of consolidated subsidiaries			6,060			3,463		11,519			6,987

NET INCOME		$	623		$	6,298	$	2,814		$	12,569

NET INCOME PER SHARE -- Note E:
Basic		$	0.04		$	0.37	$	0.16		$	0.75

Diluted		$	0.04		$	0.37	$	0.16		$	0.73

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 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

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 subsidiary			15,927												15,927

Issuance of 220,135 shares of common stock
upon exercise of stock options, net of
common stock surrendered to facilitate exercise			3,327												3,327

Surrender of 16,814 shares of common stock to
facilitate vesting of restricted stock			(756	)											(756	)

Recognition of compensation expense relating to
restricted common stock			784												784

Tax benefits from share-based payments			1,634												1,634

Issuance of 24,506 shares 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

Six Months Ended June 30, 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 14,138 shares of common stock to
facilitate vesting of restricted stock			(285	)											(285	)

Issuance of 18,312 unvested shares of restricted
common stock, net of related unearned employee
compensation and 6,822 forfeited shares			--												--

Recognition of compensation expense relating to
restricted common stock and stock options			1,172												1,172

Tax benefits from share-based payments			2												2

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

Cash dividends paid ($0.40 per share)						(6,927	)								(6,927	)

Components of comprehensive income:
Net income						2,814									2,814
Market value adjustment for investment securities
available for sale (net of income tax effect)												(14	)		(14	)
Comprehensive income															2,800

BALANCES AT JUNE 30, 2008		$	273,149		$	113,407		$	(580	)	$	(11	)	$	385,965