Capitol Bancorp (CBCRQ) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2011
	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
Fourth Floor
200 N. Washington Square
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 has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   T No   £

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   £ No   T

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

Class	Outstanding at October 31, 2011
Common Stock, No par value	41,045,267 shares

Page 1 of 61

INDEX

PART I.                      FINANCIAL INFORMATION

Forward-Looking Statements

Some statements contained in this document, including consolidated financial statements of Capitol Bancorp Limited (Capitol or the Corporation), 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 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," "could," "believe," "may," "might," 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 operating 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 and access to capital, which may depend in part on Capitol's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, (xi) changes in management, (xii) consummation of pending sales of certain bank subsidiaries, (xiii) completion of Capitol's selective bank divestiture activities, (xiv) other risks detailed in Capitol's other filings with the Securities and Exchange Commission (SEC), and (xv) the following, among others:

·Capitol's ability to continue as a going concern;

·The impact on Capitol's financial results, reputation and business if it is unable to comply with all applicable federal and state regulations and applicable formal agreements, consent orders, other regulatory actions and any related capital requirements;

·Management's ability to effectively manage interest rate risk and the impact of interest rates, in general, on the volatility of Capitol's net interest income;

·The effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, the implementation by the Department of the U.S. Treasury and federal banking regulators of a number of programs to address capital and liquidity issues within the banking system and additional programs that may apply to Capitol in the future, all of which may have significant effects on Capitol and the financial services industry;

·The decline in commercial and residential real estate values and sales volume and the likely potential for continuing illiquidity in the real estate market;

·The risks associated with the high concentration of commercial real estate loans within Capitol's portfolio;

·The uncertainties in estimating the fair value of developed real estate and undeveloped land relating to collateral-dependent loans and other real estate owned in light of declining demand for such assets, falling prices and continuing illiquidity in the real estate market;

·Negative developments and disruptions in the credit and lending markets, including the impact of the ongoing credit crisis on Capitol's business and on the businesses of its customers as well as other banks and lending institutions with which Capitol has commercial relationships;

·A continuation of volatility in the capital markets;

·The risks associated with implementing Capitol's business strategy, including its ability to preserve and access sufficient capital to execute its strategy;

Page 2 of 61

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

·Continued unemployment and its impact on Capitol's customers' savings rates and their ability to service debt obligations;

·Fluctuations in the value of Capitol's investment securities;

·The ability to attract and retain senior management experienced in banking and financial services;

·The sufficiency of the allowance for loan losses to absorb the amount of actual losses inherent within the loan portfolio;

·Capitol's ability to adapt successfully to technological changes to compete effectively in the marketplace;

·Credit risks and risks from concentrations (by geographic area and by industry) within each of Capitol's subsidiary banks' loan portfolio and individual large loans;

·The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in Capitol's market or elsewhere or providing similar services;

·The failure of assumptions underlying estimates for the allowance for loan losses and estimation of values of collateral or cash flow projections related to collateral-dependent loans;

·Volatility of rate-sensitive deposits;

·Operational risks, including data processing system failures or fraud;

·Liquidity risks;

·The ability to successfully acquire deposits for funding and the pricing thereof;

·The ability to successfully execute strategies to increase noninterest income;

·Changes in the economic environment, competition or other factors that may influence loan demand and repayment, deposit inflows and outflows, and the quality of the loan portfolio and loan and deposit pricing;

·The impact from liabilities arising from legal or administrative proceedings on the financial condition of Capitol;

·The current prohibition of Capitol's subsidiary banks to pay dividends to Capitol without prior written authorization from regulatory agencies;

·The current prohibition of Capitol's payment of cash dividends on its common stock and periodic payments on its trust-preferred securities without prior written regulatory authorization;

·Administrative or enforcement actions of banking regulators in connection with any material failure of Capitol or its subsidiary banks to comply with banking laws, rules or regulations or formal agreements with regulatory agencies;

·Capitol's compliance with the terms of its written agreement with the Federal Reserve Bank, amendments thereto or subsequent regulatory agreements;

·The continued availability of credit facilities provided by Federal Home Loan Banks to Capitol's banking subsidiaries;

Page 3 of 61

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

·The uncertainties of future depositor activity regarding potentially uninsured deposits;

·The possibility of the Federal Deposit Insurance Corporation (FDIC) assessing Capitol's banking subsidiaries for any cross-guaranty liability;

·Governmental monetary and fiscal policies, as well as legislative and regulatory changes or mandates, that may result in the imposition of costs and constraints on Capitol through higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital requirements, increases in allowance for loan loss reserves and operational limitations;

·Changes in general economic or industry conditions, nationally or in the communities in which Capitol conducts business, including without limitation, concerns regarding the recent downgrade of the United States' credit rating and the sovereign debt crisis in Europe which could have a material adverse effect on Capitol's business, financial condition and liquidity;

·Changes in legislation or regulatory and accounting principles, policies, or guidelines affecting the business conducted by Capitol;

·The impact of possible future material impairment charges;

·Acts of war or terrorism;

·Capitol's ability to manage fluctuations in the value of its assets and liabilities and maintain sufficient capital and liquidity to support its operations;

·The concentration of Capitol's nonperforming assets by loan type in certain geographic regions and with affiliated borrowing groups;

·The risk of additional future losses if the proceeds Capitol receives upon the liquidation of assets are less than the carrying value of such assets;

·Restrictions or limitations on access to funds from subsidiaries and potential obligations to contribute additional capital to Capitol's subsidiaries, which may restrict its ability to make payments on its obligations;

·The availability and cost of capital and liquidity on favorable terms, if at all;

·The risk that the realization of deferred tax assets may not occur;

·The risk that Capitol may not be able to complete its various proposed divestitures, mergers and consolidations of certain of its subsidiary banks or, if completed, realize the anticipated benefits of the proposed mergers and/or consolidations;

·The costs, effects and impacts of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto, including without limitation, the current investigation by the SEC and the results of regulatory examinations and reviews;

·The risk that Capitol could have an "ownership change" under Section 382 of the Internal Revenue Code, which could impair its ability to timely and fully utilize its net operating losses for tax purposes and so-called built-in losses that may exist if such an "ownership change" occurs;

·Other factors and other information contained in this document and in other reports and filings that Capitol makes with the SEC under the Exchange Act, including, without limitation, under the caption "Risk Factors"; and

·Other economic, competitive, governmental, regulatory, and technical factors affecting Capitol's operations, products, services and prices.

Page 4 of 61

INDEX – Continued

PART I.                      FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

For a discussion of these and other risks that may cause actual results to differ from expectations, you should refer to the risk factors and other information in this Form 10-Q and Capitol's other periodic filings, including its 2010 Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, that Capitol files from time to time with the SEC.  All written or oral forward-looking statements that are made by or are attributable to Capitol are expressly qualified by this cautionary notice.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.  All subsequent written or oral forward-looking statements attributable to Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors.  Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements.  Capitol undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.

Item 1.	Financial Statements (unaudited):	Page
	Condensed consolidated balance sheets – September 30, 2011 and December 31, 2010.	6
	Condensed consolidated statements of operations – Three months and nine months ended September 30, 2011 and 2010.	7
	Condensed consolidated statements of changes in equity – Nine months ended September 30, 2011 and 2010.	8
	Condensed consolidated statements of cash flows – Nine months ended September 30, 2011 and 2010.	9
	Notes to condensed consolidated financial statements.	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	55
Item 4.	Controls and Procedures.	55
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	56
Item 1A.	Risk Factors.	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	58
Item 3.	Defaults Upon Senior Securities.	58
Item 4.	[Removed and Reserved.]	58
Item 5.	Other Information.	59
Item 6.	Exhibits.	59
SIGNATURES		60
EXHIBIT INDEX		61

[The remainder of this page intentionally left blank]

Page 5 of 61

PART I, ITEM 1
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of September 30, 2011 and December 31, 2010
(in $1,000s, except share and per-share data)
	(Unaudited)
	September 30,				December 31,
	2011				2010
ASSETS
Cash and due from banks		$	52,222		$	44,135
Money market and interest-bearing deposits			371,647			395,655
Federal funds sold			--			50
Cash and cash equivalents			423,869			439,840
Loans held for sale			1,745			5,587
Investment securities -- Note C:
Available for sale, carried at fair value			24,690			15,489
Held for long-term investment, carried at
amortized cost which approximates fair value			2,012			2,893
Total investment securities			26,702			18,382
Federal Home Loan Bank and Federal Reserve
Bank stock (carried on the basis of cost) -- Note C			14,266			15,494
Portfolio loans -- Note D:
Loans secured by real estate:
Commercial			1,046,009			1,189,110
Residential (including multi-family)			380,893			441,629
Construction, land development and other land			142,256			184,823
Total loans secured by real estate			1,569,158			1,815,562
Commercial and other business-purpose loans			211,191			285,916
Consumer			14,796			18,559
Other			2,855			5,226
Total portfolio loans			1,798,000			2,125,263
Less allowance for loan losses			(102,917	)		(130,851	)
Net portfolio loans			1,695,083			1,994,412
Premises and equipment			28,856			32,158
Accrued interest income			5,638			6,880
Other real estate owned			104,169			101,497
Other assets			16,442			13,853
Assets of discontinued operations -- Note E			152,187			912,111
TOTAL ASSETS		$	2,468,957		$	3,540,214
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing		$	370,715		$	375,076
Interest-bearing			1,782,876			2,042,956
Total deposits			2,153,591			2,418,032
Debt obligations:
Notes payable and other borrowings			71,909			111,699
Subordinated debentures -- Note I			149,131			167,586
Total debt obligations			221,040			279,285
Accrued interest on deposits and other liabilities			52,497			49,737
Liabilities of discontinued operations -- Note E			135,338			831,841
Total liabilities			2,562,466			3,578,895
EQUITY:
Capitol Bancorp Limited stockholders' equity -- Notes G and L:
Preferred stock (Series A), 700,000 shares authorized
($100 per-share liquidation preference); 50,980 shares
issued and outstanding			5,098			5,098
Preferred stock (for potential future issuance),
19,300,000 shares authorized (none issued and outstanding)			--			--
Common stock, no par value, 1,500,000,000 shares authorized;
issued and outstanding:  2011 - 41,045,267 shares
2010 - 21,614,856 shares			292,175			287,190
Retained-earnings deficit			(392,644	)		(353,757	)
Undistributed common stock held by employee-benefit trust			(541	)		(541	)
Fair value adjustment (net of tax effect) for investment securities
available for sale (accumulated other comprehensive income)			81			156
Total Capitol Bancorp Limited stockholders' equity deficit			(95,831	)		(61,854	)
Noncontrolling interests in consolidated subsidiaries			2,322			23,173
Total equity deficit			(93,509	)		(38,681	)
TOTAL LIABILITIES AND EQUITY		$	2,468,957		$	3,540,214
See notes to condensed consolidated financial statements.

Page 6 of 61

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2011 and 2010
(in $1,000s, except per share data)
	Three Month Period							Nine Month Period
	2011				2010			2011			2010
Interest income:
Portfolio loans (including fees)		$	25,551		$	31,770		$	80,878		$	99,613
Loans held for sale			16			56			51			153
Taxable investment securities			80			53			172			302
Federal funds sold			2			1			6			8
Other			354			502			1,072			1,380
Total interest income			26,003			32,382			82,179			101,456
Interest expense:
Deposits			5,886			10,092			19,568			33,224
Debt obligations and other			3,084			3,919			9,265			12,310
Total interest expense			8,970			14,011			28,833			45,534
Net interest income			17,033			18,371			53,346			55,922
Provision for loan losses -- Note D			17,482			42,297			37,188			129,237
Net interest income (deficiency) after
provision for loan losses			(449	)		(23,926	)		16,158			(73,315	)
Noninterest income:
Service charges on deposit accounts			845			839			2,448			2,571
Trust and wealth-management revenue			784			960			2,545			3,282
Fees from origination of non-portfolio residential
mortgage loans			285			480			703			1,151
Gain on sale of government-guaranteed loans			381			409			1,424			616
Gain on debt extinguishment -- Note I			--			--			16,861			1,255
Realized gain (loss) on sale of investment securities
available for sale			--			(4	)		--			10
Other			2,646			3,088			7,434			7,015
Total noninterest income			4,941			5,772			31,415			15,900
Noninterest expense:
Salaries and employee benefits			12,433			14,799			38,791			45,704
Occupancy			1,738			2,981			7,583			9,262
Equipment rent, depreciation and maintenance			1,886			1,941			5,890			6,703
Costs associated with foreclosed properties and other
real estate owned			6,986			14,177			23,774			34,266
FDIC insurance premiums and other regulatory fees			2,124			3,073			7,569			10,316
Other			5,357			6,558			16,829			20,388
Total noninterest expense			30,524			43,529			100,436			126,639
Loss before income tax benefit			(26,032	)		(61,683	)		(52,863	)		(184,054	)
Income tax benefit			(691	)		(316	)		(3,197	)		(6,232	)
Loss from continuing operations			(25,341	)		(61,367	)		(49,666	)		(177,822	)
Discontinued operations -- Note E:
Income from operations of bank subsidiaries sold			635			2,491			1,786			8,473
Gain (loss) on sale of bank subsidiaries			(56	)		3,296			4,496			13,379
Less income tax expense			6			1,664			1,664			7,133
Income from discontinued operations			573			4,123			4,618			14,719
NET LOSS			(24,768	)		(57,244	)		(45,048	)		(163,103	)
Net losses attributable to noncontrolling interests in
consolidated subsidiaries			2,006			5,078			6,137			22,052
NET LOSS ATTRIBUTABLE TO CAPITOL
BANCORP LIMITED		$	(22,762	)	$	(52,166	)	$	(38,911	)	$	(141,051	)
NET LOSS PER COMMON SHARE ATTRIBUTABLE
TO CAPITOL BANCORP LIMITED -- Note H		$	(0.55	)	$	(2.45	)	$	(1.02	)	$	(7.12	)
See notes to condensed consolidated financial statements.

Page 7 of 61

Page 8 of 61

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2011 and 2010
(in $1,000s)
	2011			2010
OPERATING ACTIVITIES
Net loss	$	(45,048	)	$	(163,103	)
Adjustments to reconcile net loss to net cash provided
by operating activities (including discontinued operations):
Provision for loan losses		39,616			140,984
Depreciation of premises and equipment		4,347			6,305
Amortization of intangibles		--			169
Net amortization of investment security premiums		14			281
Loss on sale of premises and equipment		25			258
Gain on sale of government-guaranteed loans		(2,264	)		(1,869	)
Gain on sale of bank subsidiaries		(4,496	)		(13,379	)
Gain on extinguishment of debt		(16,861	)		(1,255	)
Realized gain on sale of investment securities available for sale		--			(10	)
Loss (gain) on sale of other real estate owned		(76	)		1,744
Write-down of other real estate owned		15,694			25,804
Amortization of issuance costs of subordinated debentures		76			109
Share-based compensation expense		171			435
Deferred income tax credit		(816	)		(5,808	)
Valuation allowance for deferred income tax assets		--			4,515
Originations and purchases of loans held for sale		(28,035	)		(89,100	)
Proceeds from sales of loans held for sale		33,331			91,994
Decrease in accrued interest income and other assets		15,018			64,954
Increase in accrued interest expense on deposits and
other liabilities		6,432			9,086
NET CASH PROVIDED BY OPERATING ACTIVITIES		17,128			72,114
INVESTING ACTIVITIES
Cash equivalents of acquired bank affiliate		--			18,949
Proceeds from sales of investment securities available for sale		488			22,075
Proceeds from calls, prepayments and maturities of investment
securities		10,104			14,935
Purchases of investment securities		(19,386	)		(22,298	)
Redemption of Federal Home Loan Bank stock by issuer		2,167			1,169
Purchase of Federal Home Loan Bank stock		(861	)		(1,411	)
Net decrease in portfolio loans		209,625			130,227
Proceeds from sales of government-guaranteed loans		26,959			15,192
Proceeds from sales of premises and equipment		405			3,742
Purchases of premises and equipment		(941	)		(7,420	)
Proceeds from sale of bank subsidiaries		37,818			33,084
Payments received on other real estate owned		238			--
Proceeds from sales of other real estate owned		22,737			35,590
NET CASH PROVIDED BY INVESTING ACTIVITIES		289,353			243,834
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		156,492			76,222
Net decrease in certificates of deposit		(404,212	)		(187,619	)
Net payments on debt obligations		(134	)		(1,548	)
Proceeds from Federal Home Loan Bank borrowings		174,850			541,480
Payments on Federal Home Loan Bank borrowings		(217,206	)		(649,067	)
Resources provided by noncontrolling interests		9,000			--
Net proceeds from issuance of common stock		--			6,870
Tax effect of share-based payments		(256	)		(293	)
NET CASH USED IN FINANCING ACTIVITIES		(281,466	)		(213,955	)
INCREASE IN CASH AND CASH EQUIVALENTS		25,015			101,993
Change in cash and cash equivalents of discontinued operations		(40,986	)		(80,861	)
Cash and cash equivalents at beginning of period		439,840			532,674
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	423,869		$	553,806
Supplemental disclosures:
Cash paid during the period for interest on deposits and debt obligations	$	32,362		$	58,451
Transfers of loans to other real estate owned		39,067			60,239
Surrender of common stock to facilitate vesting of restricted stock		12			13
Exchange of common stock for redemption of debt		5,082			3,325
See notes to condensed consolidated financial statements.

Page 9 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Limited (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 accounting principles generally accepted in the United States of America.

The condensed consolidated financial statements do, however, include all adjustments of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which Capitol considers necessary for a fair presentation of the interim periods.

The results of operations for the periods ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

The consolidated balance sheet as of December 31, 2010 was derived from audited consolidated financial statements as of that date.  Certain 2010 amounts have been reclassified to conform to the 2011 presentation.

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which are discussed on page 47 of this document, as well as a variety of risk factors discussed elsewhere in this document and in Capitol's other filings with the SEC.  Capitol's auditors included a going concern qualification in the most recent report on the Corporation's audited consolidated financial statements as of December 31, 2010.

Note B – Accounting Standards Updates

In January 2010, an accounting standards update regarding fair value measurements and disclosures was issued to require more robust disclosures about (1) different classes of assets and liabilities measured at fair value, (2) valuation techniques and inputs used, (3) the activity in Level 3 fair-value measurements and (4) the transfers between Levels 1, 2, and 3 of fair-value estimates.  The new disclosures became effective for the Corporation beginning January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair-value measurements which became effective beginning January 1, 2011.  These new disclosures did not have a material effect on the Corporation's consolidated financial statements upon implementation.

In July 2010, an accounting standards update was issued which requires significant new disclosures on a disaggregated basis about the allowance for loan losses and the credit quality of loans.  Under this standards update, a rollforward of the allowance for loan losses with the ending balance further disaggregated on the basis of the impairment methods used to establish loss estimates, along with the related ending loan balances and significant purchases and sales of loans during the period, are to be disclosed by portfolio segment or classification used for reporting purposes.  Additional disclosures are required by class of loan, including credit quality, aging of past-due loans, nonaccrual status and impairment information.  Disclosure of the nature and extent of troubled debt restructurings that occur during the period and their effect on the allowance for loan losses, as well as the effect on the allowance regarding troubled debt restructurings that occur within the prior 12 months that defaulted during the current reporting period, are also required.  The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the loan portfolio's risk and performance.

The majority of the disclosures under this new guidance, which are required as of the end of a reporting period, were first implemented in 2010 and are set forth in Note D.  The disclosure about activities that occur during a reporting period became effective January 1, 2011 and the disclosures about troubled debt restructurings became effective this quarter which did not have an effect on the Corporation's consolidated financial statements upon implementation except for expanded disclosures therein as set forth in Note D.

Page 10 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note B – Accounting Standards Updates – Continued

In April 2011, an accounting standards update was issued clarifying what constitutes a troubled debt restructuring.  When performing the evaluation of whether a loan modification or restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the debtor is experiencing financial difficulties as defined by the guidance, and (2) the modification constitutes a concession.  This guidance also clarifies that a creditor is precluded from using the borrower's effective interest rate test when performing this evaluation.  For identification and disclosure purposes, this new guidance became effective beginning in the third quarter of 2011 and was applied retrospectively to modifications occurring on or after January 1, 2011 that remain outstanding at September 30, 2011.  As a result of implementing this new guidance in the third quarter of 2011, the Corporation reassessed all loan modifications or restructurings that occurred on or after January 1, 2011 to determine whether those loans are now considered troubled debt restructurings.  As a result, the Corporation determined the recorded investment in such newly-identified troubled debt restructurings for which the allowance was previously measured under a general allowance methodology, and is now measured under a specific-reserve methodology, was $63.1 million and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss, was $9.5 million.   The implementation of this new guidance did not have a material effect on the Corporation's consolidated financial statements upon implementation except for expanded disclosures therein as set forth in Note D.

In April 2011, an accounting standards update was issued to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets on substantially the agreed upon terms.  This standard eliminates consideration of the transferor's ability to fulfill its contractual rights and obligations from the criteria, as well as related implementation guidance (i.e., that it possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets), in determining effective control, even in the event of default by the transferee.  Other criteria applicable to the assessment of effective control are not changed by this new guidance.  This new guidance will become effective January 1, 2012 and management does not expect it to have a material effect on the Corporation's consolidated financial statements upon implementation.

In May 2011, an accounting standards update was issued to amend the fair value measurement and disclosure requirements to explain how to measure fair value in certain instances, but it does not require additional fair value measurements.  Some of the amendments include clarification regarding the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity's stockholders' equity, measuring the fair value of financial instruments that are managed within a portfolio, application of premiums and discounts in a fair value measurement and expanded disclosure requirements to include quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.  This new guidance is effective prospectively beginning January 1, 2012 and management does not expect it will have a material effect on the Corporation's consolidated financial statements upon implementation.

In June 2011, an accounting standards update was issued to amend the options available for the presentation of other comprehensive income.  An entity will have the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  An entity will no longer be able to present the components of comprehensive income as part of the statement of stockholders' equity.  Regardless of which presentation method an entity chooses, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  This new guidance is effective retrospectively for all annual and interim periods presented beginning January 1, 2012 and management does not expect it will have a material effect on the Corporation's consolidated financial statements upon implementation.  In October 2011, the FASB decided to defer the presentation of reclassification adjustments until further consideration.

Page 11 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities

Investments in Federal Home Loan Bank and Federal Reserve Bank stock are combined and classified separately from investment securities in the condensed consolidated balance sheet, are restricted and may only be resold to, or redeemed by, the issuer.

Investment securities consisted of the following (in $1,000s):

	September 30, 2011				December 31, 2010(1)
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available for sale:
United States treasury	$	4,016	$	4,029	$	503	$	506
United States government agency		12,489		12,505		12,664		12,681
Mortgage-backed		7,733		7,821		1,808		1,924
Municipalities		330		335		371		378
		24,568		24,690		15,346		15,489
Held for long-term investment:
Capitol Development Bancorp Limited III		224		224		463		463
Other equity investments		1,788		1,788		2,430		2,430
		2,012		2,012		2,893		2,893
	$	26,580	$	26,702	$	18,239	$	18,382

(1) For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Securities held for long-term investment are not subject to the classification and accounting rules relating to most typical investments.  In addition, Capitol's corporate investments consist mostly of equity-method investments in non-public enterprises which, accordingly, are outside of the scope of accounting rules for most typical investments which often require use of estimated fair value.  Those entities, which are primarily involved in making equity investments in or financing small businesses, use the fair value method of accounting in valuing their investment portfolios.  Notwithstanding that those investments are outside the scope of such accounting rules, they are included in Capitol's investment securities for financial reporting purposes to summarize all such investment securities together for reporting purposes.

Gross unrealized gains and losses on investment securities available for sale were as follows (in $1,000s):

	September 30, 2011				December 31, 2010
	Gains		Losses		Gains		Losses
United States treasury	$	13			$	3
United States government agency		22	$	6		18	$	1
Mortgage-backed		118		30		116
Municipalities		5				7
	$	158	$	36	$	144	$	1

Page 12 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities – Continued

The age of gross unrealized losses and carrying value (at estimated fair value) of securities available for sale are summarized below (in $1,000s):

	September 30, 2011				December 31, 2010
	Unrealized Loss		Carrying Value		Unrealized Loss		Carrying Value
One year or less:
United States government agency	$	6	$	5,399
Mortgage-backed		30		3,150
	$	36	$	8,549	$	--	$	--
In excess of one year:
United States government agency	$	--	$	--	$	1	$	4,797

Gross realized gains and losses from sales and maturities of investment securities were insignificant for each of the periods presented.

Scheduled maturities of investment securities held as of September 30, 2011 were as follows (in $1,000s):

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	8,828	$	8,850
After one year, through five years		3,622		3,638
After five years, through ten years		887		911
After ten years		11,231		11,291
Securities held for long-term investment
without stated maturities		2,012		2,012
	$	26,580	$	26,702

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Page 13 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans

The following tables present the allowance for loan losses and the carrying amount of loans based on management's overall assessment of probable incurred losses (in $1,000s), and should not be interpreted as an indication of future charge-offs:

	September 30, 2011
	Secured by Real Estate
	Commercial		Residential (including multi- family)		Construction, Land Development and Other Land		Commercial and Other Business- Purpose Loans		Consumer		Other		Total
Allowance for loan losses:
Individually evaluated
for impairment	$	10,039	$	3,218	$	3,893	$	2,308	$	244	$	7	$	19,709
Collectively evaluated
for probable incurred
losses		38,052		18,970		10,189		14,713		1,239		45		83,208
Total allowance
for loan losses	$	48,091	$	22,188	$	14,082	$	17,021	$	1,483	$	52	$	102,917
Portfolio loans:
Individually evaluated
for impairment	$	173,568	$	52,127	$	45,298	$	19,241	$	260	$	7	$	290,501
Collectively evaluated
for probable incurred
losses		872,441		328,766		96,958		191,950		14,536		2,848		1,507,499
Total portfolio loans	$	1,046,009	$	380,893	$	142,256	$	211,191	$	14,796	$	2,855	$	1,798,000

	December 31, 2010(1)
	Secured by Real Estate
	Commercial		Residential (including multi- family)		Construction, Land Development and Other Land		Commercial and Other Business- Purpose Loans		Consumer		Other		Total
Allowance for loan losses:
Individually evaluated
for impairment	$	9,800	$	5,568	$	6,415	$	6,077					$	27,860
Collectively evaluated
for probable incurred
losses		40,625		30,230		12,595		18,735	$	719	$	87		102,991
Total allowance for
loan losses	$	50,425	$	35,798	$	19,010	$	24,812	$	719	$	87	$	130,851
Portfolio loans:
Individually evaluated
for impairment	$	171,881	$	54,442	$	52,734	$	25,892	$	22			$	304,971
Collectively evaluated
for probable incurred
losses		1,017,229		387,187		132,089		260,024		18,537	$	5,226		1,820,292
Total portfolio loans	$	1,189,110	$	441,629	$	184,823	$	285,916	$	18,559	$	5,226	$	2,125,263

(1) For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Page 14 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

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 an estimate 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 for loan losses charged to operations and reduced by net charge-offs.

The tables below summarize activity in the allowance for loan losses for the three months and nine months ended September 30, 2011 (in $1,000s) by loan type:

	Three Months Ended September 30, 2011
	Secured by Real Estate
	Commercial			Residential (including multi- family)			Construction, Land Development and Other Land			Commercial and Other Business- Purpose Loans			Consumer			Other			Total
Beginning balance	$	51,075		$	23,680		$	15,731		$	20,104		$	977		$	69		$	111,636
Charge-offs		(11,297	)		(6,376	)		(5,790	)		(5,556	)		(137	)					(29,156	)
Recoveries		989			537			361			1,003			63			2			2,955
Net charge-offs		(10,308	)		(5,839	)		(5,429	)		(4,553	)		(74	)		2			(26,201	)
Provision for loan
losses		7,324			4,347			3,780			1,470			580			(19	)		17,482
Ending balance	$	48,091		$	22,188		$	14,082		$	17,021		$	1,483		$	52		$	102,917

	Nine Months Ended September 30, 2011
	Secured by Real Estate
	Commercial			Residential (including multi- family)			Construction, Land Development and Other Land			Commercial and Other Business- Purpose Loans			Consumer			Other			Total
Beginning balance	$	50,425		$	35,798		$	19,010		$	24,812		$	719		$	87		$	130,851
Allowance for loan
losses of previously-
discontinued bank
subsidiary		1,043			117			651			500			68			1			2,380
Charge-offs		(26,686	)		(16,933	)		(18,962	)		(17,107	)		(729	)					(80,417	)
Recoveries		3,142			2,493			4,091			3,029			156			4			12,915
Net charge-offs		(23,544	)		(14,440	)		(14,871	)		(14,078	)		(573	)		4			(67,502	)
Provision for loan
losses		20,167			713			9,292			5,787			1,269			(40	)		37,188
Ending balance	$	48,091		$	22,188		$	14,082		$	17,021		$	1,483		$	52		$	102,917

Page 15 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

The table below summarizes activity in the allowance for loan losses (in $1,000s) and the ratio of net charge-offs to average portfolio loans outstanding:

	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010(1)			2011			2010(1)
Allowance for loan losses at beginning of period	$	111,636		$	131,502		$	130,851		$	115,178
Allowance for loan losses of previously-discontinued bank subsidiary		--			--			2,380			--
Loans charged-off:
Loans secured by real estate:
Commercial		(11,297	)		(20,035	)		(26,686	)		(45,812	)
Residential (including multi-family)		(6,376	)		(8,866	)		(16,933	)		(26,799	)
Construction, land development and other land		(5,790	)		(5,456	)		(18,962	)		(26,267	)
Total loans secured by real estate		(23,463	)		(34,357	)		(62,581	)		(98,878	)
Commercial and other business-purpose loans		(5,556	)		(5,600	)		(17,107	)		(17,751	)
Consumer		(137	)		(791	)		(729	)		(1,194	)
Other		--			--			--			(1	)
Total charge-offs		(29,156	)		(40,748	)		(80,417	)		(117,824	)
Recoveries:
Loans secured by real estate:
Commercial		989			736			3,142			1,475
Residential (including multi-family)		537			1,039			2,493			1,660
Construction, land development and other land		361			1,637			4,091			5,066
Total loans secured by real estate		1,887			3,412			9,726			8,201
Commercial and other business-purpose loans		1,003			436			3,029			2,041
Consumer		63			24			156			90
Other		2			--			4			--
Total recoveries		2,955			3,872			12,915			10,332
Net charge-offs		(26,201	)		(36,876	)		(67,502	)		(107,492	)
Additions to allowance charged to expense (provision
for loan losses)		17,482			42,297			37,188			129,237
Allowance for loan losses at end of period	$	102,917		$	136,923		$	102,917		$	136,923
Average total portfolio loans for the period	$	1,868,272		$	2,338,435		$	1,988,397		$	2,420,289
Ratio of net charge-offs (annualized) to average portfolio loans outstanding		5.61	%		6.31	%		4.53	%		5.92	%

(1) For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Page 16 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

Nonperforming loans (i.e., loans which are 90 days or more past due and still accruing interest and loans on nonaccrual status) and other nonperforming assets are summarized below (in $1,000s):

	September 30, 2011		June 30, 2011(1)		March 31, 2011(1)		December 31, 2010(1)
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	134,363	$	143,076	$	141,368	$	148,371
Residential (including multi-family)		50,327		51,860		51,027		57,899
Construction, land development and other land		38,129		47,077		45,440		51,621
Total loans secured by real estate		222,819		242,013		237,835		257,891
Commercial and other business-purpose loans		18,654		22,883		29,059		29,260
Consumer		323		138		528		162
Other		3		--		--		--
Total nonaccrual loans		241,799		265,034		267,422		287,313
Past due (>90 days) loans and accruing interest:
Loans secured by real estate:
Commercial		2,365		995		4,808		2,875
Residential (including multi-family)		1,245		106		688		1,484
Construction, land development and other land		689		--		2,374		2,380
Total loans secured by real estate		4,299		1,101		7,870		6,739
Commercial and other business-purpose loans		638		417		410		2,073
Consumer		67		78		19		38
Total past due loans		5,004		1,596		8,299		8,850
Total nonperforming loans	$	246,803	$	266,630	$	275,721	$	296,163
Real estate owned and other repossessed assets		104,591		102,819		105,247		101,757
Total nonperforming assets	$	351,394	$	369,449	$	380,968	$	397,920

(1)   For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Impaired loans which do not have an allowance requirement include collateral-dependent loans for which direct write-downs have been made to the carrying amount of such loans and, accordingly, no additional allowance requirement or allocation is currently necessary.

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Page 17 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

Impaired loans are summarized in the following table (in $1,000s), based on loans which either have an allowance for loan losses recorded or no such allowance as of September 30, 2011:

	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	81,662	$	95,591	$	12,873
Residential (including multi-family)		33,936		49,319		6,171
Construction, land development and other land		17,270		24,353		5,024
Total loans secured by real estate		132,868		169,263		24,068
Commercial and other business-purpose loans		16,901		36,463		5,722
Consumer		314		1,838		288
Other		3		3		7
		150,086		207,567		30,085
With no related allowance recorded:
Loans secured by real estate:
Commercial		105,998		150,495
Residential (including multi-family)		33,330		46,847
Construction, land development and other land		29,847		47,253
Total loans secured by real estate		169,175		244,595
Commercial and other business-purpose loans		11,775		18,645
Consumer		35		93
		180,985		263,333
Total	$	331,071	$	470,900	$	30,085

Included in total impaired loans as of September 30, 2011 is $190.2 million of loans modified as troubled debt restructurings (see further discussion under troubled debt restructurings section of this Note).

Interest income is recorded on impaired loans if not on nonaccrual status, or may be recorded on a cash basis in some circumstances, if such payments are not credited to principal.  For the three and nine months ended September 30, 2011, the average recorded investment in impaired loans and interest income recorded on impaired loans were as follows (in $1,000s):

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recorded		Investment		Recorded
Commercial	$	185,975	$	1,500	$	185,548	$	2,528
Residential (including multi-family)		64,161		413		65,319		702
Construction, land development and other land		50,233		205		51,723		351
Total loans secured by real estate		300,369		2,118		302,590		3,581
Commercial and other business-purpose loans		29,863		270		31,286		358
Consumer		380		2		348		2
Other		1				1
Total	$	330,613	$	2,390	$	334,225	$	3,941

Page 18 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

Impaired loans are summarized in the following table (in $1,000s), based on loans which either have an allowance for loan losses recorded or no such allowance as of December 31, 2010 (excludes amounts related to discontinued operations):

	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	78,873	$	128,277	$	12,560
Residential (including multi-family)		38,671		46,250		10,881
Construction, land development and other land		22,997		46,770		8,032
Total loans secured by real estate		140,541		221,297		31,473
Commercial and other business-purpose loans		21,170		33,833		8,970
Consumer		185		211		104
		161,896		255,341		40,547
With no related allowance recorded:
Loans secured by real estate:
Commercial		103,874		168,383
Residential (including multi-family)		29,274		48,992
Construction, land development and other land		32,669		52,713
Total loans secured by real estate		165,817		270,088
Commercial and other business-purpose loans		13,343		22,333
Consumer		18		42
		179,178		292,463
Total	$	341,074	$	547,804	$	40,547

The following tables summarize the aging and amounts of past due loans (in $1,000s):

	September 30, 2011
	Past Due Loans						Total
	(based on payment due dates)						Amount of
					Loans on		Loans More		Loans Either
	More Than				Nonaccrual		Than 29 Days		Current or
	29 Days,		More Than		Status		Past Due or on		Less Than		Total
	and Less Than		89 Days		(Generally, 90		Nonaccrual		30 Days		Portfolio
	90 Days		(Accruing)		Days or More)		Status		Past Due		Loans
Loans secured by real estate:
Commercial	$	24,025	$	2,365	$	134,363	$	160,753	$	885,256	$	1,046,009
Residential (including multi-
family)		9,100		1,245		50,327		60,672		320,221		380,893
Construction, land development
and other land		4,982		689		38,129		43,800		98,456		142,256
Total loans secured by real    estate		38,107		4,299		222,819		265,225		1,303,933		1,569,158
Commercial and other business-
purpose loans		6,378		638		18,654		25,670		185,521		211,191
Consumer		270		67		323		660		14,136		14,796
Other						3		3		2,852		2,855
Total	$	44,755	$	5,004	$	241,799	$	291,558	$	1,506,442	$	1,798,000

Page 19 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

	December 31, 2010(1)
	Past Due Loans						Total
	(based on payment due dates)						Amount of
					Loans on		Loans More		Loans Either
	More Than				Nonaccrual		Than 29 Days		Current or
	29 Days,		More Than		Status		Past Due or on		Less Than		Total
	and Less Than		89 Days		(Generally, 90		Nonaccrual		30 Days		Portfolio
	90 Days		(Accruing)		Days or More)		Status		Past Due		Loans
Loans secured by real estate:
Commercial	$	26,929	$	2,875	$	148,371	$	178,175	$	1,010,935	$	1,189,110
Residential (including multi-
family)		12,381		1,484		57,899		71,764		369,865		441,629
Construction, land development
and other land		6,046		2,380		51,620		60,046		124,777		184,823
Total loans secured by real    estate		45,356		6,739		257,890		309,985		1,505,577		1,815,562
Commercial and other business-
purpose loans		8,288		2,073		29,260		39,621		246,295		285,916
Consumer		548		38		162		748		17,811		18,559
Other										5,226		5,226
Total	$	54,192	$	8,850	$	287,312	$	350,354	$	1,774,909	$	2,125,263

(1)   For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Capitol categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt obligations based on:  current financial information, aging analysis, historical payment experience, credit documentation and public information, among other factors.  Capitol analyzes loans individually by classifying the loans as to credit risk.  This analysis generally includes all loans and is generally performed at least quarterly.  Capitol uses the following definitions for its loan risk ratings:

Pass.  Loans classified with a pass rating have been deemed to have acceptable credit quality by bank management.

Watch.  Loans classified as watch have a potential weakness that deserves management's close attention.  If not improved, those potential weaknesses may result in deterioration of the repayment prospects for the loan in the future.

Substandard.  Loans classified as substandard are inadequately protected by the borrower's current net worth, paying capacity of the borrower or the fair value of collateral.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt obligation by the borrower.  These are characterized by the reasonable possibility that some loss will be sustained if the deficiencies are not favorably resolved.

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Page 20 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

Based on management's most recent analysis, the risk categories of loans are summarized as follows (in $1,000s):

	September 30, 2011
	Pass						Total Portfolio Loans
			Watch		Substandard
Loans secured by real estate:
Commercial	$	726,206	$	91,850	$	227,953	$	1,046,009
Residential (including multi-family)		262,360		33,233		85,300		380,893
Construction, land development and
other land		73,142		15,810		53,304		142,256
Total loans secured by real estate		1,061,708		140,893		366,557		1,569,158
Commercial and other business-purpose
loans		159,949		14,452		36,790		211,191
Consumer		13,563		578		655		14,796
Other		2,524		328		3		2,855
Total	$	1,237,744	$	156,251	$	404,005	$	1,798,000

	December 31, 2010(1)
	Pass						Total Portfolio Loans
			Watch		Substandard
Loans secured by real estate:
Commercial	$	828,972	$	109,296	$	250,842	$	1,189,110
Residential (including multi-family)		313,507		34,334		93,788		441,629
Construction, land development and
other land		93,221		22,595		69,007		184,823
Total loans secured by real estate		1,235,700		166,225		413,637		1,815,562
Commercial and other business-purpose
loans		205,800		22,166		57,950		285,916
Consumer		17,163		967		429		18,559
Other		4,886		340				5,226
Total	$	1,463,549	$	189,698	$	472,016	$	2,125,263

(1)   For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Page 21 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

Troubled Debt Restructurings

Loan modifications or restructurings are accounted for as troubled debt restructurings if, for economic or legal reasons, it has been determined a borrower is experiencing financial difficulties and the bank grants a "concession" to the borrower that it would not otherwise consider.  For all classes of loans, a troubled debt restructuring may involve a modification of terms such as a reduction of the stated interest rate or loan balance, a reduction of the accrued interest, an extension of the maturity date at an interest rate lower than a current market rate for a new loan with similar risk, or some combination thereof involving a concession to the borrower to facilitate repayment.

The Corporation has designated a troubled debt restructuring as a loan that has been modified and meets one or more of the following criteria:

1.   An extension or renewal of a substandard rated loan with no change in rate or terms, and the terms provided are not representative of current market rates for credits with similar risk characteristics;

2.   A loan modification where the repayment terms are modified for a specific period of time in order to allow the borrower to liquidate or dispose of the related collateral to provide the ability to pay the loan off in full;

3.   Modification of the interest rate for a defined period of time in order to allow the borrower to repay the debt, based on current cash flow sources;

4.   A loan modified to an "interest only" structure for a period of time that will result in the loan being paid off, returned to the contracted terms or refinanced; or

5.   A modification of a loan into an A/B note structure, where the A note is at market rate terms and conditions, and the B note has been charged off.

Loans modified and classified as troubled debt restructurings are impaired loans.  Each loan that is designated as a troubled debt restructuring is individually evaluated for impairment to determine the specific reserve to be established.  The specific reserve is determined using the discounted cash flow method, the collateral dependency method or, when available, the observable market price method, and is calculated as the difference between the carrying value of the loan and the result of the impairment measurement method.  The Corporation established a specific allocation of the allowance for loan losses of $15.0 million for loans newly-classified as troubled debt restructurings during the nine months ended September 30, 2011.  A portion of this allocation had previously been established as part of the allowance for loan losses on loans that were collectively-evaluated for impairment.

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Page 22 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

The following tables summarize loans modified as troubled debt restructurings during the three months and nine months ended September 30, 2011 (in $1,000s):

	For the Three Months Ended September 30, 2011
	Number of Contracts		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Loan Loss Reserve
Troubled debt restructurings:
Loans secured by real estate:
Commercial		30	$	10,180	$	8,828	$	672
Residential		28		4,971		4,403		465
Construction, land development
and other		17		3,638		3,585		547
Total loans secured by
real estate		75		18,789		16,816		1,684
Commercial and other business-
purpose loans		19		2,628		1,929		384
Total		94	$	21,417	$	18,745	$	2,068

	For the Nine Months Ended September 30, 2011
	Number of Contracts		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Loan Loss Reserve
Troubled debt restructurings:
Loans secured by real estate:
Commercial		146	$	76,544	$	67,804	$	6,776
Residential		136		27,814		24,646		2,307
Construction, land development
and other		57		17,050		13,649		2,356
Total loans secured by
real estate		339		121,408		106,099		11,439
Commercial and other business-
purpose loans		88		15,814		13,343		3,330
Consumer		2		270		240		232
Total		429	$	137,492	$	119,682	$	15,001

Of the amounts in the table above, approximately $63 million, or 53%, and 254 contracts, or 59%, are substandard rated loans that were extended or renewed with no change in rate or terms, and the terms provided were not representative of current market rates for loans with similar risk characteristics.  The remainder of the troubled debt restructuring pool constitutes loans where repayment terms and/or interest rates were modified, or the loan was modified to an "interest only" structure.

Page 23 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Loans – Continued

A payment default is determined when a loan is 90 days or more past due.  The following table summarizes loans modified as troubled debt restructurings in the last twelve months for which there was a payment default for the three months and nine months ended September 30, 2011 (in $1,000s):

	For the Three Months Ended September 30, 2011				For the Nine Months Ended September 30, 2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled debt restructurings that
subsequently defaulted:
Loans secured by real estate:
Commercial		3	$	1,527		50	$	28,034
Residential		12		1,686		37		8,660
Construction, land development
and other						21		8,426
Total loans secured by
real estate		15		3,213		108		45,120
Commercial and other business-
purpose loans		4		663		19		3,371
Total		19	$	3,876		127	$	48,491

The total amount of troubled debt restructurings as of September 30, 2011 is detailed in the following table by loan type and accrual status (in $1,000s):

	Troubled Debt Restructurings at September 30, 2011
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	57,818	$	53,297	$	111,115
Residential (including multi-family)		21,742		16,939		38,681
Construction, land development and
other land		14,178		8,987		23,165
Total loans secured by real estate		93,738		79,223		172,961
Commercial and other business-purpose
loans		7,006		10,022		17,028
Consumer		231		27		258
Total	$	100,975	$	89,272	$	190,247

Page 24 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Discontinued Operations

Through September 30, 2011, Capitol completed the following sales of bank subsidiaries (in $1,000s):

		Sale		Gain
	Date Sold	Proceeds		(Loss)
Bank of Tucson – main office(1)	January 24, 2011	$	4,567	$	4,418
Bank of Fort Bend(2)	March 30, 2011		4,302		1,432
Community Bank of Rowan(3)	April 19, 2011		4,845		(1,298	)
Bank of the Northwest/Sunrise Bank(3)	July 28, 2011		24,113		184
		$	37,827	$	4,736

(1) Previously a wholly-owned subsidiary of Capitol.  Sale proceeds represent the net premium received from the assumption of liabilities and acquisition of assets transaction.

(2) Previously a majority-owned subsidiary of a bank-development subsidiary controlled by Capitol.

(3) Previously a majority-owned subsidiary of Capitol.

On October 4, 2011, the sale of Bank of Feather River was completed with aggregate proceeds of $3.3 million and an estimated loss of approximately $240,000, which has been reflected in Capitol's third quarter financial statements against the net gain on sale of the above-mentioned bank subsidiaries.

On October 10, 2011, the sale of Evansville Commerce Bank was completed with aggregate proceeds of $2.3 million and an estimated gain of $48,000.  On October 27, 2011, the sale of Bank of Las Colinas was completed with aggregate proceeds of $3.9 million and an estimated gain of $780,000.

Capitol's consolidated results of operations would not have been materially different if the sales of these banks had occurred at the beginning of the periods presented; however, such sales are reflected on that basis in the pro forma condensed consolidated financial statements on page 53 of this document.

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Page 25 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Discontinued Operations – Continued

The results of operations for banks sold in 2011 including Bank of Feather River, Bank of Fort Bend, Bank of Las Colinas, Bank of the Northwest, Bank of Tucson – main office, Community Bank of Rowan, Evansville Commerce Bank and Sunrise Bank, together with the results of operations of Adams Dairy Bank, Bank of Belleville, Bank of San Francisco, Community Bank of Lincoln, Fort Collins Commerce Bank, Larimer Bank of Commerce, Loveland Bank of Commerce, Napa Community Bank, Ohio Commerce Bank, Southern Arizona Community Bank and USNY Bank which were sold in 2010, are classified as discontinued operations for the periods presented and include the following components (in $1,000s):

	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011		2010
Interest income	$	3,379		$	18,604		$	18,164	$	60,451
Interest expense		455			3,593			2,550		12,164
Net interest income		2,924			15,011			15,614		48,287
Provision for loan losses		63			3,823			2,428		11,747
Net interest income after provision for
loan losses		2,861			11,188			13,186		36,540
Noninterest income		362			1,274			1,748		4,077
Gain (loss) on sale of bank subsidiaries		(56	)		3,296			4,496		13,379
Noninterest expense		2,588			9,971			13,148		32,144
Income before income taxes		579			5,787			6,282		21,852
Less income tax expense		6			1,664			1,664		7,133
Net income from discontinued operations		573			4,123			4,618		14,719
Net (income) losses attributable to noncontrolling
interests in consolidated subsidiaries		(63	)		(85	)		136		776
Net income from discontinued operations
attributable to Capitol Bancorp Limited	$	510		$	4,038		$	4,754	$	15,495
Net income from discontinued operations
per common share attributable to Capitol
Bancorp Limited	$	0.01		$	0.19		$	0.12	$	0.78

Assets and liabilities of discontinued operations are summarized below (in $1,000s):

	Sept 30, 2011			Dec 31, 2010				Sept 30, 2011		Dec 31, 2010
Assets:							Liabilities:
Cash and cash equivalents	$	34,212		$	181,668		Noninterest-bearing
Investment securities					12,657		deposits	$	32,359	$	210,574
Federal Home Loan Bank							Interest-bearing deposits		102,732		608,213
stock		257			3,419		Total deposits		135,091		818,787
Portfolio loans		116,514			705,783		Other liabilities		247		13,054
Less allowance for loan
losses		(2,246	)		(18,950	)		$	135,338	$	831,841
Net portfolio loans		114,268			686,833
Premises and equipment		1,063			7,214
Other real estate owned		620			7,563
Other assets		1,767			12,757
	$	152,187		$	912,111

Page 26 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note F – Fair Value

The following is a description of Capitol's valuation methodologies used to measure and disclose the fair values of its 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.

Mortgage loans held for sale:  Mortgage loans held for sale are carried at the lower of aggregate cost or fair value and are measured on a nonrecurring basis.  There were no mortgage loans held for sale written down to fair value at September 30, 2011.  Fair value is based on independent quoted market prices, where applicable, or the prices for other whole mortgage 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 for collateral-dependent loans are recorded to reflect partial write-downs or specific reserves based on the observable market price, current appraised value of the collateral or other estimates of fair value.

Other real estate owned:  At the time of foreclosure, foreclosed properties are adjusted to estimated fair value less estimated costs to sell upon transfer from portfolio loans to other real estate owned, establishing a new carrying value.  The Corporation subsequently adjusts estimated fair value of other real estate owned on a nonrecurring basis to reflect partial write-downs based on the observable market price or current appraisal data.

Long-lived and indefinite-lived assets:  The Corporation does not record long-lived or indefinite-lived assets at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments to a long-lived or indefinite-lived asset are recorded to reflect partial write-downs based on the observable market price or other estimate of fair value in the event of impairment.

There were no liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2011 and December 31, 2010.

Assets measured at fair value on a recurring basis were as follows (in $1,000s):

	September 30, 2011				December 31, 2010(1)
	Total		Significant Other Observable Inputs (Level 2)		Total		Significant Other Observable Inputs (Level 2)
Investment securities available for sale:
United States treasury	$	4,029	$	4,029	$	506	$	506
United States government agency		12,505		12,505		12,681		12,681
Mortgage-backed		7,821		7,821		1,924		1,924
Municipalities		335		335		378		378
	$	24,690	$	24,690	$	15,489	$	15,489

(1)   For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Page 27 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note F – Fair Value – Continued

Assets measured at fair value on a nonrecurring basis were as follows (in $1,000s):

	September 30, 2011				December 31, 2010(2)
	Total		Significant Unobservable Inputs (Level 3)		Total		Significant Unobservable Inputs (Level 3)
Impaired loans(1)	$	180,985	$	180,985	$	179,178	$	179,178
Other real estate owned(1)	$	104,169	$	104,169	$	101,497	$	101,497

(1)   Represents carrying value based on the appraised value of the applicable collateral or foreclosed property or other estimates of fair value.  For other real estate owned, such fair value is reduced by estimated costs to sell the properties.

(2)   For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Updated appraisals are generally obtained when it has been determined that a collateral-dependent loan has become impaired or when it is likely a loan secured by real estate will be foreclosed.  Adjustments to the loan's carrying value (or requirements for an allocation of the allowance for loan losses) are made, when appropriate, after review of appraisal data or, in the absence of a recent appraisal, if market conditions significantly decline further.  The timing of when a collateral-dependent loan should be classified as a nonperforming credit is contingent upon several factors, including the performance of the loan, payment history and/or results of the bank's review of updated borrower financial information.

When a borrower's performance has deteriorated (for example, the borrower has become delinquent on required payments, the borrower's updated financial information received indicates adverse financial trends or sales/leasing activity is less than expected in the case of multi-unit properties), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered.  In the period between a loan being recognized as impaired and receipt of an updated appraisal, the loan will be included within loss contingency pools, in conjunction with estimating the bank's requirements for its allowance for loan losses.  Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, the loan will be further evaluated for appropriate write-down.  Generally, negative differences between appraised value, less the estimated cost to sell, and the related carrying value of the loans are charged to the allowance for loan losses, as a partial write-down/charge-off, on a timely basis after the appraisal has been received and reviewed.  Occasionally, additional potential loss amounts may be included if circumstances exist which may further adversely impact fair value estimates.  Internally-developed evaluations may be used when the amount of a loan is less than $250,000.  Internally-prepared evaluations may also be used when the most recent appraisal date is within a year to estimate the current effect of economic conditions or deterioration.  Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

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Page 28 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note F – Fair Value – Continued

Comparative carrying values and estimated fair values of financial instruments based upon the accounting guidance set forth in Accounting Standards Codification 825-10 were as follows (in $1,000s):

	September 30, 2011						December 31, 2010(2)
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	423,869		$	423,869		$	439,840		$	439,840
Loans held for sale		1,745			1,745			5,587			5,587
Investment securities:
Available for sale		24,690			24,690			15,489			15,489
Held for long-term investment		2,012			2,012			2,893			2,893
		26,702			26,702			18,382			18,382
Federal Home Loan Bank and Federal Reserve Bank stock		14,266			14,266			15,494			15,494
Portfolio loans:
Loans secured by real estate:
Commercial		1,046,009			1,044,589			1,189,110			1,195,250
Residential (including multi-family)		380,893			381,524			441,629			441,166
Construction, land development and other land		142,256			142,847			184,823			185,017
Total loans secured by real estate		1,569,158			1,568,960			1,815,562			1,821,433
Commercial and other business-purpose loans		211,191			211,472			285,916			286,633
Consumer		14,796			15,036			18,559			18,737
Other		2,855			2,801			5,226			5,137
Total portfolio loans		1,798,000			1,798,269			2,125,263			2,131,940
Less allowance for loan losses		(102,917	)		(102,917	)		(130,851	)		(130,851	)
Net portfolio loans		1,695,083			1,695,352			1,994,412			2,001,089
Financial liabilities:
Deposits:
Noninterest-bearing		370,715			370,715			375,076			375,076
Interest-bearing:
Demand accounts		553,125			553,125			618,395			618,395
Time certificates of less than $100,000		552,033			557,759			658,916			662,711
Time certificates of $100,000 or more		677,718			682,732			765,645			769,168
Total interest-bearing		1,782,876			1,793,616			2,042,956			2,050,274
Total deposits		2,153,591			2,164,331			2,418,032			2,425,350
Notes payable and other borrowings		71,909			65,343			111,699			104,516
Subordinated debentures		149,131			151,296	(1)		167,586			170,841	(1)

(1)   Represents liquidation or principal amount outstanding.  The quoted market value of certain trust-preferred securities (Capitol Trust I and XII) included within subordinated debentures was substantially less than that amount.

(2)   For comparative purposes, original balances as previously reported have been adjusted toexclude amounts related to discontinued operations.

Estimated fair values of financial assets and liabilities in the table above are based upon a comparison of current interest rates on financial instruments and the timing of related scheduled cash flows to the estimated present value of such cash flows using current estimated market rates of interest (unless quoted market values or other fair value information is more readily available, except certain subordinated debentures, as indicated above, for which the fair value is based on the liquidation or principal amount outstanding).  For example, the estimated fair value of portfolio loans is determined based on discounted cash flow computations.  Similarly, the estimated fair values of time deposits, notes payable and other borrowings were determined through discounted cash flow computations.

Page 29 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note F – Fair Value – Continued

Such estimates of fair value are not intended to represent portfolio liquidation value and, accordingly, only represent an estimate of fair value based on current financial reporting requirements.

Given current economic conditions, the majority of the loan portfolio is not readily marketable and, accordingly, market prices may not exist.  Capitol has not attempted to market the loan portfolio to potential buyers, if any exist, to determine the fair value of those instruments.  Since negotiated prices, if any, in illiquid markets depend upon the then-present motivations of the buyer and seller, it is reasonable to assume that potential sales prices could vary widely from any estimate of fair value made without the benefit of negotiations.  Additionally, changes in market interest rates commensurate with risk may dramatically impact the value of financial instruments at any time.  Accordingly, fair value measurements for loans included in the preceding table are unlikely to represent the instruments' liquidation values.

Note G – Stock Options

Stock option activity is summarized as follows:

	Number Outstanding			Exercise Price Range					Weighted Average Exercise Price
Outstanding at January 1, 2011		1,745,602		$	1.78	to	$	46.20	$	21.53
Granted		100,000				0.09				0.09
Cancelled or expired		(272,909	)		2.01	to		25.86		25.75
Outstanding at September 30, 2011		1,572,693		$	0.09	to	$	46.20	$	19.44

Stock options were granted during the nine months ended September 30, 2011 and 2010 with an aggregate fair value approximating $7,000 and $255,000, respectively.  Share-based compensation expense relating to stock options for the nine months ended September 30, 2011 and 2010 approximated $7,000 and $242,000, respectively.

As of September 30, 2011, stock options outstanding had a weighted average remaining contractual life of 2.49 years and, due to the exercise price being greater than the fair value of Capitol's common stock, had no intrinsic value at that date.  The following table summarizes stock options outstanding segregated by exercise price range as of September 30, 2011:

				Weighted Average
Exercise Price Range		Number Outstanding		Exercise Price		Remaining Contractual Life
$	0.01 to   5.99		570,237	$	1.65	4.15 years
$	6.00 to   9.99		69,521		6.04	4.35 years
$	15.00 to 19.99		45,087		16.40	0.10 years
$	20.00 to 24.99		205,954		22.02	2.79 years
$	30.00 to 34.99		341,898		32.31	0.68 years
$	35.00 or more		339,996		37.91	1.29 years
Total outstanding			1,572,693	$	19.44

Page 30 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note H – Net Loss Per Common Share Attributable to Capitol Bancorp Limited

Computations of net loss per common share were based on the following (in 1,000s) for the periods ended September 30:

	Three Month Period						Nine Month Period
	2011			2010			2011			2010
Numerator—net loss attributable to Capitol Bancorp     Limited for the period	$	(22,762	)	$	(52,166	)	$	(38,911	)	$	(141,051	)
Denominator:
Weighted average number of common shares         outstanding, excluding unvested restricted shares         of common stock (denominator for basic and         diluted net loss per share)		41,018			21,300			38,075			19,810
Number of antidilutive stock options excluded from diluted net loss per share computation		1,573			1,922			1,573			1,922
Number of antidilutive unvested restricted shares excluded from basic and diluted net loss per share computation		26			318			26			318
Number of antidilutive warrants excluded from diluted net loss per share computation		1,326			1,326			1,326			1,326

Note I – Trust-Preferred Securities and Debt Extinguishment

In 2009, the Corporation commenced the deferral of interest payments on its various trust-preferred securities, as is permitted under the terms of the securities, in order to conserve cash and capital resources.  The payment of interest on those securities may be deferred for periods up to five years.  During such deferral periods, Capitol is prohibited from paying dividends on its common stock (subject to certain exceptions) and is further restricted by Capitol's written agreement with the Federal Reserve Bank of Chicago, which prohibits both payment of interest on the trust-preferred securities and cash dividends without prior written approval by that agency.  Accrued interest payable on such securities approximated $24.9 million and $20.8 million at September 30, 2011 and December 31, 2010, respectively.  Holders of the trust-preferred securities will recognize current taxable income relating to the deferred interest payments.

On January 31, 2011, Capitol accepted for exchange 1,180,602 of the 2,530,000 outstanding shares of trust-preferred securities of Capitol Trust I and 773,934 of the 1,454,100 outstanding shares of trust-preferred securities of Capitol Trust XII and, pursuant to the related exchange offer, issued approximately 19.5 million previously-unissued shares of Capitol's common stock.  This exchange resulted in the retirement of approximately $19.5 million aggregate liquidation amount of the trust-preferred securities on a combined basis and eliminated approximately $2.4 million of accrued interest payable associated with the retired securities, which collectively increased Capitol's equity and regulatory capital by $21.9 million, including a gain on the transaction of approximately $16.9 million.

In 2010, Capitol extinguished approximately $4.6 million in promissory notes in exchange for 1,374,000 shares of common stock resulting in a gain of $1.3 million.

Page 31 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note J – Pending Sale of Subsidiary Banks

In addition to completed sales of certain bank subsidiaries (see Note E), Capitol has entered into definitive agreements to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institutions which are pending:  Bank of Maumee, Bank of Michigan, First Carolina State Bank, Mountain View Bank of Commerce and Pisgah Community Bank.  The financial statement impact of the potential divestiture of these institutions is set forth in the accompanying pro forma condensed consolidated financial statements on pages 53 and 54 of this document.

The remaining pending bank sales are subject to regulatory approval and other significant contingencies.

Note K – Regulatory and Operating Matters

In September 2009, Capitol and its second-tier bank holding companies entered into an agreement with the Federal Reserve Bank of Chicago (the Reserve Bank) under which Capitol agreed to refrain from the following actions without the prior written consent of the Reserve Bank:  (i) declare or pay dividends; (ii) receive dividends or any other form of payment representing a reduction in capital from Michigan Commerce Bank, or from any of its subsidiary institutions that are subject to any restriction by the institution's federal or state regulator that limits the payment of dividends or other intercorporate payments; (iii) make any distributions of interest, principal, or other sums on subordinated debentures or trust-preferred securities; (iv) incur, increase or guarantee any debt; or (v) purchase or redeem any shares of the stock of Capitol, the second-tier bank holding companies, nonbank subsidiaries or any of the subsidiary banks that are held by shareholders other than Capitol.

In addition, Capitol agreed to:  (i) submit to the Reserve Bank a written plan to maintain sufficient capital at Capitol on a consolidated basis and at Michigan Commerce Bank (as Capitol's largest bank subsidiary and a separate legal entity on a stand-alone basis); (ii) notify the Reserve Bank no more than 30 days after the end of any quarter in which Capitol's consolidated or Michigan Commerce Bank's capital ratios fall below the approved capital plan's minimum ratios, as well as if any subsidiary institution's ratios fall below the minimum ratios required by the institution's federal or state regulator; (iii) review and revise its allowance for loan losses (ALLL) methodology for loans held by Capitol and submit to the Reserve Bank a written program for maintenance of an adequate ALLL for loans held by Capitol; (iv) take all necessary actions to ensure each of its subsidiary institutions comply with Federal Reserve regulations; (v) refrain from increasing any fees or charging new fees to any subsidiary institution without the prior written consent of the Reserve Bank; (vi) submit to the Reserve Bank a written plan to enhance the consolidated organization's risk management practices, a strategic plan to improve the consolidated organization's operating results and overall condition and a cash flow projection; (vii) comply with laws and regulations regarding senior executive officer positions and severance payments; and (viii) provide quarterly reports to the Reserve Bank regarding these undertakings.

Many of Capitol's bank subsidiaries have entered into formal agreements (as well as informal agreements) with their applicable regulatory agencies.  Those agreements provide for certain restrictions and other guidelines and/or limitations to be followed by the banks.

The FDIC may issue Prompt Corrective Action Notifications (PCAN) to banking subsidiaries falling below the "adequately-capitalized" regulatory-capital classification, and subsequently may issue Prompt Correction Action Directives (PCAD).  PCADs may be issued when a bank, which has previously received a PCAN, has submitted two consecutive capital restoration plans which have been rejected by the FDIC.

Page 32 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note K – Regulatory and Operating Matters – Continued

Banking subsidiaries which have received a PCAN and/or a PCAD are as follows as of September 2011 (listed in descending order based on total assets):

PCAN	PCAD
Michigan Commerce Bank	Michigan Commerce Bank
Bank of Las Vegas	Bank of Las Vegas
Sunrise Bank of Arizona	Sunrise Bank of Arizona
Sunrise Bank (GA)
First Carolina State Bank
Central Arizona Bank	Central Arizona Bank
Sunrise Bank of Albuquerque
1st Commerce Bank
Pisgah Community Bank

For each banking subsidiary which has received a PCAN, capital restoration plans have been requested by the FDIC, prepared and resubmitted for regulatory review and approval.  For banks in receipt of a PCAD, those institutions are striving to develop and implement capital restoration plans which may be subsequently acceptable to the FDIC.

Regulatory capital matters are set forth in Note L.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law and significantly changes future regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts and smaller bank holding companies will be regulated in the future.  Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of FDIC insurance coverage and impose new capital requirements on bank holding companies, including removing trust-preferred securities as a permitted component of a holding company's Tier 1 capital after a three-year phase-in period beginning January 1, 2013.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks.  Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments.  Management is continuing to evaluate the provisions of the Dodd-Frank Act and assessing its probable impact on the Corporation's business, financial condition and results of operations.  However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and on the Corporation in particular, is currently uncertain.

One particularly important aspect of the Dodd-Frank Act (as amended) is that certain trust-preferred securities issued by bank holding companies with total assets less than $10 billion, such as Capitol, will be permitted to be included as an element of qualifying capital for regulatory capital-adequacy purposes.  Accordingly, Capitol's trust-preferred securities may be included in regulatory capital measurements in the future, subject to certain limitations, although none of those securities are currently included.

Page 33 of 61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note K – Regulatory and Operating Matters – Continued

In July 2011, Capitol adopted a Tax Benefits Preservation Plan (the "Plan") designed to preserve substantial tax assets.  Capitol's tax attributes include net operating losses that could be utilized in certain circumstances to offset taxable income and reduce federal income tax liability.  Capitol's ability to use these tax attributes would be substantially limited if there were an "ownership change" as defined under Section 382 of the Internal Revenue Code and related Internal Revenue Service pronouncements.  As part of the Plan, Capitol's board of directors declared a dividend of one preferred share purchase right for each outstanding share of its common stock distributable to shareholders of record as of August 1, 2011, as well as to holders of common stock issued after that date, but would only be activated if triggered under the Plan.

Note L – Regulatory Capital Matters

The following table summarizes the amounts (in $1,000s) and related ratios of Capitol's consolidated regulatory capital position:

	September 30,				December 31,
	2011				2010
Tier 1 capital to average adjusted total assets:
Minimum required amount(1)	≥	$	105,492		≥	$	155,224
Actual amount		$	(94,499	)		$	(39,980	)
Ratio			(3.58	)%			(1.03	)%
Tier 1 capital to risk-weighted assets:
Minimum required amount(2)	≥	$	76,189		≥	$	110,909
Actual amount		$	(94,499	)		$	(39,980	)
Ratio			(4.96	)%			(1.44	)%
Combined Tier 1 and Tier 2 capital to risk- weighted assets:
Minimum required amount(3)	≥	$	152,378		≥	$	221,818
Actual amount		$	(94,499	)		$	(39,980	)
Ratio			(4.96	)%			(1.44	)%

(1)	The minimum required ratio of Tier 1 capital to average adjusted total assets is 4%.
(2)	The minimum required ratio of Tier 1 capital to risk-weighted assets to be considered "adequately-capitalized" is 4%.
(3)	The minimum required ratio of Tier 1 and Tier 2 capital to risk-weighted assets to be considered "adequately-capitalized" is 8%.

Capitol's total risk-based capital ratio at September 30, 2011 and December 31, 2010 was materially and adversely impacted by the exclusion of approximately $173.9 million and $203.7 million, respectively, of previously-qualifying Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital, primarily trust-preferred securities and a portion of the allowance for loan losses.  The Tier 1 capital deficit resulted primarily from operating losses; however, a Tier 2 limitation, primarily due to the exclusion of trust-preferred securities, did not apply to Capitol's regulatory capital computations at earlier measurement dates prior to 2010.

The preceding summary indicates that Capitol, on a consolidated basis, was classified as less than "adequately-capitalized" at September 30, 2011 for regulatory purposes.  In addition, several of its bank subsidiaries had capital levels resulting in classification as "undercapitalized" or "significantly-undercapitalized" at that date.  Banks and bank holding companies which are less than "adequately-capitalized" are subject to increased regulatory oversight, requirements and limitations.  Regarding banks classified as "undercapitalized" or "significantly-undercapitalized," or otherwise noncompliant with formal regulatory agreements, management is taking appropriate action to improve such capital classifications and related compliance in the future.

Regulatory capital ratios of the banks are set forth on page 46 on this document.

Page 34 of 61

PART I, ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of Capitol for the periods indicated, excluding the effect of discontinued operations for the periods presented.  The discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto presented elsewhere herein.  In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, some of which are material to Capitol and its subsidiaries.  Capitol's actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report.  Please refer to the commentary regarding forward-looking statements appearing on page 2 of this document.

Financial Condition

Total assets approximated $2.5 billion at September 30, 2011 and $3.5 billion at December 31, 2010.  The balance sheet includes total assets of Capitol and its consolidated subsidiaries (in $1,000s) as follows:

	September 30, 2011		December 31, 2010
Arizona Region:
Bank of Tucson(1)			$	222,882
Central Arizona Bank	$	46,605		75,590
Sunrise Bank of Albuquerque		60,875		73,539
Sunrise Bank of Arizona		325,542		353,154
Arizona Region Total		433,022		725,165
California Region:
Bank of Feather River(1)		48,032		38,930
Sunrise Bank(1)				231,836
California Region Total		48,032		270,766
Colorado Region:
Mountain View Bank of Commerce		52,220		60,303
Great Lakes Region:
Bank of Maumee		34,623		40,300
Bank of Michigan		83,383		81,873
Capitol National Bank		153,630		157,606
Evansville Commerce Bank(1)		52,990		52,506
Indiana Community Bank		124,058		128,728
Michigan Commerce Bank		822,530		933,698
Great Lakes Region Total		1,271,214		1,394,711
Nevada Region:
1st Commerce Bank		32,157		39,555
Bank of Las Vegas		337,027		375,084
Nevada Region Total		369,184		414,639
Northwest Region:
Bank of the Northwest(1)				145,540
High Desert Bank		32,526		37,967
Northwest Region Total		32,526		183,507
Southeast Region:
Community Bank of Rowan(1)				140,276
First Carolina State Bank		90,255		103,254
Pisgah Community Bank		30,326		43,125
Sunrise Bank		85,601		112,718
Southeast Region Total		206,182		399,373
Texas Region:
Bank of Fort Bend(1)				35,375
Bank of Las Colinas(1)		51,165		44,767
Texas Region Total		51,165		80,142

Page 35 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of total assets – continued:

	September 30, 2011			December 31, 2010
Parent company and other, net	$	5,412		$	11,608
Consolidated totals		2,468,957			3,540,214
Less discontinued operations		(152,187	)		(912,111	)
Consolidated totals—continuing operations	$	2,316,770		$	2,628,103

(1) Capitol sold its ownership in Bank of Las Colinas effective October 27, 2011; Evansville Commerce Bank effective October 10, 2011; Bank of Feather River effective October 4, 2011; Bank of the Northwest and Sunrise Bank effective July 28, 2011; Community Bank of Rowan effective April 19, 2011; Bank of Fort Bend effective March 30, 2011 and Bank of Tucson effective January 24, 2011.  These banks' operations are included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.

Total assets decreased $1.1 billion during the nine months ended September 30, 2011, of which $776 million related to bank subsidiaries sold during the period.

Portfolio loans, the single largest asset category (73% of total assets at September 30, 2011), decreased during the nine months ended September 30, 2011 by approximately $327 million, compared to a decrease of about $394 million during the corresponding period of 2010.  The portfolio decrease is in response to the need to preserve liquidity and capital in the current economic climate and the general economic slowdown occurring nationally.  Because portfolio loans comprise the largest portion of assets, most of this section of the narrative is devoted to loans and asset quality.

Geographic diversification of Capitol's balance sheet is important.  Prior to 1996, all of Capitol's banking operations were located in Michigan.  As of September 30, 2011, 54% of the consolidated loan portfolio relates to banks located within the Great Lakes Region (43% at December 31, 2010) and 46% of the consolidated loan portfolio relates to banks located in other regions of the country (57% at December 31, 2010).  This is important because Capitol's diversification efforts lessen disproportionate geographic concentration within a specific region.

The consolidated allowance for loan losses at September 30, 2011 approximated $102.9 million or 5.72% of total portfolio loans, a decrease from the 6.16% ratio at the beginning of the year (excluding discontinued operations), resulting from some improvement in economic conditions and changes in asset quality.  The consolidated allowance for loan losses at September 30, 2011 decreased $28 million from the beginning of the year, excluding discontinued operations, as the Corporation continues to shrink its loan portfolio in conjunction with its balance sheet deleveraging strategy and due to general loan curtailments.  The decrease in the allowance for loan losses is also somewhat reflective of stabilizing asset quality.

While the allowance for loan losses decreased from the beginning of the year, as well as from the second quarter, the provision for loan loss recorded for the quarter ended September 30, 2011 increased from $6.4 million for the second quarter to $17.5 million, or 173%.  A portion of the increased provision for loan loss was attributed to net charge-offs, which increased to $26.2 million for the quarter ended September 30, 2011 from $17.6 million for the previous quarter, notwithstanding a $123 million reduction of the loan portfolio over the same time period.

The Corporation recently received regulatory guidance about the methodology used to determine the allowance for loan losses at its bank affiliates.  The guidance recommended that the banks' methodology be modified such that higher loss rates, in part derived from loan charge-off history on the substandard risk rated loan pools, be applied to the "watch" rated loans as well as the "pass" (or acceptable credit quality) rated loan pool, the largest category of loans in the banks' portfolios.  Corporate management is in ongoing dialogue about this guidance for determining the allowance for loan losses.  Separately, management retained three independent professional accounting and consulting firms to validate the banks' methodology.  Each of these separate independent firms concluded that the banks were using a valid methodology for determining the allowance for loan losses, and that the

Page 36 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

banks' methodology was in conformity with regulatory and authoritative accounting guidance, as well as leading industry practice.  Based on management's judgment and analysis, and supported by the three separate firms' validation results, the Corporation believes that the banks' existing methodology used in determining the allowance for loan losses meets both regulatory guidance and requirements under generally accepted accounting principles, and represents management's best estimate of probable incurred losses in the loan portfolio as of September 30, 2011.  Nonetheless, the impact of the regulatory recommendations about the methodology has been incorporated in the provision for loan losses recorded for the quarter ended September 30, 2011, and is included in the allowance for loan losses as of September 30, 2011.

Loan charge-offs for the interim 2011 periods, which decreased significantly compared to 2010, are not necessarily indicative of future charge-off levels because of the variability in asset quality and resolution of nonperforming loans.  The significant increase in the provision for loan losses in the 2010 period related primarily to Michigan, Arizona and Nevada banks, and were the result of growth in nonperforming loans and a sustained difficult and uncertain economic climate.

Nonperforming loans decreased $49.4 million or 16.7% during the nine months ended September 30, 2011, compared to an increase of $29.2 million or 10.6% in the corresponding period of 2010.  Nonperforming loans have decreased for five consecutive quarters.  Nonperforming assets decreased $46.5 million for the nine months ended September 30, 2011 compared to an increase of $23.4 million in the corresponding period of 2010.  Management believes the overall decreases demonstrate some stabilization in several of Capitol's key markets; however, no assurance can be given that future operating results will continue to reflect these recent trends.

The allowance for loan losses as a percentage of nonperforming loans approximated 41.7% at September 30, 2011, compared to 44.2% at the beginning of the year (excluding operations discontinued in 2010).  As previously-discussed, the allowance for loan losses is an estimate based on judgment as determined by management at the balance-sheet date.  Levels of nonperforming loans may fluctuate at balance-sheet dates by amounts which are not commensurate with the ratio of the allowance for loan losses or the allowance coverage ratio of nonperforming loans (i.e., the allowance for loan losses as a percentage of nonperforming loans).  Several factors may contribute to this occurrence.  For example, estimated losses relating to impaired collateral-dependent loans are generally reflected as direct write-downs to those loans and charge-offs and, accordingly, there is no related allowance for loan losses allocation necessary.  Further, some collateral-dependent loans may have minimal or no loss potential which would negate a computational comparison between the allowance for loan losses and such nonperforming loans.

While recent reductions in nonperforming loans and other nonperforming assets are encouraging, future changes in asset quality remain uncertain.  Because bank subsidiaries which were sold during 2010 and the interim 2011 period had relatively better asset quality than the remaining banks, nonperforming assets increased as a percentage of consolidated portfolio loans and total assets, despite the most recent decreases in the amount of nonperforming assets.

Nonperforming loans at September 30, 2011 approximated 13.7% of total portfolio loans, a decrease from the December 31, 2010 ratio of 13.9% (excluding discontinued operations).  Of the nonperforming loans at September 30, 2011, about 92% were secured by real estate.  Those loans, when originated, had appropriate loan-to-value ratios based upon real estate market conditions at that time and, accordingly, had loss exposure which would have been expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies.  Most other nonperforming loans were generally secured by other business assets.  Nonperforming loans at September 30, 2011 were in various stages of resolution which management believes are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses.

Page 37 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Due to local, regional and national economic conditions, there is uncertainty in future real estate values, appraisal data and the resulting potential impact on valuation of collateral-dependent loans and other real estate owned.  The fair value measurement of collateral-dependent loans and other real estate owned is dependent upon appraisals of the underlying property value.  Management cautiously and diligently monitors real estate values when evaluating appraisals or its internal evaluations of property values.

Updated appraisals are generally obtained when it has been determined that a collateral-dependent loan has become impaired or when it is likely a loan secured by real estate will be foreclosed.  Adjustments to the loan's carrying value (or requirements for an allocation of the allowance for loan losses) are made, when appropriate, after review of appraisal data or, in the absence of a recent appraisal, if market conditions significantly decline further.  The timing of when a collateral-dependent loan should be classified as a nonperforming credit is contingent upon several factors, including the performance of the loan, payment history and/or results of the bank's review of updated borrower financial information.

When a borrower's performance has deteriorated (for example, the borrower has become delinquent on required payments, the borrower's updated financial information received indicates adverse financial trends or sales/leasing activity is less than expected in the case of multi-unit properties), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered.  In the period between a loan being recognized as impaired and receipt of an updated appraisal, the loan will be included within loss contingency pools, in conjunction with estimating the bank's requirements for its allowance for loan losses.  Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, the loan will be further evaluated for appropriate write-down.  Generally, negative differences between appraised value, less the estimated cost to sell, and the related carrying value of the loans are charged to the allowance for loan losses, as a partial write-down/charge-off, on a timely basis after the appraisal has been received and reviewed.  Occasionally, additional potential loss amounts may be included if circumstances exist which may further adversely impact fair value estimates.  Internally-developed evaluations may be used when the amount of a loan is less than $250,000.  Internally-prepared evaluations may also be used when the most recent appraisal date is within a year to estimate the current effect of economic conditions or deterioration.  Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

Total nonperforming loans approximated $246.8 million at September 30, 2011.  Of that total, $115 million or 46.6% (including some loans carried at the parent level) were originated by banks located within the Great Lakes Region, primarily in Michigan (excluding discontinued operations).  Nonperforming loans have decreased significantly during the nine months ended September 30, 2011, by $27.8 million within the Great Lakes Region and $10.4 million within the Arizona Region (excluding discontinued operations).

In response to the elevated level of nonperforming loans, higher levels of allowances for loan losses have been established for the Great Lakes Region (including some loans carried at the parent level), the Southeast Region and the Nevada Region, approximating 5.47%, 6.56% and 6.72% of portfolio loans for each of the respective regions on a combined basis as of September 30, 2011.  The allowance for loan losses levels range as high as 10.16% at 1st Commerce Bank, 8.69% at Pisgah Community Bank, 6.66% at Michigan Commerce Bank and 6.45% at Bank of Las Vegas.  Those ratios can be contrasted with some other banks and geographic regions within the Corporation with 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 intervention.  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 the nature of the borrower's business climate, local economic conditions and other subjective factors.  The loan rating process is fluid and subjective.

Page 38 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Potential problem loans include loans which are generally performing as agreed; however, because of loan reviews and/or lending staff's risk assessment, increased monitoring is deemed appropriate.  In addition, some loans are assigned a more adverse classification, with specific performance issues or other risk factors requiring close management and development of specific remedial action plans.

At September 30, 2011, problem and potential problem loans (including the previously-discussed nonperforming loans) approximated $560.3 million or about 31.2% of total consolidated portfolio loans, compared to approximately $661.7 million or about 31% at December 31, 2010.  These potential problem loans (exclusive of nonperforming loans) do not necessarily have significant loss exposure (nor are they necessarily deemed "impaired"), but rather are identified by management as potential problem loans 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.  Nonperforming loans, as previously discussed, are primarily secured by real estate which is subject to fair value estimates and related loss recognition.  Management believes, however, that current general economic conditions in some markets may result in continued future loan losses, as experienced in the first nine months of 2011.

Regarding other real estate owned and collateral-dependent loans in Michigan, foreclosure laws in that state 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) take much longer than in many other states.  Further, once a property is available to the bank for sale or liquidation, current market conditions (particularly in Michigan, Arizona and Nevada) may not be conducive to rapid marketing or near-term sale of the properties.

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Page 39 of 61

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 (in $1,000s):

							Allowance for												Allowance as a Percentage
	Total Portfolio Loans						Loan Losses						Nonperforming Loans						of Total Portfolio Loans
	Sept 30, 2011			Dec 31, 2010			Sept 30, 2011			Dec 31, 2010			Sept 30, 2011			Dec 31, 2010			Sept 30, 2011			Dec 31, 2010
Arizona Region:
Bank of Tucson(1)				$	159,334					$	2,380					$	7,711						1.49	%
Central Arizona Bank	$	35,950			52,844		$	2,004			2,552		$	4,165			5,092			5.57	%		4.83	%
Sunrise Bank of Albuquerque		47,559			52,502			2,267			2,499			5,878			4,731			4.77	%		4.76	%
Sunrise Bank of Arizona		245,489			264,181			14,163			16,700			27,022			29,936			5.77	%		6.32	%
Arizona Region Total		328,998			528,861			18,434			24,131			37,065			47,470			5.60	%		4.56	%
California Region:
Bank of Feather River(1)		40,936			31,297			651			479			130						1.59	%		1.53	%
Sunrise Bank(1)					183,641						7,815						8,529						4.26	%
California Region Total		40,936			214,938			651			8,294			130			8,529			1.59	%		3.86	%
Colorado Region:
Mountain View Bank of Commerce		39,067			41,087			750			789			24			883			1.92	%		1.92	%
Great Lakes Region:
Bank of Maumee		28,610			33,558			1,251			1,427			1,309			442			4.37	%		4.25	%
Bank of Michigan		63,887			64,278			1,400			1,368			1,624			2,312			2.19	%		2.13	%
Capitol National Bank		127,083			138,251			4,434			5,976			13,180			13,616			3.49	%		4.32	%
Evansville Commerce Bank(1)		34,227			38,609			892			1,103			1,464			1,801			2.61	%		2.86	%
Indiana Community Bank		96,116			112,986			3,389			3,703			6,679			8,358			3.53	%		3.28	%
Michigan Commerce Bank		656,038			812,088			43,698			57,381			89,557			114,937			6.66	%		7.07	%
Great Lakes Region Total		1,005,961			1,199,770			55,064			70,958			113,813			141,466			5.47	%		5.91	%
Nevada Region:
1st Commerce Bank		19,865			25,521			2,019			624			4,033			5,611			10.16	%		2.45	%
Bank of Las Vegas		258,925			306,802			16,710			25,235			71,356			82,042			6.45	%		8.23	%
Nevada Region Total		278,790			332,323			18,729			25,859			75,389			87,653			6.72	%		7.78	%
Northwest Region:
Bank of the Northwest(1)					118,755						4,000						6,609						3.37	%
High Desert Bank		25,371			29,872			933			1,350			208			1,053			3.68	%		4.52	%
Northwest Region Total		25,371			148,627			933			5,350			208			7,662			3.68	%		3.60	%
Southeast Region:
Community Bank of Rowan(1)					102,926						1,736						3,441						1.69	%
First Carolina State Bank		61,978			77,797			3,585			2,389			5,550			6,560			5.78	%		3.07	%
Pisgah Community Bank		22,237			28,071			1,932			1,511			5,189			6,968			8.69	%		5.38	%
Sunrise Bank		65,769			79,558			4,323			4,374			8,381			10,452			6.57	%		5.50	%
Southeast Region Total		149,984			288,352			9,840			10,010			19,120			27,421			6.56	%		3.47	%
Texas Region:
Bank of Fort Bend(1)					29,788						700						419						2.35	%
Bank of Las Colinas(1)		41,351			41,434			703			737			861			907			1.70	%		1.78	%
Texas Region Total		41,351			71,222			703			1,437			861			1,326			1.70	%		2.02	%
Parent company and other, net		4,056			5,866			59			2,973			2,648			3,170		n.m.			n.m.
Consolidated totals		1,914,514			2,831,046			105,163			149,801			249,258			325,580			5.49	%		5.29	%
Less discontinued operations		(116,514	)		(705,783	)		(2,246	)		(18,950	)		(2,455	)		(29,417	)		(1.93	)%		(2.69	)%
Consolidated totals relating to continuing operations	$	1,798,000		$	2,125,263		$	102,917		$	130,851		$	246,803		$	296,163			5.72	%		6.16	%

(1)

Capitol sold its ownership in Bank of Las Colinas effective October 27, 2011; Evansville Commerce Bank effective October 10, 2011; Bank of Feather River effective October 4, 2011; Bank of the Northwest and Sunrise Bank effective July 28, 2011; Community Bank of Rowan effective April 19, 2011; Bank of Fort Bend effective March 30, 2011 and Bank of Tucson effective January 24, 2011.  These banks' operations and results of operations are included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.

n.m.

Not meaningful.

Page 40 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Accounting for income taxes requires significant estimates and management judgments.  At September 30, 2011, Capitol had a gross deferred tax asset approximating $206.6 million ($192.1 million at December 31, 2010), subject to a related valuation allowance.  When realization of the deferred tax asset is in doubt, a valuation reserve is required to reduce the deferred tax asset to the amount which is more-likely-than-not realizable.  Management reviewed the potential realization of net deferred tax assets as of September 30, 2011 and increased the related valuation allowance to $205.5 million, maintaining the net deferred tax asset at approximately $1.1 million ($1.8 million at December 31, 2010).  The net deferred tax asset represents the amount which is more-likely-than-not realizable at the balance-sheet date for a small group of less than 80%-owned consolidated bank subsidiaries.

Results of Operations

Summary

The third quarter 2011 net loss attributable to Capitol was approximately $22.8 million compared to a net loss of $52.2 million for the third quarter of 2010.  The net loss per share attributable to Capitol was $0.55 for the three months ended September 30, 2011 compared to a net loss per share of $2.45 in the corresponding period of 2010.  Net loss attributable to Capitol for the nine months ended September 30, 2011 approximated $38.9 million compared to a net loss of $141.1 million in the corresponding period of 2010.  Net loss per common share attributable to Capitol was $1.02 for the nine months ended September 30, 2011 compared to a net loss per share of $7.12 in the corresponding 2010 period.  Net income relating to discontinued operations was not material to the periods presented except for the gain on sale of bank subsidiaries which approximated $4.5 million and $13.4 million for the nine months ended September 30, 2011 and 2010, respectively.

The primary reasons for the lower interim 2011 net loss as compared to the corresponding 2010 period were a significant reduction in the provision for loan losses of $92.0 million to $37.2 million for the nine months ended September 30, 2011 compared to a provision of $129.2 million for the nine months ended September 30, 2010 (excluding discontinued operations), as well as a gain on exchange of trust-preferred securities for common stock of approximately $16.9 million in the 2011 period.

Analytical Review

The provision for loan losses decreased significantly for the nine months ended September 30, 2011 due to lower levels of loan charge-offs, declining levels of nonperforming loans and stable valuations of collateral-dependent loans, primarily secured by real estate.  Provisions for loan losses are estimates 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 in the preceding year had a material adverse effect on interim 2010 operating results.

Net interest income for the nine-month 2011 period totaled $53.3 million, a 4.6% decrease compared to $55.9 million in 2010.  Net interest income for the three months ended September 30, 2011 totaled $17.0 million, a 7.3% decrease compared to $18.4 million in 2010.  The net interest margin approximated 2.97% for the three months ended September 30, 2011, a 2 basis-point decrease compared to 2.99% for the three months ended June 30, 2011, and a 4 basis-point decrease compared to 3.01% for the three months ended September 30, 2010.  It is not feasible to speculate on future potential changes in net interest margin.

While net interest income was relatively stable during the interim 2011 periods in spite of a significantly reduced asset base compared to 2010, provisions for loan losses did not exceed net interest income for the nine-month interim period of 2011 as it did in the comparable interim 2010 period.

Page 41 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Noninterest income for the nine months ended September 30, 2011 approximated $31.4 million, a significant increase compared to $15.9 million for the same period in 2010.  The interim 2011 period included a gain on exchange of trust-preferred securities of $16.9 million (see Note I to the accompanying condensed consolidated financial statements) and the interim 2010 period included a gain on exchange of promissory notes for common stock of $1.3 million.  When excluding each of these gains, noninterest income showed a slight decrease in 2011 compared to 2010.  Noninterest income for the three months ended September 30, 2011 totaled $4.9 million, a 14% decrease compared to $5.8 million for the same period in 2010, primarily relating to a decrease in trust and wealth management revenue and other miscellaneous income.

Noninterest expense totaled $100.4 million for the nine-month 2011 period compared to $126.6 million for the comparable period of 2010.  The decrease resulted from significantly lower costs associated with foreclosed properties and other real estate owned, which decreased $10.5 million (31%) to $23.8 million in the nine-month 2011 period ($34.3 million in the corresponding 2010 period), due to stabilizing valuations and holding costs of other real estate owned.  The cost of FDIC insurance and other regulatory fees also decreased to $7.6 million in the nine-month 2011 period compared to $10.3 million in the nine-month 2010 period due to the decline in deposits, which was used for the assessment base prior to April 2011.

The largest element of noninterest expense is salaries and employee benefits, which approximated $38.8 million for the nine months ended September 30, 2011, a decrease of 15.1% from $45.7 million in the corresponding period of 2010, as a result of Capitol's efforts to reduce and streamline staffing at its banks and corporate offices.

The more significant elements of other noninterest expense consisted of the following for the periods ended September 30 (in $1,000s):

	Three Month Period				Nine Month Period
	2011		2010(1)		2011		2010(1)
Legal fees	$	1,055	$	1,016	$	2,597	$	3,195
Insurance		624		477		1,928		1,065
Professional fees		301		408		1,532		3,179
Loan and collection expense		529		786		1,318		2,111
Bank services (ATMs, telephone     banking and Internet banking)		304		343		935		865
Directors' fees		277		370		875		1,164
Communications		230		254		722		800
Travel, lodging and meals		207		294		697		803
Paper, printing and supplies		181		245		637		881
Advertising		152		183		562		746
Other		1,497		2,182		5,026		5,579
Total	$	5,357	$	6,558	$	16,829	$	20,388

(1)   For comparative purposes, original balances as previously reported have been adjusted to exclude amounts related to discontinued operations.

Page 42 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Operating results for the nine months ended September 30 were as follows (in $1,000s):

	Total Revenues				Net Income (Loss)(1)						Return on Average Equity(2)						Return on Average Assets(2)
	2011		2010		2011			2010			2011			2010			2011			2010
Arizona Region:
Bank of Tucson(3)			$	9,268				$	1,369						9.64	%					0.84	%
Central Arizona Bank	$	2,455		2,730	$	(963	)		(3,461	)
Southern Arizona Community Bank(3)				3,977					262						3.52	%					0.36	%
Sunrise Bank of Albuquerque		2,261		2,769		(1,829	)		(3,030	)
Sunrise Bank of Arizona		14,264		14,721		(12,970	)		(34,218	)
Arizona Region Total		18,980		33,465		(15,762	)		(39,078	)
California Region:
Bank of Feather River(3)		2,440		1,835		336			88			6.85	%		1.87	%		1.03	%		0.32	%
Bank of San Francisco(3)				4,119					559						9.55	%					0.89	%
Napa Community Bank(3)				2,947					(77	)
Sunrise Bank(3)		6,663		10,018		(791	)		(3,884	)
California Region Total		9,103		18,919		(455	)		(3,314	)
Colorado Region:
Fort Collins Commerce Bank(3)				4,695					382						5.25	%					0.52	%
Larimer Bank of Commerce(3)				4,076					601						9.88	%					0.86	%
Loveland Bank of Commerce(3)				1,887					195						4.12	%					0.65	%
Mountain View Bank of Commerce		2,045		2,079		103			98			1.87	%		1.81	%		0.24	%		0.25	%
Colorado Region Total		2,045		12,737		103			1,276
Great Lakes Region:
Bank of Maumee		1,494		1,818		(871	)		(1,234	)
Bank of Michigan		3,799		3,388		261			(335	)		4.91	%					0.43	%
Capitol National Bank		6,548		7,440		181			(2,722	)		2.29	%					0.15	%
Evansville Commerce Bank(3)		1,808		2,127		(84	)		(296	)
Indiana Community Bank		4,837		5,886		(289	)		(2,514	)
Michigan Commerce Bank		41,439		46,460		(19,238	)		(63,966	)
Ohio Commerce Bank(3)				1,934					226						5.68	%					0.78	%
Great Lakes Region Total		59,925		69,053		(20,040	)		(70,841	)
Midwest Region
Adams Dairy Bank(3)				1,681					(36	)
Bank of Belleville(3)				1,048					18						1.02	%					0.10	%
Community Bank of Lincoln(3)				1,508					(872	)
Midwest Region Total				4,237					(890	)
Nevada Region:
1st Commerce Bank		939		1,255		(3,375	)		(2,979	)
Bank of Las Vegas		10,477		14,501		(6,680	)		(33,696	)
Nevada Region Total		11,416		15,756		(10,055	)		(36,675	)
Northeast Region:
USNY Bank(3)				2,712					560						17.81	%					1.44	%
Northwest Region:
Bank of the Northwest(3)		4,310		5,962		(664	)		(1,105	)
High Desert Bank		1,439		1,702		(674	)		(827	)
Northwest Region Total		5,749		7,664		(1,338	)		(1,932	)
Southeast Region:
Community Bank of Rowan(3)(4)		2,123		1,666		46			59			1.88	%		0.76	%		0.14	%		0.05	%
First Carolina State Bank		2,967		3,547		(5,191	)		(2,410	)
Pisgah Community Bank		926		1,502		(3,357	)		(8,691	)
Sunrise Bank		3,567		4,847		(4,607	)		(6,452	)
Southeast Region Total		9,583		11,562		(13,109	)		(17,494	)

Page 43 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Operating results – continued:

	Total Revenues						Net Income (Loss)(1)						Return on Average Equity(2)				Return on Average Assets(2)
	2011			2010			2011			2010			2011			2010	2011			2010
Texas Region:
Bank of Fort Bend(3)	$	720		$	1,551		$	128		$	(14	)		14.82	%			2.27	%
Bank of Las Colinas(3)		1,848			1,672			184			(13	)		4.35	%			0.51	%
Texas Region Total		2,568			3,223			312			(27	)
Parent company and other, net		14,137			2,557			15,296			5,312
Consolidated totals		133,506			181,885			(45,048	)		(163,103	)
Less discontinued operations		(19,912	)		(64,529	)		(4,618	)		(14,719	)
Consolidated totals for continuing operations	$	113,594		$	117,356		$	(49,666	)	$	(177,822	)		--		--		--		--

(1)	Excludes net losses attributable to noncontrolling interests.
(2)	Annualized for periods presented.
(3)	Capitol sold its ownership in Bank of Las Colinas effective October 27, 2011; Evansville Commerce Bank effective October 10, 2011; Bank of Feather River effective October 4, 2011; Bank of the Northwest and Sunrise Bank effective July 28, 2011; Community Bank of Rowan effective April 19, 2011; Bank of Fort Bend effective March 30, 2011; Bank of Tucson effective January 24, 2011; Southern Arizona community Bank effective December 10, 2010; Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce effective October 29, 2010; Bank of San Francisco effective September 28, 2010; Adams Dairy Bank effective August 31, 2010; USNY Bank effective August 23, 2010; Community Bank of Lincoln effective July 30, 2010; Ohio Commerce Bank effective June 30, 2010; Napa Community Bank effective April 30, 2010 and Bank of Belleville effective April 27, 2010.  These banks' results of operations are included in Capitol's consolidated totals up to the date of sale are part of discontinued operations.
(4)	As of December 31, 2009, Community Bank of Rowan (CBR) was a majority-owned subsidiary of Capitol Development Bancorp Limited III (CDBL III) which, due to a change in control effective September 30, 2009, became an unconsolidated affiliate of Capitol.  Effective June 30, 2010, CDBL III transferred its controlling interest in CBR to Capitol in exchange for preferred stock of Capitol and, accordingly, CBR became a consolidated subsidiary of Capitol on that date.

Liquidity and Capital Resources

The principal funding source for banks is deposits.  Total deposits (excluding discontinued operations) decreased $264 million during the nine months ended September 30, 2011 compared to a $306 million decrease in the corresponding period of 2010.  Brokered deposits approximated $61.6 million as of September 30, 2011, or about 2.9% of total deposits, a decrease of $161.7 million during the nine-month 2011 period, as the banks have sought to reduce use of that funding source based on maturity and interest-rate opportunities, regulatory constraints and to aid in matching the repricing of funding sources and assets.  Brokered deposits at September 30, 2011 include about $21.8 million of relationship-based structured time accounts.  Banks that are classified as less than "well-capitalized" are required to obtain approval from the FDIC to renew or obtain new brokered deposits and, for banks classified as less than "adequately-capitalized," renewal of brokered deposits is generally prohibited.

Noninterest-bearing deposits approximated 17.2% of total deposits at September 30, 2011, an increase from 15.5% at December 31, 2010.  Levels of noninterest-bearing deposits can fluctuate based on customers' transaction activity.  During the 2011 period, however, interest-bearing deposits decreased about $260 million, mostly related to the previously-mentioned reduction in brokered deposits.

Cash and cash equivalents amounted to $423.9 million or 17.2% of total assets at September 30, 2011, compared to $439.8 million or 12.4% of total assets at December 31, 2010 as reductions in portfolio loans (principally from repayments) and proceeds from sales and maturities of investment securities, government-guaranteed loans and other real estate owned were used to reduce debt obligations or deployed into liquid assets.  As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time.  Liquidity levels have been increased by management in response to regulatory guidance, coupled with limited opportunities to deploy funds into investment securities during a low interest-rate environment and a cautious approach to, and capital restrictions associated with, making new loans in an uncertain economy.

Page 44 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

Management believes the banks' liquidity position at September 30, 2011 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 September 30, 2011, Capitol's banks had approximately $24.7 million of investment securities classified as available for sale which may 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 $62.5 million at September 30, 2011 and additional borrowing capacity approximated $120.1 million.  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.  Future availability of such borrowing capacity may be contingent upon the creditworthiness of Capitol's banks and related matters.  Total notes payable and other borrowings were $9.4 million at September 30, 2011.

In 2009, the Corporation commenced the deferral of interest payments on its various trust-preferred securities, as is permitted under the terms of the securities, in order to conserve cash and capital resources.  The payment of interest on those securities may be deferred for periods up to five years.  During such deferral periods, Capitol is prohibited from paying dividends on its common stock (subject to certain exceptions) and is further restricted by Capitol's written agreement with the Federal Reserve Bank of Chicago, which prohibits both payment of interest on the trust-preferred securities and cash dividends without prior written approval by that agency.  Accrued interest payable on such securities approximated $24.9 million and $20.8 million at September 30, 2011 and December 31, 2010, respectively.  Holders of the trust-preferred securities will recognize current taxable income relating to the deferred interest payments.

On January 31, 2011, Capitol accepted for exchange 1,180,602 of the 2,530,000 outstanding shares of trust-preferred securities of Capitol Trust I and 773,934 of the 1,454,100 outstanding shares of trust-preferred securities of Capitol Trust XII and, pursuant to the related exchange offer, issued approximately 19.5 million previously-unissued shares of Capitol's common stock.  This exchange resulted in the retirement of approximately $19.5 million aggregate liquidation amount of the trust-preferred securities on a combined basis and eliminated approximately $2.4 million of accrued interest payable associated with the retired securities, which collectively increased Capitol's equity and regulatory capital by $21.9 million, including a gain on the transaction of approximately $16.9 million.

Capitol Bancorp Limited stockholders' equity, as a percentage of total assets, approximated (3.88)% at September 30, 2011 and (1.75)% at December 31, 2010.  As of September 30, 2011, total capital funds (i.e., the sum of Capitol Bancorp Limited stockholders' equity, noncontrolling interests in consolidated subsidiaries and subordinated debentures) approximated $55.6 million or 2.25% of total assets.  Capitol's equity deficit increased in the interim 2011 period due to losses incurred from operations, although the losses were less significant than in 2010 due primarily to lower provision for loan losses.

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.

Page 45 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

The following comparative analysis summarizes each bank's regulatory capital position as of the dates indicated based on the banks included in Capitol's consolidation as of September 30, 2011:

	Tier 1 Leverage						Tier 1 Risk-Based						Total Risk-Based
	Ratio(1)(4)						Capital Ratio(1)(4)						Capital Ratio(2)(4)							Regulatory Classification(3)
	Sept 30, 2011			Dec 31, 2010			Sept 30, 2011			Dec 31, 2010			Sept 30, 2011				Dec 31, 2010			Sept 30, 2011	Dec 31, 2010
Arizona Region:
Central Arizona Bank		2.26	%		2.24	%		3.89	%		3.20	%		5.20	%			4.49	%	significantly-undercapitalized	significantly-undercapitalized
Sunrise Bank of Albuquerque		2.07	%		2.43	%		2.72	%		3.39	%		4.02	%			4.68	%	significantly-undercapitalized	significantly-undercapitalized
Sunrise Bank of Arizona		2.02	%		0.69	%		2.62	%		0.92	%		3.92	%			1.84	%	significantly-undercapitalized	critically- undercapitalized(6)
California Region:
Bank of Feather River		14.15	%		16.08	%		19.74	%		21.16	%		21.00	%			22.42	%	well-capitalized	well-capitalized
Colorado Region:
Mountain View Bank of     Commerce		13.57	%		12.02	%		18.52	%		17.99	%		19.78	%			19.25	%	well-capitalized	well-capitalized
Great Lakes Region:
Bank of Maumee		6.00	%		7.00	%		8.23	%		9.43	%		9.53	%			10.72	%	adequately-capitalized	well-capitalized
Bank of Michigan		8.36	%		7.67	%		11.05	%		10.33	%		12.31	%			11.59	%	well-capitalized	well-capitalized
Capitol National Bank		6.77	%		6.10	%		8.48	%		7.74	%		9.76	%			9.03	%	adequately-capitalized	adequately-capitalized
Evansville Commerce Bank		8.42	%		8.47	%		13.47	%		12.25	%		14.74	%			13.52	%	well-capitalized	well-capitalized
Indiana Community Bank		6.79	%		6.34	%		9.32	%		8.19	%		10.60	%	��		9.47	%	adequately-capitalized(5)	adequately-capitalized
Michigan Commerce Bank		2.14	%		1.15	%		2.80	%		1.46	%		4.12	%			2.78	%	significantly-undercapitalized	critically- undercapitalized(6)
Nevada Region:
1st Commerce Bank		2.08	%		2.48	%		3.55	%		3.94	%		4.91	%			5.20	%	significantly-undercapitalized	significantly-undercapitalized
Bank of Las Vegas		2.01	%		2.06	%		2.61	%		2.93	%		3.93	%			4.27	%	significantly-undercapitalized	significantly-undercapitalized
Northwest Region:
High Desert Bank		6.72	%		7.83	%		8.97	%		10.07	%		10.25	%			11.36	%	adequately-capitalized(5)	adequately-capitalized(5)
Southeast Region:
First Carolina State Bank		2.01	%		3.11	%		3.00	%		4.75	%		4.31	%			6.02	%	significantly-undercapitalized	undercapitalized
Pisgah Community Bank		2.02	%		2.03	%		2.54	%		3.52	%		3.88	%			4.82	%	significantly-undercapitalized	significantly-undercapitalized
Sunrise Bank		2.01	%		2.14	%		2.89	%		3.29	%		4.20	%			4.59	%	significantly-undercapitalized	significantly-undercapitalized
Texas Region:
Bank of Las Colinas		11.21	%		11.58	%		14.65	%		14.46	%		15.90	%			15.72	%	well-capitalized	well-capitalized
Consolidated totals		(3.58	)%		(1.03	)%		(4.96	)%		(1.44	)%		(4.96	)%			(1.44	)%	less than adequately-capitalized	less than adequately-capitalized

(1)	The minimum required Tier 1 leverage ratio and Tier 1 risk-based capital ratio is 4%.
(2)	The minimum required total risk-based capital ratio is 8%.
(3)	In order to be classified as a "well-capitalized" institution, the total risk-based capital ratio must be 10% or more.  To be classified as an "adequately-capitalized" institution, the total risk-based capital ratio must be between 8% and 10%.  Institutions are classified as "undercapitalized" when the total risk-based ratio is between 6% and 8% and "significantly-undercapitalized" when such ratio falls below 6%.  Institutions with a Tier 1 leverage ratio below 2% are classified as "critically-undercapitalized."
(4)	Ratios are based on the banks' regulatory reports filed on or before October 28, 2011.
(5)	Institution is subject to a regulatory agreement and, accordingly, cannot be classified better than "adequately-capitalized" even though the risk-based capital ratios would otherwise suggest "well-capitalized" classification.
(6)	Subsequent capital contributions in January 2011 eliminated the banks' classification as "critically-undercapitalized" in 2011.

Page 46 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

Banks less than "adequately-capitalized" may become subject to increased regulatory enforcement pursuant to the prompt-corrective-action or other provisions of the FDIC and other bank regulatory agencies.  The preceding summary indicates that Capitol, on a consolidated basis, was classified as less than "adequately-capitalized" at September 30, 2011.

Capitol's total risk-based capital ratio at September 30, 2011 was adversely impacted by the exclusion of approximately $173.9 million of previously-qualifying Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital.  The Tier 1 capital deficit at September 30, 2011 resulted primarily from operating losses; however, the Tier 2 limitation did not apply to Capitol's regulatory capital computations at earlier measurement dates prior to 2010.

In addition to Capitol's consolidated regulatory capital classification at September 30, 2011, several of its bank subsidiaries had capital levels resulting in classification as "undercapitalized" or "significantly-undercapitalized" at that date.  Regarding banks classified as "undercapitalized" or "significantly-undercapitalized," and otherwise noncompliant with formal regulatory agreements, management is taking appropriate action to improve such capital classifications and related compliance in the future.

Proceeds from the sale of banks through September 30, 2011 have been deployed as additional capital in the remaining affiliated banks, irrespective of minority ownership, pursuant to requirements imposed by the FDIC.  Capitol anticipates augmenting the capital levels of its less than "adequately-capitalized" bank subsidiaries further, through the allocation of proceeds from the pending divestiture of certain bank subsidiaries.  Pending divestitures are discussed later in this narrative.  Management is pursuing various strategies to increase Capitol's Tier 1 capital, including raising capital through potential equity transactions, gains on divestiture of some bank subsidiaries and other initiatives.

Going-Concern Considerations

As of September 30, 2011, there are several significant adverse aspects of Capitol's consolidated financial position and results of operations which include, but are not limited to, the following:

·   An equity deficit approximating $96 million;

·   Regulatory capital classification on a consolidated basis as less than "adequately-capitalized" and related negative amounts and ratios;

·   Numerous banking subsidiaries with regulatory capital classification as "undercapitalized" or "significantly-undercapitalized";

 ·   Certain banking subsidiaries which are generally subject to formal regulatory agreements have received "prompt corrective action" notifications (PCAN) and/or directives (PCAD) from the FDIC, which require timely action by bank management and the respective boards of directors to resolve regulatory capital ratios which result in classification as less than "adequately-capitalized" (the basis of a PCAN) or to submit an acceptable capital restoration plan to the FDIC (the basis of a PCAD), and it is likely additional PCANs and/or PCADs may be issued in the future and/or that the banking subsidiaries may be unable to satisfactorily resolve such notices and/or directives;

·   In 2010 and 2011, Capitol sold several of its banking subsidiaries and has other divestiture transactions pending (see Note J to the accompanying condensed consolidated financial statements).  The proceeds from those divestitures have been redeployed at certain remaining banking subsidiaries which have experienced a significant erosion of capital due to operating losses.  While such proceeds have been a significant source of funds for redeployment, the Corporation will need to raise significant other sources of new capital in the future;

Page 47 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

·   The Corporation and substantially all of its banking subsidiaries are operating under various regulatory agreements (formal and informal) which place a number of restrictions on them and impose other requirements limiting activities and requiring preservation of capital, improvement in regulatory capital measures, reduction of nonperforming assets and other matters for which the entities have not achieved full compliance;

·   Elevated levels of nonperforming loans and other nonperforming assets as a percentage of consolidated loans and total assets, respectively; and

·   Significant losses from continuing operations in 2011, 2010, 2009 and 2008, resulting primarily from provisions for loan losses, costs associated with foreclosed properties and other real estate owned and, in 2010, an impairment charge to operations for the write-off of previously-recorded goodwill ($64.5 million).

The foregoing considerations raise some level of doubt (potentially "substantial doubt") as to the Corporation's ability to continue as a going concern.

Capitol has commenced several initiatives and other actions to mitigate these going-concern considerations and to improve its financial condition, equity, regulatory capital and regulatory compliance.

In early 2011, a partial exchange of trust-preferred securities was completed and the Corporation's stockholders approved an amendment to its articles of incorporation to increase its authorized common stock and authorize its board of directors to proceed with a rights offering and reverse stock split, in addition to a potential share exchange regarding second-tier bank-development subsidiaries.

Improvement in Capitol's and its banking subsidiaries' capitalization, financial position, asset quality and results of operations requires multi-faceted efforts, which are currently being considered in the following areas, among others:

·   Raising significant amounts of new equity capital;

·   Completion of divestitures which are currently pending;

·   Further reductions in nonperforming assets;

·   Stabilization of provisions for loan losses and impairment losses;

·   Resuscitation of Capitol's trust-preferred securities as a qualifying element of regulatory capital and/or equity; and

·   Further reductions in operating expenses as a result of mergers of bank subsidiaries completed in recent years.

Capitol's ability to continue as a going concern is contingent on the successful achievement of the items listed above.  Capitol's board of directors and management are fully engaged and committed to successful completion of those items, with a clear sense of urgency, subject to the availability of capital and continued cooperation by regulatory agencies.

Trends Affecting Operations

As noted elsewhere in this narrative, Capitol has experienced adverse trends in its results of operations, asset quality, valuation of collateral-dependent loans and other real estate owned and capital adequacy.  Capitol continues to focus its efforts on mitigating those adverse trends through a multifaceted approach, including raising and redeploying capital funds, merging bank subsidiaries on a regional basis to achieve operational efficiencies, reducing operating expenses and staffing levels, implementing hiring and compensation freezes and selling banks, among other things.  Capitol also continues to explore other solutions to improve operating results and capital adequacy.

Page 48 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Trends Affecting Operations – Continued

Capitol has made significant progress in its efforts to reduce staffing and operating costs, as well as in redeploying proceeds from the sale of banks completed thus far.  In addition, in the most recent quarterly period, a notable reduction in the amount of nonperforming assets was achieved following a slowing trend in the prior growth rate of such assets, beginning in the fourth quarter of 2009.

While Capitol's management believes its plans to improve operating results and capital adequacy will help mitigate recent adverse trends, Capitol's loan portfolio is dominated by loans secured by real estate.  Future valuation of collateral-dependent loans and other real estate owned and future loan repayments by borrowers are largely dependent upon economic conditions on a local, regional and national basis.  Uncertainty in those economic conditions, particularly relating to real estate values and the ability of borrowers to repay loans, is outside of the control of Capitol and its banks.  Accordingly, the extent to which those matters may further adversely affect Capitol in the future remains highly unpredictable.

In addition to volatility which arises from changes in asset quality, changes in market rates of interest can have a material impact on the financial condition and results of operations of financial institutions.

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.  Therefore, 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 maintained interbank borrowing rates at record low levels and has also expressed concerns about a variety of macro economic issues.  Home mortgage rates have fluctuated and residential real estate markets have deteriorated in various regions, which adversely impacts fee income from the origination of residential mortgages.  There has been widespread media coverage of earlier subprime and other residential mortgage "meltdown" issues; Capitol believes its exposure to the residential real estate crisis to be generally 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, result in lower interest income to Capitol in the near term in the current interest-rate environment; however, depositors will continue to expect interest rates on their accounts to be at reasonable market rates, 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.

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 states of Michigan, Arizona and Nevada and the national economic recession are uncertain and are likely to continue to have an adverse impact on Capitol, its banks and their customers.  It is expected that economic recovery may take an extended period of time.

Media reports raising questions about the health of the domestic economy and the sustained national recession have continued during 2011.  Although nonperforming assets have decreased in the interim 2011 period, it is likely levels of nonperforming assets and related loan losses may increase further as economic conditions, locally and nationally, evolve.

On August 5, 2011, Standard & Poor's lowered its long term sovereign credit rating on the United States of America from AAA to AA+.  While U.S. lawmakers reached an agreement to raise the federal debt ceiling on August 2, 2011, the downgrade reflected Standard & Poor's view that the fiscal consolidation plan within that agreement fell short of what would be necessary to stabilize the U.S. government's medium term debt dynamics.

There could potentially be additional downgrades of the United States' credit rating if resolution of a budget deficit reduction is not reached by the Super Committee and achieved in the near future.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Trends Affecting Operations – Continued

This downgrade could have material adverse impacts on financial markets and economic conditions in the United States and throughout the world and, in turn, the market's anticipation of these impacts could have a material adverse effect on Capitol's business, financial condition and liquidity.  In particular, it could disrupt payment systems, money markets, long-term or short-term fixed income markets, commodities markets and equity markets and adversely affect the cost and availability of funding and certain impacts, such as increased spreads in money market and other short term rates, which have been experienced already as the market anticipated the downgrade.

Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on global markets and Capitol's business, financial condition and liquidity are unpredictable and may not be immediately apparent.

Through September 30, 2011, mergers of some of Capitol's banking subsidiaries have been completed in Arizona, California, Georgia, Indiana, Michigan, Nevada and Washington.  The resulting merged institutions have been combined on a regional basis to gain efficiencies in loan portfolio and problem asset management and general operating efficiencies in daily processing.  Additional mergers and combinations of bank charters in other markets are under consideration as management evaluates potential synergies and cost savings.

Divestiture of Banks

Through September 30, 2011, Capitol completed the following sales of bank subsidiaries (in $1,000s):

		Sale		Gain
	Date Sold	Proceeds		(Loss)
Bank of Tucson – main office(1)	January 24, 2011	$	4,567	$	4,418
Bank of Fort Bend(2)	March 30, 2011		4,302		1,432
Community Bank of Rowan(3)	April 19, 2011		4,845		(1,298	)
Bank of the Northwest/Sunrise Bank(3)	July 28, 2011		24,113		184
		$	37,827	$	4,736

(1) Previously a wholly-owned subsidiary of Capitol.  Sale proceeds represent the net premium received from the assumption of liabilities and acquisition of assets transaction.

(2) Previously a majority-owned subsidiary of a bank-development subsidiary controlled by Capitol.

(3) Previously a majority-owned subsidiary of Capitol.

On October 4, 2011, the sale of Bank of Feather River was completed with aggregate proceeds of $3.3 million and an estimated loss of approximately $240,000, which has been reflected in Capitol's third quarter financial statements against the gain on sale of the above-mentioned bank subsidiaries.

On October 10, 2011, the sale of Evansville Commerce Bank was completed with aggregate proceeds of $2.3 million and an estimated gain of $48,000.  On October 27, 2011, the sale of Bank of Las Colinas was completed with aggregate proceeds of $3.9 million and an estimated gain of $780,000.

In addition to completed sales transactions, Capitol has entered into definitive agreements to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institutions which are pending:  Bank of Maumee, Bank of Michigan, First Carolina State Bank, Mountain View Bank of Commerce and Pisgah Community Bank.  The projected financial impact of the potential divestiture of these institutions is set forth in the accompanying pro forma condensed consolidated financial statements on pages 53 and 54 of this document.  Total proceeds from those pending sales are expected to approximate $9.9 million, resulting in a projected loss of $2.3 million ($0.06 per common share) and are expected to be consummated throughout the remainder of 2011 and early 2012, subject to regulatory approval and other significant contingencies.

Page 50 of 61

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Regulatory Matters

In September 2009, Capitol and its second-tier bank holding companies entered into an agreement with the Federal Reserve Bank under which Capitol agreed to refrain from the following actions without the prior written consent of the Reserve Bank:  (i) declare or pay dividends; (ii) receive dividends or any other form of payment representing a reduction in capital from Michigan Commerce Bank, or from any of its subsidiary institutions that are subject to any restriction by the institution's federal or state regulator that limits the payment of dividends or other intercorporate payments; (iii) make any distributions of interest, principal, or other sums on subordinated debentures or trust-preferred securities; (iv) incur, increase or guarantee any debt; or (v) purchase or redeem any shares of the stock of Capitol, the second-tier bank holding companies, nonbank subsidiaries or any of the subsidiary banks that are held by shareholders other than Capitol.

In addition, Capitol agreed to:  (i) submit to the Reserve Bank a written plan to maintain sufficient capital at Capitol on a consolidated basis and at Michigan Commerce Bank (as Capitol's largest bank subsidiary and a separate legal entity on a stand-alone basis); (ii) notify the Reserve Bank no more than 30 days after the end of any quarter in which Capitol's consolidated or Michigan Commerce Bank's capital ratios fall below the approved capital plan's minimum ratios as well as if any subsidiary institution's ratios fall below the minimum ratios required by the institution's federal or state regulator; (iii) review and revise its ALLL methodology for loans held by Capitol and submit to the Reserve Bank a written program for maintenance of an adequate ALLL for loans held by Capitol; (iv) take all necessary actions to ensure each of its subsidiary institutions comply with Federal Reserve regulations; (v) refrain from increasing any fees or charging new fees to any subsidiary institution without the prior written consent of the Reserve Bank; (vi) submit to the Reserve Bank a written plan to enhance the consolidated organization's risk management practices, a strategic plan to improve the consolidated organization's operating results and overall condition and a cash flow projection; (vii) comply with laws and regulations regarding senior executive officer positions and severance payments; and (viii) provide quarterly reports to the Reserve Bank regarding these undertakings.

Many of Capitol's bank subsidiaries have entered into formal agreements (as well as informal agreements) with their applicable regulatory agencies.  Those agreements provide for certain restrictions and other guidelines and/or limitations to be followed by the banks.  The banks generally subject to such agreements are noted as such in the regulatory capital detail appearing on page 46 of this document.

Regulatory capital matters are set forth in Note L of the accompanying condensed consolidated financial statements.

On July 21, 2010, the Dodd-Frank Act was signed into law and significantly changes future regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will profoundly affect how community banks, thrifts, and smaller bank holding companies will be regulated in the future.  Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of FDIC insurance coverage and impose new capital requirements on bank holding companies including removing trust-preferred securities as a permitted component of a holding company's Tier 1 capital after a three-year phase-in period beginning January 1, 2013.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks.  Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments.  Management is continuing to evaluate the provisions of the Dodd-Frank Act and assessing its probable impact on the Corporation's business, financial condition and results of operations.  However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and on the Corporation in particular, is currently uncertain.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Tax Matters

The Internal Revenue Service is currently conducting an examination of the Corporation's consolidated federal income tax returns for the years ended December 31, 2006 through 2009.  Adjustments to the taxable income or taxes payable or refundable are undetermined, pending the completion of the examination expected in late 2011 or early 2012.

In July 2011, Capitol adopted a Tax Benefits Preservation Plan (the "Plan") designed to preserve substantial tax assets.  Capitol's tax attributes include net operating losses that could be utilized in certain circumstances to offset taxable income and reduce federal income tax liability.  Capitol's ability to use these tax attributes would be substantially limited if there were an "ownership change" as defined under Section 382 of the Internal Revenue Code and related Internal Revenue Service pronouncements.  As part of the Plan, Capitol's board of directors declared a dividend of one preferred share purchase right for each outstanding share of its common stock distributable to shareholders of record as of August 1, 2011, as well as to holders of common stock issued after that date, but would only be activated if triggered under the Plan.

The Plan is designed to reduce the likelihood that Capitol will experience an ownership change by discouraging any person from becoming a 5-percent shareholder.  There is no guarantee, however, that the Plan will prevent Capitol from experiencing an ownership change.

The issuance of the preferred share purchase rights will not affect Capitol's reported per share results and is not taxable to Capitol or its shareholders.

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Page 53 of 61

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Impact of Accounting Standards Updates

There are certain accounting standards updates issued or becoming effective in 2011.  They are discussed in Note B of the accompanying condensed consolidated financial statements.

Critical Accounting Policies

Capitol's critical accounting policies are described on pages F-46 – F-48 of the financial section of its 2010 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 (Capitol's annual review of goodwill for potential impairment is performed in the fourth quarter of each year), accounting for income taxes and its consolidation policy.

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, 2010.  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

Evaluation of Disclosure Controls and Procedures

As of December 31, 2010, Capitol identified a material weakness in internal control as a result of a restatement of its financial statements and related disclosures included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.  All aspects of that restatement are in the process of being remediated in 2011.  Such remediation will consist of fully incorporating all regulatory-agency imposed requirements in the computations and internal control process for estimation of allowance for loan losses requirements both at the bank level and on a consolidated basis.

As of the end of the period covered by this Quarterly Report on Form 10-Q, Capitol evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Disclosure Controls").  The Disclosure Controls are designed to allow Capitol to reach a reasonable level of assurance that information required to be disclosed by Capitol in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and that such informationis accumulated and communicated to management, including its principal executive/financial officer to allow timely decisions regarding required disclosure.  The evaluation of the Disclosure Controls ("Controls Evaluation") was conducted under the supervision and with the participation of Capitol's management, including the Chief Executive Officer ("CEO") and the Principal Financial Officer ("PFO"). Based upon the Controls Evaluation and subsequent discussions and actions by Capitol as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 ("Form 10-K") and above, the CEO and PFO have concluded that as of September 30, 2011, Capitol's Disclosure Controls were effective at a reasonable assurance level.

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PART I, ITEM 4

CONTROLS AND PROCEDURES – Continued

Changes in Internal Controls Over Financial Reporting

During the fiscal quarter ended September 30, 2011, no changes in Capitol's "internal control over financial reporting," as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended ("Internal Control") have occurred that have materially affected or are reasonably likely to materially affect Capitol's Internal Control.

Limitations on the Effectiveness of Controls

Capitol's management, including the CEO and PFO, does not expect that its Disclosure Controls and/or its Internal Control will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Capitol have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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.   In November 2010, Capitol received a subpoena from the Chicago office of the Securities and Exchange Commission (SEC).  The subpoena requests information regarding Capitol's allowance for loan losses and related allowance estimation process and computational methodology, Capitol's methodology for grading loans and the process for making provisions for loan losses and Capitol's provision for loan losses prior to March 31, 2009.  In addition, on April 12, 2011, Capitol received an additional subpoena from the Chicago office of the SEC concerning Capitol's recently amended and restated Form 10-Q for the period ended September 30, 2010.  The subpoena and the SEC's corresponding investigation are nonpublic, which means that the information Capitol provides to the SEC will not be made available publicly; however, the investigation could result in Capitol amending its prior SEC filings in the future, depending on the outcome of such investigation.   Capitol understands that the issuance of subpoenas by the Commission, in itself, does not mean that the SEC has concluded that Capitol has broken the law or that the SEC has a negative opinion of Capitol.  Capitol is fully cooperating with the SEC in its investigation, including its follow-up requests, and cannot predict the timing or outcome of the investigation.  

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PART II.  OTHER INFORMATION – Continued

Item 1A. Risk Factors.   Other than as discussed below, during the nine months ended September 30, 2011, 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, 2010.  Refer to that section of Capitol's Form 10-K for disclosures regarding the risks and uncertainties related to Capitol's business.   In addition to the foregoing, further risk factors in the current operating environment exist:   If Capitol continues to experience significant net losses, it may be difficult to continue to operate as a going concern.   During 2010 and the interim periods of 2011, Capitol has incurred significant net losses from continuing operations, primarily resulting from additional loan losses associated with a continuing uncertain economy and operating environment.  Those operating losses have resulted in a significant erosion of capital and in regulatory matters which are discussed elsewhere in this document.   Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which include, but are not limited to, the following:   ·Significant proceeds from pending future bank sales to enable timely deployment to improve capital adequacy at remaining bank subsidiaries, in addition to raising additional capital from other sources at the parent-company level; ·Future abatement of loan losses and losses associated with other nonperforming assets; ·Future reduction in operating expenses; ·Future improvement in net interest margin and sources of noninterest income; and ·Future conversion of nonperforming assets into earning assets.   The transferability of Capitol's common shares is limited as a result of the Tax Benefits Preservation Plan.   In order to reduce the likelihood that future transactions in Capitol's common shares will result in an ownership change, on July 11, 2011, Capitol adopted a Tax Benefits Preservation Plan, which provides an economic disincentive for any person or group to become an owner, for relevant tax purposes, of 5.0% or more of Capitol's common shares.   The Tax Benefits Preservation Plan has the effect of limiting transferability of Capitol's common shares because it may make it more difficult and more expensive to acquire Capitol's common shares under the circumstances described above.  A shareholder's ability to dispose of Capitol's common shares is therefore limited by reducing the class of potential acquirers for such common shares.   There could potentially be additional downgrades of the United States' credit rating if resolution of a budget deficit reduction is not reached by the Super Committee and achieved in the near future.   There is a risk of potential cross-guaranty liability relating to Capitol's banking subsidiaries.   In accordance with Federal Reserve Board policy, Capitol is expected to act as a source of financial strength to its banking subsidiaries and to commit resources to support its banking subsidiaries in circumstances in which Capitol might not otherwise do so.  Under the Bank Holding Company Act of 1956, as amended, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary of the

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PART II.  OTHER INFORMATION – Continued

Item 1A.	Risk Factors. – Continued
	bank holding company.  Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. As FDIC-insured depository institutions, Capitol's banking subsidiaries may be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with the institution in "default" or "in danger of default."  This liability is commonly referred to as "cross-guaranty" liability.  A "default" is generally defined as the appointment of a conservator or receiver and "in danger of default" is defined as certain conditions indicating that a default is likely to occur absent regulatory assistance.  An FDIC cross-guaranty claim against a depository institution is generally senior in right of payment to claims of the holding company and its affiliates against the depository institution. If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power: (1) to transfer any of the depository institution's assets and liabilities to a new obligor without the approval of the depository institution's creditors; (2) to enforce the terms of the depository institution's contracts pursuant to their terms; or (3) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. To date, none of Capitol's banking subsidiaries have received any notice of assessment of cross-guaranty liability. Capitol's banking subsidiaries have, however, received notice from the FDIC that the FDIC may assess a cross-guaranty liability relating to a failed community bank in Florida which ceased operations in November 2009.  The FDIC alleges that the Florida bank was an affiliated institution of Capitol, although Capitol owned no securities of that bank or otherwise controlled the failed institution.  The aggregate loss to the FDIC of that failed bank approximated $23.6 million.  The FDIC has until November 2011, two years from the date of such notice, to determine whether to assess that potential cross-guaranty liability, if any.  In October 2011, Capitol's affiliate banks and the FDIC agreed to enter into a mutual tolling agreement which extends the period the FDIC has to assess the potential cross-guaranty liability and the period the banks have to challenge the actions of the FDIC for 2 years.
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.	[Removed and Reserved.]

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PART II.  OTHER INFORMATION – Continued

Item 5.

Other Information. As was previously announced, on November 15, 2010, following prior approval by the Compensation Committee of Capitol's Board of Directors, employment agreements with the following Named Executive Officers were amended and restated in their entirety: Cristin K. Reid and Bruce A. Thomas (the "Amended and Restated Employment Agreements"). Following the adoption of the Amended and Restated Employment Agreements, the Federal Reserve and Capitol discussed the Amended and Restated Employment Agreements.  The Federal Reserve indicated that Capitol should have sought prior approval for the modification of the original employment agreements, even though the material terms of the original employment agreements were not modified.  Following such conversations, effective November 11, 2011, Capitol and the Named Executive Officers elected to terminate the Amended and Restated Employment Agreements and revert back to the terms and conditions of their prior employment agreements.  There was no change in base salary incident to the reversion back to the prior employment agreements.  Copies of the forms of the prior employment agreements for Cristin K. Reid and Bruce A. Thomas are attached as Exhibit 10(R) to Capitol's Annual Report on Form 10-K for the year ended December 31, 2005 filed by Capitol with the SEC on March 16, 2006.

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 Principal Financial Officer, Nicholas G. Hahn, 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 Principal Financial Officer, Nicholas G. Hahn, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T, including: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.*
	_______________
	* As provided in Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 are deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

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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)
Date:  November 14, 2011	/s/ Joseph D. Reid                                                                                                            Joseph D. Reid Chairman and CEO (principal executive officer)
Date:  November 14, 2011	/s/ Nicholas G. Hahn                                                                                                           Nicholas G. Hahn Interim Chief Financial Officer (principal financial officer)

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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 Principal Financial Officer, Nicholas G. Hahn, 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 Principal Financial Officer, Nicholas G. Hahn, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T, including: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.*
	_______________
	* As provided in Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 are deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

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