Capitol Bancorp (CBCRQ) 10-Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2012
	OR
o	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 July 31, 2012
Common Stock, No par value	41,038,408 shares

Page 1 of 63

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:

·      Capitol may not be able to successfully restructure its existing unsecured debt obligations;

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

·      The availability and cost of capital and liquidity on favorable terms, if at all, which may depend in part on Capitol's asset quality, prospects and outlook;

·      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 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;

·      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;

·      The costs and effects of litigation, investigations, inquiries or similar matters, or adverse facts and developments related thereto;

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

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

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

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

·      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;

·      The risks associated with the high concentration of commercial real estate loans within Capitol's consolidated loan portfolio along with other credit risks associated with individual large loans;

Page 2 of 63

INDEX - Continued

PART I.             FINANCIAL INFORMATION - Continued

Forward-Looking Statements - Continued

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

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

·      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;

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

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

·      Volatility of interest rate sensitive deposits and the uncertainties of future depositor activity regarding potentially uninsured deposits;

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

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

·      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 ability to successfully execute strategies to increase noninterest income;

·      The impact of possible future material impairment charges;

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

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

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

·      A continuation of unprecedented volatility in the capital markets;

·      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 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;

·      Continued unemployment, the overall continued national economic weakness, rising commodity prices and the impact on Capitol's customers' savings rates and their ability to service debt obligations;

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

Page 3 of 63

INDEX - Continued

PART I.             FINANCIAL INFORMATION - Continued

Forward-Looking Statements - Continued

·      The effects of competition from other commercial banks, savings associations, 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 markets or elsewhere or providing similar services;

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

· ��    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;

·      The effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Emergency Economic Stabilization Act of 2008, 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;

·      Governmental monetary and fiscal policies, as well as legislative and regulatory changes, 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 and operational limitations;

·      The ability of the U.S. government to develop a fiscal operating budget that controls spending and serves to reduce the national deficit in a meaningful way, and the potential impact on future inflation and the current weak national economy;

·      Acts of war or terrorism; and

·      Other factors and other information contained in this document and in other reports and filings that Capitol makes with the SEC under the Securities Exchange Act of 1934, as amended, including, without limitation, under the caption "Risk Factors."

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 2011 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.

Page 4 of 63

INDEX - Continued

PART I.             FINANCIAL INFORMATION - Continued

Item 1.	Financial Statements (unaudited):	Page
	Condensed consolidated balance sheets - June 30, 2012 and December 31, 2011.	6
	Condensed consolidated statements of operations - Three months and six months ended June 30, 2012 and 2011.	7
	Condensed consolidated statements of comprehensive income - Three months and six months ended June 30, 2012 and 2011.	8
	Condensed consolidated statements of changes in equity - Six months ended June 30, 2012 and 2011.	9
	Condensed consolidated statements of cash flows - Six months ended June 30, 2012 and 2011.	10
	Notes to condensed consolidated financial statements.	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	36
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.	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	60
Item 3.	Defaults Upon Senior Securities.	60
Item 4.	Mine Safety Disclosures.	60
Item 5.	Other Information.	60
Item 6.	Exhibits.	61
SIGNATURES		62
EXHIBIT INDEX		63

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Page 5 of 63

PART I, ITEM 1
CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of June 30, 2012 and December 31, 2011
(in $1,000s, except per share and per-share data)
	(Unaudited)
	June 30,				December 31,
	2012				2011
ASSETS
Cash and due from banks		$	47,466		$	38,540
Money market and interest-bearing deposits			298,395			318,006
Cash and cash equivalents			345,861			356,546
Loans held for sale			1,099			2,129
Investment securities -- Note C:
Available for sale, carried at fair value			17,099			14,883
Held for long-term investment, carried at amortized cost which    approximates fair value			2,769			2,737
Total investment securities			19,868			17,620
Federal Home Loan Bank and Federal Reserve Bank stock (carried    on the basis of cost) -- Note C			12,105			12,851
Portfolio loans, less allowance for loan losses of $73,438 in 2012    and $86,745 in 2011 -- Note D			1,305,829			1,454,368
Premises and equipment			22,769			24,348
Accrued interest income			4,438			5,037
Other real estate owned			94,834			95,523
Other assets			12,947			14,345
Assets of discontinued operations -- Note E			166,157			222,498
TOTAL ASSETS		$	1,985,907		$	2,205,265
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest-bearing		$	361,003		$	328,896
Interest-bearing			1,368,029			1,529,502
Total deposits			1,729,032			1,858,398
Debt obligations:
Notes payable and other borrowings			30,694			50,445
Subordinated debentures -- Note H			149,207			149,156
Total debt obligations			179,901			199,601
Accrued interest on deposits and other liabilities			51,242			50,157
Liabilities of discontinued operations -- Note E			157,645			205,756
Total liabilities			2,117,820			2,313,912
EQUITY:
Capitol Bancorp Limited stockholders' equity -- Note K:
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:  2012 - 41,038,408 shares; 2011 - 41,039,767 shares			292,179			292,135
Retained-earnings deficit			(423,175	)		(404,846	)
Undistributed common stock held by employee-benefit trust			(541	)		(541	)
Accumulated other comprehensive income			61			70
Total Capitol Bancorp Limited stockholders' equity deficit			(126,378	)		(108,084	)
Noncontrolling interests in consolidated subsidiaries			(5,535	)		(563	)
Total equity deficit			(131,913	)		(108,647	)
TOTAL LIABILITIES AND EQUITY		$	1,985,907		$	2,205,265
See notes to condensed consolidated financial statements.

Page 6 of 63

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 2012 and 2011
(in $1,000s, except per-share data)
	Three Month Period						Six Month Period
	2012			2011			2012			2011
Interest income:
Portfolio loans (including fees)	$	19,590		$	24,273		$	40,475		$	50,365
Loans held for sale		8			9			20			27
Taxable investment securities		44			28			95			58
Other		299			299			589			650
Total interest income		19,941			24,609			41,179			51,100
Interest expense:
Deposits		3,390			5,898			7,334			12,553
Debt obligations and other		2,602			2,945			5,667			5,885
Total interest expense		5,992			8,843			13,001			18,438
Net interest income		13,949			15,766			28,178			32,662
Provision for loan losses -- Note D		294			5,736			1,160			17,216
Net interest income after provision for    loan losses		13,655			10,030			27,018			15,446
Noninterest income:
Service charges on deposit accounts		656			681			1,326			1,356
Trust and wealth-management revenue		701			817			1,424			1,761
Fees from origination of non-portfolio residential    mortgage loans		143			75			304			215
Gain on sale of government-guaranteed loans		167			384			362			726
Gain on debt extinguishment -- Note H		--			--			--			16,861
Other		2,010			2,936			3,590			4,662
Total noninterest income		3,677			4,893			7,006			25,581
Noninterest expense:
Salaries and employee benefits		10,940			12,446			21,740			24,842
Occupancy		2,413			2,727			4,993			5,558
Equipment rent, depreciation and maintenance		1,446			1,950			2,886			3,866
Costs associated with foreclosed properties and other    real estate owned		6,055			9,021			11,055			16,333
FDIC insurance premiums and other regulatory fees		1,650			2,377			3,329			5,079
Other		5,520			3,669			9,771			10,713
Total noninterest expense		28,024			32,190			53,774			66,391
Loss before income tax expense (benefit)		(10,692	)		(17,267	)		(19,750	)		(25,364	)
Income tax expense (benefit)		1			(409	)		(44	)		(2,655	)
Loss from continuing operations		(10,693	)		(16,858	)		(19,706	)		(22,709	)
Discontinued operations -- Note E:
Income (loss) from operations of bank subsidiaries sold		95			(624	)		33			(316	)
Gain on sale of bank subsidiaries		--			184			126			4,552
Less income tax expense		80			208			62			1,807
Income (loss) from discontinued operations		15			(648	)		97			2,429
NET LOSS		(10,678	)		(17,506	)		(19,609	)		(20,280	)
Net losses attributable to noncontrolling interests in    consolidated subsidiaries		339			1,068			1,358			4,131
NET LOSS ATTRIBUTABLE TO CAPITOL    BANCORP LIMITED	$	(10,339	)	$	(16,438	)	$	(18,251	)	$	(16,149	)
NET LOSS PER COMMON SHARE ATTRIBUTABLE    TO CAPITOL BANCORP LIMITED -- Note G	$	(0.25	)	$	(0.40	)	$	(0.44	)	$	(0.44	)
See notes to condensed consolidated financial statements.

Page 7 of 63

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Six Months Ended June 30, 2012 and 2011
(in $1,000s)
	Three Month Period						Six Month Period
	2012			2011			2012			2011
NET LOSS	$	(10,678	)	$	(17,506	)	$	(19,609	)	$	(20,280	)
Other comprehensive loss, net of tax:
Unrealized losses arising during the period		(1	)		(1	)		(9	)		(25	)
Less reclassification adjustment for losses included in net loss		--			--			--			--
COMPREHENSIVE LOSS		(1	)		(1	)		(9	)		(25	)
Comprehensive loss attributable to noncontrolling interests in    consolidated subsidiaries		--			--			--			--
COMPREHENSIVE LOSS ATTRIBUTABLE TO    CAPITOL BANCORP LIMITED	$	(10,679	)	$	(17,507	)	$	(19,618	)	$	(20,305	)
See notes to condensed consolidated financial statements.

Page 8 of 63

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Changes in Equity (Unaudited)
For the Six Months Ended June 30, 2012 and 2011
(in $1,000s, except share and per-share data)
	Capitol Bancorp Limited Stockholders' Equity
									Undistributed
									Common						Total Capitol
									Stock			Accumulated			Bancorp			Noncontrolling
						Retained-			Held by			Other			Limited			Interests in			Total
	Preferred		Common			Earnings			Employee-			Comprehensive			Stockholders'			Consolidated			Equity
	Stock		Stock			(Deficit)			Benefit Trust			Income (Loss)			Equity			Subsidiaries			(Deficit)
Six Months Ended June 30, 2011
Balances at January 1, 2011	$	5,098	$	287,190		$	(353,757	)	$	(541	)	$	156		$	(61,854	)	$	23,173		$	(38,681	)
Reduction in noncontrolling interest of sold subsidiaries																-			(6,433	)		(6,433	)
Increase in investment of subsidiaries due to change in ownership							633									633			863			1,496
Issuance of 19,545,360 shares of common stock for redemption of trust-preferred securities				5,082												5,082						5,082
Surrender of 70,773 shares of common stock to facilitate vesting of restricted stock				(12	)											(12	)					(12	)
Reversal of compensation expense relating to 42,600 forfeited restricted common stock shares and stock options				(115	)											(115	)					(115	)
Recognition of compensation expense relating to restricted common stock and stock options				256												256						256
Tax effect of share-based payments				(237	)											(237	)					(237	)
Net loss							(16,149	)								(16,149	)		(4,131	)		(20,280	)
Other comprehensive loss													(25	)		(25	)					(25	)
BALANCES AT JUNE 30, 2011	$	5,098	$	292,164		$	(369,273	)	$	(541	)	$	131		$	(72,421	)	$	13,472		$	(58,949	)
Six Months Ended June 30, 2012
Balances at January 1, 2012	$	5,098	$	292,135		$	(404,846	)	$	(541	)	$	70		$	(108,084	)	$	(563	)	$	(108,647	)
Reduction in noncontrolling interest of sold subsidiary																-			(3,692	)		(3,692	)
Reduction in investment of subsidiaries due to change in ownership							(78	)								(78	)		78			-
Surrender of 859 shares of common stock to facilitate vesting of restricted stock				-												-						-
Reversal of compensation expense relating to 500 forfeited restricted common stock shares and stock options				(4	)											(4	)					(4	)
Recognition of compensation expense relating to restricted common stock and stock options				65												65						65
Tax effect of share-based payments				(17	)											(17	)					(17	)
Net loss							(18,251	)								(18,251	)		(1,358	)		(19,609	)
Other comprehensive loss													(9	)		(9	)					(9	)
BALANCES AT JUNE 30, 2012	$	5,098	$	292,179		$	(423,175	)	$	(541	)	$	61		$	(126,378	)	$	(5,535	)	$	(131,913	)
See notes to condensed consolidated financial statements.

Page 9 of 63

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2012 and 2011
(in $1,000s)
	2012			2011
OPERATING ACTIVITIES
Net loss	$	(19,609	)	$	(20,280	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities (including discontinued operations):
Provision for loan losses		1,721			22,071
Depreciation of premises and equipment		2,081			3,073
Net amortization of investment security premiums		79			97
Loss on sale of premises and equipment		21			13
Gain on sale of government-guaranteed loans		(475	)		(1,686	)
Gain on sale of bank subsidiaries		(126	)		(4,552	)
Gain on extinguishment of debt		--			(16,861	)
Loss on sale of other real estate owned		535			112
Write-down of other real estate owned		7,936			11,571
Amortization of issuance costs of subordinated debentures		51			51
Share-based compensation expense		61			141
Deferred income tax credit		(201	)		(19,458	)
Valuation allowance for deferred income tax assets		--			20,012
Originations and purchases of loans held for sale		(14,300	)		(17,215	)
Proceeds from sales of loans held for sale		15,909			22,720
Decrease in accrued interest income and other assets		3,634			15,098
Increase in accrued interest expense on deposits and other liabilities		1,013			4,902
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		(1,670	)		19,809
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale		--			488
Proceeds from calls, prepayments and maturities of investment securities		10,345			9,664
Purchases of investment securities		(6,622	)		(17,798	)
Redemption of Federal Home Loan Bank stock by issuer		849			1,782
Purchase of Federal Home Loan Bank stock		(31	)		(861	)
Net decrease in portfolio loans		112,208			129,707
Proceeds from sales of government-guaranteed loans		4,241			21,942
Proceeds from sales of premises and equipment		45			62
Purchases of premises and equipment		(1,402	)		(720	)
Proceeds from sale of bank subsidiaries		4,060			13,704
Payments received on other real estate owned		34			81
Proceeds from sales of other real estate owned		24,505			16,533
NET CASH PROVIDED BY INVESTING ACTIVITIES		148,232			174,584
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and saving accounts		56,769			80,459
Net decrease in certificates of deposit		(189,666	)		(241,728	)
Net borrowing from (payments on) debt obligations		(423	)		1,193
Proceeds from Federal Home Loan Bank borrowings		43,501			104,350
Payments on Federal Home Loan Bank borrowings		(62,918	)		(130,516	)
Net proceeds from issuance of common stock		--			9,000
Tax effect of share-based payments		(17	)		(237	)
NET CASH USED IN FINANCING ACTIVITIES		(152,754	)		(177,479	)
INCREASE (DECREASE) IN CASH AND CASH   EQUIVALENTS		(6,192	)		16,914
Change in cash and cash equivalents of discontinued operations		(4,493	)		(28,123	)
Cash and cash equivalents at beginning of period		356,546			392,023
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	345,861		$	380,814
Supplemental disclosures:
Cash paid during the period for interest on deposits and debt obligations		14,240		$	22,522
Transfers of loans to other real estate owned		30,794			29,877
Surrender of common stock to facilitate vesting of restricted stock		--			12
Exchange of common stock for redemption of debt		--			5,082
See notes to condensed consolidated financial statements.

Page 10 of 63

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.

For comparative purposes, original balances as previously reported in periods prior to June 30, 2012 have been adjusted to exclude amounts related to discontinued operations.

The results of operations for the periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

The consolidated balance sheet as of December 31, 2011 was derived from audited consolidated financial statements as of that date.  Certain 2011 amounts have been reclassified to conform to the 2012 presentation.

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which are discussed on pages 35 and 48 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 and for the year ended December 31, 2011.

Note B - Accounting Standards Updates

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 became effective January 1, 2012 and it did not have any 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, 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 and expanded disclosure of the categorization by level of the fair value hierarchy for the items that are not measured at fair value in the balance sheet, but for where the estimated fair value is required to be disclosed (e.g. portfolio loans and deposits).  This new guidance was effective prospectively beginning January 1, 2012 and it did not have a material effect on the Corporation's consolidated financial statements upon implementation.  The new disclosures of the fair value levels of the Corporation's assets and liabilities are set forth in Note F.

Page 11 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note B - Accounting Standards Updates - Continued

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 was effective retrospectively for all annual and interim periods presented beginning January 1, 2012 and the Corporation now presents a separate condensed consolidated statement of comprehensive income.  In October 2011, the FASB decided to defer the presentation of reclassification adjustments pending further consideration.

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):

	June 30, 2012				December 31, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available for sale:
United States treasury	$	3,499	$	3,502	$	4,004	$	4,013
United States government agency		4,000		3,998
Mortgage-backed		9,424		9,493		10,537		10,592
Municipalities		103		106		275		278
		17,026		17,099		14,816		14,883
Held for long-term investment:
Capitol Development Bancorp Limited III		963		963		973		973
Other equity investments		1,806		1,806		1,764		1,764
		2,769		2,769		2,737		2,737
	$	19,795	$	19,868	$	17,553	$	17,620

Securities held for long-term investment are not subject to the classification and accounting rules relating to most typical investments.  In addition, Capitol's other equity 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.

Page 12 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note C - Investment Securities - Continued

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

	June 30, 2012				December 31, 2011
	Gains		Losses		Gains		Losses
United States treasury	$	4	$	1	$	9
United States government agency				2
Mortgage-backed		72		3		70	$	16
Municipalities		3				4
	$	79	$	6	$	83	$	16

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

	June 30, 2012				December 31, 2011
	Unrealized Loss		Carrying Value		Unrealized Loss		Carrying Value
One year or less:
United States treasury	$	1	$	1,499
United States government agency		2		3,998
Mortgage-backed					$	16	$	6,674
	$	3	$	5,497	$	16	$	6,674
In excess of one year:
Mortgage-backed	$	3	$	2,877	$	--	$	--

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 June 30, 2012 were as follows (in $1,000s):

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	3,507	$	3,510
After one year, through five years		4,103		4,105
After ten years		9,416		9,484
Securities held for long-term investment without stated maturities		2,769		2,769
	$	19,795	$	19,868

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

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:

	June 30, 2012
	Secured by Real Estate
	Commercial		Residential (including multi- family)		Construction, Land Development and Other Land		Commercial and Other Business- Purpose Loans		Consumer		Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	9,526	$	3,359	$	1,905	$	1,937	$	22					$	16,749
Collectively evaluated for probable incurred losses		20,204		10,779		3,588		8,254		380	$	370	$	13,114		56,689
Total allowance for loan losses	$	29,730	$	14,138	$	5,493	$	10,191	$	402	$	370	$	13,114	$	73,438
Portfolio loans:
Individually evaluated for impairment	$	132,276	$	48,522	$	22,982	$	17,061	$	95					$	220,936
Collectively evaluated for probable incurred losses		709,486		242,653		55,007		139,190		10,505	$	1,490				1,158,331
Total portfolio loans	$	841,762	$	291,175	$	77,989	$	156,251	$	10,600	$	1,490			$	1,379,267

	December 31, 2011
	Secured by Real Estate
	Commercial		Residential (including multi- family)		Construction, Land Development and Other Land		Commercial and Other Business- Purpose Loans		Consumer		Other		Unallocated		Total
Allowance for loan losses:
Individually evaluated for impairment	$	10,636	$	3,920	$	3,134	$	3,732	$	29					$	21,451
Collectively evaluated for probable incurred losses		26,685		15,866		7,355		10,262		662	$	17	$	4,447		65,294
Total allowance for loan losses	$	37,321	$	19,786	$	10,489	$	13,994	$	691	$	17	$	4,447	$	86,745
Portfolio loans:
Individually evaluated for impairment	$	167,792	$	56,210	$	36,638	$	23,583	$	63					$	284,286
Collectively evaluated for probable incurred losses		739,585		275,900		68,630		157,766		12,165	$	2,781				1,256,827
Total portfolio loans	$	907,377	$	332,110	$	105,268	$	181,349	$	12,228	$	2,781			$	1,541,113

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

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 and six months ended June 30, 2012 and 2011 (in $1,000s) by loan type:

	Three Months Ended June 30, 2012
	Secured by Real Estate
	Commercial			Residential (including multi- family)			Construction, Land Development and Other Land			Commercial and Other Business- Purpose Loans			Consumer			Other			Unallocated		Total
Beginning balance	$	30,562		$	16,978		$	9,327		$	11,990		$	498		$	13		$	11,586	$	80,954
Charge-offs		(3,714	)		(2,691	)		(1,414	)		(4,782	)		(38	)		(679	)				(13,318	)
Recoveries		1,574			568			376			2,908			82								5,508
Net charge-offs		(2,140	)		(2,123	)		(1,038	)		(1,874	)		44			(679	)				(7,810	)
Provision for loan losses		2,248			(402	)		(2,710	)		247			(128	)		1,039					294
Additional unallocated allowance		(940	)		(315	)		(86	)		(172	)		(12	)		(3	)		1,528
Ending balance	$	29,730		$	14,138		$	5,493		$	10,191		$	402		$	370		$	13,114	$	73,438

	Six Months Ended June 30, 2012
	Secured by Real Estate
	Commercial			Residential (including multi- family)			Construction, Land Development and Other Land			Commercial and Other Business- Purpose Loans			Consumer			Other			Unallocated		Total
Beginning balance	$	37,321		$	19,786		$	10,489		$	13,994		$	691		$	17		$	4,447	$	86,745
Charge-offs		(9,566	)		(7,067	)		(3,564	)		(6,560	)		(333	)		(679	)				(27,769	)
Recoveries		3,967			3,769			1,149			4,265			145			7					13,302
Net charge-offs		(5,599	)		(3,298	)		(2,415	)		(2,295	)		(188	)		(672	)				(14,467	)
Provision for loan losses		3,342			(565	)		(2,092	)		(530	)		(34	)		1,039					1,160
Additional unallocated allowance		(5,334	)		(1,785	)		(489	)		(978	)		(67	)		(14	)		8,667
Ending balance	$	29,730		$	14,138		$	5,493		$	10,191		$	402		$	370		$	13,114	$	73,438

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note D - Loans - Continued

	Three Months Ended June 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	$	49,154		$	26,056		$	17,449		$	23,719		$	824		$	44	$	117,246
Charge-offs		(6,463	)		(3,261	)		(4,239	)		(5,576	)		(369	)				(19,908	)
Recoveries		1,112			960			145			1,184			55			1		3,457
Net charge-offs		(5,351	)		(2,301	)		(4,094	)		(4,392	)		(314	)		1		(16,451	)
Provision for loan losses		5,077			(1,334	)		1,513			55			406			19		5,736
Ending balance	$	48,880		$	22,421		$	14,868		$	19,382		$	916		$	64	$	106,531

	Six Months Ended June 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	$	47,823		$	36,139		$	17,505		$	24,098		$	681		$	59	$	126,305
Acquired loan loss reserve		1,043			117			651			500			68			1		2,380
Charge-offs		(14,874	)		(10,441	)		(11,833	)		(10,822	)		(592	)				(48,562	)
Recoveries		2,044			1,941			3,153			1,959			93			2		9,192
Net charge-offs		(12,830	)		(8,500	)		(8,680	)		(8,863	)		(499	)		2		(39,370	)
Provision for loan losses		12,844			(5,335	)		5,392			3,647			666			2		17,216
Ending balance	$	48,880		$	22,421		$	14,868		$	19,382		$	916		$	64	$	106,531

The average total portfolio loans for the six months ended June 30, 2012 and 2011 were $1.5 billion and $1.9 billion, respectively.  The ratio of net charge-offs (annualized) to average portfolio loans outstanding was 1.98% and 4.21% for the six months ended June 30, 2012 and 2011, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

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):

	June 30, 2012		March 31, 2012		December 31, 2011
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	93,792	$	114,225	$	121,250
Residential (including multi-family)		36,525		39,094		45,357
Construction, land development and other land		17,409		21,411		29,088
Total loans secured by real estate		147,726		174,730		195,695
Commercial and other business-purpose loans		13,238		14,901		17,818
Consumer		174		182		124
Total nonaccrual loans		161,138		189,813		213,637
Past due (>90 days) loans and accruing interest:
Loans secured by real estate:
Commercial		1,029		515		3,778
Residential (including multi-family)		231		1,089		259
Construction, land development and other land		--		312		--
Total loans secured by real estate		1,260		1,916		4,037
Commercial and other business-purpose loans		93		233		148
Consumer		14		17		38
Total past due loans		1,367		2,166		4,223
Total nonperforming loans	$	162,505	$	191,979	$	217,860
Real estate owned and other repossessed assets		95,331		101,651		95,587
Total nonperforming assets	$	257,836	$	293,630	$	313,447

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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

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 June 30, 2012:

	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	91,090	$	103,121	$	11,633
Residential (including multi-family)		30,953		45,210		4,292
Construction, land development and other land		13,017		19,311		2,278
Total loans secured by real estate		135,060		167,642		18,203
Commercial and other business-purpose loans		13,989		25,377		3,042
Consumer		306		1,789		31
		149,355		194,808		21,276
With no related allowance recorded:
Loans secured by real estate:
Commercial		66,967		101,509
Residential (including multi-family)		29,571		43,160
Construction, land development and other land		14,712		26,343
Total loans secured by real estate		111,250		171,012
Commercial and other business-purpose loans		7,466		11,895
Consumer		15		15
		118,731		182,922
Total	$	268,086	$	377,730	$	21,276

Included in total impaired loans as of June 30, 2012 is $197.4 million of loans modified as troubled debt restructurings (see further discussion under the 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 six months ended June 30, 2012 and 2011, the average recorded investment in impaired loans and interest income recorded on impaired loans were as follows (in $1,000s):

	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recorded		Investment		Recorded
Commercial	$	164,182	$	664	$	167,544	$	2,325
Residential (including multi-family)		60,434		587		62,526		1,231
Construction, land development and other land		30,302		299		33,462		596
Total loans secured by real estate		254,918		1,550		263,532		4,152
Commercial and other business-purpose loans		23,310		338		24,686		640
Consumer		311		7		266		10
Total	$	278,539	$	1,895	$	288,484	$	4,802

Page 18 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note D - Loans - Continued

	Three Months Ended June 30, 2011				Six Months Ended June 30, 2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recorded		Investment		Recorded
Commercial	$	177,976	$	429	$	177,749	$	978
Residential (including multi-family)		59,928		121		61,904		250
Construction, land development and other land		48,161		75		49,232		111
Total loans secured by real estate		286,065		625		288,885		1,339
Commercial and other business-purpose loans		29,046		1		30,631		74
Consumer		307				278
Total	$	315,418	$	626	$	319,794	$	1,413

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, 2011:

	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	68,486	$	79,753	$	11,053
Residential (including multi-family)		32,054		36,628		5,288
Construction, land development and other land		15,443		21,391		3,464
Total loans secured by real estate		115,983		137,772		19,805
Commercial and other business-purpose loans		16,037		17,294		4,696
Consumer		166		173		95
		132,186		155,239		24,596
With no related allowance recorded:
Loans secured by real estate:
Commercial		105,548		145,956
Residential (including multi-family)		33,928		45,902
Construction, land development and other land		24,278		39,537
Total loans secured by real estate		163,754		231,395
Commercial and other business-purpose loans		11,658		16,976
Consumer		12		48
		175,424		248,419
Total	$	307,610	$	403,658	$	24,596

Included in impaired loans as of December 31, 2011 is $207.0 million of loans modified as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note).

Page 19 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note D - Loans - Continued

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

	June 30, 2012
	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	$	13,373	$	1,029	$	93,792	$	108,194	$	733,568	$	841,762
Residential (including multi- family		3,913		231		36,525		40,669		250,506		291,175
Construction, land development and other land		1,575				17,409		18,984		59,005		77,989
Total loans secured by real estate		18,861		1,260		147,726		167,847		1,043,079		1,210,926
Commercial and other business- purpose loans		2,224		93		13,238		15,555		140,696		156,251
Consumer		139		14		174		327		10,273		10,600
Other										1,490		1,490
Total	$	21,224	$	1,367	$	161,138	$	183,729	$	1,195,538	$	1,379,267

	December 31, 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	$	16,770	$	3,778	$	121,250	$	141,798	$	765,579	$	907,377
Residential (including multi- family		4,913		259		45,357		50,529		281,581		332,110
Construction, land development and other land		3,691				29,088		32,779		72,489		105,268
Total loans secured by real estate		25,374		4,037		195,695		225,106		1,119,649		1,344,755
Commercial and other business- purpose loans		3,930		148		17,818		21,896		159,453		181,349
Consumer		476		38		124		638		11,590		12,228
Other										2,781		2,781
Total	$	29,780	$	4,223	$	213,637	$	247,640	$	1,293,473	$	1,541,113

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.  The following loan risk rating definitions are used:

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note D - Loans - Continued

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.

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

	June 30, 2012
	Pass						Total Portfolio Loans
			Watch		Substandard
Loans secured by real estate:
Commercial	$	571,210	$	99,766	$	170,786	$	841,762
Residential (including multi-family)		199,684		25,662		65,829		291,175
Construction, land development and other land		40,399		12,470		25,120		77,989
Total loans secured by real estate		811,293		137,898		261,735		1,210,926
Commercial and other business-purpose loans		118,629		12,310		25,312		156,251
Consumer		9,557		622		421		10,600
Other		1,490						1,490
Total	$	940,969	$	150,830	$	287,468	$	1,379,267

	December 31, 2011
	Pass						Total Portfolio Loans
			Watch		Substandard
Loans secured by real estate:
Commercial	$	606,691	$	90,673	$	210,013	$	907,377
Residential (including multi-family)		224,285		31,319		76,506		332,110
Construction, land development and other land		52,315		12,134		40,819		105,268
Total loans secured by real estate		883,291		134,126		327,338		1,344,755
Commercial and other business-purpose loans		135,017		14,412		31,920		181,349
Consumer		11,134		574		520		12,228
Other		2,487		294				2,781
Total	$	1,031,929	$	149,406	$	359,778	$	1,541,113

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

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 because the borrower is experiencing financial difficulty and the loan 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 loan portfolios contain primarily three categories of troubled debt restructurings, (1) loans for which the rate or terms have been modified (2) loans for which the rate or terms have not been modified but the loan was extended or renewed, and (3) loans that have been modified with interest only terms.  The following are the factors that enter into the determination of the specific reserve for each of these categories:

Loans for which the rate or terms have been modified:  The specific reserve for loans in this category, for which the repayment ability is based on the cash flows of the borrower, is determined using a discounted cash flow analysis.  The discount period used is based on when the bank believes, based on cash flows from the borrower or project, that the credit will be paid in full.  The period used is generally based on a defined cash flow event that is projected to occur in the future.  For an event which will result in a paydown allowing for a refinance, the discount period would be the number of months until the refinance.  If an event for paydown or refinance cannot be documented, a discount period that will result in the cash flows from the borrower reducing the loan balance down to the collateral value is used.  The specific reserve for loans in this category that have been deemed collateral dependent is determined using the collateral dependency method.

Loans for which there has been no rate or term modification:  If there has been no change in the rate and term, a discounted cash flow analysis using the same terms would not, in most cases, yield a specific reserve allocation commensurate with loans in the general allowance account that have similar risk characteristics with respect to payment default but that have not been modified and are a troubled debt restructuring.  In the determination of the specific reserve for this category of loans, the appropriate general pool loss reserve factor is used as a baseline with adjustments made based on known circumstances that may affect the collectability of the loan.  Any increase or decrease to the baseline general allowance reserve factor is determined based on the loss experience for loans with similar risk characteristics.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note D - Loans - Continued

Loans that have interest only terms:  Unless there is a specific event that can be documented which will result in the loan being paid, returned to the original contract terms or refinanced, these loans are treated as collateral-dependent and the specific reserve is based on the net value of the collateral held.

The following table summarizes loans modified as troubled debt restructurings during the three and six months ended June 30, 2012 (in $1,000s):

	Three Months Ended June 30, 2012
	Number of Contracts		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Post- restructuring Loan Loss Reserve
Troubled debt restructurings:
Loans secured by real estate:
Commercial		39	$	17,851	$	14,345	$	736
Residential		31		4,237		3,823		454
Construction, land development and other land		6		596		563		15
Total loans secured by real estate		76		22,684		18,731		1,205
Commercial and other business- purpose loans		5		350		327		7
Total		81	$	23,034	$	19,058	$	1,212

	Six Months Ended June 30, 2012
	Number of Contracts		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Post- restructuring Loan Loss Reserve
Troubled debt restructurings:
Loans secured by real estate:
Commercial		83	$	31,081	$	26,184	$	1,296
Residential		60		8,309		6,914		685
Construction, land development and other land		12		1,652		1,400		41
Total loans secured by real estate		155		41,042		34,498		2,022
Commercial and other business- purpose loans		18		1,304		1,194		42
Consumer		2		40		39		3
Total		175	$	42,386	$	35,731	$	2,067

Of the amounts in the table above for the six months ended June 30, 2012, approximately $10.6 million, or 30%, and 54 contracts, or 30%, 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note D - Loans - Continued

The following table summarizes loans modified as troubled debt restructurings in the last twelve months for which there was a payment default (i.e., when a loan becomes 90 days or more past due) during the three and six months ended June 30, 2012 (in $1,000s):

	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled debt restructurings that subsequently defaulted:
Loans secured by real estate:
Commercial		10	$	1,151		16	$	2,056
Residential		7		1,177		13		1,651
Construction, land development and other land		3		473		8		1,194
Total loans secured by real estate		20		2,801		37		4,901
Commercial and other business- purpose loans		4		282		6		384
Consumer						1		90
Total		24	$	3,083		44	$	5,375

The total amount of troubled debt restructurings as of June 30, 2012 and December 31, 2011 is detailed in the following tables by loan type and accrual status (in $1,000s):

	Troubled Debt Restructurings at June 30, 2012
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	48,637	$	64,264	$	112,901
Residential (including multi-family)		21,912		24,016		45,928
Construction, land development and other land		9,928		10,320		20,248
Total loans secured by real estate		80,477		98,600		179,077
Commercial and other business-purpose loans		9,823		8,201		18,024
Consumer		134		147		281
Total	$	90,434	$	106,948	$	197,382

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note D - Loans - Continued

	Troubled Debt Restructurings at December 31, 2011
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	65,589	$	52,784	$	118,373
Residential (including multi-family)		25,358		20,625		45,983
Construction, land development and other land		13,714		10,635		24,349
Total loans secured by real estate		104,661		84,044		188,705
Commercial and other business-purpose loans		8,336		9,876		18,212
Consumer				54		54
Total	$	112,997	$	93,974	$	206,971

Note E - Discontinued Operations

During the six months ended June 30, 2012, Capitol completed the following sale of a bank subsidiary (in $1,000s):

		Sale
	Date Sold	Proceeds		Gain
Mountain View Bank of Commerce(1)	January 30, 2012	$	4,060	$	126

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

On July 27, 2012, Capitol completed the sale of Bank of Michigan with aggregate proceeds of $3.6 million and a net estimated loss of $270,000.

On July 30, 2012, Capitol completed the sale of First Carolina State Bank with aggregate proceeds of $1.3 million and a net estimated gain of $290,000.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note E - Discontinued Operations - Continued

The assets, liabilities and results of operations for Mountain View Bank of Commerce, First Carolina State Bank and Bank of Michigan, together with the results of operations of 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, are classified as discontinued operations for the periods presented and include the following components (in $1,000s):

	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012		2011
Interest income	$	1,725		$	9,191		$	3,696	$	19,861
Interest expense		398			1,548			856		3,520
Net interest income		1,327			7,643			2,840		16,341
Provision for loan losses		101			2,374			561		4,855
Net interest income after provision for loan losses		1,226			5,269			2,279		11,486
Noninterest income		376			1,134			708		2,279
Gain on sale of bank subsidiaries					184			126		4,552
Noninterest expense		1,507			7,027			2,954		14,081
Income (loss) before income taxes		95			(440	)		159		4,236
Less income tax expense		80			208			62		1,807
Net income (loss) from discontinued operations		15			(648	)		97		2,429
Net (income) loss attributable to noncontrolling interests in consolidated subsidiaries		(22	)		478			66		651
Net income (loss) from discontinued operations attributable to Capitol Bancorp Limited	$	(7	)	$	(170	)	$	163	$	3,080
Net income from discontinued operations per common share attributable to Capitol Bancorp Limited	$	--		$	--		$	--	$	0.08

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

	June 30, 2012			Dec 31, 2011				June 30, 2012		Dec 31, 2011
Assets:							Liabilities:
Cash and cash equivalents	$	34,554		$	40,575		Noninterest-bearing deposits
Investment securities		4,179			10,199			$	24,335	$	27,292
Federal Home Loan Bank stock							Interest-bearing deposits		123,319		165,864
		593			957		Total deposits		147,654		193,156
Portfolio loans		122,953			163,156		Other liabilities		9,991		12,600
Less allowance for loan losses
		(5,579	)		(6,535	)		$	157,645	$	205,756
Net portfolio loans		117,374			156,621
Premises and equipment		3,911			3,452
Other real estate owned		3,379			5,949
Other assets		2,167			4,745
	$	166,157		$	222,498

Page 26 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note F - Fair Value

Accounting standards establish a hierarchy that prioritizes the use of fair value inputs used in valuation methodologies into the following three levels:

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

Level 2:  Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

Level 3:  Significant unobservable inputs that reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of Capitol's valuation methodologies used to measure and disclose the fair values of its 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 (Level 1 inputs).  If quoted prices are not available, fair values are measured using independent pricing models, as Level 2 inputs.

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 June 30, 2012.  Fair value is based on independent quoted market prices, where applicable (Level 1 inputs), or the prices for other whole mortgage loans with similar characteristics, as Level 2 inputs.

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 based on the observable market price, current appraised value of the collateral or other estimates of fair value, as Level 3 inputs.

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, as Level 3 inputs.

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 June 30, 2012 and December 31, 2011.

Page 27 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note F - Fair Value - Continued

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

	June 30, 2012				December 31, 2011
	Total		Significant Other Observable Inputs (Level 2)		Total		Significant Other Observable Inputs (Level 2)
Investment securities available for sale:(1)
United States treasury	$	3,502	$	3,502	$	4,013	$	4,013
United States government agency		3,998		3,998
Mortgage-backed		9,493		9,493		10,592		10,592
Municipalities		106		106		278		278
	$	17,099	$	17,099	$	14,883	$	14,883

(1) Level 2 inputs for investment securities available for sale include pricing models from independent pricing sources with reasonable levels of price transparency.

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

	June 30, 2012				December 31, 2011
	Total		Significant Unobservable Inputs (Level 3)		Total		Significant Unobservable Inputs (Level 3)
Impaired loans(1)	$	118,731	$	118,731	$	175,424	$	175,424
Other real estate owned(2)	$	94,834	$	94,834	$	95,523	$	95,523

(1)      Level 3 inputs for impaired loans include appraised value of the applicable collateral or other unobservable estimates of fair value.

(2)      Level 3 inputs for other real estate owned include appraised value of the foreclosed property or other unobservable estimates of fair value.  

           Fair value is reduced by estimated costs to sell the properties.

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 downgrade 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, an impaired loan will be further evaluated for appropriate write-down.  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

Page 28 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note F - Fair Value - Continued

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.

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):

			June 30, 2012						December 31, 2011
	Level Used to Measure Estimated Fair Value		Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Financial assets:
Cash		1	$	47,466		$	47,466		$	38,540		$	38,540
Cash equivalents		2		298,395			298,395			318,006			318,006
Loans held for sale		2		1,099			1,099			2,129			2,129
Investment securities:
Available for sale		2		17,099			17,099			14,883			14,883
Held for long-term investment		3		2,769			2,769			2,737			1,981
				19,868			19,868			17,620			16,864
Federal Home Loan Bank and Federal Reserve Bank stock		2		12,105			12,105			12,851			12,851
Portfolio loans:
Loans secured by real estate:
Commercial		3		841,762			839,488			907,377			903,687
Residential (including multi-family)		3		291,175			290,789			332,110			331,434
Construction, land development and other land		3		77,989			78,037			105,268			105,262
Total loans secured by real estate				1,210,926			1,208,314			1,344,755			1,340,383
Commercial and other business-purpose loans		3		156,251			156,183			181,349			181,350
Consumer		3		10,600			10,815			12,228			12,406
Other		3		1,490			1,458			2,781			2,546
Total portfolio loans				1,379,267			1,376,770			1,541,113			1,536,685
Less allowance for loan losses		3		(73,438	)		(73,438	)		(86,745	)		(86,745	)
Net portfolio loans				1,305,829			1,303,332			1,454,368			1,449,940
Financial liabilities:
Deposits:
Noninterest-bearing		1		361,003			361,003			328,896			328,896
Interest-bearing:
Demand accounts		2		507,722			507,722			502,866			502,866
Time certificates of less than $100,000		3		373,757			376,161			454,833			460,012
Time certificates of $100,000 or more		3		486,550			489,034			571,803			575,942
Total interest-bearing				1,368,029			1,372,917			1,529,502			1,538,820
Total deposits				1,729,032			1,733,920			1,858,398			1,867,716
Notes payable and other borrowings		3		30,694			20,908			50,445			50,824
Subordinated debentures		3		149,207			29,080			149,156			123,452

Page 29 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note F - Fair Value - Continued

Estimated fair values of financial assets and liabilities in the preceding table 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 subordinated debentures, 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.  Except for subordinated debentures, 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note G - 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 June 30:

	Three Month Period						Six Month Period
	2012			2011			2012			2011
Numerator-net loss attributable to Capitol Bancorp Limited for the period	$	(10,339	)	$	(16,438	)	$	(18,251	)	$	(16,149	)
Denominator:
Weighted average number of common shares outstanding, excluding unvested restricted shares of common stock (denominator for basic and diluted net loss)		41,021			40,946			41,020			36,579
Number of antidilutive stock options excluded from diluted net loss per share computation		1,722			1,541			1,722			1,541
Number of antidilutive unvested restricted shares excluded from basic and diluted net loss per share computation		18			30			18			30
Number of antidilutive warrants excluded from diluted net loss per share computation		1,250			1,326			1,250			1,326
Net income (loss) per common share attributable to Capitol Bancorp Limited:
From continuing operations	$	(0.25	)	$	(0.40	)	$	(0.44	)	$	(0.52	)
From discontinued operations		--			--			--			0.08
Total net loss per common share attributable to Capitol Bancorp Limited	$	(0.25	)	$	(0.40	)	$	(0.44	)	$	(0.44	)

Note H - 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 liquid 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 $32.5 million and $27.6 million at June 30, 2012 and December 31, 2011, respectively.  Holders of the trust-preferred securities 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 $3.4 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note I - Pending Sale of Subsidiary Banks

In addition to completed sales of certain bank subsidiaries (see Note E), Capitol has entered into a definitive agreement to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institution which is pending:  High Desert Bank.  Total proceeds from this pending sale are expected to approximate $760,000, resulting in a projected loss of $210,000 ($0.01 per common share) based on Capitol's investment in the bank as of June 30, 2012, and the sale is expected to be consummated in 2012, subject to regulatory approval and other significant contingencies.

Note J - 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 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note J - Regulatory and Operating Matters - Continued

Capitol's banking subsidiaries which have received a PCAD are as follows as of June 2012 (listed in descending order based on total assets):

Michigan Commerce Bank

Bank of Las Vegas

Sunrise Bank of Arizona

Sunrise Bank

Central Arizona Bank

Sunrise Bank of Albuquerque

1^st Commerce Bank

Pisgah Community Bank

These banks are striving to develop and implement capital restoration plans which may be acceptable to the FDIC.  Typically, a capital plan is not deemed acceptable by the FDIC until receipt of the planned capital funds is imminent.

Regulatory capital matters are set forth in Note K.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law and is significantly impacting the 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 abolished the Office of Thrift Supervision and transferred its functions to other federal banking agencies, relaxed rules regarding interstate branching, allowed financial institutions to pay interest on business checking accounts, changed the scope of FDIC insurance coverage and imposes 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 established the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which was 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 assess 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, currently remains 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.

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, which would only be activated if triggered under the Plan.

Page 33 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note K - Regulatory Capital Matters

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

		June 30,				December 31,
		2012				2011
Tier 1 capital to average adjusted total assets:
Minimum required amount	≥	$	80,701		≥	$	92,356
Actual amount		$	(132,168	)		$	(109,146	)
Ratio			(6.55	)%			(4.73	)%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1)	≥	$	61,153		≥	$	68,615
Actual amount		$	(132,168	)		$	(109,146	)
Ratio			(8.65	)%			(6.36	)%
Combined Tier 1 and Tier 2 capital to risk- weighted assets:
Minimum required amount(2)	≥	$	122,307		≥	$	137,231
Actual amount		$	(132,168	)		$	(109,146	)
Ratio			(8.65	)%			(6.36	)%

(1)	The minimum required ratio of Tier 1 capital to risk-weighted assets to be considered "adequately-capitalized" is 4%.
(2)	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 June 30, 2012 and December 31, 2011 was materially and adversely impacted by the exclusion of approximately $169.1 million and $171.5 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.  Capitol's Tier 1 capital will need to increase to a positive level in order to allow for the inclusion of trust-preferred securities in Tier 2 capital for regulatory capital computation purposes.

The preceding summary indicates that Capitol, on a consolidated basis, was classified as less than "adequately-capitalized" at June 30, 2012 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 47 on this document.

Page 34 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note L - Financial Restructuring Plan

On June 22, 2012, Capitol announced the commencement of a voluntary restructuring plan designed to facilitate Capitol's objective of converting existing debt, including senior notes and trust-preferred securities, to equity and with the primary objectives of enhancing capital levels, improving liquidity and accelerating Capitol's return to profitability.  The initiative includes the opportunity to preserve Capitol's substantial deferred tax assets.

Under the restructuring plan, which was approved by Capitol's Board of Directors and reviewed with Capitol's primary regulators, existing debt holders were asked to exchange their debt securities for both preferred and common stock of the Corporation (the "Exchange Offer").  Simultaneously, Capitol solicited votes from all debt and equity holders for a prepackaged plan of reorganization (the "Standby Plan") for Capitol and its affiliate Financial Commerce Corporation ("FCC"), formerly known as Michigan Commerce Bancorp Limited, to be commenced in the event that the Exchange Offer was not successful.   The Standby Plan contemplates the conversion of all current trust-preferred security holders, unsecured senior note holders, current preferred equity shareholders and current common equity shareholders into new classes of common stock, which will retain approximately 53% of the voting control and value of the restructured company.  Capitol is also actively seeking external capital sources sufficient to restore all affiliate institutions to "well-capitalized" status in exchange for approximately 47% of the restructured Corporation.

The restructuring initiatives will facilitate the conversion of Capitol's trust-preferred securities to equity and strengthen the composition of Capitol's capital base by increasing its Tier 1 common and tangible common equity ratios.  Through this restructuring plan, and current capital raise, Capitol expects to have increased capital flexibility to continue to support its community banking platform.

The Exchange Offer and voting on the Standby Plan expired on July 27, 2012.  The results were overwhelmingly in support of the Standby Plan, and the conditions were not satisfied for the exchange offers to the existing debt holders.  All classes voted to accept the Standby Plan with all votes substantially exceeding the required thresholds for a successful solicitation.

Accordingly, on August 9, 2012, Capitol proceeded with a voluntary prepackaged bankruptcy filing in order to restructure its debt and streamline its capital structure.  Capitol and FCC filed a voluntary joint prepackaged bankruptcy petition.  Capitol's banking subsidiaries are not part of the filing and continue to conduct business on an uninterrupted basis.

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Page 35 of 63

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 $2.0 billion at June 30, 2012 and $2.2 billion at December 31, 2011.  The balance sheets include total assets of Capitol and its consolidated subsidiaries (in $1,000s) as follows:

	June 30, 2012			December 31, 2011
Arizona Region:
Central Arizona Bank	$	39,297		$	41,976
Sunrise Bank of Albuquerque		56,098			60,063
Sunrise Bank of Arizona		258,108			303,513
Arizona Region Total		353,503			405,552
Colorado Region:
Mountain View Bank of Commerce(1)					51,665
Great Lakes Region:
Bank of Maumee		35,072			33,495
Bank of Michigan(1)		89,898			85,664
Capitol National Bank		168,657			153,938
Indiana Community Bank		106,905			119,372
Michigan Commerce Bank		706,600			776,289
Great Lakes Region Total		1,107,132			1,168,758
Nevada Region:
1st Commerce Bank		23,225			26,375
Bank of Las Vegas		288,491			318,174
Nevada Region Total		311,716			344,549
Northwest Region:
High Desert Bank		30,713			31,020
Southeast Region:
First Carolina State Bank(1)		76,259			85,169
Pisgah Community Bank		27,272			28,120
Sunrise Bank		74,753			81,119
Southeast Region Total		178,284			194,408
Parent company and other, net		4,559			9,313
Consolidated totals		1,985,907			2,205,265
Less discontinued operations		(166,157	)		(222,498	)
Consolidated totals-continuing operations	$	1,819,750		$	1,982,767

(1) Capitol sold its ownership in First Carolina State Bank effective July 30, 2012, Bank of Michigan effective July 27, 2012 and Mountain View Bank of Commerce effective January 30, 2012.  These banks' operations are included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.

Page 36 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

Total assets decreased $219.4 million during the six months ended June 30, 2012, of which $51.7 million related to the bank subsidiary sold during the period.

Portfolio loans, the single largest asset category (69% of total assets at June 30, 2012), decreased during the six months ended June 30, 2012 by approximately $161.8 million, compared to a decrease of about $191.5 million during the corresponding period of 2011.  Although Capitol's banks operate in regions where the economies are beginning to show some signs of recovery, they are still challenged with continued relative weakness in real estate values in their banking regions and markets.  The portfolio decrease is attributed largely to shrinkage due in part to disciplined pricing and portfolio management, as the banks continue to deploy available options to preserve liquidity and bolster regulatory capital levels.  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 continues to play an important role in risk management and the road to improved profitability.  Prior to 1996, all of Capitol's banking operations were located in Michigan.  At June 30, 2012, Capitol's primary geographic banking regions include Phoenix, Arizona, Las Vegas, Nevada and the Great Lakes Region, dominated by the largest banking affiliate, located in Ann Arbor, Michigan.  As of June 30, 2012, 62% of the consolidated loan portfolio relates to the Great Lakes Region (60% at December 31, 2011) and 38% relates to banks located in other regions of the country (40% at December 31, 2011).  While concentration levels remain somewhat static compared to the end of 2011, the geographic mix of portfolio loans has changed slightly over the past few years as Capitol has divested of banks.  Management believes that these banking regions offer the Corporation the best opportunity to increase market presence as well as improved performance and resource allocation.

The consolidated allowance for loan losses at June 30, 2012 approximated $73.4 million or 5.32% of total portfolio loans, a decrease from the 5.63% ratio at the beginning of the year (excluding discontinued operations), resulting from some improvement in economic conditions and positive changes in asset quality.  The consolidated allowance for loan losses at June 30, 2012 decreased $13.3 million from the beginning of the year, excluding discontinued operations, as the Corporation continued to reduce its loan portfolio in conjunction with its balance sheet deleveraging strategy and as a result of general loan curtailments.  The decrease in the allowance for loan losses is also somewhat reflective of the effects of stabilizing asset quality, as levels of nonperforming loans have declined.

Last year, the Corporation received regulatory guidance regarding the methodology used to determine the allowance for loan losses at its three largest banks.  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, in frequent dialogue with the regulators concerning their guidance for determining the allowance for loan losses, evaluated other methodologies permissible in accordance with regulatory pronouncements and industry practices.  As a result of the evaluation, Capitol began to phase in migration analysis beginning in December 31, 2011.  Since that time, migration analysis has been used, at least in part, to determine the allowance for loan losses at its three largest banks.  In calculating the annualized net charge-off rates, the banks generally applied at least a twenty-four month look back period of the loan portfolio as of December 31, 2011 and a twenty-four to thirty-three month look back and loss accumulation period as of June 30, 2012.  The calculations were tailored to the individual bank to account for loss histories and market conditions within the markets served by the bank.  The time periods for the loan portfolio look back period were chosen based on dialogue with regulatory authorities, and were selected in a manner so as to reach a confidence interval such that most of the incurred historical losses captured under the migration approach had been accounted for in the analysis.  As of December 31, 2011, this migration analysis approach to calculating annualized net charge-off rates was validated by an independent professional accounting and consulting firm, without issue.  Based on management's analysis and judgment, and supported by an external firm's validation of the migration technique, the Corporation believes that the methodology used to determine 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 consolidated loan portfolio as of June 30, 2012.

Page 37 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

At June 30, 2012, the Corporation's largest banking affiliate calculated its allowance for loan losses using three different techniques and eight iterations of migration analysis.  The techniques included the methodology developed by the FDIC, the approach used by the bank during most of 2011 and eight iterations of migration analysis.  The eight iterations of migration analysis used look back and loss accumulation periods of twelve, fifteen, eighteen, twenty-one, twenty-four, twenty-seven, thirty and thirty-three months.  The ten calculations produced an allowance for loan losses level that resulted in excess reserves ranging from $11.4 million to $31.5 million at June 30, 2012; the methodology recommended by the regulators resulted in a $13.1 million excess reserve.  Since it is currently operating under a Consent Order, written regulatory approval is required for the bank to release any portion of its $13.1 million in excess reserves and record a negative provision for loan losses.  As of July 2012, written regulatory approval had not been received.  The bank has identified the $13.1 million portion of its allowance for loan losses at June 30, 2012 as unallocated.

The methodology used in the determination of the allowance for loan losses at June 30, 2012 for the remaining banking affiliates has remained consistent with no changes to the techniques used to calculate historical loan loss experience, and has been incorporated in the consolidated provision for loan losses recorded for the six months ended June 30, 2012.

Loan charge-offs for the interim 2012 period, which decreased significantly compared to the same period in 2011, are not necessarily indicative of future charge-off levels because of the variability in asset quality and resolution of nonperforming loans.  The significant level of the provision for loan losses in the comparable 2011 interim period related primarily to Michigan, Arizona and Nevada banks, and were the result of higher levels of nonperforming loans and a challenging and uncertain economic climate.

Total nonperforming loans approximated $162.5 million at June 30, 2012 (excluding discontinued operations).  Of that total, $79.9 million or 49% (including some loans carried at the parent level) were originated by banks located within the Great Lakes Region, primarily in Michigan.  Nonperforming loans decreased significantly during the six-month period, including decreases of $28.5 million within the Great Lakes Region and $22.6 million within the Nevada Region.

In response to the elevated level of nonperforming loans, higher levels of allowances for loan losses have been established for the Great Lakes Region, the Southeast Region and the Nevada Region, approximating 5.66%, 6.98% and 5.07% of portfolio loans, respectively, for each of the regions on a combined basis as of June 30, 2012.  The allowance for loan losses levels reach as high as 9.73% at 1^st Commerce Bank, 8.77% at Pisgah Community Bank and 7.04% at Michigan Commerce Bank.  While these levels of allowance to loans remain high in these regions, Michigan Commerce Bank has identified that $13.1 million of its allowance is unallocated and has requested a negative provision for loan losses to bring the allowance to loans to a commensurate level based on the acceptable loan loss reserve determination methodologies discussed previously.  Those ratios can be contrasted with some other banks and geographic regions within the Corporation with lower levels of nonperforming loans.

Nonperforming loans decreased $55.4 million or 25.4% during the six months ended June 30, 2012, compared to a decrease of $25.9 million or 9.0% in the corresponding period of 2011.  Nonperforming loans have decreased for eight consecutive quarters.  Nonperforming assets decreased $55.6 million for the six months ended June 30, 2012, compared to a decrease of $27.0 million in the corresponding period of 2011.  Management believes the overall decreases primarily demonstrate signs of stability in several of Capitol's key markets; however, there can be no assurance that future operating results will continue to reflect these recent trends.

The allowance for loan losses as a percentage of nonperforming loans approximated 45.19% at June 30, 2012, compared to 39.8% at the beginning of the year (excluding operations discontinued in 2012).  As previously discussed, the allowance for loan losses is an estimate based on management's judgment 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

Page 38 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

relating to impaired collateral-dependent loans are generally reflected as direct write-downs to those loans as 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.

Nonperforming loans at June 30, 2012 approximated 11.78% of total portfolio loans, a decrease from the December 31, 2011 ratio of 14.14% (excluding discontinued operations).  While total nonperforming loans have declined for eight consecutive quarters, the ongoing divestiture activity and general deleveraging of the balance sheet have previously reduced the impact the declining nonperforming loans had on the ratio of nonperforming loans to total loans.  This is the first quarter of the past eight quarters that also reflects a decline in this key asset quality metric, further underscoring the Corporation's commitment to restoring balance sheet strength by resolving historical loan portfolio deterioration.

Of the nonperforming loans at June 30, 2012, 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 as markets deteriorate.  Most other nonperforming loans were generally secured by other business assets.  Nonperforming loans at June 30, 2012 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.

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 downgrade 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, an impaired loan will be further evaluated for appropriate write-down.  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.

Page 39 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

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 and internal loan ratings are periodically updated.  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.

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

At June 30, 2012, problem and potential problem loans (including the previously-discussed nonperforming loans) approximated $438.3 million or about 32% of total consolidated portfolio loans, compared to approximately $509.2 million or about 33% at December 31, 2011.  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 six months of 2012.

Included in problem and potential problem loans are loans modified as troubled debt restructurings.  These loans decreased $9.6 million during the six months ended June 30, 2012, which was mostly related to charge-offs and payments received, including loans paid in full.  The following table presents the activity within troubled debt restructurings for the six months ended June 30, 2012 (in $1,000s):

	Secured by Real Estate
	Commercial			Residential (including multi- family)			Construction, Land Development and Other Land			Commercial and Other Business- Purpose Loans			Consumer		Total
Beginning balance	$	118,374		$	45,982		$	24,349		$	18,212		$	54	$	206,971
New additions		21,626			6,423			2,084			1,284			39		31,456
Payments received, including loans paid-in-full		(13,117	)		(3,151	)		(3,607	)		(1,953	)		6		(21,822	)
Charge-offs and other		(13,982	)		(3,326	)		(2,578	)		481			182		(19,223	)
Ending balance	$	112,901		$	45,928		$	20,248		$	18,024		$	281	$	197,382

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.

The Corporation's other real estate owned decreased $689,000 during the six months ended June 30, 2012, which was mostly related to sales and write-downs of properties acquired in foreclosure.

Page 40 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Financial Condition - Continued

The following table presents the activity within other real estate owned for the six months ended June 30, 2012 (in $1,000s):

Other real estate owned at January 1	$	95,523
Properties acquired in restructure of loans or in lieu of foreclosure		30,795
Properties sold		(23,822	)
Payments received from tenants, credited to carrying amount		(34	)
Write-down of other real estate owned		(7,628	)
Other real estate owned at June 30	$	94,834

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
	June 30, 2012			Dec 31, 2011			June 30, 2012			Dec 31, 2011			June 30, 2012			Dec 31, 2011			June 30, 2012			Dec 31, 2011
Arizona Region:
Central Arizona Bank	$	30,454		$	33,108		$	1,586		$	1,801		$	3,281		$	4,069			5.21	%		5.44	%
Sunrise Bank of Albuquerque		41,866			45,924			2,135			2,013			4,585			4,077			5.10	%		4.38	%
Sunrise Bank of Arizona		203,886			237,914			6,147			11,126			18,199			24,038			3.01	%		4.68	%
Arizona Region Total		276,206			316,946			9,868			14,940			26,065			32,184			3.57	%		4.71	%
Colorado Region:
Mountain View Bank of Commerce(1)					40,060						751						22						1.87	%
Great Lakes Region:
Bank of Maumee		24,915			26,334			1,003			1,084			604			988			4.03	%		4.12	%
Bank of Michigan(1)		71,638			64,970			1,936			1,505			1,125			715			2.70	%		2.32	%
Capitol National Bank		113,339			119,929			2,901			3,681			9,018			12,423			2.56	%		3.07	%
Indiana Community Bank		83,406			92,257			3,028			3,346			5,788			7,803			3.63	%		3.63	%
Michigan Commerce Bank		558,723			618,852			39,329			41,653			63,074			86,179			7.04	%		6.73	%
Great Lakes Region Total		852,021			922,342			48,197			51,269			79,609			108,108			5.66	%		5.56	%
Nevada Region:
1st Commerce Bank		16,183			18,542			1,575			1,634			1,981			3,998			9.73	%		8.81	%
Bank of Las Vegas		210,439			240,110			9,921			13,440			41,344			61,908			4.71	%		5.60	%
Nevada Region Total		226,622			258,652			11,496			15,074			43,325			65,906			5.07	%		5.83	%
Northwest Region:
High Desert Bank		25,431			25,913			962			957			713						3.78	%		3.69	%
Southeast Region:
First Carolina State Bank(1)		51,315			58,126			3,643			4,279			5,688			5,280			7.10	%		7.36	%
Pisgah Community Bank		16,821			19,753			1,475			1,925			4,268			3,717			8.77	%		9.75	%
Sunrise Bank		53,544			62,207			3,375			4,084			9,395			8,395			6.30	%		6.57	%
Southeast Region Total		121,680			140,086			8,493			10,288			19,351			17,392			6.98	%		7.34	%
Parent company and other, net		260			270			1			1			255			265			0.38	%		0.37	%
Consolidated totals		1,502,220			1,704,269			79,017			93,280			169,318			223,877			5.26	%		5.47	%
Less discontinued operations		(122,953	)		(163,156	)		(5,579	)		(6,535	)		(6,813	)		(6,017	)		4.54	%		4.01	%
Consolidated totals relating to continuing operations	$	1,379,267		$	1,541,113		$	73,438		$	86,745		$	162,505		$	217,860			5.32	%		5.63	%

(1) Capitol sold its ownership in First Carolina State Bank effective July 30, 2012, Bank of Michigan effective July 27, 2012 and Mountain View Bank of Commerce effective January 30, 2012.  These banks' operations are included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.

Page 41 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Results of Operations

Summary

Net loss attributable to Capitol for the three months ended June 30, 2012 was approximately $10.3 million compared to a net loss of $16.4 million in the corresponding period of 2011.  The net loss per share attributable to Capitol was $0.25 for the three months ended June 30, 2012 compared to net loss per share of $0.40 in the corresponding period of 2011.  Net loss attributable to Capitol for the six months ended June 30, 2012 approximated $18.3 million compared to a net loss of $16.1 million in the corresponding period of 2011.  Net loss per common share attributable to Capitol was $0.44 for the six months ended June 30, 2012 and 2011.  Net income relating to discontinued operations was not material to the periods presented, except for the gain on sale of bank subsidiaries which approximated $126,000 and $4.6 million for the six months ended June 30, 2012 and 2011, respectively.

The 2011 interim period included a $16.9 million gain related to an exchange of trust-preferred securities.  The interim 2012 net loss showed significant improvement compared to the corresponding 2011 interim period, exclusive of such gain.  There was a significant reduction in the provision for loan losses of $16.0 million to $1.2 million for the six months ended June 30, 2012, compared to a provision of $17.2 million for the corresponding period of 2011 (excluding discontinued operations), as well as a reduction in operating expenses of $12.6 million, or 19.0%, in the 2012 period as compared to the corresponding 2011 period.

Analytical Review

Operating results in all of the Corporation's banking regions improved dramatically for the six months ended June 30, 2012 compared to the same period in 2011.  While total revenues from continuing operations declined by $28.5 million (37.2%) for the six months ended June 30, 2012 compared to the same period in 2011, due mainly to the aforementioned gain on exchange of trust-preferred securities in the 2011 period, net operating losses from continuing operations declined to $19.7 million from $39.6 million exclusive of that one-time gain, or by 50%, for the same comparable period.  In the Great Lakes Region, one of the Michigan-based banks, Capitol National Bank, posted a $69,000 profit, while the largest banking affiliate, Michigan Commerce Bank, recorded only a $363,000 net loss compared to an $11.6 million loss for the same period in 2011.  Most of the improvement in operating results is directly related to significantly lower provisions for loan losses and lower costs associated with foreclosed properties and other real estate owned.

The consolidated provision for loan losses decreased significantly for the six months ended June 30, 2012 due to lower levels of loan charge-offs, declining levels of nonperforming loans and stabilizing 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.

Net interest income for the six months ended June 30, 2012 totaled $28.2 million, a 13.7% decrease compared to $32.7 million in 2011.  Due in part to an increase of 2.30% in the percentage of performing loans to total loans, as well as an increase of 2.90% of noninterest-bearing demand deposits to total funding, the net interest margin improved to 3.20% for the three months ended June 30, 2012, an 8 basis-point increase compared to 3.12% for the three months ended March 31, 2012 and a 25 basis-point increase compared to 2.90% for the three months ended December 31, 2011.  Net interest margin increased 23 basis-points to 3.15% for the six months ended June 30, 2012 as compared to 2.92% for the six months ended June 30, 2011.  It is not feasible to speculate on future potential changes in net interest margin.

Noninterest income for the six months ended June 30, 2012 approximated $7.0 million, a significant decrease compared to $25.6 million for the same period in 2011.  However, the interim 2011 period included a $16.9 million gain on exchange of trust-preferred securities (see Note H to the accompanying condensed consolidated financial statements).  When excluding this gain, noninterest income reflected only a slight decrease in 2012 as compared to 2011.

Page 42 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Results of Operations - Continued

Noninterest expense totaled $53.8 million for the six-month 2012 period compared to $66.4 million for the comparable period of 2011.  The decrease resulted from significantly lower costs associated with foreclosed properties and other real estate owned, which decreased $5.3 million (32%) to $11.1 million in the six-month 2012 period ($16.3 million in the corresponding 2011 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 $3.3 million in the six-month 2012 period compared to $5.1 million in the same period of 2011.

The largest element of noninterest expense is salaries and employee benefits, which approximated $21.7 million for the six months ended June 30, 2012, a decrease of $3.1 million (12%) from $24.8 million in the corresponding period of 2011, as a result of Capitol's ongoing efforts to 'right size' the Corporation and streamline staffing at its banks and corporate offices following bank divestitures.

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

	Three Month Period				Six Month Period
		2012		2011(1)		2012		2011(1)
Legal fees	$	1,628	$	626	$	2,453	$	1,386
Professional fees		723		789		1,400		1,212
Insurance		486		564		1,012		1,205
Loan and collection expense		327		303		634		748
Bank services (ATMs, telephone banking and Internet banking)		258		281		523		575
Communications		202		229		400		456
Other		1,896		877		3,349		5,131
Total	$	5,520	$	3,669	$	9,771	$	10,713

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

Legal fees, as noted in the table above, increased approximately $1.0 million for the three and six months ended June 30, 2012, as compared to the same time periods of 2011, due largely to costs directly associated with the Corporation's research, planning, implementation and on-going execution of its Exchange Offer and Standby Plan for financial restructuring.

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Page 43 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Results of Operations - Continued

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

	Total Revenues						Net Income (Loss)(1)						Return on Average Equity(2)						Return on Average Assets(2)
	2012			2011			2012			2011			2012			2011			2012			2011
Arizona Region:
Central Arizona Bank	$	846		$	1,442		$	(581	)	$	(1,031	)
Sunrise Bank of Albuquerque		1,318			1,536			(581	)		(1,480	)
Sunrise Bank of Arizona		6,760			10,303			(2,464	)		(7,368	)
Arizona Region Total		8,924			13,281			(3,626	)		(9,879	)
California Region:
Bank of Feather River(3)					1,536						143						4.44	%					0.69	%
Sunrise Bank(3)					5,691						(729	)
California Region Total					7,227						(586	)
Colorado Region:
Mountain View Bank of Commerce(3)		221			1,381			16			51						1.40	%					0.18	%
Great Lakes Region:
Bank of Maumee		801			1,020			(271	)		(82	)
Bank of Michigan(3)		2,630			2,561			6			220			0.17	%		6.30	%		0.01	%		0.55	%
Capitol National Bank		3,772			4,356			69			(121	)		1.26	%					0.09	%
Evansville Commerce Bank(3)					1,186						(96	)
Indiana Community Bank		2,702			3,310			130			(158	)		3.22	%					0.23	%
Michigan Commerce Bank		22,701			28,390			(363	)		(11,613	)
Great Lakes Region Total		32,606			40,823			(429	)		(11,850	)
Nevada Region:
1st Commerce Bank		498			660			(335	)		(2,933	)
Bank of Las Vegas		6,099			7,168			(2,221	)		(2,811	)
Nevada Region Total		6,597			7,828			(2,556	)		(5,744	)
Northwest Region:
Bank of the Northwest(3)					3,700						(472	)
High Desert Bank		880			959			(336	)		(487	)
Northwest Region Total		880			4,659			(336	)		(959	)
Southeast Region:
Community Bank of Rowan(3)					2,123						46						1.88	%					0.14	%
First Carolina State Bank(3)		1,553			2,029			(898	)		(2,961	)
Pisgah Community Bank		448			629			(1,253	)		(3,000	)
Sunrise Bank		1,793			2,390			(2,582	)		(3,233	)
Southeast Region Total		3,794			7,171			(4,733	)		(9,148	)
Texas Region:
Bank of Fort Bend(3)					720						128						14.82	%					2.27	%
Bank of Las Colinas(3)					1,215						117						4.17	%					0.50	%
Texas Region Total					1,935						245
Parent company and other, net		(433	)		14,515			(7,945	)		17,590
Consolidated totals		52,589			98,820			(19,609	)		(20,280	)
Less discontinued operations		(4,404	)		(22,139	)		97			2,429
Consolidated totals for continuing operations	$	48,185		$	76,681		$	(19,706	)	$	(22,709	)		--			--			--			--

(1)	Excludes net losses attributable to noncontrolling interests.
(2)	Annualized for periods presented.
(3)	Capitol sold its ownership in First Carolina State Bank effective July 30, 2012; Bank of Michigan effective July 27, 2012; Mountain View Bank of Commerce effective January 30, 2012; 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 and Bank of Fort Bend effective March 30, 2011.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.

Page 44 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Liquidity and Capital Resources

The principal funding source for banks is deposits.  Total deposits (excluding discontinued operations) decreased $129.4 million during the six months ended June 30, 2012 compared to a $152.3 million decrease in the corresponding period of 2011.  Brokered deposits approximated $4.3 million as of June 30, 2012, or about 2.5% of total deposits, a decrease of $23.5 million during the six-month 2012 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.  All of the brokered deposits at June 30, 2012 were in relationship-based structured time accounts.  In addition, deposits have decreased as part of the banks' deleveraging strategy and as customers bring deposits within the FDIC insured limit.  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 20.9% of total deposits at June 30, 2012, an increase from 17.7% at December 31, 2011.  Levels of noninterest-bearing deposits can fluctuate based on customers' transaction activity.  During the 2012 period, however, interest-bearing deposits decreased about $161.5 million, mostly related to the previously-mentioned reduction in brokered deposits.

Cash and cash equivalents amounted to $345.9 million, or 17.4%, of total assets at June 30, 2012, compared to $356.5 million, or 16.2%, of total assets at December 31, 2011, 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 were 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.  Management believes Capitol's liquidity position at June 30, 2012 is adequate to fund loan demand and meet depositor needs.

In addition to cash and cash equivalents, an additional source of long-term liquidity is the banks' marketable investment securities.  Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements and the banks have not engaged in active trading of their investments.  At June 30, 2012, Capitol's banks had approximately $17.1 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 $18.5 million at June 30, 2012 and additional borrowing capacity approximated $120.8 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, exclusive of Federal Home Loan Bank borrowings, were $13.9 million at June 30, 2012.

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 liquid 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 to shareholders without prior written approval by that agency.  Accrued interest payable on such securities approximated $32.5 million and $27.6 million at June 30, 2012 and December 31, 2011, respectively.  Holders of the trust-preferred securities recognize current taxable income relating to the deferred interest payments.

Page 45 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Liquidity and Capital Resources - Continued

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 $3.4 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 (6.36)% at June 30, 2012 and (4.90)% at December 31, 2011.  As of June 30, 2012, total capital funds (i.e., the sum of Capitol Bancorp Limited stockholders' equity, noncontrolling interests in consolidated subsidiaries and subordinated debentures) approximated $17.3 million or 0.87% of total assets.  Capitol's equity deficit increased in the interim 2012 period due to losses incurred from operations, although the losses were less significant than in 2011 due primarily to lower provisions for loan losses recorded at its banks.

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.

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Page 46 of 63

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 June 30, 2012:

	Tier 1 Leverage		Tier 1 Risk-Based		Total Risk-Based
	Ratio(2)		Capital Ratio(2)		Capital Ratio(2)		Regulatory Classification(1)
	June 30, 2012	Dec 31, 2011	June 30, 2012	Dec 31, 2011	June 30, 2012	Dec 31, 2011	June 30, 2012	Dec 31, 2011
Arizona Region:
Central Arizona Bank	2.03%	2.01%	2.71%	2.65%	4.00%	3.95%	significantly-undercapitalized	significantly-undercapitalized
Sunrise Bank of Albuquerque	2.10%	2.43%	2.81%	3.22%	4.10%	4.50%	significantly-undercapitalized	significantly-undercapitalized
Sunrise Bank of Arizona	2.04%	2.03%	2.57%	2.56%	3.84%	3.85%	significantly-undercapitalized	significantly-undercapitalized
Great Lakes Region:
Bank of Maumee	4.55%	5.41%	6.79%	7.56%	8.08%	8.85%	adequately-capitalized	adequately-capitalized
Capitol National Bank	6.60%	6.90%	9.84%	9.15%	11.11%	10.42%	adequately-capitalized(3)	adequately-capitalized(3)
Indiana Community Bank	7.54%	6.66%	10.36%	9.35%	11.64%	10.63%	adequately-capitalized(3)	adequately-capitalized(3)
Michigan Commerce Bank	2.44%	2.17%	3.04%	2.84%	4.36%	4.16%	significantly-undercapitalized	significantly-undercapitalized
Nevada Region:
1st Commerce Bank	2.27%	2.30%	3.24%	3.88%	4.59%	5.22%	significantly-undercapitalized	significantly-undercapitalized
Bank of Las Vegas	2.01%	2.16%	2.68%	2.90%	3.97%	4.20%	significantly-undercapitalized	significantly-undercapitalized
Northwest Region:
High Desert Bank	5.66%	6.47%	7.65%	8.72%	8.93%	10.00%	adequately-capitalized	adequately-capitalized(3)
Southeast Region:
Pisgah Community Bank	2.03%	2.09%	2.93%	2.93%	4.25%	4.28%	significantly-undercapitalized	significantly-undercapitalized
Sunrise Bank	2.05%	2.16%	2.89%	2.97%	4.20%	4.29%	significantly-undercapitalized	significantly-undercapitalized
Consolidated totals	(6.55)%	(4.73)%	(8.65)%	(6.36)%	(8.65)%	(6.36)%	less than adequately-capitalized(4)	less than adequately-capitalized

(1)	Bank regulatory capital classifications are defined as follows: Well-Capitalized - Total risk-based capital ratio must be 10% or more, and Tier 1 risk-based capital ratio must be 6% or more, and Tier 1 leverage ratio must be 5% or more, and the bank must not be subject to formal regulatory enforcement action requiring non-standard capital ratios. Adequately-Capitalized - Does not meet the criteria for "well-capitalized," but has total risk-based capital ratio of 8% or more, and Tier 1 risk-based capital ratio of 4% or more, and Tier 1 leverage ratio of 4% or more. Undercapitalized - Does not meet the criteria for "adequately-capitalized," but has total risk-based capital ratio of 6% or more, and Tier 1 risk-based capital ratio of 3% or more, and Tier 1 leverage ratio of 3% or more. Significantly-Undercapitalized - Does not meet the criteria for "undercapitalized," but has Tier 1 leverage ratio of 2% or more.  Institutions with a Tier 1 leverage ratio below 2% are classified as "critically-undercapitalized."
(2)	Ratios are based on the banks' regulatory reports filed on or before July 30, 2012.
(3)	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.
(4)	Bank holding companies are required to maintain a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a Tier 1 leverage ratio of 4% or more.  The Bank Holding Company Act does not provide uniform terminology to describe bank holding companies exceeding or falling below required capital levels.

Page 47 of 63

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 June 30, 2012.

Capitol's total risk-based capital ratio at June 30, 2012 was adversely impacted by the exclusion of approximately $169.1 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 June 30, 2012 resulted primarily from operating losses.

In addition to Capitol's consolidated regulatory capital classification at June 30, 2012, several of its bank subsidiaries had capital levels resulting in classification as "significantly-undercapitalized" at that date.  Regarding banks classified as "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 June 30, 2012 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, the financial restructuring plan discussed later in this narrative, gains on divestiture of some bank subsidiaries and other initiatives.

Going-Concern Considerations

As of June 30, 2012, 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 $131.9 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 "significantly-undercapitalized";

· Certain banking subsidiaries which are generally subject to formal regulatory agreements have received "prompt corrective action" notifications and/or directives 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 the banking subsidiaries may be unable to satisfactorily resolve such notices and/or directives;

· Capitol has sold several of its banking subsidiaries during the past few years and has other divestiture transactions pending (see Note I 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;

· 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

Page 48 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Liquidity and Capital Resources - Continued

· Significant losses from continuing operations, resulting primarily from elevated provisions for loan losses and costs associated with foreclosed properties and other real estate owned.

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 a financial restructuring plan;

· Completion of divestitures which are currently pending;

· Further reductions in nonperforming assets;

· Stabilization of provisions for loan losses and impairment losses;

· Upon the Tier 1 capital level becoming positive either through future earnings or additional new equity capital, or both, Capitol's trust-preferred securities may be included as a qualifying element of regulatory capital and/or equity; and

· Further reductions in operating expenses as a result of potential mergers of bank subsidiaries.

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, including the previously mentioned financial restructuring plan.

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.  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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Trends Affecting Operations - Continued

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.

In late 2008, the Federal Reserve took unprecedented action to reduce market interest rates to near zero.  Further, in December 2011, the Federal Reserve indicated plans to hold short-term market interest rates at near zero through 2013.  Because of Capitol's consolidated asset-sensitive gap position, such rates generally have an adverse impact on net interest margin (and results of operations) as interest rates on loans reprice quickly, while rates paid on deposits reprice over an extended period of time.  It is also more difficult to attract deposits and deploy liquidity in a very low rate environment.  It is impossible to speculate on the timing, size and direction of future interest rate changes.

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 and economic conditions within Capitol's primary banking regions in particular, including Michigan, Arizona, Nevada and the Southeast, are uncertain and could continue to have an adverse effect on Capitol's banks and their customers.  It is likely that, absent significant catalysts, these states' economic recoveries in particular may take an extended period of time.

Concerns about the future health of the domestic economy and a sustained recession continue to be reported in many of Capitol's markets.  During 2010 and 2009, nonperforming assets increased significantly before showing a decline in 2011 and early 2012; it is likely that levels of nonperforming assets and related loan losses and adverse valuation adjustments may continue as economic conditions, locally and nationally, evolve.

Capitol and its banking subsidiaries, along with the entire banking industry, are subject to significant regulatory requirements which impact current and future operations.  In addition to the extent of regulatory interaction with financial institutions, extensive rules and regulations governing lending activities, deposit gathering and capital adequacy, among others, translate into a significant cost burden of financial institution regulation.  Such costs include the amount of management time and expense incurred in developing systems and maintaining compliance with those rules and regulations, as well as the cost of examinations, audits and other compliance activities.  The future of financial institution regulation, and its costs, is uncertain and difficult to predict.

Divestiture of Banks

During the six months ended June 30, 2012, Capitol completed the following sale of a bank subsidiary (in $1,000s):

		Sale
	Date Sold	Proceeds		Gain
Mountain View Bank of Commerce(1)	January 30, 2012	$	4,060	$	126

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

On July 27, 2012, Capitol completed the sale of Bank of Michigan with aggregate proceeds of $3.6 million and a net estimated loss of $270,000.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Divestiture of Banks - Continued

On July 30, 2012, Capitol completed the sale of First Carolina State Bank with aggregate proceeds of $1.3 million and a net estimated gain of $290,000.

In addition to completed sales transactions, Capitol has entered into a definitive agreement to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institution which is pending:  High Desert Bank.  Total proceeds from this pending sale are expected to approximate $760,000, resulting in a projected loss of $210,000 ($0.01 per common share) based on Capitol's investment in the bank as of June 30, 2012, and the sale is expected to be consummated in 2012, subject to regulatory approval and other significant contingencies.

Regulatory 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 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 47 of this document.

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

On July 21, 2010, the Dodd-Frank Act was signed into law and is significantly impacting the 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 abolished the Office of Thrift Supervision and transferred its functions to the other federal banking agencies, relaxed rules regarding interstate branching, allowed financial institutions to pay interest on business checking accounts, changed the scope of FDIC insurance coverage and imposed 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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Regulatory Matters - Continued

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 was 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 assess 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, currently remains uncertain.

In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the "Basel III" capital rules, which set new capital requirements for banking organizations.  On June 7, 2012, the Federal Reserve Board requested comment on three proposed rules that, taken together, would establish an integrated regulatory capital framework implementing the Basel III regulatory capital reforms in the United States.  As proposed, the U.S.implementation of Basel III would lead to significantly higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place.  Once adopted, these new capital requirements would be phased in over time.  Additionally, the U.S. implementation of Basel III contemplates that, for banking organizations with less than $15 billion in assets, the ability to treat trust preferred securities as tier 1 capital would be phased out over a ten-year period.  The ultimate impact of the U.S. implementation of the new capital and liquidity standards to Capitol and its affiliate banks is currently being reviewed.  At this point, Capitol cannot determine the ultimate effect that any final regulations, if enacted, would have upon its earnings or financial position.

Tax Matters

Accounting for income taxes requires significant estimates and management judgments.  At June 30, 2012, Capitol had a gross deferred tax asset approximating $196.8 million, subject to a related valuation allowance of $196.8 million.

An Internal Revenue Service examination which commenced in 2011 is expected to conclude in 2012.  The findings of this examination are not expected to have a material impact on Capitol's consolidated financial statements as of June 30, 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 future 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, which 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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Other Corporate Matters

Effective June 1, 2012, Capitol effected a reorganization of several of its affiliate banks through a contribution agreement (the "Contribution Agreement") by and among Capitol, Financial Commerce Corporation ("FCC"), formerly known as Michigan Commerce Bancorp Limited, a Michigan corporation and wholly owned subsidiary of the Corporation and other subsidiaries of the Corporation (the "Subsidiaries").  Pursuant to the Contribution Agreement, the Corporation and the Subsidiaries contributed (i) all of the equity interests in each of Bank of Las Vegas ("BOLV"), Sunrise Bank of Albuquerque ("SBAQ") and Indiana Community Bank ("ICB") and (ii) over 99% of the equity interests in Sunrise Bank of Arizona (together with BOLV, SBAQ, and ICB, the "Subsidiary Banks") to FCC in exchange for additional shares of FCC.  Capitol retained its other banking subsidiaries.  Prior to the transactions effected by the Contribution Agreement (the "Contribution"), the sole asset of FCC was the common stock of Michigan Commerce Bank.

Financial Restructuring Plan

On June 22, 2012, Capitol announced the commencement of a voluntary restructuring plan designed to facilitate Capitol's objective of converting existing debt to equity and with the primary objectives of enhancing capital levels, improving liquidity and accelerating Capitol's return to profitability.  The initiative includes the opportunity to preserve Capitol's substantial deferred tax assets.

Under the restructuring plan, which was approved by Capitol's Board of Directors and reviewed with Capitol's primary regulators, existing debt holders were asked to exchange their debt securities for both preferred and common stock of the Corporation (the "Exchange Offer").  Simultaneously, Capitol solicited votes from all debt and equity holders for a prepackaged plan of reorganization (the "Standby Plan") for Capitol and its affiliate FCC to be commenced in the event that the Exchange Offer was not successful or Capitol believed the transactions contemplated by the Standby Plan are in the best interests of all stakeholders.  The Standby Plan contemplates the conversion of all current trust-preferred security holders, unsecured senior note holders, current preferred equity shareholders and current common equity shareholders into new classes of common stock, which will retain approximately 53% of the voting control and value of the restructured company.  Capitol has also been actively seeking to identify external capital sources sufficient to restore all affiliate institutions to "well-capitalized" status in exchange for approximately 47% of the restructured Corporation, which is a critical component of the likelihood of success of the Standby Plan.

When the trust-preferred securities were originally issued, and until recently, substantially all of those securities comprised a crucial element of Capitol's compliance with regulatory capital requirements because they were a material component of regulatory capital.  Because of Capitol's weakened financial condition and changes to banking regulations affecting its ability (as well as that of other bank holding companies in the United States) to include any portion of these securities in regulatory capital computations, today only a small portion of these securities are included in the Corporation's current regulatory capital measurements and in the future will cease to be includable in the composition of regulatory capital components.  The restructuring initiatives will facilitate the conversion of Capitol's trust-preferred securities to equity and represent an efficient opportunity to strengthen the composition of Capitol's capital base by increasing its Tier 1 common and tangible common equity ratios, while also reducing the dividend and interest expense associated with these securities.  By increasing its common equity component, and successfully completing the capital raise component of the plan, Capitol expects to have increased capital flexibility to continue to support its community banking platform, and strategically take advantage of select market opportunities and implement its long-term strategies.

The Exchange Offer and voting on the Standby Plan expired on July 27, 2012.  The results were overwhelmingly in support of the Standby Plan, and the conditions were not satisfied for the exchange offers to the existing debt holders.  All classes voted to accept the Standby Plan with all votes substantially exceeding the required thresholds for a successful solicitation.

Accordingly, on August 9, 2012, Capitol proceeded with a voluntary prepackaged bankruptcy filing in order to restructure its debt and streamline its capital structure.  Capitol and FCC filed a voluntary joint prepackaged bankruptcy petition (the "Joint Plan of Reorganization").  Capitol's banking subsidiaries are not part of the filing and  

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Other Corporate Matters - Continued

continue to conduct business on an uninterrupted basis.  Capitol has filed a motion with the Court requesting that trading in Capitol's senior notes, trust preferred securities, preferred stock and common stock be restricted to preserve certain of Capitol's deferred tax assets.

The Joint Plan of Reorganization provides for the restructuring of Capitol's and FCC's liabilities in a manner designed to maximize recoveries to all creditors and to enhance the financial stability of the reorganized debtors while simultaneously raising new capital from outside investors, which can be immediately deployed into the reorganized debtor's subsidiary banks, thus avoiding the disastrous consequences that would result from the seizure of any subsidiary bank.  Specifically, the Joint Plan of Reorganization restructures Capitol's senior notes, trust-preferred securities, Series A preferred stock and common stock and leaves unimpaired the rights of all other claim holders.  The Joint Plan of Reorganization also contemplates an equity infusion of at least $70 million and up to $115 million pursuant to a separate equity commitment agreement to be entered into by Capitol and certain third-party investors prior to the date on which the Joint Plan of Reorganization becomes effective.

It is important at the outset to emphasize the limited dimensions of this process:

· No banking subsidiary of Capitol or their respective depositors will be affected in any way.  Each subsidiary bank continues to operate and its customers' deposits remain insured up to the applicable limits by the FDIC.  Banks themselves cannot file for reorganization, but bank holding companies can use the reorganization process under federal law.  Capitol and FCC are bank holding companies, not banks.

· Since the Standby Plan was approved, the court-supervised reorganization should move forward very quickly.  A prepackaged plan shortens and simplifies the bankruptcy process to make it very efficient and effective.

· Subject to the approval of the Bankruptcy Court, all of Capitol's general unsecured creditors will be paid in full in order to maintain the regular course of business at the Corporation's subsidiary banks, as uninterrupted service at the subsidiary bank level is critical to the success of the recapitalization efforts.  A loss of customer confidence in the safety of their deposits would have disastrous consequences for the Corporation.

Financial Statement Impact of Emergence from Bankruptcy

Upon approval and exit from bankruptcy, Capitol's financial statements will be impacted significantly in accordance with "Fresh-start Accounting" rules.  Under these rules:

· Assets are marked to estimated fair value.  The difference between the carrying value of loans, investments and other financial assets before fresh-start accounting (including allowance for loan losses) and the estimated fair value as recorded in fresh-start accounting will be accreted/amortized into interest income over the estimated life of the assets.  This prospective accounting will result in a reduced level of loan charge-offs compared to historic results due to the adjustment of loan balances and concurrent elimination of the allowance for loan losses in the fresh-start accounting.

· Liabilities, including debt, will also be marked to estimated fair value.  The difference between the carrying value of deposits, debt and other financial liabilities before the emergence date and the estimated fair value at the emergence date as recorded in fresh-start accounting  will be accreted/amortized in interest expense over the estimated life of the liabilities or debt.

· All equity held by stockholders prior to emergence from bankruptcy will be cancelled.  Upon exiting, new common equity will be issued to certain debt holders.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS - Continued

Other Corporate Matters - Continued

Assuming completion of the Joint Plan of Reorganization, at September 30, 2012 and December 31, 2012, Capitol's consolidated financial statements will reflect the assets and liabilities of Capitol, inclusive of adjustments for fresh-start accounting. The consolidated financials statements will also include a Statement of Comprehensive Income for (1) the period from January 1, 2012 until the date of emergence from bankruptcy, which is expected to be in September 2012 and (2) the period from the date of emergence until September 30, 2012 and December 31, 2012, respectively.

Impact of Accounting Standards Updates

There are certain accounting standards updates issued or becoming effective in 2012.  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-47 - F-50 of the financial section of its 2011 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 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, 2011.  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 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, 2011 ("Form 10-K") and above, the CEO and PFO have concluded that as of June 30, 2012, 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 June 30, 2012, 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, controls 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.

Item 1A.

Risk Factors. The restructuring transactions that will be effectuated under the Joint Plan of Reorganization (the "Joint Plan of Reorganization") involve a high degree of risk and uncertainty.  You should carefully consider the risks and uncertainties described below, as well as the other information appearing elsewhere in this Quarterly Report on Form 10-Q before making a decision whether to invest in Capitol.  References in these Risk Factors to the "Plan of Reorganization" are references to Capitol Bancorp Ltd. and Financial Commerce Corporation's Plan of Reorganization under Chapter 11 of the Bankruptcy Code as such plan is described in the Confidential Out-of-Court Exchange Offering Memorandum and Solicitation of Consents and Disclosure Statement and Solicitation of Votes Related to an In-Court Standby Prepackaged Joint Plan of Reorganization of Capitol and Financial Commerce Corporation relating to offers to exchange certain outstanding senior notes and trust-preferred securities and solicitation to the holders of Capitol's senior notes, trust-preferred securities, Series A preferred stock and common stock to accept a prepackaged joint plan of reorganization, June 22, 2012 (the "Offering Memorandum and Disclosure Statement") as supplement pursuant to the Supplement No. 1 to the Offering Memorandum and Disclosure Statement dated July 6, 2012 (the "Supplement").  The terms used in these Risk Factors without definition shall have the meanings ascribed to them in the Offering Memorandum and Disclosure Statement and the Supplement.

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PART II.  OTHER INFORMATION - Continued

Item 1A. Risk Factors. - Continued   The recently announced Basel III capital rules may have a material impact on Capitol's operations.   In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the "Basel III" capital rules, which set new capital requirements for banking organizations.  On June 7, 2012, the Federal Reserve Board requested comment on three proposed rules that, taken together, would establish an integrated regulatory capital framework implementing the Basel III regulatory capital reforms in the United States.  As proposed, the U.S. implementation of Basel III would lead to significantly higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place.  Once adopted, these new capital requirements would be phased in over time.  Additionally, the U.S. implementation of Basel III contemplates that, for banking organizations with less than $15 billion in assets, the ability to treat trust preferred securities as tier 1 capital would be phased out over a ten-year period.  The ultimate impact of the U.S. implementation of the new capital and liquidity standards to Capitol and its affiliate banks is currently being reviewed.  At this point, Capitol cannot determine the ultimate effect that any final regulations, if enacted, would have upon its earnings or financial position.  In addition, important questions remain as to how the numerous capital and liquidity mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act will be integrated with the requirements of Basel III.   Risks Related to Implementing the Joint Plan of Reorganization   The commencement of the Chapter 11 Cases with the U.S. Bankruptcy Court for the Eastern District of Michigan (the "Court") for the purpose of implementing the Joint Plan of Reorganization may result in a number of adverse consequences.   If the Debtors file the Joint Plan of Reorganization, the Debtors may seek to amend, waive, modify or withdraw the Joint Plan of Reorganization at any time prior to the Confirmation Date.   Upon filing of the Joint Plan of Reorganization, Capitol and Financial Commerce Corporation (collectively, the "Debtors") reserve the right, prior to its confirmation or substantial consummation thereof, subject to the provisions of section 1127 of the Bankruptcy Code and rule 3019 of Federal Rules of Bankruptcy Procedure (such rules, the "Bankruptcy Rules"), and, after confirmation, subject to the terms of the Joint Plan of Reorganization, to amend the terms of the Joint Plan of Reorganization or waive any conditions thereto, if and to the extent such amendments or waivers are necessary or desirable to consummate the Joint Plan of Reorganization.  The potential impact of any such amendment or waiver on the holders of claims and equity security interests cannot presently be foreseen, but may include a change in the economic impact of the Joint Plan of Reorganization on some or all of the classes or a change in the relative rights of such classes.  All holders of claims and equity security interests will receive notice of such amendments or waivers as required by applicable law and the Court.  If, after receiving sufficient acceptances, but prior to confirmation of the Joint Plan of Reorganization, the Debtors seek to modify the Joint Plan of Reorganization, the previously solicited acceptances will be valid only if (i) all classes of adversely affected creditors and equity security holders accept the modification in writing, or (ii) the Court determines, after notice to designated parties, that such modification was de minimis or purely technical or otherwise did not adversely change the treatment of holders of accepting claims and equity security interests.   In certain instances, a Chapter 11 bankruptcy case may be converted to a case under chapter 7 of the Bankruptcy Code.   If no plan of reorganization is confirmed, or if the Court otherwise finds that it would be in the best interest of creditors, the Chapter 11 Cases may be converted to a liquidation case under Chapter 7 of the Bankruptcy Code (a "Liquidation Case"), pursuant to which a trustee would be appointed to liquidate the Debtors' assets for distribution in accordance with the priorities established by the Bankruptcy Code.  The Debtors believe that a Liquidation Case could result in no distributions being made to Capitol's shareholders or possibly smaller distributions being made to Capitol's creditors than those provided for in the Joint Plan of Reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing the

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PART II.  OTHER INFORMATION - Continued

Item 1A. Risk Factors. - Continued   Debtors' businesses as a going concern; (ii) additional administrative expenses involved in the appointment of a trustee; and (iii) additional expenses and claims, some of which would be entitled to priority, which would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of the operations.   The Court may not confirm the Joint Plan of Reorganization.   Although the Debtors believe that the Joint Plan of Reorganization will satisfy all requirements necessary for confirmation under the Bankruptcy Code, there can be no assurance that the Court will reach the same conclusion.  Moreover, there can be no assurance that modifications of the Joint Plan of Reorganization will not be required for confirmation or that such modifications would not necessitate the re-solicitation of votes.  In the event that the Court does not confirm the Joint Plan of Reorganization, Capitol may be required to seek an alternative restructuring of its obligations to its creditors and equity security holders.  There can be no assurance that the terms of any such alternative restructuring would be similar to or as favorable to Capitol's creditors and shareholders as those proposed in the Joint Plan of Reorganization.   For example, the Court might determine that the Joint Plan of Reorganization is not "feasible" pursuant to section 1129(a)(11) of the Bankruptcy Code.  For the Joint Plan of Reorganization to be feasible, the Debtors must establish that the confirmation of the Joint Plan of Reorganization is not likely to be followed by the liquidation, or the need for further financial reorganization, of the Debtors or any successor of the Debtors under the Joint Plan of Reorganization, unless such liquidation or reorganization is proposed in the Joint Plan of Reorganization.  The feasibility requirement requires the Debtors to put forth concrete evidence indicating that they have a reasonable likelihood of meeting their obligations under the Joint Plan of Reorganization and remaining commercially viable entities.  The Debtors believe that their Projections demonstrate that the Joint Plan of Reorganization is feasible in that they will be able to satisfy all of their obligations under the Joint Plan of Reorganization and confirmation of the Joint Plan of Reorganization is not likely to be followed by a liquidation or the need for a further financial reorganization.   Section 1122 of the Bankruptcy Code provides that a plan of reorganization may place a claim or an equity security interest in a particular class only if such claim or equity security interest is substantially similar to the other claims or equity security interests of such class.  The Debtors believe that the classification of claims and equity security interests under the Joint Plan of Reorganization complies with the requirements set forth in the Bankruptcy Code.  However, once the Chapter 11 Cases have been commenced, a claim or equity security holder could challenge the classification.  In such an event, the cost of the Joint Plan of Reorganization and the time needed to confirm the Joint Plan of Reorganization could increase and the Court may not agree with the Debtors' classification of claims and equity security interests.  If the Court concludes that the classification of claims and equity interests under the Joint Plan of Reorganization does not comply with the requirements of the Bankruptcy Code, the Debtors may need to modify the Joint Plan of Reorganization.  Such modification could require a re-solicitation of votes on the Joint Plan of Reorganization.  If the Court determined that the Debtors' classification of claims and equity security interests was not appropriate or if the Court determined that the different treatment provided to claims or equity security holders was unfair or inappropriate, the Joint Plan of Reorganization might not be confirmed.  If this occurs, the amended plan of reorganization that would ultimately be confirmed may be less attractive to certain classes of the Debtors' claims and equity security holders than the Joint Plan of Reorganization.   In most instances, a plan of reorganization is filed and votes to accept or reject the plan are solicited after the filing of a petition commencing a chapter 11 case. The Debtors, however, solicited votes prior to the commencement of the Chapter 11 Cases in accordance with section 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b), which require that the Debtors' solicitation be in compliance with any applicable nonbankruptcy law, rule, or regulation governing the adequacy of disclosure in connection with such solicitation.  The Court could conclude that the Offering Memorandum and Disclosure Statement and/or the Supplement did not meet these solicitation requirements.

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PART II.  OTHER INFORMATION - Continued

Item 1A. Risk Factors. - Continued   With regard to solicitation of votes prior to the commencement of the Chapter 11 Cases, if the Court concludes that the requirements of section 1126(b) of the Bankruptcy Code and/or Bankruptcy Rule 3018(b) have not been met, then the Court could deem such votes invalid, and the Joint Plan of Reorganization would not be confirmed without a re-solicitation of votes to accept or reject the Joint Plan of Reorganization.  While the Debtors believe that the requirements of section 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018 will be met, the Court may not reach the same conclusion.   If the Court were to find any material deficiencies, the Debtors could be required to restart the process of filing another plan of reorganization and disclosure statement, seeking Court approval of a disclosure statement, soliciting votes from classes of debt and equity security holders, and seeking Court confirmation of the plan of reorganization.  If this occurs, confirmation of the Joint Plan of Reorganization would be delayed and possibly jeopardized.  Additionally, should the Joint Plan of Reorganization fail to be approved, confirmed, or consummated, the Debtors' creditors and others with an equity security interest may be in a position to propose alternative plans of reorganization.  Any such failure to confirm the Joint Plan of Reorganization would likely entail significantly greater risk of delay, expense and uncertainty, which would likely have a material adverse effect upon Debtors' businesses and financial condition.   The Debtors may fail to meet all conditions precedent to effectiveness of the Joint Plan of Reorganization.   Although the Debtors believe that the date on which the Joint Plan of Reorganization becomes effective (the "Effective Date") may occur as soon as the date on which the Court's order confirming the Joint Plan of Reorganization (the "Confirmation Order") is entered by the Court (the "Confirmation Date"), there can be no assurance as to such timing.  Moreover, if the conditions precedent to the Effective Date, including the entry of a Confirmation Order, execution and delivery of certain documents and the receipt of all necessary authorizations and regulatory approvals, have not occurred, the Joint Plan of Reorganization may not become effective and ultimately may be vacated by the Court.   The announcement of the filing of the Chapter 11 Cases could adversely affect the value of Capitol's businesses.   It is possible that announcing the filing of the Chapter 11 Cases could adversely affect Capitol's operations and relationships with employees and portfolio companies.  Due to uncertainties, many risks exist, including the following:   ·     employees may be distracted from performance of their duties or more easily attracted to other employment opportunities, including with Capitol's competitors; and   ·     the ability to pursue additional financing may be negatively impacted.   The occurrence of one or more of these events could have a material and adverse effect on the financial condition, operations and prospects of Capitol and the value of its stock, senior notes and/or trust-preferred securities.   The Debtors cannot predict the amount of time needed following filing of the Chapter 11 Cases to implement the Joint Plan of Reorganization, and lengthy Chapter 11 Cases could disrupt their businesses, as well as impair the prospect for reorganization on the terms contained in the Joint Plan of Reorganization and possibly provide an opportunity for other plans to be proposed.   The Debtors cannot be certain that the Chapter 11 Cases solely for the purpose of implementing the Joint Plan of Reorganization would be of relatively short duration (e.g., 30 to 45 days) and would not unduly disrupt their businesses. It is impossible to predict with certainty the amount of time necessary for the Joint Plan of Reorganization to be confirmed by the Court, and the Debtors cannot be certain that the Joint Plan of Reorganization would be confirmed.  Moreover, time limitations exist for which the Debtors have an exclusive right to file a plan before other proponents can propose and file their own plan.

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PART II.  OTHER INFORMATION - Continued

Item 1A.	Risk Factors. - Continued Lengthy Chapter 11 Cases would also involve additional expenses and divert the attention of management from operation of the Debtors' businesses, as well as create concerns for employees.  The disruption that the Chapter 11 Cases could inflict upon the Debtors' businesses would increase with the length of time it takes to complete the proceedings and the severity of that disruption would depend upon the attractiveness and feasibility of the Joint Plan of Reorganization from the perspective of the constituent parties, including employees. If the Debtors are unable to obtain confirmation of the Joint Plan of Reorganization on a timely basis because of a challenge to the Joint Plan of Reorganization or a failure to satisfy the conditions to the effectiveness of the Joint Plan of Reorganization, the Debtors may be forced to operate in the Chapter 11 Cases for an extended period while trying to develop a different reorganization plan that can be confirmed.  Protracted Chapter 11 Cases would increase both the probability and the magnitude of the adverse effects described above. If the Debtors are unable to raise sufficient capital through the anticipated Equity Infusion, the Debtors may still seek Bankruptcy Protection. The anticipated equity infusion from outside investors is a critical component of the likelihood of success of the Joint Plan of Reorganization.  However, Capitol has not secured written commitments for the equity infusion as of the date of this quarterly report.  If Capitol is unable to raise capital from new investors, or raise less than the amount currently anticipated, it may be forced to operate in the Chapter 11 Cases for an extended period while trying to develop a different reorganization plan that can be confirmed.
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.	Mine Safety Disclosures. Not applicable.
Item 5.	Other Information. None.

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PART II.  OTHER INFORMATION - Continued

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.

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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:  August 9, 2012	/s/ Joseph D. Reid                                                                          Joseph D. Reid Chairman and CEO (principal executive officer)
Date:  August 9, 2012	/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.

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