Capitol Bancorp (CBCRQ) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2013
	OR
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________

Commission file number:  001-31708

CAPITOL BANCORP LTD.

(Exact name of registrant as specified in its charter)

Michigan	38-2761672
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
Capitol Bancorp Ltd.
200 N. Washington Square
Lansing, Michigan	48933
(Address of principal executive offices)	(Zip Code)

517-487-6555

(Registrant's telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   T No   £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   T No   £

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

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

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

Yes   £ No   T

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

Class	Outstanding at October 31, 2013
Common Stock, No par value	41,171,479 shares

Page 1 of 63

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed consolidated balance sheets – September 30, 2013 and December 31, 2012.	6
	Condensed consolidated statements of operations – Three months and nine months ended September 30, 2013 and 2012.	7
	Condensed consolidated statements of comprehensive income (loss) – Three months and nine months ended September 30, 2013 and 2012.	8
	Condensed consolidated statements of changes in equity – Nine months ended September 30, 2013 and 2012.	9
	Condensed consolidated statements of cash flows – Nine months ended September 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.	59
Item 4.	Controls and Procedures.	59
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	60
Item 1A.	Risk Factors.	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	60
Item 3.	Defaults Upon Senior Securities.	61
Item 4.	Mine Safety Disclosures.	61
Item 5.	Other Information.	61
Item 6.	Exhibits.	61
SIGNATURES		62
EXHIBIT INDEX		63

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Page 2 of 63

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;

·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 five 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;

·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;

Page 3 of 63

FORWARD-LOOKING STATEMENTS – Continued

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

·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 impact of possible future material impairment charges;

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

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

·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.

Page 4 of 63

FORWARD-LOOKING STATEMENTS – Continued

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.

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Page 5 of 63

PART I, ITEM 1

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Balance Sheets (Unaudited)

As of September 30, 2013 and December 31, 2012

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

	September 30, 2013			December 31, 2012
				As Adjusted (Note C)
ASSETS
Cash and due from banks	$	22,282		$	43,727
Money market and interest-bearing deposits		192,849			214,340
Cash and cash equivalents		215,131			258,067
Loans held for sale		73			-
Investment securities available for sale, carried at fair value -- Note E		14,552			15,662
Federal Home Loan Bank and Federal Reserve Bank stock (carried on the basis of cost) -- Note E		6,262			7,456
Portfolio loans, less allowance for loan losses of $32,265 in 2013 and $51,508 in 2012 -- Note F		672,463			879,817
Premises and equipment		15,563			17,715
Accrued interest income		2,256			3,038
Other real estate owned		47,783			63,242
Other assets		10,122			14,438
Assets of discontinued operations -- Note G		-			361,867
TOTAL ASSETS	$	984,205		$	1,621,302
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	190,745		$	246,538
Interest-bearing		723,744			947,603
Total deposits		914,489			1,194,141
Notes payable and other borrowings		8,908			5,426
Accrued interest on deposits and other liabilities		7,748			4,970
Liabilities of discontinued operations -- Note G		-			354,020
Liabilities subject to compromise -- Note B		195,723			200,293
Total liabilities		1,126,868			1,758,850
EQUITY:
Capitol Bancorp Limited stockholders' equity -- Note N:
Preferred stock (Series A), 700 shares authorized ($100 per-share liquidation preference); 51 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 - 41,171,479 shares; 2012 - 41,177,479 shares		292,090			292,092
Retained-earnings deficit		(422,892	)		(424,022	)
Undistributed common stock held by employee-benefit trust		(541	)		(541	)
Accumulated other comprehensive income (loss)		(173	)		72
Total Capitol Bancorp Limited stockholders' equity deficit		(126,418	)		(127,301	)
Noncontrolling interests in consolidated subsidiaries		(16,245	)		(10,247	)
Total equity deficit		(142,663	)		(137,548	)
TOTAL LIABILITIES AND EQUITY	$	984,205		$	1,621,302

See notes to condensed consolidated financial statements.

Page 6 of 63

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Statements of Operations (Unaudited)

For the Three and Nine Months Ended September 30, 2013 and 2012

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

	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
				As Adjusted (Note C)						As Adjusted (Note C)
Interest income:
Portfolio loans (including fees)	$	10,212		$	14,440		$	33,087		$	44,562
Loans held for sale		2			19			3			39
Taxable investment securities		33			40			108			127
Other		189			221			552			712
Total interest income		10,436			14,720			33,750			45,440
Interest expense:
Deposits		1,419			2,305			4,826			7,832
Debt obligations and other		85			998			281			6,618
Total interest expense		1,504			3,303			5,107			14,450
Net interest income		8,932			11,417			28,643			30,990
Provision for loan losses -- Note F		3			277			(12,183	)		791
Net interest income after provision for loan losses		8,929			11,140			40,826			30,199
Noninterest income:
Service charges on deposit accounts		385			483			1,130			1,479
Trust and wealth-management revenue		667			735			2,117			2,159
Fees from origination of non-portfolio residential mortgage loans		49			199			175			503
Gain on sale of government-guaranteed loans		-			-			-			344
Other		1,488			3,646			5,197			6,819
Total noninterest income		2,589			5,063			8,619			11,304
Noninterest expense:
Salaries and employee benefits		6,263			8,209			20,819			25,595
Occupancy		1,512			1,637			4,712			5,014
Equipment rent, depreciation and maintenance		803			1,102			2,794			3,540
Costs (income) associated with foreclosed properties and other real estate owned		1,048			1,170			2,454			6,748
FDIC insurance premiums and other regulatory fees		650			1,110			2,501			3,564
Other		2,124			4,133			9,395			11,710
Total noninterest expense		12,400			17,361			42,675			56,171
Income (loss) before reorganization items and income taxes (benefit)		(882	)		(1,158	)		6,770			(14,668	)
Reorganization items -- Note B		360			2,746			2,195			2,746
Income (loss) before income taxes (benefit)		(1,242	)		(3,904	)		4,575			(17,414	)
Income taxes (benefit)		-			48			(1,547	)		4
Income (loss) from continuing operations		(1,242	)		(3,952	)		6,122			(17,418	)
Discontinued operations -- Note G:
Income (loss) from operations of bank subsidiaries discontinued		92			(1,432	)		458			(6,189	)
Gain (loss) on bank subsidiaries discontinued		(4,653	)		29			(5,911	)		155
Less income tax expense		-			39			-			101
Loss from discontinued operations		(4,561	)		(1,442	)		(5,453	)		(6,135	)
NET INCOME (LOSS)		(5,803	)		(5,394	)		669			(23,553	)
Net losses attributable to noncontrolling interests in consolidated subsidiaries		100			471			461			1,829
NET INCOME (LOSS) ATTRIBUTABLE TO CAPITOL BANCORP LIMITED	$	(5,703	)	$	(4,923	)	$	1,130		$	(21,724	)
NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CAPITOL BANCORP LIMITED -- Note J	$	(0.14	)	$	(0.12	)	$	0.03		$	(0.53	)

See notes to condensed consolidated financial statements.

Page 7 of 63

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

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

For the Three and Nine Months Ended September 30, 2013 and 2012

(in $1,000s)

	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
				As Adjusted (Note C)						As Adjusted (Note C)
NET INCOME (LOSS)	$	(5,803	)	$	(5,394	)	$	669		$	(23,553	)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) arising during the period		(180	)		27			(245	)		18
COMPREHENSIVE INCOME (LOSS)		(5,983	)		(5,367	)		424			(23,535	)
Comprehensive loss attributable to noncontrolling interests in consolidated subsidiaries		100			471			461			1,829
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CAPITOL BANCORP LIMITED	$	(5,883	)	$	(4,896	)	$	885		$	(21,706	)

See notes to condensed consolidated financial statements.

Page 8 of 63

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Statements of Changes in Equity (Unaudited)

For the Nine Months Ended September 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)
Nine Months Ended September 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																-			(7,360	)		(7,360	)
Reduction in investment of subsidiaries due to change in ownership							(144	)								(144	)		144			-
Issuance of 145,609 shares of common stock upon exercise of stock options				1												1						1
Surrender of 1,897 shares of common stock to facilitate vesting of restricted stock				-												-						-
Reversal of compensation expense relating to 5,500 forfeited restricted common stock shares and stock options				(86	)											(86	)					(86	)
Recognition of compensation expense relating to restricted common stock and stock options				72												72						72
Tax effect of share-based payments				(29	)											(29	)					(29	)
Net loss							(21,724	)								(21,724	)		(1,829	)		(23,553	)
Other comprehensive loss													18			18						18
BALANCES AT SEPTEMBER 30, 2012	$	5,098	$	292,093		$	(422,586	)	$	(541	)	$	88		$	(125,848	)	$	(9,608	)	$	(135,456	)
Nine Months Ended September 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 6,000 forfeited restricted common stock shares and stock options				(6	)											(6	)					(6	)
Recognition of compensation expense relating to restricted common stock and stock options				4												4						4
Net income (loss)							1,130									1,130			(461	)		669
Other comprehensive loss													(245	)		(245	)					(245	)
BALANCES AT SEPTEMBER 30, 2013	$	5,098	$	292,090		$	(422,892	)	$	(541	)	$	(173	)	$	(126,418	)	$	(16,245	)	$	(142,663	)

See notes to condensed consolidated financial statements.

Page 9 of 63

CAPITOL BANCORP LIMITED

(DEBTOR-IN-POSSESSION)

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2013 and 2012

(in $1,000s)

	2013			2012
				As Adjusted (Note C)
OPERATING ACTIVITIES
Net income (loss)	$	669		$	(23,553	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities (including discontinued operations):
Provision for loan losses		(12,764	)		2,247
Depreciation of premises and equipment		2,189			3,044
Reorganization items		2,195			2,746
Net amortization of investment security premiums		61			89
Loss on sale of premises and equipment		64			50
Gain on sale of government-guaranteed loans		-			(555	)
Loss (gain) on bank subsidiaries discontinued		6,434			(155	)
Loss (gain) on sale of other real estate owned		(2,219	)		(135	)
Write-down of other real estate owned		2,547			10,188
Amortization of issuance costs of subordinated debentures		-			59
Share-based compensation expense		(2	)		(14	)
Deferred income tax expense (credit)		2			(993	)
Originations and purchases of loans held for sale		(1,812	)		(22,077	)
Proceeds from sales of loans held for sale		1,739			23,604
Decrease in accrued interest income and other assets		9,052			2,110
Decrease in accrued interest expense on deposits and other liabilities		(4,114	)		(114	)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		4,041			(3,459	)
INVESTING ACTIVITIES
Proceeds from calls, prepayments and maturities of investment securities		4,930			14,525
Purchases of investment securities		(5,247	)		(7,620	)
Redemption of Federal Home Loan Bank stock by issuer		1,415			1,848
Purchases of Federal Home Loan Bank stock		-			(31	)
Net decrease in portfolio loans		144,193			190,816
Proceeds from sales of government-guaranteed loans		-			4,984
Proceeds from sales of premises and equipment		49			28
Purchases of premises and equipment		(318	)		(1,499	)
Proceeds from sale of bank subsidiaries		1,000			8,940
Payments received on other real estate owned		97			54
Proceeds from sales of other real estate owned		30,056			35,987
NET CASH PROVIDED BY INVESTING ACTIVITIES		176,175			248,032
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		77,291			124,114
Net decrease in certificates of deposit		(260,177	)		(329,190	)
Net payments on debt obligations		-			(2,317	)
Proceeds from Federal Home Loan Bank borrowings		4,500			59,511
Payments on Federal Home Loan Bank borrowings		(2,018	)		(81,528	)
Net proceeds from issuance of common stock		-			1
Tax effect of share-based payments		-			(29	)
NET CASH USED IN FINANCING ACTIVITIES		(180,404	)		(229,438	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(188	)		15,135
Change in cash and cash equivalents of discontinued operations		2,005			(1,327	)
Change in cash and cash equivalents of deconsolidated subsidiary		(44,753	)		-
Cash and cash equivalents at beginning of period		258,067			271,211
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	$ 215,131		$	$ 285,019
Supplemental disclosures:
Cash paid during the period for interest on deposits and debt obligations		6,369			18,529
Transfers of loans to other real estate owned		11,485			38,222

See notes to condensed consolidated financial statements.

Page 10 of 63

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 September 30, 2013 have been adjusted to exclude amounts related to discontinued operations (see Note G).

The results of operations for the period ended September 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 a 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 a 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, third-party actions, or otherwise.

Page 11 of 63

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 was September 24, 2013.  The combined hearing to be conducted by the Bankruptcy Court on final approval of the Amended Disclosure Statement, and confirmation of the Amended Joint Liquidating Plan is presently scheduled for December 18, 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 are 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 distinguishes prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise (none as of September 30, 2013) and from post-petition liabilities.  Liabilities that may be affected by a Chapter 11 plan of reorganization are 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):

	September 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		3,196		7,108
Accounts payable and other accrued liabilities		1,093		1,751
Total liabilities subject to compromise	$	195,723	$	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 $ 7.7 million for the three and nine months ended September 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 nine months ended

Page 12 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note B – Debtor-in-Possession Financial Information – Continued

September 30, 2013 and 2012 consisted of the following (in $1,000s):

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2013		2012		2013		2012
Professional fees	$	360	$	665	$	2,195	$	665
Deferred issuance costs		-		2,081		-		2,081
	$	360	$	2,746	$	2,195	$	2,746

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.

Page 13 of 63

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		$	(266,445	)	$	3,050		$	879,817
Total assets		1,618,252						3,050			1,621,302
Accrued interest on deposits and other liabilities		9,779			(1,291	)		(3,518	)		4,970
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 September 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	$	3,172		$	(1,252	)	$	(750	)	$	1,170
Total noninterest expense		23,735			(5,624	)		(750	)		17,361
Loss before income tax benefit		(6,155	)		1,501			750			(3,904	)
Loss from continuing operations		(6,203	)		1,501			750			(3,952	)
Net loss		(6,144	)					750			(5,394	)
Net loss attributable to Capitol Bancorp Limited		(5,673	)					750			(4,923	)
Net loss per common share attributable to Capitol Bancorp Limited	$	(0.14	)							$	(0.12	)

Page 14 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note C – Change in Accounting Principle – Continued

	Nine Months Ended September 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	$	14,227		$	(5,279	)	$	(2,200	)	$	6,748
Total noninterest expense		77,509			(19,138	)		(2,200	)		56,171
Loss before income tax benefit		(25,905	)		6,291			2,200			(17,414	)
Loss from continuing operations		(25,909	)		6,291			2,200			(17,418	)
Net loss		(25,753	)					2,200			(23,553	)
Net loss attributable to Capitol Bancorp Limited		(23,924	)					2,200			(21,724	)
Net loss per common share attributable to Capitol Bancorp Limited	$	(0.58	)							$	(0.53	)

(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 63

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):

	September 30, 2013				December 31, 2012
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
United States treasury	$	3,249	$	3,250	$	3,499	$	3,500
United States government agency		5,000		4,682		4,000		3,987
Mortgage-backed		6,564		6,620		8,055		8,175
	$	14,813	$	14,552	$	15,554	$	15,662

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

	September 30, 2013				December 31, 2012
	Gains		Losses		Gains		Losses
United States treasury	$	1			$	1
United States government agency		1	$	319			$	13
Mortgage-backed		60		4		120
	$	62	$	323	$	121	$	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):

	September 30, 2013				December 31, 2012
	Unrealized Loss		Carrying Value		Unrealized Loss		Carrying Value
One year or less:
United States government agencies	$	319	$	4,181	$	13	$	3,987
Mortgage-backed		4		1,741		-		-
	$	323	$	5,922	$	13	$	3,987

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

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	3,249	$	3,250
After one year, through five years		1,000		999
After five years, through ten years		4,349		4,295
After ten years		6,215		6,008
	$	14,813	$	14,552

Page 16 of 63

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:

	September 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	$	4,570	$	1,917	$	873	$	1,328	$	3					$	8,691
Collectively evaluated for probable incurred losses		7,301		4,363		694		1,746		213	$	187	$	9,070		23,574
Total allowance for loan losses	$	11,871	$	6,280	$	1,567	$	3,074	$	216	$	187	$	9,070	$	32,265
Portfolio loans:
Individually evaluated for impairment	$	71,684	$	17,436	$	8,253	$	6,849	$	28					$	104,250
Collectively evaluated for probable incurred losses		380,318		129,199		22,249		61,176		5,586	$	1,950				600,478
Total portfolio loans	$	452,002	$	146,635	$	30,502	$	68,025	$	5,614	$	1,950			$	704,728

	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	$	6,214	$	2,153	$	881	$	1,022	$	8					$	10,278
Collectively evaluated for probable incurred losses		8,721		6,241		1,063		3,441		866	$	3	$	20,895		41,230
Total allowance for loan losses	$	14,935	$	8,394	$	1,944	$	4,463	$	874	$	3	$	20,895	$	51,508
Portfolio loans:
Individually evaluated for impairment	$	89,964	$	29,314	$	10,447	$	10,071	$	22					$	139,818
Collectively evaluated for probable incurred losses		482,512		178,027		29,730		92,574		6,671	$	1,993				791,507
Total portfolio loans	$	572,476	$	207,341	$	40,177	$	102,645	$	6,693	$	1,993			$	931,325

Page 17 of 63

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 nine months ended September 30, 2013 and 2012 (in $1,000s) by loan type:

	Three Months Ended September 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	$	11,444		$	6,443		$	1,936		$	2,615		$	303		$	391		$	9,378		$	32,510
Charge-offs		(1,453	)		(800	)		(234	)		(411	)		(2	)								(2,900	)
Recoveries		1,509			470			334			259			80									2,652
Net charge-offs		56			(330	)		100			(152	)		78									(248	)
Provision for loan losses		173			103			(482	)		581			(167	)		(205	)					3
Net change in unallocated allowance		198			64			13			30			2			1			(308	)
Ending balance	$	11,871		$	6,280		$	1,567		$	3,074		$	216		$	187		$	9,070		$	32,265

	Nine Months Ended September 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	$	14,935		$	8,394		$	1,944		$	4,463		$	874		$	3		$	20,895		$	51,508
Less allowance for deconsolidated  subsidiary – Note H		(765	)		(869	)		(53	)		(422	)		(48	)								(2,157	)
Charge-offs		(6,435	)		(3,237	)		(2,906	)		(980	)		(318	)		(7	)					(13,883	)
Recoveries		3,631			1,602			2,254			1,338			155									8,980
Net charge-offs		(2,804	)		(1,635	)		(652	)		358			(163	)		(7	)					(4,903	)
Provision for loan losses		746			468			344			(1,289	)		(444	)		192			(12,200	)		(12,183	)
Net change in unallocated allowance		(241	)		(78	)		(16	)		(36	)		(3	)		(1	)		375
Ending balance	$	11,871		$	6,280		$	1,567		$	3,074		$	216		$	187		$	9,070		$	32,265

Page 18 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

	Three Months Ended September 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	$	22,642		$	10,014		$	3,192		$	8,760		$	228		$	368		$	13,114	$	58,318
Charge-offs		(4,533	)		(2,985	)		(657	)		(472	)		(171	)		23					(8,795	)
Recoveries		614			359			312			876			276			63					2,500
Net charge-offs		(3,919	)		(2,626	)		(345	)		404			105			86					(6,295	)
Provision for loan losses		2,466			1,595			(703	)		(2,556	)		(97	)		(428	)				277
Net change in unallocated allowance		(3,338	)		(1,107	)		(273	)		(554	)		(43	)		(12	)		5,327
Ending balance	$	17,851		$	7,876		$	1,871		$	6,054		$	193		$	14		$	18,441	$	52,300

	Nine Months Ended September 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	$	26,576		$	15,854		$	6,739		$	11,057		$	533		$	12		$	4,447	$	65,218
Charge-offs		(11,141	)		(7,857	)		(2,503	)		(6,125	)		(373	)		(656	)				(28,655	)
Recoveries		4,193			3,907			1,320			5,046			410			70					14,946
Net charge-offs		(6,948	)		(3,950	)		(1,183	)		(1,079	)		37			(586	)				(13,709	)
Provision for loan losses		6,992			(1,120	)		(2,968	)		(2,468	)		(266	)		621					791
Net change in unallocated allowance		(8,769	)		(2,908	)		(717	)		(1,456	)		(111	)		(33	)		13,994
Ending balance	$	17,851		$	7,876		$	1,871		$	6,054		$	193		$	14		$	18,441	$	52,300

Page 19 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

Average total portfolio loans for the nine months ended September 30, 2013 and 2012 were $785.8 million and $1.1 billion, respectively.  The ratio of net charge-offs (annualized) to average portfolio loans outstanding was 0.68 % and 1.71% for the nine months ended September 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):

	September 30, 2013		June 30, 2013		March 31, 2013		December 31, 2012
							As Adjusted (Note C)
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	46,944	$	55,172	$	60,045	$	65,443
Residential (including multi-family)		12,242		15,847		18,063		21,049
Construction, land development and other land		5,292		5,937		6,161		5,667
Total loans secured by real estate		64,478		76,956		84,269		92,159
Commercial and other business-purpose loans		4,680		5,238		6,021		8,159
Consumer		133		139		328		189
Total nonaccrual loans		69,291		82,333		90,618		100,507
Past due (>90 days) loans and accruing interest:
Loans secured by real estate:
Commercial		-		-		1,017		515
Residential (including multi-family)		-		-		-		85
Total loans secured by real estate		-		-		1,017		600
Commercial and other business-purpose loans		-		-		-		70
Total past due loans		-		-		1,017		670
Total nonperforming loans	$	69,291	$	82,333	$	91,635	$	101,177
Real estate owned and other repossessed assets		47,815		46,775		54,887		63,306
Total nonperforming assets	$	117,106	$	129,108	$	146,522	$	164,483

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 generally necessary.

Page 20 of 63

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 September 30, 2013:

	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	46,502	$	59,377	$	5,276
Residential (including multi-family)		14,770		26,603		3,382
Construction, land development and other land		5,536		9,293		919
Total loans secured by real estate		66,808		95,273		9,577
Commercial and other business-purpose loans		5,096		11,986		1,217
Consumer		199		449		31
		72,103		107,708		10,825
With no related allowance recorded:
Loans secured by real estate:
Commercial		57,782		75,745
Residential (including multi-family)		11,524		12,391
Construction, land development and other land		4,470		5,882
Total loans secured by real estate		73,776		94,018
Commercial and other business-purpose loans		3,123		3,761
Consumer		51		51
		76,950		97,830
Total	$	149,053	$	205,538	$	10,825

Included in total impaired loans as of September 30, 2013 is $119.9 million of loans modified and reported as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note), along with $5.1 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 nine months ended September 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				Nine Months Ended
	September 30, 2013				September 30, 2013
	Average Recorded Investment		Interest Income Recorded		Average Recorded Investment		Interest Income Recorded
Loans secured by real estate:
Commercial	$	111,720	$	2,003	$	117,185	$	5,472
Residential (including multi-family)		32,733		380		38,059		1,057
Construction, land development and other land		14,504		60		18,582		229
Total loans secured by real estate		158,957		2,443		173,826		6,758
Commercial and other business-purpose loans		11,243		100		13,937		410
Consumer		236		7		196		7
Total	$	170,436	$	2,550	$	187,959	$	7,175

Page 21 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

	Three Months Ended						Nine Months Ended
	September 30, 2012						September 30, 2012
	Average Recorded Investment			Interest Income Recorded			Average Recorded Investment		Interest Income Recorded
	As Adjusted (Note C)						As Adjusted (Note C)
Loans secured by real estate:
Commercial		$	126,443		$	1,715	$	128,941	$	3,717
Residential (including multi-family)			49,098			596		48,687		1,722
Construction, land development and other land			25,137			30		25,510		540
Total loans secured by real estate			200,678			2,341		203,138		5,979
Commercial and other business-purpose loans			18,315			61		18,661		671
Consumer			180					172		7
Total		$	219,173		$	2,402	$	221,971	$	6,657

 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	$	61,640	$	75,459	$	7,563
Residential (including multi-family)		17,776		31,470		2,706
Construction, land development and other land		7,150		11,562		1,036
Total loans secured by real estate		86,566		118,491		11,305
Commercial and other business-purpose loans		7,609		17,134		1,574
Consumer		207		1,351		57
		94,382		136,976		12,936
With no related allowance recorded:
Loans secured by real estate:
Commercial		53,108		81,579
Residential (including multi-family)		18,690		21,791
Construction, land development and other land		5,982		9,136
Total loans secured by real estate		77,780		112,506
Commercial and other business-purpose loans		6,246		8,112
Consumer		9		9
		84,035		120,627
Total	$	178,417	$	257,603	$	12,936

Included in impaired loans as of December 31, 2012 is $138.9 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 63

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):

	September 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		$	4,798		$	-	$	46,944		$	51,742		$	400,260		$	452,002
Residential (including multi-family)			1,582			-		12,242			13,824			132,811			146,635
Construction, land development and other land			697			-		5,292			5,989			24,513			30,502
Total loans secured by real estate			7,077			-		64,478			71,555			557,584			629,139
Commercial and other business-purpose loans			772			-		4,680			5,452			62,573			68,025
Consumer			382			-		133			515			5,099			5,614
Other			-			-		-			-			1,950			1,950
Total		$	8,231		$	-	$	69,291		$	77,522		$	627,206		$	704,728

	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		$	12,534		$	515		$	65,443		$	78,492		$	493,984		$	572,476
Residential (including multi-family)			5,364			85			21,049			26,498			180,843			207,341
Construction, land development and other land			4,242						5,667			9,909			30,268			40,177
Total loans secured by real estate			22,140			600			92,159			114,899			705,095			819,994
Commercial and other business-purpose loans			2,933			70			8,159			11,162			91,483			102,645
Consumer			280						189			469			6,224			6,693
Other															1,993			1,993
Total		$	25,353		$	670		$	100,507		$	126,530		$	804,795		$	931,325

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 63

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):

	September 30, 2013
	Pass		Watch		Substandard		Total Portfolio Loans
Loans secured by real estate:
Commercial	$	315,889	$	52,327	$	83,786	$	452,002
Residential (including multi-family)		106,607		17,576		22,452		146,635
Construction, land development and other land		17,129		4,123		9,250		30,502
Total loans secured by real estate		439,625		74,026		115,488		629,139
Commercial and other business-purpose loans		52,603		6,188		9,234		68,025
Consumer		4,953		174		487		5,614
Other		1,950						1,950
Total	$	499,131	$	80,388	$	125,209	$	704,728

	December 31, 2012 (As adjusted – Note C)
	Pass		Watch		Substandard		Total Portfolio Loans
Loans secured by real estate:
Commercial	$	408,689	$	60,929	$	102,858	$	572,476
Residential (including multi-family)		150,861		18,951		37,529		207,341
Construction, land development and other land		21,773		7,394		11,010		40,177
Total loans secured by real estate		581,323		87,274		151,397		819,994
Commercial and other business-purpose loans		82,931		4,894		14,820		102,645
Consumer		4,533		1,765		395		6,693
Other		1,993						1,993
Total	$	670,780	$	93,933	$	166,612	$	931,325

Page 24 of 63

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 has been granted one or more of the following concessions:

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 modification to an "interest only" structure for a period of time that should 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 to be established or the charge-off, if any, to be taken.  The specific reserve or charge-off amount is determined using the discounted cash flow method, the collateral dependency method or, when available, the observable market price method.

The loan portfolios contain generally three categories of troubled debt restructurings, (1) loans for which the rate, amount of the note 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 at rates or terms deemed below current rate and terms for credits with comparable risk factors, 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 or charge-off amount for each of these categories:

Loans for which the rate or terms have been modified:  The specific reserve or charge-off amount, 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 pay down or an expected refinance cannot be documented, a discount period that will result in the cash flows (after being adjusted for a probability of default), reducing the loan balance down to the collateral value is considered, or as an alternative, the remaining amortization period is generally used.  If the loan is deemed collateral dependent, either due to the estimated cash flows not being supported by reasonable and supportable projections, or signifcant uncertainty exists on the borrower's ability to refinance or repay the debt at maturity, the reserve or charge-off 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, or if deemed to be collateral dependent, the amount of charge-off required..

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 63

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 nine months ended September 30, 2013 and 2012 (in $1,000s):

	Three Months Ended September 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		7	$	6,941	$	6,211	$	749
Residential		10		848		787		35
Construction, land development and other land		-		-		-		-
Total loans secured by real estate		17		7,789		6,998		784
Commercial and other business-purpose loans		2		129		129		-
Consumer		3		102		102		1
Total		22	$	8,020	$	7,229	$	785

	Nine Months Ended September 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		31	$	17,200	$	13,916	$	1,066
Residential		41		3,957		3,399		230
Construction, land development and other land		2		94		91		12
Total loans secured by real estate		74		21,251		17,406		1,308
Commercial and other business-purpose loans		20		1,774		985		297
Consumer		3		102		102		1
Total		97	$	23,127	$	18,493	$	1,606

Page 26 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

	Three Months Ended September 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		17	$	11,325	$	8,522	$	404
Residential		15		2,427		2,195		154
Construction, land development and other land		3		913		913		33
Total loans secured by real estate		35		14,665		11,630		591
Commercial and other business-purpose loans		10		760		764		65
Consumer		-		-		-		-
Total		45	$	15,425	$	12,394	$	656

	Nine Months Ended September 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		82	$	30,669	$	25,620	$	1,746
Residential		67		8,398		7,838		489
Construction, land development and other land		12		1,968		1,837		57
Total loans secured by real estate		161		41,035		35,295		2,292
Commercial and other business-purpose loans		25		1,784		1,644		90
Consumer		1		2		1		-
Total		187	$	42,821	$	36,940	$	2,382

Of the amounts in the table above for the nine months ended September 30, 2013, approximately $8.4 million, or 45%, and 52 contracts, or 54%, and for the nine months ended September 30, 2012, approximately $15.6 million, or 42%, and 71 contracts, or 38%, 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 63

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 nine months ended September 30, 2013 and 2012 (in $1,000s):

	Three Months Ended September 30, 2013				Nine Months Ended September 30, 2013
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled debt restructurings that subsequently defaulted:
Loans secured by real estate:
Commercial		5	$	2,570		12	$	4,874
Residential		3		294		19		1,990
Construction, land development and other land		-		-		4		1,427
Total loans secured by real estate		8		2,864		35		8,291
Commercial and other business-purpose loans		-		-		1		-
Consumer		-		-		-		-
Total		8	$	2,864		36	$	8,291

	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled debt restructurings that subsequently defaulted:
Loans secured by real estate:
Commercial		13	$	4,574		28	$	6,073
Residential		8		549		21		1,761
Construction, land development and other land		6		1,081		11		1,306
Total loans secured by real estate		27		6,204		60		9,140
Commercial and other business-purpose loans		4		215		10		441
Consumer		1		47		2		48
Total		32	$	6,466		72	$	9,629

Page 28 of 63

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 September 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 September 30, 2013
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	31,670	$	53,394	$	85,064
Residential (including multi-family)		7,651		13,694		21,345
Construction, land development and other land		3,230		4,086		7,316
Total loans secured by real estate		42,551		71,174		113,725
Commercial and other business-purpose loans		2,666		3,409		6,075
Consumer				117		117
Total	$	45,217	$	74,700	$	119,917

	Troubled Debt Restructurings at December 31, 2012
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	41,350	$	49,305	$	90,655
Residential (including multi-family)		12,902		15,417		28,319
Construction, land development and other land		2,797		7,465		10,262
Total loans secured by real estate		57,049		72,187		129,236
Commercial and other business-purpose loans		3,965		5,695		9,660
Consumer				27		27
Total	$	61,014	$	77,909	$	138,923

Page 29 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note G – Discontinued Operations

During the nine months ended September 30, 2013, 1^st Commerce Bank, Central Arizona Bank, Pisgah Community Bank, Sunrise Bank and Sunrise Bank of Arizona were closed by either their state regulators or the FDIC (see Note M).  Capitol recorded a net loss of $5.9 million on its investment in these banks, which has been included in discontinued operations.

The assets, liabilities and results of operations of the above-mentioned banks 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 nine months ended September 30, 2013 and 2012 and include the following components (in $1,000s):

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
Interest income	$	1,316		$	5,247		$	7,798		$	19,402
Interest expense		125			875			958			3,585
Net interest income		1,191			4,372			6,840			15,817
Provision for loan losses		-			248			(581	)		1,455
Net interest income after provision for  loan losses		1,191			4,124			7,421			14,362
Noninterest income		78			564			1,055			2,037
Gain (loss) on bank subsidiaries discontinued		(4,653	)		29			(5,911	)		155
Noninterest expense		1,177			6,120			8,018			22,588
Loss before income taxes		(4,561	)		(1,403	)		(5,453	)		(6,034	)
Less income taxes		-			39			-			101
Net loss from discontinued operations		(4,561	)		(1,442	)		(5,453	)		(6,135	)
Net loss attributable to noncontrolling interests  in consolidated subsidiaries		-			395			327			1,412
Net loss from discontinued operations attributable to Capitol Bancorp Limited	$	(4,561	)	$	(1,047	)	$	(5,126	)	$	(4,723	)
Net loss from discontinued operations per common share attributable to Capitol Bancorp Limited	$	(0.11	)	$	(0.03	)	$	(0.12	)	$	(0.12	)

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

	Dec 31, 2012				Dec 31, 2012
Assets:				Liabilities:
Cash and cash equivalents	$	68,780		Noninterest-bearing deposits	$	76,873
Investment securities		44		Interest-bearing deposits		272,854
Federal Home Loan Bank stock		3,075		Total deposits		349,727
Portfolio loans		278,392		Other liabilities		4,293
Less allowance for loan losses		(11,947	)
Net portfolio loans		266,445			$	354,020
Premises and equipment		3,114
Other real estate owned		17,721
Other assets		2,688
	$	361,867

Page 30 of 63

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 were placed in escrow pending the issuance by the FDIC of a waiver of cross-guaranty liability, which was recently granted.  Pursuant to the terms of a settlement agreement with the FDIC, approved by the Bankruptcy Court on November 12, 2013, the FDIC will receive 85% of the proceeds from the sale of the bank.  As such, an additional loss on sale of approximately $1.3 million will be recorded in the fourth quarter of 2013.

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 September 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.

Page 31 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note I – Fair Value – Continued

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.

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

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

	September 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		$	3,250		$	3,250		$	3,500		$	3,500
United States government agency			4,682			4,682			3,987			3,987
Mortgage-backed			6,620			6,620			8,175			8,175
		$	14,552		$	14,552		$	15,662		$	15,662

 (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):

	September 30, 2013						December 31, 2012
	Total			Significant Unobservable Inputs (Level 3)			Total			Significant Unobservable Inputs (Level 3)
Impaired loans(1)		$	76,950		$	76,950		$	84,035		$	84,035
Other real estate owned(2)		$	47,783		$	47,783		$	63,242		$	63,242

 (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 (including delinquent real estate taxes).

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

Page 32 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note I – Fair Value – Continued

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 (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):

			September 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	$	22,282		$	22,282		$	43,727		$	43,727
Cash equivalents		2		192,849			192,849			214,340			214,340
Loans held for sale		2		73			73
Investment securities available for sale		2		14,552			14,552			15,662			15,662
Federal Home Loan Bank and Federal Reserve Bank stock		2		6,262			6,262			7,456			7,456
Portfolio loans:
Loans secured by real estate:
Commercial		3		452,002			448,343			572,476			569,789
Residential (including multi-family)		3		146,635			146,848			207,341			207,737
Construction, land development and other land		3		30,502			30,480			40,177			40,221
Total loans secured by real estate				629,139			625,671			819,994			817,747
Commercial and other business-purpose loans		3		68,025			67,709			102,645			102,352
Consumer		3		5,614			5,712			6,693			6,836
Other		3		1,950			1,835			1,993			1,864
Total portfolio loans				704,728			700,927			931,325			928,799
Less allowance for loan losses		3		(32,265	)		(32,265	)		(51,508	)		(51,508	)
Net portfolio loans				672,463			668,662			879,817			877,291
Financial liabilities:
Deposits:
Noninterest-bearing		1		190,745			190,745			246,538			246,538
Interest-bearing:
Demand accounts		2		279,916			279,916			362,710			362,710
Time certificates of less than $100,000		3		187,919			188,997			256,261			258,728
Time certificates of $100,000 or more		3		255,909			257,246			328,632			331,081
Total interest-bearing				723,744			726,159			947,603			952,519
Total deposits				914,489			916,904			1,194,141			1,199,057
Notes payable and other borrowings		3		8,908			10,106			5,426			6,667

Page 33 of 63

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.

Page 34 of 63

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 September 30:

	Three Months Ended						Nine Months Ended
	2013			2012			2013			2012
				As Adjusted (Note C)						As Adjusted (Note C)
Numerator—net income (loss) attributable to Capitol Bancorp Limited for the period	$	(5,703	)	$	(4,923	)	$	1,130		$	(21,724	)
Denominator:
Weighted average number of common shares outstanding, excluding unvested restricted shares of common stock (denominator for basic and diluted earnings per share)		41,169			41,070			41,169			41,037
Number of antidilutive stock options excluded from diluted earnings per share computation		878			1,445			878			1,445
Number of antidilutive unvested restricted shares excluded from basic and diluted earnings per share computation		2			9			2			9
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	$	(0.03	)	$	(0.09	)	$	0.15		$	(0.41	)
From discontinued operations		(0.11	)		(0.03	)		(0.12	)		(0.12	)
Total net income (loss) per common share attributable to Capitol Bancorp Limited	$	(0.14	)	$	(0.12	)	$	0.03		$	(0.53	)

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 September 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).

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.  Net proceeds from this pending sale (adjusted for the effects of a settlement agreement with the FDIC as approved by the Bankruptcy Court on November 12, 2013 pursuant to which the FDIC will receive 85% of the proceeds from the sale and grant a waiver of the potential assessment of any cross-guaranty liability against Bank of Maumee) are expected to approximate $81,000, resulting in a projected loss of approximately $405,000 based on Capitol's investment in the bank as of September 30, 2013.

Page 35 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note L –Pending Sale of Subsidiary Banks – Continued

Capitol has also entered into an agreement to sell its controlling interests held by FCC in Bank of Las Vegas, Indiana Community Bank, Michigan Commerce Bank and Sunrise Bank of Albuquerque in one transaction subject to various bankruptcy bidding proceedings, regulatory approval and other contingencies (refer to page 56 of this document for further information on these bankruptcy proceedings).

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.

Most 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 September 30, 2013 (listed in descending order based on total assets):

Michigan Commerce Bank

Bank of Las Vegas

Sunrise Bank of Albuquerque

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.

Page 36 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note M – Regulatory and Operating Matters – Continued

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 has reissued a notice of intent to take possession and contol of the Bank following an administrative hearing scheduled for November 22, 2013.  Since receiving this notice, Capitol has entered into an agreement to sell the Bank.

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.

On August 23, 2013, Sunrise Bank of Arizona, 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 First Fidelity Bank, National Association, based in Oklahoma City, Oklahoma, to assume all of the deposits of Sunrise Bank of Arizona.  As the owner of substantially all of the capital stock of Sunrise Bank of Arizona, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of Sunrise Bank of Arizona or its assets by the FDIC.  However, Capitol believes it will not realize any recovery.

Page 37 of 63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note M – Regulatory and Operating 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.

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 continues 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, remains uncertain.

In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the "Basel III" capital rules, which set 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 provides for 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 Capitol's 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.

Regulatory capital matters are set forth in Note N.

Page 38 of 63

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:

	September 30, 2013			December 31, 2012 (4)
Tier 1 capital to average adjusted total assets:
Minimum required amount(1)	≥$	42,326		≥$	66,520
Actual amount	$	(142,572	)	$	(144,341	)
Ratio		(13.47	)%		(8.68	)%
Tier 1 capital to risk-weighted assets:
Minimum required amount(2)	≥$	29,020		≥$	49,402
Actual amount	$	(142,572	)	$	(144,341	)
Ratio		(19.65	)%		(11.69	)%
Combined Tier 1 and Tier 2 capital to risk- weighted assets:
Minimum required amount(3)	≥$	58,041		≥$	98,805
Actual amount	$	(142,572	)	$	(144,341	)
Ratio		(19.65	)%		(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 September 30, 2013 and December 31, 2012 were materially and adversely impacted by the exclusion of approximately $ 160.7 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 September 30, 2013 for regulatory purposes.  In addition, several of its bank subsidiaries had capital levels resulting in classification as "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 63

PART I, ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of Capitol for the periods indicated, excluding the effect of discontinued operations for the periods presented.  The discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto presented elsewhere herein.  In addition to historical information, the following discussion 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 $984.2 million at September 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:

	September 30, 2013		December 31, 2012
			As Adjusted (Note C)
Southwest Region:
Sunrise Bank of Albuquerque	$	42,184	$	48,108
Great Lakes Region:
Bank of Maumee		28,166		34,977
Capitol National Bank(1)				144,737
Indiana Community Bank		95,077		101,358
Michigan Commerce Bank		586,457		662,766
Great Lakes Region Total		709,700		943,838
Nevada Region:
Bank of Las Vegas		223,687		260,248
Parent company and other, net		8,634		7,241
Consolidated totals—continuing operations	$	984,205	$	1,259,435

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

Total assets decreased $637.1million during the nine months ended September 30, 2013, of which $361.9 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 (71.6% of total assets at September 30, 2013), decreased during the nine months ended September 30, 2013 by approximately $226.6 million, compared to a decrease of about $180.6 million during the corresponding period of 2012.  Approximately $98.8 million of the $226.6 million decline in portfolio loans for the nine months ended September 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 operate within regulatory capital guidelines.  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 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

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

					Allowance for								Allowance as a Percentage
	Total Portfolio Loans				Loan Losses				Nonperforming Loans				of Total Portfolio Loans
	Sept 30, 2013		Dec 31, 2012		Sept 30, 2013		Dec 31, 2012		Sept 30, 2013		Dec 31, 2012		Sept 30, 2013			Dec 31, 2012
			As Adjusted (Note C)				As Adjusted (Note C)				As Adjusted (Note C)					As Adjusted (Note C)
Southwest Region:
Sunrise Bank of Albuquerque	$	33,681	$	36,954	$	1,634	$	1,611	$	2,669	$	3,740		4.85	%		4.36	%
Great Lakes Region:
Bank of Maumee		21,299		23,596		1,042		1,025		509		483		4.89	%		4.34	%
Capitol National Bank(1)				100,373				2,126				6,842					2.12	%
Indiana Community Bank		74,543		80,907		2,495		2,855		2,915		5,309		3.35	%		3.53	%
Michigan Commerce Bank		414,131		499,178		21,923		37,449		46,027		58,107		5.29	%		7.50	%
Great Lakes Region Total		509,973		704,054		25,460		43,455		49,451		70,741		4.99	%		6.17	%
Nevada Region:
Bank of Las Vegas		160,817		190,060		5,170		6,441		16,914		26,439		3.21	%		3.39	%
Parent company and other, net		257		257		1		1		257		257		0.39	%		0.39	%
Consolidated totals relating to continuing operations	$	704,728	$	931,325	$	32,265	$	51,508	$	69,291	$	101,177		4.58	%		5.53	%

(1) Effective March 1, 2013, Capitol National Bank ceased to be a consolidated subsidiary of Capitol due to a change in control; Capitol's remaining interest in 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 September 30, 2013, Capitol's primary geographic banking regions include Las Vegas, Nevada and the Great Lakes Region.  As of September 30, 2013, 72.4% of the consolidated loan portfolio relates to the Great Lakes Region (75.6% at December 31, 2012) and 27.6% relates to banks located in other regions of the country (24.4% 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 September 30, 2013 approximated $32.3 million or 4.58% of total portfolio loans, a decrease from the 5.53% ratio at the beginning of the year, as a result of a $12.2 million provision reversal at Michigan Commerce Bank, effective June 30, 2013, as well as 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 September 30, 2013 decreased $19.2 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 63

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 then three largest banks.  The guidance recommended that the banks' methodology be modified.  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, several affiliate banks began to phase in migration analysis effective December 31, 2011.  Since that time, one of Capitol's largest remaining affiliate banks has used migration analysis to conclude on the appropriate level for the allowance for loan losses.  The calculation is tailored to the individual bank in order to account for loss histories and market conditions within the markets it serves.  The time period for the loan portfolio look-back period was 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 that bank for two accounting periods (December 31, 2011 and September 30, 2012).

The remaining bank affiliates have continued to use a historical loss methodology in determining the appropriate level of reserves maintained in the allowance for loan losses due to the size of their loan portfolios.  Based on management's analysis and judgment, and supported by the external firm's validation of the migration technique, 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 September 30, 2013.

At September 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 $3.9 million to $15.0 million at September 30, 2013, with the methodology developed by the regulators resulting in a $9.1 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 $9.1 million in excess reserves and record any additional negative provision for loan losses; as such, the Corporation has identified the $9.1 million portion of MCB's allowance for loan losses at September 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 4.99% of portfolio loans on a combined basis as of September 30, 2013.

Nonperforming loans approximated $69.3 million at September 30, 2013 and $101.2 million at December 31, 2012 or 9.8% and 10.9% of portfolio loans, respectively.  Of the nonperforming loans at September 30, 2013, $49.7 million or 71.7% (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 $25.5 million of the $32.3 million consolidated allowance for loan losses, or 78.9%, as of September 30, 2013, with the majority being maintained at MCB.

Page 42 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Nonperforming loans decreased $31.9 million or 31.5% during the nine months ended September 30, 2013, compared to a decrease of $92.7 million or 46.9% in the corresponding period of 2012.  Nonperforming loans have decreased for thirteen consecutive quarters.  Of the $31.9 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, $14.4 million related to declines at the remaining Great Lakes Region banks and a $9.5 million decline was experienced within the Nevada Region.  Total nonperforming assets decreased $47.4 million for the nine months ended September 30, 2013, compared to a decrease of $103.4 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 September 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 46.6%, a decrease from the 50.9% 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 September 30, 2013, about 93.1% 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 September 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 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

In addition to the identification of nonperforming loans involving borrowers with payment performance difficulties (i.e., nonaccrual loans and loans past-due 90 days or more), management utilizes an internal loan review process to identify other potential problem loans which may warrant additional monitoring or other 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 September 30, 2013, problem loans (i.e., substandard, nonaccrual loans) and potential problem loans approximated $205.6 million or about 29.2% of total consolidated portfolio loans, compared to approximately $260.5 million or about 28.0% at December 31, 2012, whereas problem and potential problem loans, excluding nonperforming loans, approximated $136.3 million, or 19.3%, of total consolidated loans at September 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 September 30, 2013 and December 31, 2012 is $119.9 million and $138.9 million, respectively, of loans modified and reported as troubled debt restructurings.  These loans decreased $19.0 million during the nine months ended September 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 nine months ended September 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	$	90,655		$	28,319		$	10,262		$	9,660		$	27		$	138,923
Less troubled debt restructurings of deconsolidated subsidiary		(5,978	)		(4,504	)		(470	)		(1,220	)		(9	)		(12,181	)
Additions		15,718			4,066			129			1,788			101			21,802
Payments received, including loans paid in full		(7,372	)		(5,092	)		(754	)		(3,714	)		(2	)		(16,934	)
Charge-offs and other		(3,212	)		(1,076	)		(1,223	)		(239	)					(5,750	)
Troubled debt restructurings removed from reporting(1)		(4,747	)		(368	)		(628	)		(200	)					(5,943	)
Ending balance	$	85,064		$	21,345		$	7,316		$	6,075		$	117		$	119,917

(1 (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 may not be conducive to rapid marketing or near-term sale of the properties.

The Corporation's other real estate owned decreased $15.5 million during the nine months ended September 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 nine months ended September 30, 2013 (in $1,000s):

Other real estate owned at January 1	$	63,242
Properties acquired in restructure of loans or in lieu of foreclosure		11,485
Properties sold		(22,107	)
Payments received from tenants, credited to carrying amount		97
Write-down of other real estate owned		(2,216	)
Less other real estate owned of deconsolidated subsidiary – Note H		(2,718	)
Other real estate owned at September 30	$	47,783

Page 45 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations

Summary

Net loss attributable to Capitol for the three months ended September 30, 2013 was approximately $5.7 million compared to a net loss of $4.9 million in the corresponding period of 2012.  The net loss per share attributable to Capitol was $0.14 for the three months ended September 30, 2013 compared to a net loss per share of $0.12 in the corresponding period of 2012.  Net income attributable to Capitol for the nine months ended September 30, 2013 approximated $1.1 million compared to a net loss of $21.7 million in the corresponding period of 2012.  Net income per common share attributable to Capitol was $0.03 for the nine months ended September 30, 2013 compared to a net loss per share of $0.53 in the corresponding period of 2012.  Net loss relating to discontinued operations was $4.6 million and $5.5 million for the three and nine months ended September 30, 2013, respectively, compared to a net loss of $1.4 million and $6.1 million for the three and nine months ended September 30, 2012, respectively.

The net results of operations for the nine-month interim period of 2013 showed significant improvement compared to the corresponding 2012 interim period.  There was a total reduction in the provision for loan losses of $13.0 million to a negative $12.2 million for the nine months ended September 30, 2013, compared to a provision of $791,000 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 $13.5 million, or 24.0%, as compared to the corresponding 2012 period.

Analytical Review

Operating results in most of the Corporation's banking regions improved dramatically for the nine months ended September 30, 2013 compared to the same period in 2012.  While total revenues from continuing operations declined by $14.4 million (25.3%) for the nine months ended September 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 $6.1 million from a net loss of $17.4 million, or 135.1%, for the same comparable period.  Excluding the one-time $12.2 million provision reversal, net loss from operations for the nine months ended September 30, 2013 would have been $6.1 million, or an $11.3 million (65.1%) improvement over the comparable 2012 period.  In the Great Lakes Region, two of the region's three remaining banks posted a profit for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2013 totaled $28.6 million, a 7.6% decrease compared to $31.0 million in 2012.  The net interest margin was 3.83% for the three months ended September 30, 2013, a 12 basis-point decrease compared to 3.95% for the three months ended June 30, 2013, a 9 basis-point increase compared to 3.74% for the three months ended March 31, 2013 and a 16 basis-point decrease compared to 3.99% for the three months ended December 31, 2012.  Net interest margin increased 51 basis-points to 3.81% for the nine months ended September 30, 2013, as compared to 3.30% for the nine months ended September 30, 2012.  The net interest margin for the nine months ended September 30, 2013 and three months ended December 31, 2012 were positively impacted, as compared to the nine months ended September 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 nine months ended September 30, 2013 approximated $8.6 million, a 23.8% decrease from the $11.3 million for the same period in 2012.

Page 46 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Noninterest expense totaled $42.7 million for the nine-month 2013 period compared to $56.2 million for the comparable period of 2012.  Part of the decrease resulted from significantly lower costs associated with foreclosed properties and other real estate owned, which decreased $4.3 million (63.6%) to $2.5 million in the nine-month 2013 period ($6.7 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 $2.5 million in the nine-month 2013 period compared to $3.6 million in the same period of 2012.

The largest element of noninterest expense is salaries and employee benefits, which approximated $20.8 million for the nine months ended September 30, 2013, a decrease of $4.8 million (18.7%) from $25.6 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 September 30 (in $1,000s):

	Three Month Period				Nine Month Period
	2013		2012 (1)		2013		2012 (1)
Insurance expense	$	276	$	400	$	996	$	958
Legal fees		206		725		765		2,750
Bank services (ATMs, telephone banking and Internet banking)		193		172		570		569
Loan and collection expense		169		284		514		829
Communications		121		132		369		432
Paper, printing and supplies		113		117		364		386
Other		1,046		2,303		5,817		5,786
Total	$	2,124	$	4,133	$	9,395	$	11,710

(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 nine months ended September 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 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

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

	Total Revenues				Net Income (Loss)(1)						Return on Average Equity(2)						Return on Average Assets(2)
	2013		2012		2013			2012(4)			2013			2012			2013			2012
Southwest Region:
Sunrise Bank of Albuquerque	$	1,532	$	1,942	$	(803	)	$	(620	)
Great Lakes Region:
Bank of Maumee		1,128		1,221		(466	)		(366	)
Capitol National Bank(3)		1,042		5,590		56			189			3.06	%		2.30	%		0.24	%		0.15	%
Indiana Community Bank		3,504		4,008		66			214			1.04	%		3.51	%		0.09	%		0.26	%
Michigan Commerce Bank		26,526		33,420		13,121			2,402			67.77	%					2.88	%
Great Lakes Region Total		32,200		44,239		12,777			2,439
Nevada Region:
Bank of Las Vegas		8,361		9,146		21			(3,078	)		0.51	%					0.01	%
Parent company and other, net		276		1,417		(5,873	)		(16,159	)
Consolidated totals for continuing operations	$	42,369	$	56,744	$	6,122		$	(17,418	)		--			--			--			--

(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; Capitol's remaining interest in 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 $279.7 million during the nine months ended September 30, 2013 compared to a $129.1 million decrease in the corresponding period of 2012.  Brokered deposits approximated $345,000 as of September 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 have brought 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 are generally prohibited.

Noninterest-bearing deposits approximated 20.9% of total deposits at September 30, 2013, a slight decrease from 20.6% 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 $215.1 million, or 21.9%, of total assets at September 30, 2013, compared to $258.1 million, or 15.9%, 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 investment securities during a low interest rate environment and a cautious approach

Page 48 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

to, and capital restrictions associated with, making new loans in a still uncertain economy.  Management believes Capitol's liquidity position at September 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 September 30, 2013, Capitol's banks had approximately $14.6 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 there under approximated $5.4 million at September 30, 2013 and additional borrowing capacity approximated $59.1 million.  These facilities are used from time to time as a lower-cost funding source versus various rates and maturities of time deposits available within banks' individual communities.  Future availability of such borrowing capacity may be contingent upon the creditworthiness of Capitol's banks and other factors.  Total notes payable and other borrowings, exclusive of Federal Home Loan Bank borrowings, were $3.5 million at September 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 September 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 (12.8)% at September 30, 2013 and (7.9)% at December 31, 2012.  As of September 30, 2013, total capital funds (i.e., the sum of Capitol Bancorp Limited stockholders' equity, noncontrolling interests in consolidated subsidiaries and subordinated debentures) approximated $8.6 million.  Capitol's equity deficit decreased in the interim 2013 period as a result of the $1.1 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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

The following comparative analysis summarizes each bank's regulatory capital position as of the dates indicated based on the banks included in Capitol's consolidation as of September 30, 2013:

	Tier 1 Leverage						Tier 1 Risk-Based						Total Risk-Based
	Ratio(2)						Capital Ratio(2)						Capital Ratio(2)						Regulatory Classification(1)(2)
	Sept 30, 2013			Dec 31, 2012			Sept 30, 2013			Dec 31, 2012			Sept 30, 2013			Dec 31, 2012			Sept 30, 2013	Dec 31, 2012
Southwest Region:
Sunrise Bank of Albuquerque		2.75	%		2.01	%		3.50	%		2.71	%		4.80	%		4.00	%	significantly-undercapitalized	significantly-undercapitalized
Great Lakes Region:
Bank of Maumee		3.30	%		4.00	%		4.59	%		5.92	%		5.89	%		7.21	%	significantly-undercapitalized	undercapitalized
Indiana Community Bank		8.81	%		8.33	%		11.93	%		11.23	%		13.20	%		12.51	%	adequately-capitalized(3)	adequately-capitalized(3)
Michigan Commerce Bank		5.98	%		2.61	%		8.45	%		3.52	%		9.75	%		4.84	%	adequately-capitalized	significantly-undercapitalized
Nevada Region:
Bank of Las Vegas		2.34	%		2.01	%		3.06	%		2.60	%		4.33	%		3.87	%	significantly-undercapitalized	significantly-undercapitalized
Consolidated totals		(13.47	)%		(8.68	)%		(19.65	)%		(11.69	)%		(19.65	)%		(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 October 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 September 30, 2013.

Capitol's total risk-based capital ratio at September 30, 2013 was adversely impacted by the exclusion of approximately $160.7 million of Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital.  The Tier 1 capital deficit at September 30, 2013 resulted primarily from operating losses.

In addition to Capitol's consolidated regulatory capital classification at September 30, 2013, three of its bank subsidiaries had capital levels resulting in classification as "significantly-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.

Proceeds from the sale of banks through September 30, 2013 have been deployed as additional capital in the remaining affiliated banks, irrespective of minority ownership, pursuant to requirements imposed by the FDIC.

Page 50 of 63

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

Going-Concern Considerations

As of September 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 $142.7 million;

· The seizure of five 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;

· Three banking subsidiaries with regulatory capital classification as "significantly-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 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);

· 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 a level of doubt as to the Corporation's ability to continue as a going concern.

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

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 has continued 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.

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.  Net proceeds from this pending sale (adjusted for the effects of a settlement agreement with the FDIC as approved by the Bankruptcy Court on November 12, 2013 pursuant to which the FDIC will receive 85% of the proceeds from the sale and grant a waiver of the potential assessment of any cross-guaranty liability against Bank of Maumee) are expected to approximate $81,000, resulting in a projected loss of approximately $405,000 based on Capitol's investment in the bank as of September 30, 2013.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Pending Divestiture of Banks – Continued

Capitol has also entered into an agreement to sell its controlling interests held by FCC in Bank of Las Vegas, Indiana Community Bank, Michigan Commerce Bank and Sunrise Bank of Albuquerque in one transaction subject to various bankruptcy bidding proceedings, regulatory approval and other contingencies (refer to page 56 of this document for further information on these bankruptcy proceedings).

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.

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Regulatory Matters – Continued

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 has reissued a notice of intent to take possession and control of the Bank following an administrative hearing scheduled for November 22, 2013.  Since receiving this notice, Capitol has entered into an agreement to sell the Bank.

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.

On August 23, 2013, Sunrise Bank of Arizona, 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 First Fidelity Bank, National Association, based in Oklahoma City, Oklahoma, to assume all of the deposits of Sunrise Bank of Arizona.  As the owner of substantially all of the capital stock of Sunrise Bank of Arizona, Capitol would be entitled to the net recoveries, if any, following the liquidation or sale of Sunrise Bank of Arizona 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.

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Regulatory Matters – Continued

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 continues 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, remains uncertain.

In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the "Basel III" capital rules, which set 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 provides for 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 Capitol's earnings or financial position, is difficult to determine at this point due to the current bankruptcy proceedings.

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

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 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.  The Internal Revenue Service has accepted Capitol's amended 2009 return and reduced the outstanding liability to $4.9 million.

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Tax Matters – Continued

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, the State and Capitol agreed to settle the matter including interest for the 2009 and 2010 returns for approximately $113,000 and $39,000, respectively, which have been reflected in Capitol's liabilities as of September 30, 2013.  Penalties were waived.

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.

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, third-party actions, or otherwise.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Other Corporate Matters – Continued

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 were permitted to solicit acceptances of the Amended Joint Liquidating Plan and the Debtors have concluded 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, was September 24, 2013 (with the exception of the Official Committee of Unsecured Creditors (the "Committee"), individual Committee members, Manufacturers and Traders Trust Company, as Trustee, an affiliate of a member of the Committee, and the ad hoc group of senior note holders, as to all of whom such objection deadline was extended to December 6, 2013).  This was 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.  A hearing on the estimation of claims of certain creditors for purposes of voting on the Amended Joint Liquidating Plan is presently scheduled for November 19, 2013.  The combined hearing to be conducted by the Bankruptcy Court on final approval of the Amended Disclosure Statement and confirmation of the Amended Joint Liquidating Plan is presently scheduled for December 18, 2013.  The Committee has filed a motion in the bankruptcy proceedings seeking the appointment of a chief restructuring officer for Capitol and FCC or, alternatively, a chapter 11 trustee (the "CRO Motion").  At the conclusion of the aforementioned combined hearing, if the Bankruptcy Court denies final approval of the Amended Disclosure Statement or confirmation of the Amended Joint Liquidating Plan, the Court will hear the Committee's CRO Motion.  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.

On October 11, 2013, Capitol, FCC, and Talmer Bancorp, Inc., a Michigan corporation (the "Purchaser") entered into a Stock Purchase Agreement (the "Purchase Agreement"). Pursuant to the terms and subject to the conditions of the Purchase Agreement, Capitol agreed to sell, assign and transfer to the Purchaser, subject to approval of the Bankruptcy Court pursuant to Section 363 of Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") and free and clear of all encumbrances: (i) all of the issued and outstanding shares of common stock of the Surviving Bank (as defined below); (ii) all bank related contracts; (iii) all right, title and interest to any proceeds received or to be received after December 31, 2012 related to any such contract; (iv) all of the trademarks and service marks registered to Capitol; and (v) certain other assets of Capitol and FCC, for a cash purchase price of $4.0 million. In addition, the Purchaser has agreed to make an equity contribution into the Surviving Bank at closing in the amount of up to $90 million and to pay $2.5 million of certain post-petition administrative fees and expenses incurred in the bankruptcy. With respect to any contract or agreement to which Capitol or FCC is a party, the Purchaser shall pay the amount required to be paid with respect to such contract or agreement to cure all monetary defaults under such contract or agreement to the extent required by Section 365(b) of the bankruptcy.

Capitol, through its affiliate FCC, owns all of the issued and outstanding shares of capital stock of Indiana Community Bank, an Indiana state-chartered bank ("Indiana Bank"), Michigan Commerce Bank, a Michigan state-chartered bank ("Michigan Bank"), Bank of Las Vegas, a Nevada state-chartered bank ("Nevada Bank") and Sunrise Bank of Albuquerque, a New Mexico state-chartered bank (the "New Mexico Bank") (Indiana Bank, Michigan Bank, Nevada Bank and New Mexico Bank, collectively, the "Banks"). The Banks will enter a merger agreement, which will become effective simultaneously with, or immediately prior to, the closing of the transaction proposed under the Purchase Agreement, pursuant to which Indiana Bank, Nevada Bank and New Mexico Bank will merge with and into Michigan Bank, with Michigan Bank as the surviving entity (the "Surviving Bank").

Consummation of the proposed transaction is subject to customary closing conditions including, among other things: (i) the representations and warranties of the parties to the Purchase Agreement being true and correct as of the closing; (ii) the Bankruptcy Court entering a final sale order acceptable to the Purchaser; (iii) the receipt of a waiver of

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Other Corporate Matters – Continued

liability from the FDIC regarding any potential cross-guaranty liability that may be asserted against the Banks; (iv) resolution of certain tax issues; and (v) the receipt of requisite regulatory approvals.  On November 12, 2013, the Debtors received Bankruptcy Court approval to enter into an agreement with the FDIC whereby the FDIC would receive 85% of the proceeds of the sale as a condition to its waiving cross-guaranty liability against the Surviving Bank.  The agreement remains subject to FDIC Board approval.

The parties intend for the sale and purchase contemplated under the Purchase Agreement to be effectuated pursuant to an order of the Bankruptcy Court approving such transactions under Sections 105, 363 and 365 of the Bankruptcy Code.  Pursuant to the existing schedule approved by the Bankruptcy Court, (i) November 14, 2013 is the deadline for submission in prescribed form of any competing bids, (ii) November 18, 2013 is the scheduled auction, if necessary, in the offices of Capitol's and FCC's bankruptcy counsel, and (iii) the hearing before the Bankruptcy Court on approval of the sale is to be conducted on November 19, 2013.

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.

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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 and financial officers 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 September 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 September 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.

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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. G3 Properties LLC, et al. v Capitol Bancorp Ltd. et al., Ingham Circuit Case No. 11-39-CZ Plaintiffs, investors in Capitol Development Bancorp Limited VIII ("CDBL VIII", a subsidiary of Capitol), sued Capitol.  Plaintiffs allege that certain transactions between CDBL VIII and Capitol were improper.  Capitol refutes that allegation.  Discovery is ongoing, and a trial date of December 16, 2013 has been set.  The parties have reached a preliminary settlement which remains subject to court and other approvals.  Capitol does not expect the settlement to have a material effect on its financial condition.
Item 1A.	Risk Factors. Other than as set forth below, during the nine months ended September 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 the FDIC appointed itself as receiver.  On August 23, 2013, Sunrise Bank of Arizona was closed by its state regulator 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.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
	(a)None. (b)Not applicable. (c)None.

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PART II.  OTHER INFORMATION – Continued

Item 3.	Defaults Upon Senior Securities. Capitol's August 9, 2012 voluntary petition for relief under Chapter 11 of the Bankruptcy Code constituted an event of default under the governing documents of the Corporation's various series of trust-preferred securities.  There is approximately $151.3 million in principal amount of trust-preferred securities outstanding.
Item 4.	Mine Safety Disclosures. Not applicable.
Item 5.	Other Information. None.
Item 6.	Exhibits:

(a)	(b)
Exhibit No.	Description of Exhibit
31.1	Certification of Chief Executive Officer, Joseph D. Reid pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of 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:  November 14, 2013	/s/ Joseph D. Reid Joseph D. Reid Chairman and CEO (principal executive officer)
Date:  November 14, 2013	/s/ Marie D. Walker Marie D. Walker Chief Accounting Officer (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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