Capitol Bancorp (CBCRQ) 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2013
	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   o No   x

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, 2013
Common Stock, No par value	41,174,479 shares

Page 1 of 62

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed consolidated balance sheets – June 30, 2013 and December 31, 2012.	6
	Condensed consolidated statements of operations – Three months and six months ended June 30, 2013 and 2012.	7
	Condensed consolidated statements of comprehensive income (loss) – Three months and six months ended June 30, 2013 and 2012.	8
	Condensed consolidated statements of changes in equity – Six months ended June 30, 2013 and 2012.	9
	Condensed consolidated statements of cash flows – Six months ended June 30, 2013 and 2012.	10
	Notes to condensed consolidated financial statements.	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	58
Item 4.	Controls and Procedures.	58
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	59
Item 1A.	Risk Factors.	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	59
Item 3.	Defaults Upon Senior Securities.	59
Item 4.	Mine Safety Disclosures.	60
Item 5.	Other Information.	60
Item 6.	Exhibits.	60
SIGNATURES		61
EXHIBIT INDEX		62

[The remainder of this page intentionally left blank]

Page 2 of 62

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's ability to implement its proposed liquidation plan or successfully emerge from Chapter 11 bankruptcy and  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 transactions;

·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 enforcement actions with regulatory agencies;

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

·The recent seizure of four of Capitol's subsidiary banks by applicable state banking regulators and the Federal Deposit Insurance Corporation ("FDIC");

·The possibility of the FDIC or an applicable state banking regulator seizing more of Capitol's subsidiary banks;

·The possibility of the FDIC assessing Capitol's banking subsidiaries for any cross-guaranty liability for recently seized banks or losses arising from any additional bank closures;

·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;

Page 3 of 62

FORWARD-LOOKING STATEMENTS – Continued

·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;

·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 impaired 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 in order to compete effectively in the marketplace;

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

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

·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 decreased demand for such assets, falling prices and continuing illiquidity in the real estate market;

·The impact of negative developments and disruptions in the credit and lending markets on Capitol's business and the businesses of its customers, as well as on 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;

Page 4 of 62

FORWARD-LOOKING STATEMENTS – Continued

·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, the quality of the loan portfolio and loan and deposit pricing;

·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 mutual funds, and other financial institutions operating in Capitol's markets or elsewhere which provide 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 enforcement actions, 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;

·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, the reader should refer to the risk factors and other information in this Form 10-Q and Capitol's other periodic filings, including its 2012 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 5 of 62

PART I, ITEM 1

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Balance Sheets

As of June 30, 2013 and December 31, 2012

(in $1,000s, except share and per-share data)

	(Unaudited) June 30, 2013			December 31, 2012
				As Adjusted (Note C)
ASSETS
Cash and due from banks	$	27,034		$	48,280
Money market and interest-bearing deposits		232,316			241,454
Cash and cash equivalents		259,350			289,734
Investment securities available for sale, carried at fair value -- Note E		15,154			15,686
Federal Home Loan Bank and Federal Reserve Bank stock (carried on the basis of cost) -- Note E		8,369			9,847
Portfolio loans, less allowance for loan losses of $37,204 in 2013 and $56,616 in 2012 -- Note F		868,524			1,053,052
Premises and equipment		17,195			19,028
Accrued interest income		3,003			3,576
Other real estate owned		50,298			69,050
Other assets		10,807			14,849
Assets of discontinued operations -- Note G		-			146,480
TOTAL ASSETS	$	1,232,700		$	1,621,302
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest-bearing		242,193			302,528
Interest-bearing		918,818			1,101,324
Total deposits		1,161,011			1,403,852
Notes payable and other borrowings		4,926			5,426
Accrued interest on deposits and other liabilities		7,649			5,944
Liabilities of discontinued operations -- Note G		-			143,335
Liabilities subject to compromise -- Note B		195,792			200,293
Total liabilities		1,369,378			1,758,850
EQUITY:
Capitol Bancorp Limited stockholders' equity -- Note N:
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:  2013 - 41,174,479 shares; 2012 - 41,177,479 shares		292,092			292,092
Retained-earnings deficit		(417,189	)		(424,022	)
Undistributed common stock held by employee-benefit trust		(541	)		(541	)
Accumulated other comprehensive income		7			72
Total Capitol Bancorp Limited stockholders' equity deficit		(120,533	)		(127,301	)
Noncontrolling interests in consolidated subsidiaries		(16,145	)		(10,247	)
Total equity deficit		(136,678	)		(137,548	)
TOTAL LIABILITIES AND EQUITY	$	1,232,700		$	1,621,302

See notes to condensed consolidated financial statements.

Page 6 of 62

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Statements of Operations (Unaudited)

For the Three and Six Months Ended June 30, 2013 and 2012

(in $1,000s, except per-share data)

	Three Months Ended						Six Months Ended
	2013			2012			2013			2012
				As Adjusted (Note C)						As Adjusted (Note C)
Interest income:
Portfolio loans (including fees)	$	13,202		$	17,790		$	27,466		$	36,444
Loans held for sale		1			8			1			20
Taxable investment securities		41			43			76			91
Other		226			272			428			546
Total interest income		13,470			18,113			27,971			37,101
Interest expense:
Deposits		1,803			2,955			3,866			6,427
Debt obligations and other		92			2,589			196			5,634
Total interest expense		1,895			5,544			4,062			12,061
Net interest income		11,575			12,569			23,909			25,040
Provision for loan losses -- Note F		(12,196	)		230			(11,980	)		891
Net interest income after provision for loan losses		23,771			12,339			35,889			24,149
Noninterest income:
Service charges on deposit accounts		434			591			910			1,195
Trust and wealth-management revenue		729			701			1,450			1,424
Fees from origination of non-portfolio residential mortgage loans		67			143			126			304
Gain on sale of government-guaranteed loans		-			167			-			362
Other		1,754			1,864			4,239			3,336
Total noninterest income		2,984			3,466			6,725			6,621
Noninterest expense:
Salaries and employee benefits		8,216			10,104			16,890			19,922
Occupancy		1,954			2,068			4,006			4,293
Equipment rent, depreciation and maintenance		1,081			1,327			2,188			2,655
Costs (income) associated with foreclosed properties and other real estate owned		(92	)		4,377			1,106			7,344
FDIC insurance premiums and other regulatory fees		1,134			1,459			2,227			2,952
Other		2,816			4,900			7,659			8,556
Total noninterest expense		15,109			24,235			34,076			45,722
Income (loss) before reorganization items and income taxes (benefit)		11,646			(8,430	)		8,538			(14,952	)
Reorganization items -- Note B		755			-			1,835			-
Income (loss) before income taxes (benefit)		10,891			(8,430	)		6,703			(14,952	)
Income taxes (benefit)		-			1			(1,547	)		(44	)
Income (loss) from continuing operations		10,891			(8,431	)		8,250			(14,908	)
Discontinued operations -- Note G:
Loss from operations of bank subsidiaries discontinued		(654	)		(1,417	)		(520	)		(3,315	)
Gain (loss) on bank subsidiaries discontinued		(1,258	)		-			(1,258	)		126
Less income tax benefit		-			80			-			62
Loss from discontinued operations		(1,912	)		(1,497	)		(1,778	)		(3,251	)
NET INCOME (LOSS)		8,979			(9,928	)		6,472			(18,159	)
Net losses attributable to noncontrolling interests in consolidated subsidiaries		321			339			361			1,358
NET INCOME (LOSS) ATTRIBUTABLE TO CAPITOL BANCORP LIMITED	$	9,300		$	(9,589	)	$	6,833		$	(16,801	)
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CAPITOL BANCORP LIMITED -- Note J	$	0.23		$	(0.23	)	$	0.17		$	(0.41	)

See notes to condensed consolidated financial statements.

Page 7 of 62

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

For the Three and Six Months Ended June 30, 2013 and 2012

(in $1,000s)

	Three Months Ended						Six Months Ended
	2013			2012			2013			2012
				As Adjusted (Note C)						As Adjusted (Note C)
NET INCOME (LOSS)	$	8,979		$	(9,928	)	$	6,472		$	(18,159	)
Other comprehensive loss, net of tax:
Unrealized losses arising during the period		(61	)		(1	)		(65	)		(9	)
COMPREHENSIVE INCOME (LOSS)		8,918			(9,929	)		6,407			(18,168	)
Comprehensive loss attributable to noncontrolling interests in consolidated subsidiaries		321			339			361			1,358
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CAPITOL BANCORP LIMITED	$	9,239		$	(9,590	)		6,768			(16,810	)

See notes to condensed consolidated financial statements.

Page 8 of 62

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Statements of Changes in Equity (Unaudited)

For the Six Months Ended June 30, 2013 and 2012

(in $1,000s, except share and per-share data)

	Capitol Bancorp Limited Stockholders' Equity
	Preferred Stock		Common Stock			Retained- Earnings (Deficit)			Undistributed Common Stock Held by Employee- Benefit Trust			Accumulated Other Comprehensive Income (Loss)			Total Capitol Bancorp Limited Stockholders' Equity (Deficit)			Noncontrolling Interests in Consolidated Subsidiaries			Total Equity (Deficit)
Six months ended June 30, 2012
Balances at December 31, 2011, as previously reported	$	5,098	$	292,135		$	(404,846	)	$	(541	)	$	70		$	(108,084	)	$	(563	)	$	(108,647	)
Cumulative effect of change in accounting principle -- Note C							4,128									4,128						4,128
Balances at January 1, 2012, as adjusted		5,098		292,135			(400,718	)		(541	)		70			(103,956	)		(563	)		(104,519	)
Reduction in noncontrolling interest of sold subsidiaries																-			(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							(16,801	)								(16,801	)		(1,358	)		(18,159	)
Other comprehensive loss													(9	)		(9	)					(9	)
BALANCES AT JUNE 30, 2012	$	5,098	$	292,179		$	(417,597	)	$	(541	)	$	61		$	(120,800	)	$	(5,535	)	$	(126,335	)
Six months ended June 30, 2013
Balances at December 31, 2012, as previously reported	$	5,098	$	292,092		$	(430,590	)	$	(541	)	$	72		$	(133,869	)	$	(10,247	)	$	(144,116	)
Cumulative effect of change in accounting principle -- Note C							6,568									6,568						6,568
Balances at January 1, 2013, as adjusted		5,098		292,092			(424,022	)		(541	)		72			(127,301	)		(10,247	)		(137,548	)
Reduction in noncontrolling interest of subsidiaries discontinued																-			(47	)		(47	)
Reduction in investment in subsidiaries due to change in ownership																-			(5,490	)		(5,490	)
Reversal of compensation expense relating to 3,000 forfeited restricted common stock shares and stock options				(3	)											(3	)					(3	)
Recognition of compensation expense relating to restricted common stock and stock options				3												3						3
Net income (loss)							6,833									6,833			(361	)		6,472
Other comprehensive loss													(65	)		(65	)					(65	)
BALANCES AT JUNE 30, 2013	$	5,098	$	292,092		$	(417,189	)	$	(541	)	$	7		$	(120,533	)	$	(16,145	)	$	(136,678	)

See notes to condensed consolidated financial statements.

Page 9 of 62

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2013 and 2012

(in $1,000s)

	2013			2012
				As Adjusted (Note C)
OPERATING ACTIVITIES
Net income (loss)	$	6,472		$	(18,159	)
Adjustments to reconcile net income (loss) to net cash provided (used) by   operating activities (including discontinued operations):
Provision for loan losses		(12,766	)		1,721
Depreciation of premises and equipment		1,572			2,081
Reorganization items		1,835			-
Net amortization of investment security premiums		40			79
Loss on sale of premises and equipment		62			21
Gain on sale of government-guaranteed loans		-			(475	)
Loss (gain) on bank subsidiaries discontinued		1,781			(126	)
Loss (gain) on sale of other real estate owned		(1,747	)		535
Write-down of other real estate owned		1,977			7,936
Amortization of issuance costs of subordinated debentures		-			51
Share-based compensation expense		-			61
Deferred income tax expense (credit)		2			(201	)
Originations and purchases of loans held for sale		(921	)		(14,300	)
Proceeds from sales of loans held for sale		921			15,909
Decrease in accrued interest income and other assets		8,674			3,634
Decrease in accrued interest expense on deposits and other liabilities		(4,360	)		(437	)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		3,542			(1,670	)
INVESTING ACTIVITIES
Proceeds from calls, prepayments and maturities of investment securities		3,393			10,345
Purchases of investment securities		(3,997	)		(6,622	)
Redemption of Federal Home Loan Bank stock by issuer		971			849
Purchases of Federal Home Loan Bank stock		-			(31	)
Net decrease in portfolio loans		100,628			112,208
Proceeds from sales of government-guaranteed loans		-			4,241
Proceeds from sales of premises and equipment		34			45
Purchases of premises and equipment		(216	)		(1,402	)
Proceeds from sale of bank subsidiaries		1,000			4,060
Payments received on other real estate owned		69			34
Proceeds from sales of other real estate owned		26,478			24,505
NET CASH PROVIDED BY INVESTING ACTIVITIES		128,360			148,232
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		34,554			56,769
Net decrease in certificates of deposit		(157,311	)		(189,666	)
Net payments on debt obligations		-			(423	)
Proceeds from Federal Home Loan Bank borrowings		500			43,501
Payments on Federal Home Loan Bank borrowings		(2,000	)		(62,918	)
Tax effect of share-based payments		-			(17	)
NET CASH USED IN FINANCING ACTIVITIES		(124,257	)		(152,754	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		7,645			(6,192	)
Change in cash and cash equivalents of discontinued operations		6,724			(9,078	)
Change in cash and cash equivalents of deconsolidated subsidiary		(44,753	)		-
Cash and cash equivalents at beginning of period		289,734			319,453
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	259,350		$	304,183
Supplemental disclosures:
Cash paid during the period for interest on deposits and debt obligations		4,683			14,240
Transfers of loans to other real estate owned		8,409			30,794

See notes to condensed consolidated financial statements.

Page 10 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note A – Background and 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, 2013 have been adjusted to exclude amounts related to discontinued operations (see Note G).

The results of operations for the period ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.

The consolidated balance sheet as of December 31, 2012 was derived from audited consolidated financial statements as of that date.  Certain 2012 amounts have been reclassified to conform to the 2013 presentation.  Refer to Note C for the effects of a change in accounting principle on amounts previously reported in the 2012 consolidated financial statements.

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which are discussed below and on page 51 of this document, as well as upon 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, 2012.

Bankruptcy Filings

On August 9, 2012, Capitol and its affiliate Financial Commerce Corporation ("FCC"), (collectively the "Debtors"), filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Eastern District of Michigan (the "Bankruptcy Court").  The Debtors' Chapter 11 Cases (the "Chapter 11 Cases") are being jointly administered under Case Number 12-58409.  Capitol and FCC continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  Capitol's banking subsidiaries are not part of the filing and continue to conduct business on an uninterrupted basis.

On May 16, 2013, Capitol and FCC filed a proposed Joint Liquidating Plan of Capitol Bancorp Ltd. and Financial Commerce Corporation (the "Joint Liquidating Plan") and related Disclosure Statement with the Bankruptcy Court for the resolution of outstanding claims against and equity security interests in the Debtors.  The Joint Liquidating Plan superseded the prepackaged plan of reorganization filed by Capitol and FCC with the Bankruptcy Court in August 2012, which was withdrawn.  On May 22, 2013, Capitol and FCC filed an Amended Disclosure Statement (the "Amended Disclosure Statement"), which superseded the Disclosure Statement filed on May 16, 2013.

On July 17, 2013, Capitol and FCC filed an Amended Joint Liquidating Plan of Capitol Bancorp Ltd. and Financial Commerce Corporation (the "Amended Joint Liquidating Plan"), which superseded the prior Joint Liquidating Plan. Information contained in the Amended Joint Liquidating Plan and Amended Disclosure Statement is subject to change, whether as a result of amendments to the Amended Joint Liquidating Plan or the Amended Disclosure Statement, third-party actions, or otherwise.

Page 11 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note A – Background and Basis of Presentation – Continued

The Amended Joint Liquidating Plan is subject to acceptance by the creditors of Capitol and FCC (as, and to the extent, required under the Bankruptcy Code) and confirmation by the Bankruptcy Court.  The deadline for creditors to vote on the Amended Joint Liquidating Plan is September 24, 2013.  The combined hearing to be conducted by the Bankruptcy Court on (i) final approval of the Amended Disclosure Statement, and (ii) confirmation of the Amended Joint Liquidating Plan is scheduled for October 9, 2013.

Accounting Standards Codification ("ASC") Topic 852, Reorganizations, which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared.  However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Amounts that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the condensed consolidated statements of operations beginning in the quarter ended September 30, 2012.  The condensed consolidated balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise (none as of June 30, 2013) and from post-petition liabilities.  Liabilities that may be affected by a Chapter 11 plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  Capitol applied ASC Topic 852 effective August 9, 2012 and has segregated those items as outlined above for all reporting periods subsequent to such date and will continue to do so until emergence from Chapter 11.

Refer to Note D for a description of a recently issued accounting standards update related to the liquidation basis of accounting.  As discussed there, management has determined that the Corporation has not met the criteria of the accounting standards update for reporting under the liquidation basis of accounting.

Note B – Debtor-in-Possession Financial Information

Liabilities Subject to Compromise

As required by ASC Topic 852, the amount of liabilities subject to compromise represents management's estimate of known or potential prepetition and post-petition claims to be addressed in connection with the bankruptcy filing.  Such claims are subject to future adjustments.  The liabilities subject to compromise consist of the following (in $1,000s):

	June 30, 2013		December 31, 2012
Trust-preferred securities	$	151,296	$	151,296
Senior notes		6,820		6,820
Accrued interest payable		33,318		33,318
Accrued estimated taxes payable		3,265		7,108
Accounts payable and other accrued liabilities		1,093		1,751
Total liabilities subject to compromise	$	195,792	$	200,293

In accordance with ASC Topic 852, interest was no longer accrued on the trust-preferred securities and senior notes included in liabilities subject to compromise after Capitol filed for bankruptcy protection.  If Capitol had continued to accrue interest on these debt obligations, additional contractual interest expense of $2.5 million and $5.2 million for the three and six months ended June 30, 2013, respectively, would have been reported.

Reorganization Items

Professional advisory fees and other costs directly associated with the reorganization are reported separately as reorganization items pursuant to ASC Topic 852.  The reorganization items for the three and six months ended June 30, 2013 consisted only of professional fees in the amount of $755,000 and $1,835,000, respectively.

Page 12 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note C – Change in Accounting Principle

Effective January 1, 2013, the Corporation elected to change its method of accounting related to the reserve for, and payment of, delinquent real and personal property taxes on properties serving as collateral for impaired loans.  The Corporation pays delinquent property taxes on these properties to avoid lien attachment by the taxing authorities.  Previously, the Corporation recorded an accrued liability for delinquent property taxes in accordance with ASC 450-20, "Loss Contingencies," with a corresponding charge to "Costs associated with foreclosed properties and other real estate owned."  Recent regulatory guidance suggests a more preferable method of accounting for these estimated delinquent property taxes is to consider the amount of such taxes when performing impairment analyses on collateral-dependent impaired loans.  Based on its analysis, the Corporation has determined this method of accounting is preferable.  Under the newly adopted method of accounting, when a loan is deemed to be collateral-dependent and a specific impairment analysis is performed, the delinquent property taxes will be reflected in the impairment calculation similar to estimated selling costs.  The decision on whether to reserve for, or charge-off, the amount of delinquent property taxes will depend upon whether the net value of the collateral (property appraised amount, less estimated costs to sell and the amount of the delinquent property taxes) is greater or less than the loan balance.  When the delinquent property taxes are paid, the amount will be added to the loan basis and considered in current and future impairment analyses.

In accordance with ASC 250-10-45, "Accounting Changes – Change in Accounting Principle," the Corporation is reporting the change in accounting principle through retrospective application as of the beginning of 2012, the first period presented in the accompanying condensed consolidated financial statements.  This is also the period through which the Corporation has determined it is practicable to determine the most appropriate amount of the beginning adjustment.  For periods prior to 2012, management believes determining the appropriate amount is impracticable due to the availability of records, subsequent changes in loan balances and relationships and the assumptions about management's intent at the time that is now difficult to independently substantiate.  Also, management believes retrospective application of the new accounting principle to periods prior to 2012 would not produce a materially different result.

Upon retrospective application of the new accounting method, it was determined that either (1) the adjusted impaired loan analyses resulted in no additional reserves or charge-offs, or (2) an adequate amount of unallocated allowance for loan losses existed to absorb the impact of any collateral shortfall on a by-loan basis.  As a result, the net effect of adopting the new accounting method was a decrease of the retained-earnings deficit and a reduction of accrued liabilities of $4.1 million as of January 1, 2012, with no effect on the total allowance for loan losses.  As indicated in the following table, the cumulative increase to portfolio loans, decrease to the accrued liability and decrease to the retained-earnings deficit were $3.1 million, $3.5 million and $6.6 million, respectively, as of December 31, 2012.

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Page 13 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note C – Change in Accounting Principle – Continued

All 2012 periods have been retrospectively adjusted to reflect the change in accounting principle.  The following tables summarize the adjustments to the Corporation's unaudited condensed consolidated financial statements for each affected line item (in $1,000s, except per-share data):

Condensed Consolidated Balance Sheet (Unaudited)

	As of December 31, 2012
	As Previously Reported			Reclassification of Discontinued Operations(1)			Effect of Change in Accounting Principle			As Adjusted
Portfolio loans, less allowance for loan losses	$	1,143,212		$	(93,210	)	$	3,050		$	1,053,052
Total assets		1,618,252						3,050			1,621,302
Accrued interest on deposits and other liabilities		9,779			(317	)		(3,518	)		5,944
Total liabilities		1,762,368						(3,518	)		1,758,850
Retained-earnings deficit		(430,590	)					6,568			(424,022	)
Total Capitol Bancorp Limited stockholders' equity deficit		(133,869	)					6,568			(127,301	)
Total equity deficit		(144,116	)					6,568			(137,548	)

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

Condensed Consolidated Statement of Operations (Unaudited)

	Three Months Ended June 30, 2012
	As Previously Reported			Reclassification of Discontinued Operations(1)			Effect of Change in Accounting Principle			As Adjusted
Costs associated with foreclosed properties and other real estate owned	$	6,055		$	(928	)	$	(750	)	$	4,377
Total noninterest expense		28,024			(3,039	)		(750	)		24,235
Loss before income tax benefit		(10,692	)		1,512			750			(8,430	)
Loss from continuing operations		(10,693	)		1,512			750			(8,431	)
Net loss		(10,678	)					750			(9,928	)
Net loss attributable to Capitol Bancorp Limited		(10,339	)					750			(9,589	)
Net loss per common share attributable to Capitol Bancorp Limited	$	(0.25	)							$	(0.23	)

Page 14 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note C – Change in Accounting Principle – Continued

	Six Months Ended June 30, 2012
	As Previously Reported			Reclassification of Discontinued Operations(1)			Effect of Change in Accounting Principle			As Adjusted
Costs associated with foreclosed properties and other real estate owned	$	11,055		$	(2,261	)	$	(1,450	)	$	7,344
Total noninterest expense		53,774			(6,602	)		(1,450	)		45,722
Loss before income tax benefit		(19,750	)		3,348			1,450			(14,952	)
Loss from continuing operations		(19,706	)		3,348			1,450			(14,908	)
Net loss		(19,609	)					1,450			(18,159	)
Net loss attributable to Capitol Bancorp Limited		(18,251	)					1,450			(16,801	)
Net loss per common share attributable to Capitol Bancorp Limited	$	(0.44	)							$	(0.41	)

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

Note D – Accounting Standards Updates

In February 2013, an accounting standards update was issued to amend and improve the reporting of reclassifications out of accumulated other comprehensive income.  The amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements.  However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts.  This new guidance became effective prospectively for all annual and interim periods beginning January 1, 2013 and it did not have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

In April 2013, an accounting standards update was issued to improve the reporting as to when and how the liquidation basis of accounting should be applied.  The update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is 'imminent'.  Liquidation is deemed imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy).  The update requires financial statements prepared using the liquidation basis of accounting to present relevant information about an entity's expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation.  An entity is required to recognize and measure its liabilities in accordance with U.S. GAAP that otherwise applies to those liabilities.  The entity is also required to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the anticipated duration of the liquidation process, including any costs associated with sale or settlement of its assets and liabilities.  This new guidance will become effective for entities that determine liquidation is imminent during annual and interim periods beginning January 1, 2014 and should be applied prospectively from the day that liquidation becomes imminent.  Early adoption is permitted.  Capitol's management has determined that liquidation is not currently imminent for the Corporation, as defined by this accounting standards update, and will continue to evaluate adoption of this accounting guidance if the Corporation meets the criteria for reporting under the liquidation basis of accounting in the future.

Page 15 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note E – 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 available for sale consisted of the following (in $1,000s):

	June 30, 2013				December 31, 2012
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
United States treasury	$	3,498	$	3,499	$	3,499	$	3,500
United States government agency		4,500		4,373		4,000		3,987
Mortgage-backed		7,146		7,282		8,078		8,199
	$	15,144	$	15,154	$	15,577	$	15,686

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

	June 30, 2013				December 31, 2012
	Gains		Losses		Gains		Losses
United States treasury	$	1			$	1
United States government agency			$	127			$	13
Mortgage-backed		142		6		121
	$	143	$	133	$	122	$	13

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, 2013				December 31, 2012
	Unrealized Loss		Carrying Value		Unrealized Loss		Carrying Value
One year or less:
United States government agencies	$	127	$	4,373	$	13	$	3,987
Mortgage-backed		6		1,948
	$	133		6,321		13		3,987

Scheduled maturities of investment securities held as of June 30, 2013 were as follows (in $1,000s):

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	3,498	$	3,499
After one year, through five years		500		498
After five years, through ten years		4,476		4,455
After ten years		6,670		6,702
	$	15,144	$	15,154

Page 16 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – 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, 2013
	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	$	5,882	$	2,530	$	1,121	$	1,014	$	60					$	10,607
Collectively evaluated for probable incurred losses		8,645		4,845		932		2,042		365	$	390	$	9,378		26,597
Total allowance for loan losses	$	14,527	$	7,375	$	2,053	$	3,056	$	425	$	390	$	9,378	$	37,204
Portfolio loans:
Individually evaluated for impairment	$	98,529	$	24,271	$	9,630	$	10,353	$	81					$	142,864
Collectively evaluated for probable incurred losses		491,344		158,355		28,667		74,547		6,023	$	3,928				762,864
Total portfolio loans	$	589,873	$	182,626	$	38,297	$	84,900	$	6,104	$	3,928			$	905,728

	December 31, 2012 (As Adjusted – Note C)
	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	$	7,444	$	2,668	$	1,011	$	1,327	$	56					$	12,506
Collectively evaluated for probable incurred losses		10,594		6,796		1,310		3,563		948	$	4	$	20,895		44,110
Total allowance for loan losses	$	18,038	$	9,464	$	2,321	$	4,890	$	1,004	$	4	$	20,895	$	56,616
Portfolio loans:
Individually evaluated for impairment	$	114,039	$	34,763	$	11,765	$	12,577	$	89					$	173,233
Collectively evaluated for probable incurred losses		590,090		195,092		35,368		105,997		7,847	$	2,041				936,435
Total portfolio loans	$	704,129	$	229,855	$	47,133	$	118,574	$	7,936	$	$ 2,041			$	1,109,668

Page 17 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – 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, 2013 and 2012 (in $1,000s) by loan type:

	Three Months Ended June 30, 2013
	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	$	18,260		$	7,994		$	2,238		$	4,882		$	259		$	141		$	19,091		$	52,865
Charge-offs		(3,362	)		(1,280	)		(435	)		(220	)		(285	)								(5,582	)
Recoveries		694			580			153			668			22									2,117
Net charge-offs		(2,668	)		(700	)		(282	)		448			(263	)								(3,465	)
Provision for loan losses		559			582			202			(2,042	)		446			257			(12,200	)		(12,196	)
Net change in unallocated allowance		(1,624	)		(501	)		(105	)		(232	)		(17	)		(8	)		2,487
Ending balance	$	14,527		$	7,375		$	2,053		$	3,056		$	425		$	390		$	9,378		$	37,204

	Six Months Ended June 30, 2013
	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	$	18,038		$	9,464		$	2,321		$	4,890		$	1,004		$	4		$	20,895		$	56,616
Less allowance for deconsolidated   subsidiary – Note H		(765	)		(869	)		(53	)		(422	)		(48	)								(2,157	)
Charge-offs		(5,701	)		(2,561	)		(2,715	)		(1,031	)		(411	)		(7	)					(12,426	)
Recoveries		2,260			1,666			1,936			1,213			76									7,151
Net charge-offs		(3,441	)		(895	)		(779	)		182			(335	)		(7	)					(5,275	)
Provision for loan losses		1,141			(188	)		593			(1,530	)		(191	)		395			(12,200	)		(11,980	)
Net change in unallocated allowance		(446	)		(137	)		(29	)		(64	)		(5	)		(2	)		683
Ending balance	$	14,527		$	7,375		$	2,053		$	3,056		$	425		$	390		$	9,378		$	37,204

Page 18 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

	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	$	26,198		$	14,462		$	7,690		$	10,666		$	394		$	13		$	11,586	$	71,009
Charge-offs		(3,478	)		(2,369	)		(1,190	)		(4,470	)		(11	)		(679	)				(12,197	)
Recoveries		1,569			538			362			2,876			78								5,423
Net charge-offs		(1,909	)		(1,831	)		(828	)		(1,594	)		67			(679	)				(6,774	)
Provision for loan losses		2,164			(249	)		(3,039	)		490			(175	)		1,039					230
Net change in unallocated allowance		(940	)		(315	)		(86	)		(172	)		(12	)		(3	)		1,528
Ending balance	$	25,513		$	12,067		$	3,737		$	9,390		$	274		$	370		$	13,114	$	64,465

	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	$	32,854		$	17,415		$	8,727		$	12,283		$	601		$	17		$	4,447	$	76,344
Charge-offs		(8,918	)		(6,476	)		(3,340	)		(6,183	)		(228	)		(679	)				(25,824	)
Recoveries		3,959			3,627			1,125			4,199			137			7					13,054
Net charge-offs		(4,959	)		(2,849	)		(2,215	)		(1,984	)		(91	)		(672	)				(12,770	)
Provision for loan losses		2,952			(714	)		(2,286	)		69			(169	)		1,039					891
Net change in unallocated allowance		(5,334	)		(1,785	)		(489	)		(978	)		(67	)		(14	)		8,667
Ending balance	$	25,513		$	12,067		$	3,737		$	9,390		$	274		$	370		$	13,114	$	64,465

Page 19 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

The average total portfolio loans for the six months ended June 30, 2013 and 2012 were $1.0 billion and $1.3 billion, respectively.  The ratio of net charge-offs (annualized) to average portfolio loans outstanding was 1.07% and 1.94% for the six months ended June 30, 2013 and 2012, respectively.

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, 2013		March 31, 2013		December 31, 2012
					As Adjusted (Note C)
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	62,333	$	70,762	$	75,811
Residential (including multi-family)		18,312		20,928		25,620
Construction, land development and other land		6,389		7,085		6,645
Total loans secured by real estate		87,034		98,775		108,076
Commercial and other business-purpose loans		6,226		7,234		9,306
Consumer		139		424		285
Total nonaccrual loans		93,399		106,433		117,667
Past due (>90 days) loans and accruing interest:
Loans secured by real estate:
Commercial		2,296		1,017		515
Residential (including multi-family)		-		-		85
Total loans secured by real estate		2,296		1,017		600
Commercial and other business-purpose loans		-		-		70
Total past due loans		2,296		1,017		670
Total nonperforming loans	$	95,695	$	107,450	$	118,337
Real estate owned and other repossessed assets		50,304		58,793		69,115
Total nonperforming assets	$	145,999	$	166,243	$	187,452

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.

Page 20 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – 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, 2013:

	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	66,554	$	78,749	$	6,461
Residential (including multi-family)		17,765		31,003		3,364
Construction, land development and other land		6,284		10,354		1,195
Total loans secured by real estate		90,603		120,106		11,020
Commercial and other business-purpose loans		5,525		13,124		1,156
Consumer		204		451		122
		96,332		133,681		12,298
With no related allowance recorded:
Loans secured by real estate:
Commercial		65,145		91,670
Residential (including multi-family)		14,686		17,137
Construction, land development and other land		5,382		7,390
Total loans secured by real estate		85,213		116,197
Commercial and other business-purpose loans		6,095		7,298
Consumer		16		16
		91,324		123,511
Total	$	187,656	$	257,192	$	12,298

Included in total impaired loans as of June 30, 2013 is $146.1 million of loans modified and reported as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note), along with $5.5 million of loans modified as troubled debt restructurings which are no longer reported as troubled debt restructurings due to the loans being in compliance with their modified terms and having an interest rate consistent with market rates.

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, 2013 and 2012, the average recorded investment in impaired loans and interest income recorded on impaired loans were as follows (in $1,000s):

	Three Months Ended				Six Months Ended
	June 30, 2013				June 30, 2013
	Average Recorded Investment		Interest Income Recorded		Average Recorded Investment		Interest Income Recorded
Commercial	$	138,152	$	2,154	$	142,931	$	3,981
Residential (including multi-family)		37,788		297		42,882		756
Construction, land development and other land		15,969		79		19,992		200
Total loans secured by real estate		191,909		2,530		205,805		4,937
Commercial and other business-purpose loans		14,419		188		16,749		389
Consumer		296		1		286		2
Total	$	206,624	$	2,719	$	222,840	$	5,328

Page 21 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

	Three Months Ended					Six Months Ended
	June 30, 2012					June 30, 2012
	Average Recorded Investment			Interest Income Recorded		Average Recorded Investment		Interest Income Recorded
	As Adjusted (Note C)					As Adjusted (Note C)
Commercial		$	153,709	$	434	$	155,604	$	2,002
Residential (including multi-family)			54,724		535		56,269		1,126
Construction, land development and other land			27,502		245		29,760		510
Total loans secured by real estate			235,935		1,214		241,633		3,638
Commercial and other business-purpose loans			21,945		333		22,712		608
Consumer			257		6		213		9
Total		$	258,137	$	1,553	$	264,558	$	4,255

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, 2012:

	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
	As Adjusted (Note C)		As Adjusted (Note C)
With an allowance recorded:
Loans secured by real estate:
Commercial	$	70,689	$	85,377	$	8,886
Residential (including multi-family)		19,099		32,989		3,241
Construction, land development and other land		7,332		12,125		1,121
Total loans secured by real estate		97,120		130,491		13,248
Commercial and other business-purpose loans		9,947		19,754		1,880
Consumer		369		1,513		136
		107,436		151,758		15,264
With no related allowance recorded:
Loans secured by real estate:
Commercial		69,290		101,147
Residential (including multi-family)		22,936		28,938
Construction, land development and other land		7,324		11,142
Total loans secured by real estate		99,550		141,227
Commercial and other business-purpose loans		6,513		8,546
Consumer		9		9
		106,072		149,782
Total	$	213,508	$	301,540	$	15,264

Included in impaired loans as of December 31, 2012 is $168.2 million of loans modified and reported as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note).

Page 22 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

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

	June 30, 2013
	Past Due Loans (based on payment due dates)								Total Amount of
	More Than 29 Days, and Less Than 90 Days			More Than 89 Days (Accruing)			Loans on Nonaccrual Status (Generally, 90 Days or More)		Loans More Than 29 Days Past Due or on Nonaccrual Status			Loans Either Current or Less Than 30 Days Past Due			Total Portfolio Loans
Loans secured by real estate:
Commercial		$	6,487		$	2,296	$	62,333		$	71,116		$	518,757		$	589,873
Residential (including multi- family)			2,966					18,312			21,278			161,348			182,626
Construction, land development and other land			42					6,389			6,431			31,866			38,297
Total loans secured by real estate			9,495			2,296		87,034			98,825			711,971			810,796
Commercial and other business- purpose loans			2,472					6,226			8,698			76,202			84,900
Consumer			222					139			361			5,743			6,104
Other			2								2			3,926			3,928
Total		$	12,191		$	2,296	$	93,399		$	107,886		$	797,842		$	905,728

	December 31, 2012 (As Adjusted – Note C)
	Past Due Loans (based on payment due dates)									Total Amount of
	More Than 29 Days, and Less Than 90 Days			More Than 89 Days (Accruing)			Loans on Nonaccrual Status (Generally, 90 Days or More)			Loans More Than 29 Days Past Due or on Nonaccrual Status			Loans Either Current or Less Than 30 Days Past Due			Total Portfolio Loans
Loans secured by real estate:
Commercial		$	13,629		$	515		$	75,811		$	89,955		$	614,174		$	704,129
Residential (including multi- family)			5,768			85			25,620			31,473			198,382			229,855
Construction, land development and other land			4,242						6,645			10,887			36,246			47,133
Total loans secured by real estate			23,639			600			108,076			132,315			848,802			981,117
Commercial and other business- purpose loans			3,106			70			9,306			12,482			106,092			118,574
Consumer			280						285			565			7,371			7,936
Other															2,041			2,041
Total		$	27,025		$	670		$	117,667		$	145,362		$	964,306		$	1,109,668

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.

Page 23 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

Watch.  Loans classified as watch have potential weaknesses that deserve 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 have a well-defined weakness or weaknesses that could jeopardize the liquidation of the debt obligation by the borrower.  These loans 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, 2013
	Pass		Watch		Substandard		Total Portfolio Loans
Loans secured by real estate:
Commercial	$	407,506	$	64,925	$	117,442	$	589,873
Residential (including multi-family)		131,493		19,893		31,240		182,626
Construction, land development and other land		22,368		5,242		10,687		38,297
Total loans secured by real estate		561,367		90,060		159,369		810,796
Commercial and other business-purpose loans		62,758		8,599		13,543		84,900
Consumer		5,306		350		448		6,104
Other		3,926				2		3,928
Total	$	633,357	$	99,009	$	173,362	$	905,728

	December 31, 2012 (As adjusted – Note C)
	Pass		Watch		Substandard		Total Portfolio Loans
Loans secured by real estate:
Commercial	$	494,643	$	72,978	$	136,508	$	704,129
Residential (including multi-family)		165,556		20,044		44,255		229,855
Construction, land development and other land		26,264		8,491		12,378		47,133
Total loans secured by real estate		686,463		101,513		193,141		981,117
Commercial and other business-purpose loans		93,812		6,663		18,099		118,574
Consumer		5,613		1,765		558		7,936
Other		2,041						2,041
Total	$	787,929	$	109,941	$	211,798	$	1,109,668

Page 24 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – 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 that 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. Modification of the interest rate in order to allow the borrower to repay the debt, based on current cash flow sources;

3. 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

4. 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, if any, 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) substandard 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 generally determined using a discounted cash flow analysis, adjusted for a probability-of-default factor.  The discount period used is based on when the bank believes, depending on cash flows from the borrower or project, that the loan will be paid in full or refinanced.  If an event for paydown or an expected refinance cannot be documented, a discount period that will result in the cash flows being adjusted for a probability of default from the borrower, reducing the loan balance down to the collateral value, is generally used.  If the loan is deemed collateral dependent, the reserve will be 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, adjusted for a probability of default, is calculated to determine the specific reserve.

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

Page 25 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

The following table summarizes loans modified as troubled debt restructurings during the three and six months ended June 30, 2013 and 2012 (in $1,000s):

	Three Months Ended June 30, 2013
	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		10		$	7,136		$	4,738		$	300
Residential		8			1,156			1,142			93
Total loans secured by real estate		18			8,292			5,880			393
Commercial and other business- purpose loans		8			1,306			1,186			120
Total		26		$	9,598		$	7,066		$	513

	Six Months Ended June 30, 2013
	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		23		$	10,631		$	8,122		$	614
Residential		34			3,842			3,532			473
Construction, land development and other land		2			94			91			9
Total loans secured by real estate		59			14,567			11,745			1,096
Commercial and other business- purpose loans		18			1,776			1,540			133
Total		77		$	16,343		$	13,285		$	1,229

Page 26 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

	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		37	$	16,982	$	14,149	$	735
Residential		30		4,208		3,794		452
Construction, land development and other land		6		597		564		15
Total loans secured by real estate		73		21,787		18,507		1,202
Commercial and other business- purpose loans		5		350		327		7
Total		78	$	22,137	$	18,834	$	1,209

	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		69	$	28,086	$	24,111	$	1,224
Residential		56		7,809		6,415		594
Construction, land development and other land		10		1,262		1,010		27
Total loans secured by real estate		135		37,157		31,536		1,845
Commercial and other business- purpose loans		17		1,165		1,055		42
Consumer		2		40		39		3
Total		154	$	38,362	$	32,630	$	1,890

Of the amounts in the table above for the six months ended June 30, 2013, approximately $4.0 million, or 30%, and 37 contracts, or 48%, and for the six months ended June 30, 2012, approximately $9.6 million, or 29%, and 46 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.

Page 27 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – 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, 2013 and 2012 (in $1,000s):

	Three Months Ended June 30, 2013				Six Months Ended June 30, 2013
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled debt restructurings that subsequently defaulted:
Loans secured by real estate:
Commercial		2	$	3,024		8	$	5,772
Residential		9		837		16		1,941
Construction, land development and other land		2		582		5		1,867
Total loans secured by real estate		13		4,443		29		9,580
Commercial and other business- purpose loans						1
Consumer		1
Total		14	$	4,443		30	$	9,580

	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		15	$	1,640
Residential		7		1,177		13		1,651
Construction, land development and other land		3		473		5		481
Total loans secured by real estate		20		2,801		33		3,772
Commercial and other business- purpose loans		4		282		6		384
Consumer						1		90
Total		24	$	3,083		40	$	4,246

Page 28 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

The total amount of troubled debt restructurings as of June 30, 2013 and December 31, 2012 is detailed in the following tables by loan type and accrual status (in $1,000s):

	Troubled Debt Restructurings at June 30, 2013
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	38,764	$	64,882	$	103,646
Residential (including multi-family)		10,687		13,777		24,464
Construction, land development and other land		4,171		4,649		8,820
Total loans secured by real estate		53,622		83,308		136,930
Commercial and other business-purpose loans		3,689		5,394		9,083
Consumer				81		81
Total	$	57,311	$	88,783	$	146,094

	Troubled Debt Restructurings at December 31, 2012
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	48,679	$	64,168	$	112,847
Residential (including multi-family)		15,798		16,415		32,213
Construction, land development and other land		3,102		8,010		11,112
Total loans secured by real estate		67,579		88,593		156,172
Commercial and other business-purpose loans		4,811		7,153		11,964
Consumer				94		94
Total	$	72,390	$	95,840	$	168,230

Page 29 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note G – Discontinued Operations

During the six months ended June 30, 2013, 1^st Commerce Bank, Central Arizona Bank, Pisgah Community Bank and Sunrise Bank were closed either by their state regulators or the FDIC (see Note M).  Capitol recorded a net loss of $1,258,000 on its investment in these banks, which has been included in discontinued operations.

The assets, liabilities and results of operations of 1^st Commerce Bank, Central Arizona Bank, Pisgah Community Bank and Sunrise Bank, closed in 2013, together with the results of operations of Mountain View Bank of Commerce, Bank of Michigan, First Carolina State Bank and High Desert Bank, sold in 2012, are classified as discontinued operations for the three and six months ended June 30, 2013 and 2012 and include the following components (in $1,000s):

	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
Interest income	$	577		$	3,553		$	1,825		$	7,774
Interest expense		114			846			374			1,796
Net interest income		463			2,707			1,451			5,978
Provision for loan losses		-			165			(787	)		830
Net interest income after provision for  loan losses		463			2,542			2,238			5,148
Noninterest income		53			587			282			1,093
Gain (loss) on bank subsidiaries discontinued		(1,258	)		-			(1,258	)		126
Noninterest expense		1,170			4,546			3,040			9,556
Loss before income taxes		(1,912	)		(1,417	)		(1,778	)		(3,189	)
Less income taxes (benefit)		-			80			-			62
Net loss from discontinued operations		(1,912	)		(1,497	)		(1,778	)		(3,251	)
Net loss attributable to noncontrolling interests in consolidated subsidiaries		264			363			327			1,095
Net loss from discontinued operations attributable to Capitol Bancorp Limited	$	(1,648	)		(1,134	)		(1,451	)		(2,156	)
Net loss from discontinued operations per common share attributable to Capitol Bancorp Limited	$	(0.04	)		(0.03	)		(0.04	)		(0.05	)

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

	Dec 31, 2012				Dec 31, 2012
Assets:				Liabilities:
Cash and cash equivalents	$	37,113		Noninterest-bearing deposits	$	20,883
Investment securities		21		Interest-bearing deposits		119,134
Federal Home Loan Bank stock		684		Total deposits		140,017
Portfolio loans		100,049		Other liabilities		3,318
Less allowance for loan losses		(6,839	)
Net portfolio loans		93,210			$	143,335
Premises and equipment		1,800
Other real estate owned		11,913
Other assets		1,739
	$	146,480

Page 30 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note H – Deconsolidation of Subsidiary

In February 2013, Capitol sold a portion of the shares it owned of Capitol National Bank ("CNB") for $1 million and reduced its ownership in CNB following the execution of separate share exchange agreements consummated in 2011 and 2012.  Capitol recorded a net loss of $2.2 million as a result of these transactions, and no longer held a controlling financial interest in CNB after February 28, 2013.  Accordingly, CNB ceased to be a consolidated subsidiary of Capitol and assets approximating $146.0 million and related equity amounts were removed from the condensed consolidated balance sheet.  Capitol's remaining interest in CNB was sold in April 2013, resulting in an additional net loss of $703,000.  Proceeds from the sale are in escrow pending the issuance by the FDIC of a waiver of cross-guaranty liability.

Note I – 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.  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.  There were no mortgage loans held for sale written down to fair value at June 30, 2013.

Loans:  The Corporation does not record loans at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments to collateral-dependent loans are recorded to reflect partial write-downs based on the observable market price, 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 on 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 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.

Page 31 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note I – Fair Value – Continued

There were no liabilities measured at fair value on a recurring or nonrecurring basis as of June 30, 2013 and December 31, 2012.

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

	June 30, 2013						December 31, 2012
	Total			Significant Other Observable Inputs (Level 2)			Total			Significant Other Observable Inputs (Level 2)
Investment securities available for sale:(1)
United States treasury		$	3,499		$	3,499		$	3,500		$	3,500
United States government agency			4,373			4,373			3,987			3,987
Mortgage-backed			7,282			7,282			8,199			8,199
		$	15,154		$	15,154		$	15,686		$	15,686

 (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, 2013						December 31, 2012
	Total			Significant Unobservable Inputs (Level 3)			Total			Significant Unobservable Inputs (Level 3)
Impaired loans(1)		$	91,324		$	91,324		$	106,072		$	106,072
Other real estate owned(2)		$	50,298		$	50,298		$	69,050		$	69,050

 (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 loan has become collateral-dependent.  Adjustments to the loan's carrying value (or requirements for an allocation of the allowance for loan losses) are made, when appropriate, after the review of an appraisal or evaluation.  The timing of when a collateral-dependent loan should be classified as a nonperforming loan is contingent upon several factors, including the performance of the loan, the borrower's 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 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 for the loan if it is deemed collateral-dependent.  Loans which are not deemed collateral-dependent 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 or evaluation and after any further fair value analysis is completed on those loans deemed to be collateral-dependent, the loans will be further evaluated for appropriate write-down.  Negative differences between appraised value, less estimated costs to sell

Page 32 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note I – Fair Value – Continued

(including delinquent real estate taxes), and the related carrying value of the loans are generally charged to the allowance for loan losses, as partial write-downs/charge-offs, on a timely basis.  Occasionally, additional potential loss amounts may be included if circumstances exist which may further adversely impact fair value estimates.  Internally-prepared evaluations may be used to estimate the current valuation changes driven by current economic conditions.  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, 2013						December 31, 2012
									As Adjusted – Note C
	Level Used to Measure Estimated Fair Value		Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Financial assets:
Cash		1	$	27,034		$	27,034		$	48,280		$	48,280
Cash equivalents		2		232,316			232,316			241,454			241,454
Loans held for sale		2
Investment securities available for sale		2		15,154			15,154			15,686			15,686
Federal Home Loan Bank and Federal Reserve Bank stock		2		8,369			8,369			9,847			9,847
Portfolio loans:
Loans secured by real estate:
Commercial		3		589,873			585,264			704,129			700,865
Residential (including multi-family)		3		182,626			182,493			229,855			230,105
Construction, land development and other land		3		38,297			38,335			47,133			47,254
Total loans secured by real estate				810,796			806,092			981,117			978,224
Commercial and other business-purpose loans		3		84,900			84,511			118,574			118,347
Consumer		3		6,104			6,279			7,936			8,134
Other		3		3,928			3,779			2,041			1,912
Total portfolio loans				905,728			900,661			1,109,668			1,106,617
Less allowance for loan losses		3		(37,204	)		(37,204	)		(56,616	)		(56,616	)
Net portfolio loans				868,524			863,457			1,053,052			1,050,001
Financial liabilities:
Deposits:
Noninterest-bearing		1		242,193			242,193			302,528			302,528
Interest-bearing:
Demand accounts		2		372,124			372,124			438,797			438,797
Time certificates of less than $100,000		3		227,308			228,603			280,549			283,101
Time certificates of $100,000 or more		3		319,386			320,938			381,978			384,604
Total interest-bearing				918,818			921,665			1,101,324			1,106,502
Total deposits				1,161,011			1,163,858			1,403,852			1,409,030
Notes payable and other borrowings		3		4,926			6,182			5,426			6,667

Page 33 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note I – 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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Page 34 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note J – Net Income (Loss) Per Common Share Attributable to Capitol Bancorp Limited

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

	Three Months Ended June 30						Six Months Ended June 30
	2013			2012			2013			2012
				As Adjusted (Note C)						As Adjusted (Note C)
Numerator—net income (loss) attributable to Capitol Bancorp Limited for the period	$	9,300		$	(9,589	)	$	6,833		$	(16,801	)
Denominator:
Weighted average number of common shares outstanding, excluding unvested restricted shares of common stock (denominator for basic earnings per share)		41,169			41,020			41,169			41,020
Effect of dilutive securities:
Unvested restricted shares of common stock		54			--			35			--
Denominator for diluted earnings per share -
Weighted average number of common shares and potential dilution		41,223			41,020			41,204			41,020
Number of antidilutive stock options excluded from diluted earnings per share computation		1,067			1,722			1,067			1,722
Number of antidilutive unvested restricted shares excluded from basic and diluted earnings per share computation		1			18			1			18
Number of antidilutive warrants excluded from diluted earnings per share computation		--			1,250			--			1,250
Net income (loss) per common share attributable to Capitol Bancorp Limited:
From continuing operations	$	0.27		$	(0.20	)	$	0.21		$	(0.36	)
From discontinued operations		(0.04	)		(0.03	)		(0.04	)		(0.05	)
Total net income (loss) per common share attributable to Capitol Bancorp Limited	$	0.23		$	(0.23	)	$	0.17		$	(0.41	)

Note K – 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 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 from that agency.  Accrued interest payable on such securities approximated $33.3 million at June 30, 2013 and December 31, 2012.  Holders of the trust-preferred securities recognize current taxable income relating to the deferred interest payments.  The accrual of interest was discontinued as of the bankruptcy filing date (see Note B).

Page 35 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note L – Pending Sale of Subsidiary Banks

Capitol has entered into a definitive agreement to sell its controlling interest held by a bank-development subsidiary in Bank of Maumee.  Total proceeds from this pending sale are expected to approximate $640,000, resulting in a projected gain of $77,000 (less than $0.01 per common share) based on Capitol's investment in the bank as of June 30, 2013.  The sale is subject to regulatory approval and other contingencies.

Note M – 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 enforcement actions (as well as informal agreements) with their applicable regulatory agencies.  Those enforcement actions 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.

Capitol's banking subsidiaries which have received a PCAD are as follows as of June 30, 2013 (listed in descending order based on total assets):

Michigan Commerce Bank

Bank of Las Vegas

Sunrise Bank of Arizona

Sunrise Bank of Albuquerque

Page 36 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note M – Regulatory and Operating Matters – Continued

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.

On September 20, 2012, the State of New Mexico Regulation and Licensing Department, Financial Institutions Division (the "New Mexico FID") issued a written notice of its intention to take possession and control of Sunrise Bank of Albuquerque and its assets for the purpose of the reorganization or liquidation through receivership if certain findings of the New Mexico FID were not corrected by December 20, 2012.  In the event that such a reorganization or liquidation of Sunrise Bank of Albuquerque had taken place, the FDIC would have experienced losses and such losses could have been assessed against the Corporation's other depository institution subsidiaries.  Such liability would likely have had a material adverse effect on the financial condition of any assessed subsidiary institution and on the Corporation as the common parent.  In February 2013, Capitol provided Sunrise Bank of Albuquerque with a $1.0 million capital injection to raise the Bank's capital level to 4.00% and thus satisfied the New Mexico FID mandate.  The Bank continues to provide banking services in a normal manner, including maintaining FDIC insurance for its depositors.  However, the Bank's capital level fell below 4.00% as of June 30, 2013 and, as such, the New Mexico FID may reissue a notice of intent to take possession.

On May 10, 2013, Sunrise Bank, a subsidiary bank of Capitol, was closed by the Georgia Department of Banking and Finance and the FDIC was appointed as receiver.  The FDIC entered into a purchase and assumption agreement with Synovus Bank, based in Columbus, Georgia, to assume all of the deposits of Sunrise Bank.  As the owner of substantially all of the capital stock of Sunrise Bank, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of Sunrise Bank or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

Also on May 10, 2013, Pisgah Community Bank ("PCB"), a subsidiary bank of Capitol, was closed by the North Carolina Office of the Commissioner of Banks and the FDIC was appointed as receiver.  The FDIC entered into a purchase and assumption agreement with Capital Bank, NA, based in Rockville, Maryland, to assume all of the deposits of PCB.  As the owner of substantially all of the capital stock of PCB, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of PCB or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

On May 14, 2013, Central Arizona Bank ("CAB"), a subsidiary bank of Capitol, was closed by the Arizona Department of Financial Institutions and the FDIC was appointed as receiver.  The FDIC entered into a purchase and assumption agreement with Western State Bank, based in Devils Lake, North Dakota, to assume all of the deposits of CAB.  As the owner of substantially all of the capital stock of CAB, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of CAB or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

On June 6, 2013, 1^st Commerce Bank, a subsidiary bank of Capitol, was closed by the FDIC and the FDIC appointed itself as receiver.  The FDIC entered into a purchase and assumption agreement with Plaza Bank, based in Irvine, California, to assume all of the deposits of 1^st Commerce Bank.  As the owner of substantially all of the capital stock of 1^st Commerce Bank, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of 1^st Commerce Bank or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

It is likely that the FDIC will experience losses in connection with these closures, and the FDIC could assess such losses against the Corporation's other depository institution subsidiaries.  Such liability would have a material adverse effect on the financial condition of any assessed subsidiary institution and on Capitol as the common parent.  Such liability could also have a material adverse effect on Capitol's ability to emerge from bankruptcy protection.

Regulatory capital matters are set forth in Note N.

Page 37 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note M – Regulatory and Operating Matters – Continued

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 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, following 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, continues to remain 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 forth new capital requirements for banking organizations.  On July 2, 2013, the Federal Reserve Board approved a final rule that establishes an integrated regulatory capital framework implementing the Basel III regulatory capital reforms in the United States.  Under the final rule, a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets will be applied to all supervised financial institutions.  The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.  These new capital requirements will be phased in over time with the phase-in period for smaller, less complex banking organizations beginning in January 2015 and the phase-in period for larger institutions beginning in January 2014.  Additionally, the U.S. implementation of Basel III maintains the ability to treat trust-preferred securities purchased before May 19, 2010 as Tier 1 capital for banking organizations with less than $15 billion in assets.  The ultimate impact of the U.S. implementation of the new capital and liquidity standards to Capitol and its affiliate banks as well as the impact upon its earnings or financial position is difficult to determine at this point due to the current bankruptcy proceedings.

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 to reduce federal income tax liability.  Capitol's ability to use these tax attributes would be substantially limited if an "ownership change" was to occur, as defined under Section 382 of the Internal Revenue Code and related Internal Revenue Service pronouncements.  In accordance with the provisions 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 subsequent to that date, which would only be activated if triggered under the Plan.

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Page 38 of 62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note N – Regulatory Capital Matters

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

	June 30, 2013			December 31, 2012(4)
Tier 1 capital to average adjusted total assets:
Minimum required amount(1)	≥$	51,385		≥$	66,520
Actual amount	$	(136,805	)	$	(144,341	)
Ratio		(10.65	)%		(8.68	)%
Tier 1 capital to risk-weighted assets:
Minimum required amount(2)	≥$	36,907		≥$	49,402
Actual amount	$	(136,805	)	$	(144,341	)
Ratio		(14.83	)%		(11.69	)%
Combined Tier 1 and Tier 2 capital to risk- weighted assets:
Minimum required amount(3)	≥$	73,814		≥$	98,805
Actual amount	$	(136,805	)	$	(144,341	)
Ratio		(14.83	)%		(11.69	)%

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

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

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

(4) As originally filed with regulatory agency.

Capitol's total risk-based capital ratios at June 30, 2013 and December 31, 2012 were materially and adversely impacted by the exclusion of approximately $163.1 million and $167.3 million, respectively, of 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 generally 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, 2013 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 less than "adequately-capitalized," 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 50 on this document.

Page 39 of 62

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 3 of this document.

Refer to Note C to the accompanying condensed consolidated financial statements for the effects of a change in accounting principle on previously reported 2012 amounts which have been updated in this discussion and analysis.

Financial Condition

Total assets approximated $1.2 billion at June 30, 2013 and $1.6 billion at December 31, 2012.  The balance sheets include total assets of Capitol and its consolidated subsidiaries (in $1,000s) as follows:

	June 30, 2013		December 31, 2012
			As Adjusted (Note C)
Arizona Region:
Sunrise Bank of Albuquerque	$	46,524	$	48,108
Sunrise Bank of Arizona		202,362		215,387
Arizona Region Total		248,886		263,495
Great Lakes Region:
Bank of Maumee		31,207		34,977
Capitol National Bank(1)				144,737
Indiana Community Bank		96,937		101,358
Michigan Commerce Bank		612,382		662,766
Great Lakes Region Total		740,526		943,838
Nevada Region:
Bank of Las Vegas		235,120		260,248
Parent company and other, net		8,168		7,241
Consolidated totals—continuing operations	$	1,232,700	$	1,474,822

(1) Effective March 1, 2013, Capitol National Bank ceased to be a consolidated subsidiary of Capitol due to a change in control; the bank was subsequently sold in April 2013 (see Note H).

Total assets decreased $388.6 million during the six months ended June 30, 2013, of which $146.5 million related to the bank subsidiaries closed during the period and $146.0 million was the result of the bank subsidiary deconsolidation during the period.

Portfolio loans, the single largest asset category (73.5% of total assets at June 30, 2013), decreased during the six months ended June 30, 2013 by approximately $203.9 million, compared to a decrease of about $144.8 million during the corresponding period of 2012.  Approximately $98.8 million of the $203.9 million decline in portfolio loans for the six months ended June 30, 2013 was related to the deconsolidation of a bank subsidiary.  Capitol's banks operate in an environment that appears to be stabilizing but still challenged with continued relative weakness in real estate values in their respective regions and markets.  The remaining 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.

Page 40 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming loans and ratio of the allowance as a percentage of portfolio loans (in $1,000s):

					Allowance for								Allowance as a Percentage
	Total Portfolio Loans				Loan Losses				Nonperforming Loans				of Total Portfolio Loans
	June 30, 2013		Dec 31, 2012		June 30, 2013		Dec 31, 2012		June 30, 2013		Dec 31, 2012		June 30, 2013			Dec 31, 2012
			As Adjusted (Note C)				As Adjusted (Note C)				As Adjusted (Note C)					As Adjusted (Note C)
Arizona Region:
Sunrise Bank of Albuquerque	$	35,348	$	36,954	$	1,661	$	1,611	$	3,424	$	3,740		4.70	%		4.36	%
Sunrise Bank of Arizona		156,176		178,343		4,694		5,108		13,362		17,160		3.01	%		2.86	%
Arizona Region Total		191,524		215,297		6,355		6,719		16,786		20,900		3.32	%		3.12	%
Great Lakes Region:
Bank of Maumee		21,140		23,596		1,009		1,025		419		483		4.77	%		4.34	%
Capitol National Bank(1)				100,373				2,126				6,842					2.12	%
Indiana Community Bank		75,309		80,907		2,598		2,855		4,198		5,309		3.45	%		3.53	%
Michigan Commerce Bank		448,365		499,178		22,093		37,449		50,025		58,107		4.93	%		7.50	%
Great Lakes Region Total		544,814		704,054		25,700		43,455		54,642		70,741		4.72	%		6.17	%
Nevada Region:
Bank of Las Vegas		169,133		190,060		5,148		6,441		24,010		26,439		3.04	%		3.39	%
Parent company and other, net		257		257		1		1		257		257		0.39	%		0.39	%
Consolidated totals relating to continuing operations	$	905,728	$	1,109,668	$	37,204	$	56,616	$	95,695	$	118,337		4.11	%		5.10	%

(1) Effective March 1, 2013, Capitol National Bank ceased to be a consolidated subsidiary of Capitol due to a change in control; the bank was subsequently sold in April 2013 (see Note H).

Geographic diversification of Capitol's balance sheet continues to play an important role in risk management and the road to improved financial performance.  Prior to 1996, all of Capitol's banking operations were located in Michigan.  At June 30, 2013, Capitol's primary geographic banking regions include Phoenix, Arizona, Las Vegas, Nevada and the Great Lakes Region.  As of June 30, 2013, 60.2% of the consolidated loan portfolio relates to the Great Lakes Region (63.4% at December 31, 2012) and 39.8% relates to banks located in other regions of the country (36.6% at December 31, 2012).  While concentration levels remain somewhat static compared to the end of 2012, the geographic mix of portfolio loans has changed slightly over the past few years as Capitol has divested banks and regulators have closed banks.  Management believes that these banking regions offer the Corporation the best opportunity to increase market presence, as well as improve performance and resource allocation.

The consolidated allowance for loan losses at June 30, 2013 approximated $37.2 million or 4.11% of total portfolio loans, a decrease from the 5.10% ratio at the beginning of the year, as a result of a $12.2 million provision reversal at Michigan Commerce Bank, along with lower charge-offs due to improvement in economic conditions and positive changes in asset quality, along with loan shrinkage and the deconsolidation of a bank subsidiary during the period.  The consolidated allowance for loan losses at June 30, 2013 decreased $19.4 million from the beginning of the year, 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 and provision reversal.  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.

Page 41 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

In 2011, 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 effective December 31, 2011.  Since that time, migration analyses have been used, at least in part, to conclude on the appropriate level for the allowance for loan losses at its three largest banks.  The calculations are tailored to each individual bank in order to account for loss histories and market conditions within the markets served by each.  The time periods for the loan portfolio look-back period were selected in such a manner as to capture losses incurred based on current economic conditions.

An independent professional accounting and consulting firm validated the migration technique used by CBC's largest banks for two accounting periods (December 31, 2011 and September 30, 2012).  Based on management's analysis and judgment, and supported by the external firm's validation of the migration technique and the internal validation of the historical loss approach used at the smaller banks, the Corporation believes that the methodologies used in determining the allowance for loan losses meet both regulatory guidance and requirements under United States generally accepted accounting principles, and represent management's best estimate of probable incurred losses in the consolidated loan portfolio as of June 30, 2013.

At June 30, 2013, the Corporation's largest banking affiliate, Michigan Commerce Bank ("MCB"), tested the adequacy of its allowance for loan losses using multiple techniques which included a methodology developed by the regulatory agencies and the aforementioned migration analysis.  Following the methodology developed by the regulators, MCB recorded an unallocated reserve of $20.9 million and $19.2 million as of December 31, 2012 and March 31, 2013, respectively.  On December 21, 2012, MCB formally requested regulatory approval to decrease this portion of its allowance for loan losses by recording a negative provision expense.  MCB received regulatory approval to record a $12.2 million negative provision for loan losses effective June 30, 2013, which had a material impact on MCB's results of operations.  This reversal of excess reserves improved MCB's capital ratio calculation to "adequately-capitalized."

Following the aforementioned reversal of provision, the techniques applied by MCB produced an allowance for loan losses level that resulted in excess reserves ranging from $8.8 million to $16.4 million at June 30, 2013, with the methodology developed by the regulators resulting in a $9.4 million excess reserve.  Since it is currently operating under a Consent Order, written regulatory approval is required for MCB to release any portion of its $9.4 million in excess reserves and record any additional negative provision for loan losses; as such, the Corporation has identified the $9.4 million portion of MCB's allowance for loan losses at June 30, 2013 as unallocated.

In part due to a continued elevated level of nonperforming loans, higher levels of allowances for loan losses have been established for banks located in the Great Lakes Region, approximating 4.72% of portfolio loans on a combined basis as of June 30, 2013.

Nonperforming loans approximated $95.7 million at June 30, 2013 and $118.3 million at December 31, 2012 or 10.6% and 10.7% of portfolio loans, respectively.  Of the nonperforming loans at June 30, 2013, $54.9 million or 57.4% (including an insignificant amount carried at the parent level) were originated by banks located within the Great Lakes Region, primarily in Michigan, consistent with prior periods.  The banks within the Great Lakes Region also maintained $25.7 million of the $37.2 million consolidated allowance for loan losses, or 69.1%, as of June 30, 2013, with the majority being maintained at MCB.

Page 42 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Nonperforming loans decreased $22.6 million or 19.1% during the six months ended June 30, 2013, compared to a decrease of $54.8 million or 27.7% in the corresponding period of 2012.  Nonperforming loans have decreased for twelve consecutive quarters.  Of the $22.6 million decline in nonperforming loans for the interim 2013 period, $6.8 million related to the deconsolidation of a bank subsidiary within the Great Lakes Region, $9.3 million related to declines at the remaining Great Lakes Region banks and a $4.1 million decline was experienced within the Arizona Region.  Total nonperforming assets decreased $41.5 million for the six months ended June 30, 2013, compared to a decrease of $52.7 million in the corresponding period of 2012.  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.

At June 30, 2013, the "coverage ratio" of the allowance for loan losses to nonperforming loans (i.e., the allowance as a percentage of nonperforming loans) was 38.9%, a decrease from the 47.8% level at the beginning of the year, due mainly to the aforementioned reversal of provision at MCB.  Management views the current level of the coverage ratio as being acceptable, inasmuch as many nonperforming loans already reflect partial write-downs based on the estimated fair value of the underlying real estate for collateral-dependent nonperforming loans.  Comparison of the coverage ratio of the allowance to nonperforming loans is complicated by the accounting rules for loss recognition of impaired loans.  For example, when an impaired, collateral-dependent loan is evaluated based on its fair value as of a particular balance-sheet date, any estimated shortfall is typically recognized as a charge to the allowance for loan losses.  As a result, many nonperforming loans are carried at a written-down level and no allowance component may be necessary at the balance-sheet date.

Of the nonperforming loans at June 30, 2013, about 93% 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, 2013 were in various stages of resolution which management believes are adequately collateralized or otherwise appropriately provided for in its determination of the adequacy of the allowance for loan losses.

Updated appraisals are generally obtained when it has been determined that a loan has become collateral-dependent.  Adjustments to the loan's carrying value (or requirements for an allocation of the allowance for loan losses) are made, when appropriate, after the review of an appraisal or evaluation.  The timing of when a collateral-dependent loan should be classified as a nonperforming loan is contingent upon several factors, including the performance of the loan, the borrower's 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 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 for the loan if it is deemed collateral-dependent.  Loans which are not deemed collateral-dependent 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 or evaluation and after any further fair value analysis is completed on those loans deemed to be collateral-dependent, the loans will be further evaluated for appropriate write-down.  Negative differences between appraised value, less the estimated costs to sell (including delinquent real estate taxes), and the related carrying value of the loans are generally charged to the allowance for loan losses, as partial write-downs/charge-offs, on a timely basis.  Occasionally, additional potential loss amounts may be included if circumstances exist which may further adversely impact fair value estimates.  Internally-prepared evaluations may be used to estimate the current valuation changes driven by current economic conditions.  Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

Page 43 of 62

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 attention.  This loan review process is a continuous activity which periodically updates internal loan ratings.  When originated, 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, as well as 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 review's and/or lending staff's risk assessment, increased monitoring is deemed appropriate (i.e., "watch" and "substandard, accrual" loans).  In addition, some loans with specific performance issues or other risk factors, such as nonaccrual loans, are assigned a more adverse rating, requiring closer management attention and development of specific remedial action plans.

At June 30, 2013, problem loans (i.e., substandard, nonaccrual loans) and potential problem loans approximated $272.4 million or about 30.1% of total consolidated portfolio loans, compared to approximately $321.7 million or about 29.0% at December 31, 2012, whereas problem and potential problem loans, excluding nonperforming loans, approximated $176.7 million, or 19.5%, of total consolidated loans at June 30, 2013.  Such loans are an important component of management's ongoing and proactive loan review activities, which are designed to early-identify loans which warrant close monitoring at both the bank and corporate credit administration levels.  It is important to note that these potential problem loans do not necessarily have significant loss exposure, but rather are identified by management in this manner to aid in loan administration and risk management.  These loans are considered in management's evaluation of the adequacy of the allowance for loan losses.

Included in total impaired loans as of June 30, 2013 and December 31, 2012 is $146.1 million and $168.2 million, respectively, of loans modified and reported as troubled debt restructurings.  These loans decreased $22.1 million during the six months ended June 30, 2013, which was mostly related to the bank subsidiary deconsolidation and the removal from reporting of loans identified as troubled debt restructurings that are in compliance with their modified terms.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

The following table presents the activity within troubled debt restructurings for the six months ended June 30, 2013 (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	$	112,847		$	32,213		$	11,112		$	11,964		$	94		$	168,230
Less troubled debt restructurings of deconsolidated subsidiary		(5,978	)		(4,504	)		(470	)		(1,220	)		(9	)		(12,181	)
Additions		8,795			2,855			105			1,667						13,422
Payments received, including loans paid in full		(6,475	)		(4,710	)		(682	)		(3,021	)		(3	)		(14,891	)
Charge-offs and other		(796	)		(1,022	)		(617	)		(107	)		(1	)		(2,543	)
Troubled debt restructurings removed from reporting(1)		(4,747	)		(368	)		(628	)		(200	)					(5,943	)
Ending balance	$	103,646		$	24,464		$	8,820		$	9,083		$	81		$	146,094

(1) Troubled debt restructurings which have an interest rate consistent with market rates at time of restructuring and are in compliance with their modified terms need not continue to be reported as troubled debt restructurings in calendar years after the restructuring took place.

Regarding other real estate owned and collateral-dependent loans, foreclosure laws in Michigan generally favor borrowers rather than lenders and, accordingly, foreclosure and redemption periods (i.e., the number of months it takes for a financial institution to obtain clear title to freely market the real estate) take much longer in that state 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 $18.8 million during the six months ended June 30, 2013, primarily as a result of sales of properties acquired in foreclosure.

The following table presents the activity within other real estate owned for the six months ended June 30, 2013 (in $1,000s):

Other real estate owned at January 1	$	69,050
Properties acquired in restructure of loans or in lieu of foreclosure		8,409
Properties sold		(22,695	)
Payments received from tenants, credited to carrying amount		69
Write-down of other real estate owned		(1,817	)
Less other real estate owned of deconsolidated subsidiary – Note H		(2,718	)
Other real estate owned at June 30	$	50,298

Page 45 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations

Summary

Net income attributable to Capitol for the three months ended June 30, 2013 was approximately $9.3 million compared to a net loss of $9.6 million in the corresponding period of 2012.  The net income per share attributable to Capitol was $0.23 for the three months ended June 30, 2013 compared to a net loss per share of $0.23 in the corresponding period of 2012.  Net income attributable to Capitol for the six months ended June 30, 2013 approximated $6.8 million compared to a net loss of $16.8 million in the corresponding period of 2012.  Net income per common share attributable to Capitol was $0.17 for the six months ended June 30, 2013 compared to a net loss per share of $0.41 in the corresponding period of 2012.  Net income relating to discontinued operations was not material to the periods presented.

The interim 2013 net results of operation showed significant improvement compared to the corresponding 2012 interim period.  There was a total reduction in the provision for loan losses of $12.9 million to a negative $12.0 million for the six months ended June 30, 2013, compared to a provision of $891,000 for the corresponding period of 2012 (excluding discontinued operations), related mainly to the previously mentioned $12.2 million provision reversal at Michigan Commerce Bank.  Operating expenses also decreased significantly during the period by $11.6 million, or 25.5%, as compared to the corresponding 2012 period.

Analytical Review

Operating results in all of the Corporation's banking regions improved dramatically for the six months ended June 30, 2013 compared to the same period in 2012.  While total revenues from continuing operations declined by $9.0 million (20.6%) for the six months ended June 30, 2013 compared to the same period in 2012, due mainly to a significant decline in interest income, net operating income from continuing operations increased to $7.8 million from a net loss of $14.9 million, or 152.4%, for the same comparable period.  Excluding the one-time $12.2 million provision reversal, net loss from operations for the six months ended June 30, 2013 would have been $4.4 million, or a $10.5 million (70.5%) improvement over the comparable 2012 period.  In the Great Lakes Region, all but one of the region's four banks posted a profit for the six months ended June 30, 2013.  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, 2013 due to the $12.2 million provision reversal at Michigan Commerce Bank, 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, 2013 totaled $23.9 million, a 4.5% decrease compared to $25.0 million in 2012.  The net interest margin was 3.95% for the three months ended June 30, 2013, a 21 basis-point increase compared to 3.74% for the three months ended March 31, 2013 and a 4 basis-point decrease compared to 3.99% for the three months ended December 31, 2012.  Net interest margin increased 72 basis-points to 3.87% for the six months ended June 30, 2013, as compared to 3.15% for the six months ended June 30, 2012.  The net interest margin for the six months ended June 30, 2013 and three months ended December 31, 2012 were positively impacted, as compared to the six months ended June 30, 2012, by the discontinued accrual of interest on the Corporation's trust-preferred securities, as discussed in Note K to the accompanying condensed consolidated financial statements.

Noninterest income for the six months ended June 30, 2013 approximated $6.7 million, a 1.6% increase from the $6.6 million for the same period in 2012.

Page 46 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Noninterest expense totaled $34.1 million for the six-month 2013 period compared to $45.7 million for the comparable period of 2012.  The decrease resulted from significantly lower costs associated with foreclosed properties and other real estate owned, which decreased $6.2 million (84.9%) to $1.1 million in the six-month 2013 period ($7.3 million in the corresponding 2012 period), due to stabilizing valuations and reduced holding costs of other real estate owned.  The cost of FDIC insurance and other regulatory fees also decreased to $2.2 million in the six-month 2013 period compared to $3.0 million in the same period of 2012.

The largest element of noninterest expense is salaries and employee benefits, which approximated $16.9 million for the six months ended June 30, 2013, a decrease of $3.0 million (15.2%) from $19.9 million in the corresponding period of 2012.  The decrease is largely a result of Capitol's ongoing efforts to streamline operations at its banks and corporate offices.

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
	2013		2012 (1)		2013		2012 (1)
Insurance expense	$	371	$	331	$	831	$	703
Legal fees		285		1,518		621		2,237
Bank services (ATMs, telephone banking and Internet banking)		207		219		409		443
Loan and collection expense		179		315		365		588
Communications		144		177		291		347
Paper, printing and supplies		133		150		276		308
Other		1,497		2,190		4,866		3,930
Total	$	2,816	$	4,900	$	7,659	$	8,556

(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, were significantly higher for the three and six months ended June 30, 2012 as compared to 2013, due largely to costs directly associated with the Corporation's research, planning, implementation and on-going execution of its original Exchange Offer and Standby Plan for financial restructuring incurred prior to the bankruptcy filing date.  Legal fees related to the bankruptcy incurred after the August 9, 2012 bankruptcy filing date are classified in reorganization items.

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Page 47 of 62

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)
	2013			2012			2013			2012(4)			2013			2012			2013			2012
Arizona Region:
Sunrise Bank of Albuquerque	$	1,040		$	1,318		$	(400	)	$	(581	)
Sunrise Bank of Arizona		5,351			6,760			93			(2,464	)		3.99	%					0.09	%
Arizona Region Total		6,391			8,078			(307	)		(3,045	)
Great Lakes Region:
Bank of Maumee		748			801			(318	)		(271	)
Capitol National Bank(3)		1,042			3,772			56			69			3.06	%		1.26	%		0.24	%		0.09	%
Indiana Community Bank		2,419			2,702			97			130			2.28	%		3.22	%		0.19	%		0.23	%
Michigan Commerce Bank		18,207			22,701			12,475			1,087			118.87	%					4.07	%
Great Lakes Region Total		22,416			29,976			12,310			1,015
Nevada Region:
Bank of Las Vegas		5,933			6,099			571			(2,221	)		21.95	%					0.47	%
Parent company and other, net		(44	)		(431	)		(4,324	)		(10,657	)
Consolidated totals for continuing operations	$	34,696		$	43,722		$	8,250		$	(14,908	)		--			--			--			--

(1)	Excludes net losses attributable to noncontrolling interests.
(2)	Annualized for periods presented.
(3)	Effective March 1, 2013, Capitol National Bank ceased to be a consolidated subsidiary of Capitol due to a change in control; the bank was subsequently sold in April 2013 (see Note H).
(4)	As adjusted for the retrospective effect of a change in accounting principle (see Note C).

Liquidity and Capital Resources

The principal funding source for banks is deposits.  Total deposits (excluding discontinued operations) decreased $242.8 million during the six months ended June 30, 2013 compared to a $117.7 million decrease in the corresponding period of 2012.  Brokered deposits approximated $495,000 as of June 30, 2013, or less than 1% of total deposits, 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.  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, 2013, a slight decrease from 21.5% at December 31, 2012.  Levels of noninterest-bearing deposits can fluctuate based on customers' transaction activity.  Further, some of this small decrease can be attributed to the expiration of the FDIC's transaction account guarantee ("TAG") program at December 31, 2012, which previously provided for unlimited insurance on noninterest bearing demand deposit accounts.

Cash and cash equivalents amounted to $259.4 million, or 21.0%, of total assets at June 30, 2013, compared to $289.7 million, or 17.9%, of total assets at December 31, 2012, as reductions in portfolio loans (principally from repayments) and proceeds from sales and maturities of investment securities 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

Page 48 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

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, 2013 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, 2013, Capitol's banks had approximately $15.2 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 $1.4 million at June 30, 2013 and additional borrowing capacity approximated $90.4 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 $3.5 million at June 30, 2013.

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 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 from that agency.  Accrued interest payable on such securities approximated $33.3 million at June 30, 2013 and December 31, 2012.  Holders of the trust-preferred securities recognize current taxable income relating to the deferred interest payments.  The accrual of interest was discontinued as of the August 9, 2012 bankruptcy filing date.

Capitol Bancorp Limited stockholders' equity, as a percentage of total assets, approximated (9.8)% at June 30, 2013 and (7.9)% at December 31, 2012.  As of June 30, 2013, total capital funds (i.e., the sum of Capitol Bancorp Limited stockholders' equity, noncontrolling interests in consolidated subsidiaries and subordinated debentures) approximated $14.6 million.  Capitol's equity deficit decreased in the interim 2013 period as a result of the $6.8 million net income for the interim 2013 period.

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 49 of 62

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, 2013:

	Tier 1 Leverage						Tier 1 Risk-Based						Total Risk-Based
	Ratio(2)						Capital Ratio(2)						Capital Ratio(2)						Regulatory Classification(1)(2)
	June 30, 2013			Dec 31, 2012			June 30, 2013			Dec 31, 2012			June 30, 2013			Dec 31, 2012			June 30, 2013	Dec 31, 2012
Arizona Region:
Sunrise Bank of Albuquerque		3.59	%		2.01	%		4.47	%		2.71	%		5.76	%		4.00	%	significantly- undercapitalized	significantly- undercapitalized
Sunrise Bank of Arizona		2.36	%		2.05	%		3.04	%		2.61	%		4.31	%		3.88	%	significantly- undercapitalized	significantly- undercapitalized
Great Lakes Region:
Bank of Maumee		3.45	%		4.00	%		5.35	%		5.92	%		6.65	%		7.21	%	undercapitalized	undercapitalized
Indiana Community Bank		8.42	%		8.33	%		11.95	%		11.23	%		13.23	%		12.51	%	adequately-capitalized(3)	adequately-capitalized(3)
Michigan Commerce Bank		5.74	%		2.61	%		7.70	%		3.52	%		8.99	%		4.84	%	adequately-capitalized	significantly- undercapitalized
Nevada Region:
Bank of Las Vegas		2.50	%		2.01	%		3.29	%		2.60	%		4.56	%		3.87	%	significantly- undercapitalized	significantly- undercapitalized
Consolidated totals		(10.65	)%		(8.68	)%		(14.83	)%		(11.69	)%		(14.83	)%		(11.69	)%	less than adequately- capitalized(4)	less than adequately- capitalized(4)

(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. Critically-Undercapitalized – Institutions with a Tier 1 leverage ratio below 2%.
(2)	Ratios and regulatory classifications are based on the banks' regulatory reports filed at original due date on or before July 30, 2013.
(3)	Institution is subject to a formal enforcement action 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.

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, 2013.

Capitol's total risk-based capital ratio at June 30, 2013 was adversely impacted by the exclusion of approximately $163.1 million of Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital.  The Tier 1 capital deficit at June 30, 2013 resulted primarily from operating losses.

In addition to Capitol's consolidated regulatory capital classification at June 30, 2013, several of its bank subsidiaries had capital levels resulting in classification as "significantly-undercapitalized" or "undercapitalized" at that date.  Regarding banks classified as less than "adequately-capitalized," and otherwise noncompliant with formal regulatory agreements, management is taking appropriate action to improve such capital classifications and related compliance in the future.

Page 50 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

Proceeds from the sale of banks through June 30, 2013 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, subject to FDIC approval and waivers of any FDIC cross-guaranty liability claims as a result of the recent closures at four subsidiary banks.  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 bank subsidiaries and other initiatives.

Going-Concern Considerations

As of June 30, 2013, 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:

· The Corporation has filed for protection under Chapter 11 and has filed a proposed liquidation plan subject to approval;

· An equity deficiency approximating $136.7 million;

· The seizure of four subsidiary banks and the potential related cross-guaranty liability;

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

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

· Certain banking subsidiaries which are generally subject to formal enforcement actions and informal 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 L to the accompanying condensed consolidated financial statements) or in the planning stages.  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 enforcement actions, which place a number of restrictions on them and impose other requirements limiting activities, requiring preservation of capital and improvement in regulatory capital measures, reduction of nonperforming assets and other things 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

· Losses from continuing operations, resulting from elevated provisions for loan losses and costs associated with foreclosed properties and other real estate owned in prior periods.

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

Page 51 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

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.  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:

· Completion of pending divestitures;

· Further reductions in nonperforming assets;

· Stabilization of provisions for loan losses and impairment losses; and

· Further reductions in operating expenses through potential divestitures or mergers of bank subsidiaries and continued streamlining of corporate operations.

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.

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.

Page 52 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Trends Affecting Operations – Continued

In late 2008, the Federal Reserve took unprecedented action to reduce the overnight interbank lending rate to near zero, which caused banks across the country to reduce short-term rate indices used to price retail and commercial loans and deposits.  Further, in December 2011, the Federal Reserve indicated plans to hold short-term market interest rates near zero through 2013.  As the prime rate fell, asset sensitive institutions generally experienced margin compression as floating rate loans repriced more quickly and in greater volume than funding liabilities.  Capitol's subsidiary banks mitigated the effect through increased use of interest rate floors on new and renewed loans and swift reduction of deposit rates.  As many of Capitol's subsidiary banks reduced loan volume, they were able to maintain liquidity levels while significantly reducing non-core funding dependency and lowering retail deposit rates.

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.  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.

Pending Divestiture of Banks

Capitol has entered into a definitive agreement to sell its controlling interest held by a bank-development subsidiary in Bank of Maumee.  Total proceeds from this pending sale are expected to approximate $640,000, resulting in a projected gain of $77,000 (less than $0.01 per common share) based on Capitol's investment in the bank as of June 30, 2013.  The sale has been approved by the Bankruptcy Court, but remains subject to regulatory approval and other 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 cash flow projections; (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.

Page 53 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Regulatory Matters – Continued

Many of Capitol's bank subsidiaries have entered into formal enforcement actions (as well as informal agreements) with their applicable regulatory agencies.  Those enforcement actions provide for certain restrictions and other guidelines and/or limitations to be followed by the banks.  The banks generally subject to such enforcement actions are noted as such in the regulatory capital detail appearing on page 50 of this document.  In all instances where Capitol or its banks are subject to formal enforcement actions or informal agreements, corporate and/or bank management, as the case may be, and their boards of directors are fully committed and working proactively towards achieving compliance with those enforcement actions and improving their entity's financial condition.

On September 20, 2012, the State of New Mexico Regulation and Licensing Department, Financial Institutions Division (the "New Mexico FID") issued a written notice of its intention to take possession and control of Sunrise Bank of Albuquerque and its assets for the purpose of reorganization or liquidation through receivership if certain findings of the New Mexico FID were not corrected by December 20, 2012.  In the event that such a reorganization or liquidation of Sunrise Bank of Albuquerque had taken place, the FDIC would have experienced losses and such losses could have been assessed against the Corporation's other depository institution subsidiaries.  Such liability would likely have had a material adverse effect on the financial condition of any assessed subsidiary institution and on the Corporation as the common parent.  In February 2013, Capitol provided Sunrise Bank of Albuquerque with a $1 million capital injection to raise the Bank's capital level to 4.00% and thus satisfied the New Mexico FID mandate.  The Bank continues to provide banking services in a normal manner, including maintaining FDIC insurance for its depositors.  However, the Bank's capital level fell below 4.00% as of June 30, 2013 and, as such, the New Mexico FID may reissue a notice of intent to take possession.

On May 10, 2013, Sunrise Bank, a subsidiary bank of Capitol, was closed by the Georgia Department of Banking and Finance and the FDIC was appointed as receiver.  The FDIC entered into a purchase and assumption agreement with Synovus Bank, based in Columbus, Georgia, to assume all of the deposits of Sunrise Bank.  As the owner of substantially all of the capital stock of Sunrise Bank, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of Sunrise Bank or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

Also on May 10, 2013, Pisgah Community Bank ("PCB"), a subsidiary bank of Capitol, was closed by the North Carolina Office of the Commissioner of Banks and the FDIC was appointed as receiver.  The FDIC entered into a purchase and assumption agreement with Capital Bank, NA, based in Rockville, Maryland, to assume all of the deposits of PCB.  As the owner of substantially all of the capital stock of PCB, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of PCB or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

On May 14, 2013, Central Arizona Bank ("CAB"), a subsidiary bank of Capitol, was closed by the Arizona Department of Financial Institutions and the FDIC was appointed as receiver.  The FDIC entered into a purchase and assumption agreement with Western State Bank, based in Devils Lake, North Dakota, to assume all of the deposits of CAB.  As the owner of substantially all of the capital stock of CAB, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of CAB or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

On June 6, 2013, 1^st Commerce Bank, a subsidiary bank of Capitol, was closed by the FDIC and the FDIC appointed itself as receiver.  The FDIC entered into a purchase and assumption agreement with Plaza Bank, based in Irvine, California, to assume all of the deposits of 1^st Commerce Bank.  As the owner of substantially all of the capital stock of 1^st Commerce Bank, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of 1^st Commerce Bank or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

Page 54 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Regulatory Matters – Continued

It is likely that the FDIC will experience losses in connection with these closures, and the FDIC could assess such losses against the Corporation's other depository institution subsidiaries.  Such liability would have a material adverse effect on the financial condition of any assessed subsidiary institution and on Capitol as the common parent.  Such liability could also have a material adverse effect on Capitol's ability to emerge from bankruptcy protection.

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

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 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 the removal of trust-preferred securities as a permitted component of a holding company's Tier 1 capital, following a three-year phase-in period beginning January 1, 2013.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which 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, continues to remain 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 forth new capital requirements for banking organizations.  On July 2, 2013, the Federal Reserve Board approved a final rule that establishes an integrated regulatory capital framework implementing the Basel III regulatory capital reforms in the United States.  Under the final rule, a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets will be applied to all supervised financial institutions.  The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.  These new capital requirements will be phased in over time with the phase-in period for smaller, less complex banking organizations beginning in January 2015 and the phase-in period for larger institutions beginning in January 2014.  Additionally, the U.S. implementation of Basel III maintains the ability to treat trust-preferred securities purchased before May 19, 2010 as Tier 1 capital for banking organizations with less than $15 billion in assets.  The ultimate impact of the U.S. implementation of the new capital and liquidity standards to Capitol and its affiliate banks as well as the impact upon its earnings or financial position is difficult to determine at this point due to the current bankruptcy proceedings.

Tax Matters

As of December 31, 2012, Capitol had recorded a $6.4 million tax liability pursuant to an Internal Revenue Service examination of the Corporation's 2009 income tax return which denied the deductibility of certain expenses in 2009, including expenses associated with other real estate owned.  These expenses will be deductible by Capitol over a period of three years, beginning with the 2010 income tax return.  Potential interest charges related to the final assessed liability have been estimated at $422,000 which Capitol recorded in other noninterest expense in the fourth quarter of 2012.  On March 1, 2013, the Office of the Chief Counsel – Internal Revenue Service concluded that, in large part, the banking industry's treatment of deducting other real estate owned expenses for tax purposes was

Page 55 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Tax Matters – Continued

proper.  As a result of this ruling, Capitol filed an amended 2009 return in June 2013 and reduced its tax liability by $1.5 million, to a net liability of $4.9 million, for expense deductions taken in 2009 related to other real estate owned activities.

Capitol received a final notice of taxes due from the State of Michigan related to the Michigan Business Tax.  The notice, dated September 25, 2012, pertained to the year ended December 31, 2009 and indicated an amount due of $771,000, including penalties and interest.  Included in this notice, and in response to the Corporation's filing for reorganization, the State alleged that Capitol had not properly computed and filed its 2009 Michigan Business Tax return.  Capitol received an earlier notice from the State of Michigan, dated September 21, 2012, claiming additional tax was due for the year ended December 31, 2010 in the amount of $202,000, including penalties and interest.  In response to these notices, Capitol filed a Petition with the Michigan Tax Tribunal on October 30, 2012, formally appealing the 2009 findings and stating that all required returns were properly filed and all associated Michigan Business Tax due was paid.  In addition, Capitol also requested an informal conference with the State in regard to the 2009 and 2010 returns.  Prior to any informal conference with the State or a hearing with the Michigan Tax Tribunal, the State Attorney General's Office and the State agreed to settle the amount due for the 2009 and 2010 returns for approximately $113,000 and $39,000, respectively, including interest.  Penalties were waived.  Capitol has recorded a liability for these amounts as of June 30, 2013.

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 to reduce federal income tax liability.  Capitol's ability to use these tax attributes would be substantially limited if an "ownership change" was to occur, as defined under Section 382 of the Internal Revenue Code and related IRS pronouncements.  In accordance with the provisions 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 subsequent to 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.

Other Corporate Matters

Bankruptcy Proceedings

On June 22, 2012, 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").  The Standby Plan contemplated 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.

Voting on the Standby Plan expired on July 27, 2012.  The results were overwhelmingly in support of the Standby Plan.  Accordingly, on August 9, 2012, Capitol and FCC (collectively, the "Debtors") each proceeded with filing a voluntary bankruptcy petition with the intent of effectuating a restructure of their debt and a streamlining of their capital structure pursuant to the Standby Plan.  The Debtors' banking subsidiaries were not part of the bankruptcy filing.  Capitol was also granted a motion by the Bankruptcy Court requiring that trading in the Corporation's senior notes, trust-preferred securities, preferred stock and common stock be restricted to preserve certain of its deferred tax assets.  The bankruptcy proceedings are still in process.

Page 56 of 62

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Other Corporate Matters – Continued

On May 16, 2013, Capitol and FCC filed a proposed Joint Liquidating Plan of Capitol Bancorp Ltd. and Financial Commerce Corporation (the "Joint Liquidating Plan") and related Disclosure Statement with the Bankruptcy Court for the resolution of outstanding claims against and equity security interests in the Debtors.  The Joint Liquidating Plan superseded the Standby Plan filed by Capitol and FCC with the Bankruptcy Court in August 2012, which was withdrawn.  On May 22, 2013, Capitol and FCC filed an Amended Disclosure Statement (the "Amended Disclosure Statement"), which superseded the Disclosure Statement filed on May 16, 2013.  Capitol and FCC continue to remain in possession of their assets and properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

On July 17, 2013, Capitol and FCC filed an Amended Joint Liquidating Plan of Capitol Bancorp Ltd. and Financial Commerce Corporation (the "Amended Joint Liquidating Plan"), which superseded the prior Joint Liquidating Plan.  Information contained in the Amended Joint Liquidating Plan and Amended Disclosure Statement is subject to change, whether as a result of amendments to the Amended Joint Liquidating Plan or the Amended Disclosure Statement, third-party actions, or otherwise.

Pursuant to an Order entered on June 27, 2013, the Amended Disclosure Statement was granted preliminary approval by the Bankruptcy Court.  The Amended Joint Liquidating Plan is subject to acceptance by the creditors of Capitol and FCC (as, and to the extent, required under the Bankruptcy Code) and confirmation by the Bankruptcy Court.  There can be no assurances that the requisite acceptances of the Amended Joint Liquidating Plan will be obtained from the creditors of Capitol and FCC, that the Bankruptcy Court will grant final approval of the Amended Disclosure Statement, or that the Bankruptcy Court will confirm the Amended Joint Liquidating Plan.

Pursuant to prior Orders of the Bankruptcy Court, Capitol and FCC are permitted to solicit acceptances of the Amended Joint Liquidating Plan and the Debtors have commenced the solicitation process.  The deadline for creditors to timely return ballots on the Amended Joint Liquidating Plan, as well as to file any objections thereto, is September 24, 2013, at 4:30 p.m. Eastern Daylight Time.  This is also the deadline for the filing of any motions with the Bankruptcy Court to estimate claims for purposes of voting on the Amended Joint Liquidating Plan.  The combined hearing to be conducted by the Bankruptcy Court on (i) final approval of the Amended Disclosure Statement, and (ii) confirmation of the Amended Joint Liquidating Plan is scheduled for October 9, 2013, at 10:00 a.m. Eastern Daylight Time.  The foregoing summary is not intended to be, nor should it be construed as, a solicitation for a vote on the Amended Joint Liquidating Plan.

Impact of Accounting Standards Updates

Certain accounting standards updates were issued or became effective in 2013.  They are discussed in Note D of the accompanying condensed consolidated financial statements.

Critical Accounting Policies

Capitol's critical accounting policies are described on pages F-47 – F-49 of the financial section of its 2012 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.

Page 57 of 62

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, 2012.  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 Accounting Officer ("PAO"). 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, 2012 ("Form 10-K") and above, the CEO and PAO have concluded that as of June 30, 2013, Capitol's Disclosure Controls were effective at a reasonable assurance level.

Changes in Internal Controls Over Financial Reporting

During the fiscal quarter ended June 30, 2013, 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 PAO, 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.

Page 58 of 62

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. There were no material changes from the Legal Proceedings set forth in Part I, Item 1, "Legal Proceedings," of Capitol's Form 10-Q for the three months ended March 31, 2013.
Item 1A.	Risk Factors. Other than as set forth below, during the six months ended June 30, 2013, there were no material changes from the risk factors set forth in Part I, Item 1A, "Risk Factors," of Capitol's Form 10-K for the year ended December 31, 2012.  Refer to that section of Capitol's Form 10-K for disclosures regarding the risks and uncertainties related to Capitol's business. There is a risk of potential cross-guaranty liability relating to Capitol's banking subsidiaries resulting from recent bank closures. As FDIC-insured depository institutions, Capitol's banking subsidiaries may be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with the institution in "default" or "in danger of default."  This liability is commonly referred to as "cross-guaranty" liability.  A "default" is generally defined as the appointment of a conservator or receiver and "in danger of default" is defined as certain conditions indicating that a default is likely to occur absent regulatory assistance.  An FDIC cross-guaranty claim against a depository institution is generally senior in right of payment to claims of the holding company and its affiliates. On May 10, 2013, each of Sunrise Bank and Pisgah Community Bank were closed by their applicable state regulator and placed into receivership with the FDIC.  On May 14, 2013, Central Arizona Bank was closed by its state regulator and placed into receivership with the FDIC.  On June 6, 2013, 1st Commerce Bank was closed by the FDIC and placed into receivership with the FDIC.  It is likely that the FDIC will experience losses in connection with these closures, and the FDIC could assess such losses against the Corporation's other depository institution subsidiaries.  Such liability would have a material adverse effect on the financial condition of any assessed subsidiary institution and on Capitol as the common parent.  Such liability could also have a material adverse effect on Capitol's ability to emerge from bankruptcy protection.
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.

Page 59 of 62

PART II.  OTHER INFORMATION – Continued

Item 4.	Mine Safety Disclosures. Not applicable.
Item 5.	Other Information. On June 13, 2013, Joseph D. Reid took a voluntary reduction of thirty-three percent in his base salary compensation.  This follows prior voluntary reductions of ten percent on January 1, 2009, twenty percent on October 1, 2009, twenty-five percent effective March 31, 2011 and thirty-three percent effective April 2, 2012.
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 Accounting Officer, Marie D. Walker, 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 Accounting Officer, Marie D. Walker, 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 Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Changes in Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) 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 14, 2013	/s/ Joseph D. Reid Joseph D. Reid Chairman and CEO (principal executive officer)
Date:  August 14, 2013	/s/ Marie D. Walker                                                      Marie D. Walker Director of Corporate Accounting (principal accounting 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 Accounting Officer, Marie D. Walker, 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 Accounting Officer, Marie D. Walker, 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 Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Changes in Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

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