form10q.htm

CAPITOL BANCORP LTD.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2010 and 2009
(in $1,000s)

	2010			2009

OPERATING ACTIVITIES
Net loss	$	(105,859	)	$	(50,867	)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities (including discontinued operations):
Provision for loan losses		94,864			67,574
Depreciation of premises and equipment		4,300			5,419
Amortization of intangibles		115			237
Net amortization (accretion) of investment security premiums (discounts)		270			(43	)
Loss on sale of premises and equipment		34			18
Gain on sales of government-guaranteed loans		(968	)		(645	)
Gain on sales of bank subsidiaries		(10,083	)
Gain on debt extinguishment		(1,255	)
Realized gain on sales of investment securities available for sale		(14	)		(1	)
Loss on sales of other real estate owned		1,727			722
Write-down of other real estate owned		14,442			6,785
Amortization of issuance costs of subordinated debentures		73			73
Share-based compensation expense		357			580
Deferred income tax credit		(48,038	)		(28,036	)
Valuation allowance for deferred income tax assets		49,331
Originations and purchases of loans held for sale		(59,630	)		(204,779	)
Proceeds from sales of loans held for sale		65,752			184,410
Decrease (increase) in accrued interest income and other assets		(4,174	)		9,603
Increase in accrued interest expense on deposits and other liabilities		2,910			6,742

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		4,154			(2,208	)

INVESTING ACTIVITIES
Cash equivalents of acquired bank affiliate		18,949
Proceeds from sales of investment securities available for sale		22,079
Proceeds from calls, prepayments and maturities of investment
securities		10,057			5,498
Purchases of investment securities		(14,004	)		(3,724	)
Redemption of Federal Home Loan Bank stock by issuer		(1,424	)		(5,664	)
Purchase of Federal Home Loan Bank stock		637			4,975
Net decrease in portfolio loans		47,912			56,360
Proceeds from sales of government-guaranteed loans		11,961			4,686
Proceeds from sales of premises and equipment		126			1,935
Purchases of premises and equipment		(3,620	)		(1,792	)
Proceeds from sales of bank subsidiaries		33,084
Proceeds from sales of other real estate owned		27,730			7,939

NET CASH PROVIDED BY INVESTING ACTIVITIES		153,487			70,213

FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		95,339			117,679
Net increase (decrease) in certificates of deposit		(57,080	)		79,728
Net borrowings from (payments on) debt obligations		(973	)		6,652
Proceeds from Federal Home Loan Bank borrowings		465,358			1,842,341
Payments on Federal Home Loan Bank borrowings		(517,981	)		(1,933,343	)
Resources provided by noncontrolling interests		3,420			134
Net proceeds from issuance of common stock		6,836
Tax effect of share-based payments		(36	)		(117	)
Cash dividends paid					(864	)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(5,117	)		112,210

INCREASE IN CASH AND CASH EQUIVALENTS		152,524			180,215

Change in cash and cash equivalents of discontinued operations		1,035			4,618

Cash and cash equivalents at beginning of period		771,079			571,236

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	924,638		$	756,069

Supplemental disclosures:
Cash paid during the period for interest on deposits and debt obligations	$	40,620		$	61,056
Transfers of loans to other real estate owned		41,291			50,854
Surrender of common stock to facilitate exercise of stock options
and vesting of restricted stock		3			23

See notes to condensed consolidated financial statements.

Page 9 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Capitol Bancorp Limited (Capitol or the Corporation) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America.

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

The results of operations for the periods ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

The consolidated balance sheet as of December 31, 2009 was derived from audited consolidated financial statements as of that date. Certain 2009 amounts have been reclassified to conform to the 2010 presentation.

Note B – Accounting Standards Updates

In December 2007, a new accounting standard was issued to create accounting and reporting requirements for noncontrolling interests in a subsidiary (when it is not wholly-owned) and for the deconsolidation of a subsidiary and became effective January 1, 2009. In January 2010, an accounting standards update was issued clarifying the types of transactions that should be accounted for as a decrease in ownership of a subsidiary, which became effective for the Corporation on January 1, 2010 (with retrospective application to January 1, 2009) and did not have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

A new standard became effective January 1, 2009 clarifying the accounting for transfers of financial assets and repurchase financing transactions. Subsequently, further guidance revised requirements for the presentation and disclosure of transfers of financial assets and the effects of a transfer on an entity's financial position, financial performance and cash flows along with placing limitations on portions of financial assets that are eligible for accounting recognition as a sale. The guidance applies to transfers of financial assets occurring on or after January 1, 2010 and did not materially affect the Corporation's financial position or results of operations upon implementation.

In December 2009, an accounting standards update was issued to improve financial reporting by entities involved with variable interest entities. This update replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity, and it requires additional disclosures about a reporting entity's involvement in variable interest entities. The guidance became effective f or the Corporation on January 1, 2010 and did not have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

In January 2010, an accounting standards update regarding fair value measurements and disclosures was issued to require more robust disclosures about (1) different classes of assets and liabilities measured at fair value, (2) valuation techniques and inputs used, (3) the activity in Level 3 fair-value measurements, and (4) the transfers between Levels 1, 2, and 3 of fair-value estimates. The new disclosures became effective for the Corporation beginning January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair-value measurements which become effective beginning January 1, 2011. The required interim disclosures for 2010 are set forth in Note E. Management does not expect this new guidance to have a material effect on th e Corporation's condensed consolidated financial statements upon implementation in 2011 of the deferred disclosure requirements.

Page 10 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note B – Accounting Standards Updates – Continued

In April 2010, an accounting standards update was issued clarifying that modifications of loans accounted for within a pool that have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. Loans not accounted for within pools continue to be subject to the troubled debt restructuring accounting provisions. This new guidance is effective for modifications of loans accounted for within pools occurring after July 1, 2010 and management does not expect it to have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

In July 2010, an accounting standards update was issued which will require significant new disclosures on a disaggregated basis about the allowance for loan losses and the credit quality of financing receivables (i.e., portfolio loans). Under this standards update, a rollforward of the allowance for loan losses with the ending balance further disaggregated on the basis of the impairment methods used to establish loss estimates, along with the related ending loan balances and significant purchases and sales of loans during the period are to be disclosed by portfolio segment or classification used for reporting purposes. Additional disclosures will be required by type of loan, including credit quality, aging of past-due loans, nonaccrual status and impairment information. Disclosure of the nature and extent of troubled debt restructurings that occur during the period and their effect on the allowance for loan losses as well as the effect on the allowance of troubled debt restructurings that occur within the prior 12 months that defaulted during the current reporting period will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the loan portfolio's risk and performance. The majority of the disclosures, which are required as of the end of a reporting period, are effective for interim and annual periods ending after December 15, 2010 and will be first included in the Corporation's annual financial statements for the year ending December 31, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning after December 15, 2010 and will be first disclosed in the Corporation's financial statements for the interim period end ing March 31, 2011. Management does not expect this new guidance to have a material effect on the Corporation's annual and interim consolidated financial statements upon implementation.

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Page 11 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities

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

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

	June 30, 2010				December 31, 2009(1)
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available for sale:
United States treasury	$	504	$	507	$	1,500	$	1,500
United States government agency		17,814		17,898		12,956		12,939
Mortgage-backed		4,813		5,032		24,690		24,598
Municipalities		515		523		727		739
		23,646		23,960		39,873		39,776
Held for long-term investment:
Capitol Development Bancorp Limited III		474		474		672		672
Corporate		2,610		2,610		5,119		5,119
Other		250		250		100		100
		3,334		3,334		5,891		5,891

	$	26,980	$	27,294	$	45,764	$	45,667

(1)	Excludes investment securities related to discontinued operations with an amortized cost and estimated fair value of approximately $1 million.

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

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

	June 30, 2010				December 31, 2009(1)
	Gains		Losses		Gains		Losses

United States treasury	$	3	$	--
United States government agency		84		--	$	5	$	22
Mortgage-backed		219		--		122		214
Municipalities		8		--		12		--

	$	314	$	--	$	139	$	236

(1)	Excludes gross unrealized gains of $2,000 related to operations discontinued in 2010.

Page 12 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities – Continued

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

	June 30, 2010				December 31, 2009
	Unrealized Loss		Carrying Value		Unrealized Loss		Carrying Value

One year or less:
United States treasury	$	--	$	--
United States government agency		--		--	$	22	$	8,979
Mortgage-backed		--		--		214		19,879

	$	--	$	--	$	236	$	28,858

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

Scheduled maturities of investment securities held as of June 30, 2010 were as follows (in $1,000s):

	Amortized Cost		Estimated Fair Value

Due in one year or less	$	5,442	$	5,445
After one year, through five years		13,343		13,428
After five years, through ten years		943		979
After ten years		3,918		4,108
Securities held for long-term
investment without stated
maturities		3,334		3,334

	$	26,980	$	27,294

Note D – Discontinued Operations

On April 27, 2010, sale of Bank of Belleville, previously a majority-owned subsidiary, was completed. Capitol received cash consideration of $5.0 million and recorded a gain of approximately $1.2 million. On April 30, 2010, sale of Napa Community Bank, previously a majority-owned subsidiary, was completed. Capitol received cash consideration of $21.6 million and recorded a gain of approximately $7.4 million. Under the terms of the sale transaction, Capitol could receive additional proceeds of up to $5.3 million in the future, subject to Napa Community Bank's future financial performance. On June 30, 2010, sale of Ohio Commerce Bank, previously a majority-owned subsidiary of a bank-development subsidiary controlled by Capitol, was completed with cash consideration of $6.5 million and a gain of approximately $1.5 million. Capitol's consolidated results of operations would not have been materially different if the sales of these banks had occurred at the beginning of the periods presented; however, they are reflected in pro forma condensed consolidated financial statements on page 44.

Page 13 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Discontinued Operations – Continued

The results of operations of Bank of Belleville, Napa Community Bank and Ohio Commerce Bank, together with the results of operations of Bank of Santa Barbara and Yuma Community Bank which were sold in 2009, are classified as discontinued operations for the periods presented and include the following components (in $1,000s):

	Three Months Ended June 30					Six Months Ended June 30
	2010			2009		2010			2009

Interest income	$	1,792		$	5,780	$	5,434		$	11,401
Interest expense		347			1,305		1,081			2,774
Net interest income		1,445			4,475		4,353			8,627
Provision for loan losses		164			1,147		1,223			1,449
Net interest income after provision		1,281			3,328		3,130			7,178
Noninterest income		117			308		495			587
Gain on sale of bank subsidiaries		10,083					10,083
Noninterest expense		995			3,434		3,366			6,812
Income before income taxes		10,486			202		10,342			953
Less income tax expense		3,687			88		3,621			406
Net income from discontinued
operations		6,799			114		6,721			547
Net loss (income) attributable to
noncontrolling interests in
consolidated subsidiaries		(94	)		369		(167	)		557
Net income from discontinued
operations attributable to Capitol
Bancorp Limited	$	6,705		$	483	$	6,554		$	1,104
Net income from discontinued
operations per share attributable
to Capitol Bancorp Limited	$	0.32		$	0.03	$	0.34		$	0.06

Assets and liabilities of discontinued operations as of December 31, 2009 are summarized below (in $1,000s):

Assets:
Cash and cash equivalents	$	37,842
Loans held for sale		4,512
Portfolio loans		254,746
Less allowance for loan losses		(4,341	)
Net portfolio loans		250,405
Premises and equipment		1,369
Other assets		9,422

	$	303,550

Liabilities:
Noninterest-bearing deposits	$	54,380
Interest-bearing deposits		207,816
Total deposits		262,196
Debt obligations		8,500
Other liabilities		576

	$	271,272

Page 14 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Fair Value

The following is a description of Capitol's valuation methodologies used to measure and disclose the fair values of its assets and liabilities on a recurring or nonrecurring basis:

Investment securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, when available (Level 1). If quoted prices are not available, fair values are measured using independent pricing models (Level 2).

Mortgage loans held for sale: Mortgage loans held for sale are carried at the lower of cost or fair value and are measured on a nonrecurring basis. There were no mortgage loans held for sale written down to fair value at June 30, 2010. Fair value is based on independent quoted market prices, where applicable, or the prices for other mortgage whole loans with similar characteristics.

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

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 accounting basis. The Corporation subsequently adjusts estimated fair value of other real estate owned on a nonrecurring basis to reflect partial write-downs based on the observable market price or current appraisal data.

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

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 were as follows

(in $1,000s):

	Total		Significant Other Observable Inputs (Level 2)

Investment securities available for sale:
United States treasury	$	507	$	507
United States government agency		17,898		17,898
Mortgage-backed		5,032		5,032
Municipalities		523		523

	$	23,960	$	23,960

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Page 15 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Fair Value – Continued

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 were as follows (in $1,000s):

	Total(1)		Significant Other Observable Inputs (Level 2)(1)

Investment securities available for sale:
United States treasury	$	1,500	$	1,500
United States government agency		12,939		12,939
Mortgage-backed		24,598		24,598
Municipalities		739		739

	$	39,776	$	39,776

(1) Excludes investment securities related to discontinued operations approximating $1 million.

Assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2010 were as follows (in $1,000s):

	Total		Significant Unobservable Inputs (Level 3)

Impaired loans(1)	$	223,132	$	223,132

Other real estate owned(1)	$	108,715	$	108,715

(1)	Represents carrying value based on the appraised value of the applicable collateral or foreclosed property or other estimates of fair value.

Assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2009 were as follows (in $1,000s):

	Total(2)		Significant Unobservable Inputs (Level 3)(2)

Impaired loans(1)	$	137,008	$	137,008

Other real estate owned(1)	$	111,102	$	111,102

(1)	Represents carrying value based on the appraised value of the applicable collateral or other estimates of fair value.

(2)	Excludes impaired loans of $1,974,000 and other real estate owned of $718,000 related to discontinued operations.

Page 16 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Fair Value – Continued

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

When borrower performance has deteriorated (for example, sales or leasing has not occurred as expected, the borrower has become delinquent on required payments or the borrower's updated financial information received indicates adverse financial trends), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered. In the period between a loan being recognized as impaired and receipt of an updated appraisal, the loan will be included within loss contingency pools. Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, the loan will be further evaluated for appropriate charge-down. Generally, negative differences between appraised value, less the estimated cost to sell, and the related carrying value of the loan are charged to the a llowance for loan losses when the appraisal has been received and reviewed. Occasionally, additional amounts may be included in the estimate of requirements for the allowance for loan losses if there are pending circumstances which may adversely impact the fair value estimates. Internally-developed evaluations may be used when the amount of the loan is less than $250,000. Internal evaluations may also be used when the most recent appraisal date is within a year and economic conditions have had corrections or deterioration. Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

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Page 17 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Fair Value – Continued

Comparative carrying values and estimated fair values of financial instruments based upon the accounting guidance set forth in ASC 825-10 (formerly FAS 107) were as follows (in $1,000s):

	June 30, 2010						December 31, 2009(2)
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	924,638		$	924,638		$	771,079		$	771,079
Loans held for sale		5,931			5,931			11,621			11,621
Investment securities:
Available for sale		23,960			23,960			39,776			39,776
Held for long-term investment		3,334			3,334			5,891			5,891
		27,294			27,294			45,667			45,667
Federal Home Loan Bank and Federal Reserve Bank stock		24,021			24,021			23,215			23,215
Portfolio loans:
Loans secured by real estate:
Commercial		1,825,943			1,722,979			1,884,309			1,803,661
Residential (including multi-family)		720,938			685,906			727,816			693,450
Construction, land development and other land		420,318			357,651			471,121			397,343
Total loans secured by real estate		2,967,199			2,766,536			3,083,246			2,894,454
Commercial and other business-purpose loans		578,056			556,974			633,276			616,490
Consumer		38,777			38,165			42,691			43,047
Other		33,332			32,146			33,142			31,433
Total portfolio loans		3,617,364			3,393,821			3,792,355			3,585,424
Less allowance for loan losses		(160,482	)		(160,482	)		(140,323	)		(140,323	)
Net portfolio loans		3,456,882			3,233,339			3,652,032			3,445,101

Financial liabilities:
Deposits:
Noninterest-bearing		682,736			682,736			624,721			624,721
Interest-bearing:
Demand accounts		1,228,452			1,228,452			1,211,149			1,211,149
Time certificates of less than $100,000		962,255			963,966			906,908			909,009
Time certificates of $100,000 or more		1,309,774			1,311,550			1,405,660			1,407,728
Total interest-bearing		3,500,481			3,503,968			3,523,717			3,527,886
Total deposits		4,183,217			4,186,704			4,148,438			4,152,607
Notes payable and other borrowings		214,983			226,321			267,659			267,765
Subordinated debentures		167,514			170,841	(1)		167,441			170,841	(1)

(1)	Represents liquidation or principal amount outstanding. The quoted market value of certain trust-preferred securities

(Capitol Trust I and XII) included within subordinated debentures was substantially less than that amount.

(2)	Excludes amounts related to discontinued operations.

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). For example, the estimated fair value of portfolio loans is based on discounted cash flow computations. Similarly, the estimated fair values of time deposits, debt obligations and subordinated debentures were determined through discounted cash flow computations. Such estimates of fair value are not intended to represent market value or portfolio liquidation value, and only represent an estimate of fair value based on current financial reporting requirements.

Page 18 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Fair Value – Continued

Given current economic conditions, a portion 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 table on the preceding page are unlikely to represent the instruments' liquidation values.

Note F – Stock Options

Stock option activity is summarized as follows:

	Number Outstanding			Exercise Price Range		Weighted Average Exercise Price

Outstanding at January 1, 2010		2,504,483		$	2.01 to $ 46.20	$	24.61
Granted		206,656		1.78 to 1.96			1.95
Exercised		(10,000	)		2.01		2.01
Cancelled or expired		(397,626	)	17.42 to 34.52			25.60

Outstanding at June 30, 2010		2,303,513		$	1.78 to $ 46.20	$	22.51

Stock options were granted during the six months ended June 30, 2010 and 2009, with an aggregate fair value approximating $255,000 and $240,000, respectively. Stock options granted during the interim 2010 period have various vesting dates through 2012 and expire on dates in 2014 and 2015. Share-based compensation expense relating to stock options for the six months ended June 30, 2010 and 2009 approximated $174,000 and $238,000, respectively.

As of June 30, 2010, stock options outstanding had a weighted average remaining contractual life of 2.11 years and, due to the exercise price being greater than the fair value of Capitol's common stock, had no intrinsic value at that date. The following table summarizes stock options outstanding segregated by exercise price range as of June 30, 2010:

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

$	1.00 to 14.99		600,680	$	2.45	3.34 years
$	15.00 to 19.99		78,682		16.40	1.09 years
$	20.00 to 24.99		359,330		21.78	2.49 years
$	25.00 to 29.99		270,765		26.94	0.61 years
$	30.00 to 34.99		628,548		31.99	1.31 years
$	35.00 or more		365,508		37.93	2.44 years

Total outstanding			2,303,513	$	22.51

Page 19 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note G – Net Loss Per Share Attributable to Capitol Bancorp Limited

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

	Three Month Period						Six Month Period
	2010			2009			2010			2009

Numerator—net loss attributable to Capitol Bancorp Limited for the period	$	(41,003	)	$	(16,304	)	$	(88,885	)	$	(36,978	)

Denominator:
Weighted average number of shares outstanding, excluding unvested restricted shares (denominator for basic and diluted earnings per share)		20,684			17,244			19,052			17,203

Number of antidilutive stock options excluded from diluted net loss per share computation		2,304			2,428			2,304			2,428

Number of antidilutive unvested restricted shares excluded from diluted net loss per share computation		126			123			126			123

Number of antidilutive warrants excluded from diluted net loss per share computation		76			76			76			76

Note H – Trust-Preferred Securities

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, to conserve cash and capital resources. The payment of interest 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. Accrued interest payable on such securities approximated $18.1 million and $11.2 million at June 30, 2010 and December 31, 2009, respectively. Holders of the trust-preferred securities will recognize current taxable income relating to the deferred interest payments.

In late May 2010, Capitol proposed an offer to exchange up to 2,908,200 shares of its common stock for any and all of its outstanding 10.50% trust-preferred securities of Capitol Trust XII (the Trust XII Preferred Securities). For each $10.00 liquidation amount of the Trust XII Preferred Securities, Capitol would issue 2 shares of its common stock under the terms of the proposed exchange offer. No accrued and unpaid interest with respect to the Trust XII Preferred Securities will be paid to holders tendering any such securities in the proposed exchange offer. The proposed exchange offer has been extended to August 31, 2010 and the amount of Trust XII Preferred Securities which may be exchanged, if any, cannot be determined until the exchange proposal is completed.

Note I - Issuance of Preferred Stock

On June 30, 2010, Capitol issued an aggregate 95,000 shares of its Series A Noncumulative Perpetual Preferred Stock (the Series A Preferred Stock). Of that aggregate issuance, 44,020 shares were issued to a consolidated subsidiary of Capitol and, accordingly, have been eliminated in consolidation. The remaining 50,980 shares were issued to an affiliate bank-development company which is an unconsolidated affiliate of Capitol. The liquidation preference of the shares issued was $100.00 per share, for an aggregate issuance price of $9.5 million of which $4.4 million has been eliminated upon consolidation. The Series A Preferred Stock is nonvoting and callable at Capitol's option after 36 months from date of issuance at $100.00 per share plus any accrued dividends. Dividends on such shar es are payable only when and if declared by Capitol's board of directors based on an annual rate of 6%.

Page 20 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note J – Pending Sale of Subsidiary Banks

Capitol has entered into definitive agreements to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institutions: Adams Dairy Bank, Bank of Fort Bend, Bank of Las Colinas, Bank of San Francisco, Community Bank of Rowan, Fort Collins Commerce Bank, Larimer Bank of Commerce, Loveland Bank of Commerce, Mountain View Bank of Commerce and USNY Bank. The projected financial statement impact of the potential divestiture of these institutions is set forth in the accompanying pro forma condensed consolidated financial statements on pages 43 and 44.

On July 30, 2010, the sale of Community Bank of Lincoln, previously a majority-owned subsidiary of a bank-development subsidiary controlled by Capitol, was completed. Capitol received cash consideration of $3.7 million and recorded a gain of approximately $1.4 million. Capitol's consolidated results of operations would not have been materially different if the sale had occurred at the beginning of the periods presented.

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

Note K – Proposed Spin-Off

In July 2009, Capitol announced its intention to formally and legally separate the operations of Michigan Commerce Bancorp Limited (MCBL) as an independent publicly-traded company through a spin-off transaction. Capitol has deferred plans to complete the proposed spin-off.

Note L – Regulatory Agreements

In September 2009, Capitol and its second-tier bank holding companies entered into a written agreement with the Federal Reserve Bank of Chicago (the Reserve Bank) under which Capitol has 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.

Capitol has also 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 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 sub sidiary 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.

Page 21 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note M – Sale of Common Stock and Warrants

In April 2010, Capitol completed an offering of 2.5 million shares of previously unissued common stock and warrants for the purchase of 1.25 million additional shares of common stock, resulting in net proceeds approximating $6.8 million with a corresponding increase to Capitol's stockholders' equity. The warrants have an exercise price of $3.50 per warrant and expire in 2013.

Note N – Regulatory Capital Matters

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

		June 30,				December 31,
		2010				2009
Tier 1 capital to average adjusted total assets:
Minimum required amount	≥	$	191,537		≥	$	210,651
Actual amount		$	114,331			$	242,547
Ratio			2.39	%			4.61	%

Tier 1 capital to risk-weighted assets:
Minimum required amount(1)	≥	$	143,319		≥	$	162,089
Actual amount		$	114,331			$	242,547
Ratio			3.19	%			5.99	%

Combined Tier 1 and Tier 2 capital to risk- weighted assets:
Minimum required amount(2)	≥	$	286,637		≥	$	324,177
Actual amount		$	228,662			$	383,449
Ratio			6.38	%			9.46	%

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

The summary above indicates that Capitol, on a consolidated basis, was classified as less than adequately-capitalized at June 30, 2010. In addition to that aspect of its regulatory capital classification at that date, several of its bank subsidiaries had capital levels resulting in classification as undercapitalized or significantly-undercapitalized at that date. Further, one bank was classified as critically-undercapitalized at June 30, 2010; however, that bank's adverse capital classification was resolved on July 30, 2010 as a result of a merger transaction with other affiliated banks. Regarding banks classified as undercapitalized or significantly-undercapitalized, and otherwise noncompliant with formal regulatory agreements, management is taking appro priate action to improve such capital classifications and related compliance in the future.

Note O – Subsequent Events

Effective July 30, 2010, Peoples State Bank and Sunrise Bank of Atlanta merged with and into Bank of Valdosta. Upon completion of the merger, the surviving bank was renamed Sunrise Bank. Prior to the merger, each of the banks was either a majority-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.

Additionally, on July 30, 2010, the controlling interest in Community Bank of Lincoln was sold (see Note J).

Page 22 of 50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note O – Subsequent Events – Continued

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

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Page 23 of 50

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. The discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, some of which are material to Capitol and its bank 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 co mmentary regarding forward-looking statements appearing on page 2 of this document.

Financial Condition

Total assets approximated $4.7 billion at June 30, 2010 and $5.1 billion at December 31, 2009. The balance sheet includes total assets of Capitol and its consolidated subsidiaries (in $1,000s) as follows:

	June 30, 2010		December 31, 2009
Arizona Region:
Bank of Tucson	$	229,041	$	204,933
Central Arizona Bank		88,024		95,303
Southern Arizona Community Bank		96,735		94,585
Sunrise Bank of Albuquerque		82,192		78,930
Sunrise Bank of Arizona		430,865		495,168
Arizona Region Total		926,857		968,919

California Region:
Bank of Feather River		40,795		33,693
Bank of San Francisco		96,312		87,740
Napa Community Bank(7)				166,873
Sunrise Bank(4)		257,099		296,197
California Region Total		394,206		584,503

Colorado Region:
Fort Collins Commerce Bank		100,149		93,908
Larimer Bank of Commerce		94,255		89,623
Loveland Bank of Commerce		39,879		40,032
Mountain View Bank of Commerce		52,761		50,621
Colorado Region Total		287,044		274,184

Great Lakes Region:
Bank of Maumee		45,410		46,796
Bank of Michigan		98,280		99,344
Capitol National Bank		184,542		200,597
Evansville Commerce Bank		50,363		56,392
Indiana Community Bank(5)		168,017		175,407
Michigan Commerce Bank(1)		1,154,877		1,233,289
Ohio Commerce Bank(7)				66,175
Great Lakes Region Total		1,701,489		1,878,000

Midwest Region:
Adams Dairy Bank		46,138		44,309
Bank of Belleville(7)				70,502
Community Bank of Lincoln		55,243		60,356
Midwest Region Total		101,381		175,167

Nevada Region:
1st Commerce Bank		46,038		38,811
Bank of Las Vegas(2)		482,331		488,786
Nevada Region Total		528,369		527,597

Northeast Region:
USNY Bank		69,998		64,176

Page 24 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of total assets – continued:

	June 30, 2010		December 31, 2009
Northwest Region:
Bank of the Northwest(3)	$	161,150	$	174,005
High Desert Bank		37,850		41,849
Northwest Region Total		199,000		215,854

Southeast Region:
Bank of Valdosta		50,265		55,156
Community Bank of Rowan(6)		139,433
First Carolina State Bank		113,222		115,716
Peoples State Bank		24,999		26,198
Pisgah Community Bank		59,402		62,773
Sunrise Bank of Atlanta		54,815		55,966
Southeast Region Total		442,136		315,809

Texas Region:
Bank of Fort Bend		38,929		31,548
Bank of Las Colinas		45,966		43,003
Texas Region Total		84,895		74,551

Parent company and other, net		13,320		53,180

Consolidated Totals	$	4,748,695	$	5,131,940

(1)	Effective March 31, 2010, Bank of Auburn Hills and Paragon Bank & Trust merged with and into Michigan Commerce Bank. Prior to the merger, Bank of Auburn Hills and Paragon Bank & Trust were wholly-owned subsidiaries of Capitol.
(2)	Effective January 29, 2010, Black Mountain Community Bank, Desert Community Bank and Red Rock Community Bank merged with and into Bank of Las Vegas. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(3)	Effective February 19, 2010, Bank of Bellevue, Bank of Everett and Bank of Tacoma merged with and into Issaquah Community Bank. Upon completion of the merger, the surviving bank was renamed Bank of the Northwest. Prior to the merger, each of the banks was either a majority-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(4)	Effective March 5, 2010, Bank of Escondido, Sunrise Bank of San Diego and Sunrise Community Bank merged with and into Point Loma Community Bank. Upon completion of the merger, the surviving bank was renamed Sunrise Bank. Prior to the merger, each of the banks was either a wholly-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(5)	Effective March 22, 2010, Elkhart Community Bank merged with and into Goshen Community Bank. Upon completion of the merger, the surviving bank was renamed Indiana Community Bank. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(6)	As of December 31, 2009, Community Bank of Rowan (CBR) was a majority-owned subsidiary of Capitol Development Bancorp Limited III (CDBL III) which, due to a change in control effective September 30, 2009, was an unconsolidated affiliate of Capitol. Effective June 30, 2010, CDBL III transferred its controlling interest in CBR to Capitol in exchange for preferred stock of Capitol and, accordingly, CBR became a consolidated subsidiary of Capitol on that date.
(7)	Capitol's interest in this bank subsidiary was sold during the six months ended June 30, 2010.

Portfolio loans, the single largest asset category, decreased during the six months ended June 30, 2010 by approximately $430 million, compared to a decrease of about $158 million during the corresponding period of 2009. Approximately $255 million of the interim 2010 net loan portfolio decrease related to banks sold during the three months ended June 30, 2010. The portfolio decrease related to banks within the consolidated group at June 30, 2010, which approximated $175 million, is in response to the need to preserve liquidity and capital in the current economic climate and the general economic slowdown occurring nationally.

Geographic diversification of Capitol's balance sheet is important. Prior to 1996, all of Capitol's banking operations were located in Michigan. As of June 30, 2010, 37% of the consolidated loan portfolio relates to banks located within the Great Lakes Region (39% at December 31, 2009) and 63% of the consolidated loan portfolio relates to banks located in other regions of the country (61% at December 31, 2009). This is important because Capitol's diversification efforts lessen disproportionate geographic concentration within a specific region.

Page 25 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

The consolidated allowance for loan losses at June 30, 2010 approximated $160 million or 4.44% of total portfolio loans, an increase from the 3.70% ratio at the beginning of the year (excluding discontinued operations), resulting from continued deterioration in economic conditions and asset quality.

The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio at the balance-sheet date. Management's determination of the adequacy of the allowance is based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio and other factors. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The table below summarizes portfolio loan balances and activity in the allowance for loan losses (in $1,000s):

	Periods Ended June 30
	Three Month Period						Six Month Period
	2010			2009(1)			2010			2009(1)

Allowance for loan losses at beginning of period	$	147,526		$	94,150		$	140,323		$	87,636

Allowance for loan losses of previously-deconsolidated bank subsidiary		1,769						1,769

Loans charged-off:
Loans secured by real estate:
Commercial		(15,603	)		(2,052	)		(26,191	)		(5,625	)
Residential (including multi-family)		(6,800	)		(6,994	)		(18,972	)		(14,897	)
Construction, land development and other land		(8,742	)		(5,372	)		(22,624	)		(13,479	)
Total loans secured by real estate		(31,145	)		(14,418	)		(67,787	)		(34,001	)
Commercial and other business-purpose loans		(6,220	)		(4,121	)		(13,756	)		(12,174	)
Consumer		(265	)		(250	)		(426	)		(542	)
Other		(1	)		(1	)		(1	)		(1	)
Total charge-offs		(37,631	)		(18,790	)		(81,970	)		(46,718	)
Recoveries:
Loans secured by real estate:
Commercial		384			20			742			122
Residential (including multi-family)		514			154			622			201
Construction, land development and other land		2,284			2			3,605			121
Total loans secured by real estate		3,182			176			4,969			444
Commercial and other business-purpose loans		987			289			1,682			833
Consumer		49			14			68			29
Other		--			--			--			1
Total recoveries		4,218			479			6,719			1,307
Net charge-offs		(33,413	)		(18,311	)		(75,251	)		(45,411	)
Additions to allowance charged to expense		44,600			32,511			93,641			66,125

Allowance for loan losses at end of period	$	160,482		$	108,350		$	160,482		$	108,350

Average total portfolio loans for the period	$	3,672,751		$	4,334,687		$	3,611,204		$	4,315,798

Ratio of net charge-offs (annualized) to average portfolio loans outstanding		3.64	%		1.69	%		4.17	%		2.10	%

(1)	Excludes amounts related to operations discontinued in 2010.

Page 26 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Loan charge-offs for the interim 2010 periods, which increased significantly compared to 2009, are not necessarily indicative of future charge-off levels because of the variability in asset quality and resolution of nonperforming loans. The significant increase in the provision for loan losses in the 2010 periods was associated primarily with Michigan, Arizona and Nevada banks, due to growth in nonperforming loans and a sustained difficult and uncertain economic climate. The interim 2010 provision for loan losses is discussed in further detail in the 'Results of Operations' section of this narrative.

The amounts of the allowance for loan losses allocated in the following table (in $1,000s) are based on management's estimate of losses inherent in the portfolio at the balance-sheet date and should not be interpreted as an indication of future charge-offs:

	June 30, 2010					December 31, 2009(1)
	Amount		Percentage of Total Portfolio Loans			Amount		Percentage of Total Portfolio Loans




Loans secured by real estate:
Commercial	$	55,154		1.53	%	$	55,509		1.46	%
Residential (including multi-family)		39,237		1.08	%		27,422		0.72	%
Construction, land development and other land		24,934		0.69	%		22,144		0.59	%
Total loans secured by real estate		119,325		3.30	%		105,075		2.77	%
Commercial and other business-purpose loans		38,837		1.07	%		33,665		0.89	%
Consumer		2,079		0.06	%		1,377		0.04	%
Other		241		0.01	%		206		0.01	%

Total allowance for loan losses	$	160,482		4.44	%	$	140,323		3.70	%

(1) Excludes amounts related to operations discontinued in 2010.

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Page 27 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

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

	June 30, 2010		March 31, 2010(1)		December 31, 2009(1)
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	163,759	$	152,495	$	130,281
Residential (including multi-family)		57,195		63,457		55,347
Construction, land development and other land		94,133		81,139		82,239
Total loans secured by real estate		315,087		297,091		267,867
Commercial and other business-purpose loans		31,165		27,102		23,063
Consumer		1,481		518		380
Total nonaccrual loans		347,733		324,711		291,310

Past due (>90 days) loans and accruing interest:
Loans secured by real estate:
Commercial		5,544		5,796		6,234
Residential (including multi-family)		2,508		768		228
Construction, land development and other land		2,113		3,035		3,713
Total loans secured by real estate		10,165		9,599		10,175
Commercial and other business-purpose loans		1,344		2,101		1,546
Consumer		32		12		534
Total past due loans		11,541		11,712		12,255

Total nonperforming loans	$	359,274	$	336,423	$	303,565

Real estate owned and other repossessed assets		108,815		109,719		111,167

Total nonperforming assets	$	468,089	$	446,142	$	414,732

(1)	Excludes amounts related to operations discontinued in 2010.

Nonperforming loans increased $55.7 million or 18% during the six months ended June 30, 2010, compared to a much larger increase of $91 million or 53% in the corresponding period of 2009.

Total nonperforming assets increased $22 million for the three-month period ended June 30, 2010, about 30% less than the amount of increase in the immediately preceding quarterly period and the smallest level of growth since the three-month period ended June 30, 2008. In addition, real estate owned and other repossessed property decreased at June 30, 2010 on a net basis for the second consecutive quarter as proceeds from sales of such properties increased during the interim 2010 periods nearly 250% over 2009 interim levels and at a modest loss. During the interim 2010 periods, nonperforming assets at Capitol's largest bank (Michigan Commerce Bank) stabilized and decreased slightly. While these recent occurrences are encouraging, future changes in asset qu ality remain uncertain.

Page 28 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Loans are considered impaired when it is probable that all amounts due according to the contractual terms of a loan agreement will not be collected, including contractually scheduled interest and principal payments. Impaired loans, which are included in nonperforming loans, are summarized below (in $1,000s):

	June 30, 2010		December 31, 2009(1)
Impaired loans:
Loans which have an allowance requirement	$	147,031	$	112,804
Loans which do not have an allowance requirement		260,408		214,147

Total impaired loans	$	407,439	$	326,951

Allowance for loan losses related to impaired loans	$	25,695	$	19,858

(1)

Excludes impaired loans of $5,780 and allowance for loan losses related to impaired loans of $280 for operations discontinued in 2010.

Impaired loans which do not have an allowance requirement include collateral-dependent loans for which direct write-downs have been made to the carrying amount of such loans and, accordingly, no additional allowance requirement or allocation is currently necessary. The coverage ratio of the allowance for loan losses as a percentage of nonperforming loans approximated 45% at June 30, 2010, compared to 46% at the beginning of the year (excluding operations discontinued in 2010).

Nonperforming loans at June 30, 2010 approximated 9.9% of total portfolio loans, a further increase from the December 31, 2009 ratio of 8% (excluding discontinued operations). The increase in the percentage of nonperforming loans resulted, in part, from the decrease in portfolio loans during the interim 2010 period ($175 million). Nonperforming loans increased $56 million during the interim 2010 period of which $22.9 million occurred during the three months ended June 30, 2010. Notably, the pace of growth in nonperforming loans decreased for the third consecutive quarter as of June 30, 2010. Of the nonperforming loans at June 30, 2010, about 91% were real estate secured. Those loans, when originated, had appropriate loan-to-value ratios based upon real estate market conditions at tha t time and, accordingly, had loss exposure which would have been expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies. Most other nonperforming loans were generally secured by other business assets. Nonperforming loans at June 30, 2010 were in various stages of resolution which management believes are adequately collateralized or otherwise appropriately considered in its determination of the adequacy of the allowance for loan losses.

The total of impaired loans typically exceeds the aggregate amount of nonperforming loans. The difference between those totals relates to impaired loans which are not in nonperforming status at the balance-sheet date.

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

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

Page 29 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

When borrower performance has deteriorated (for example, sales or leasing has not occurred as expected, the borrower has become delinquent on required payments or the borrower's updated financial information received indicates adverse financial trends), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered. In the period between a loan being recognized as impaired and receipt of an updated appraisal, the loan will be included within loss contingency pools. Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, the loan will be further evaluated for appropriate charge-down. Generally, negative differences between appraised value, less the estimated cost to sell, and the related carrying value of the loans are charged t o the allowance for loan losses when the appraisal has been received and reviewed. Occasionally, additional amounts may be included in the estimate of requirements for the allowance for loan losses if there are pending circumstances which may adversely impact fair value estimates. Internally-developed evaluations may be used when the amount of the loan is less than $250,000. Internal evaluations may also be used when the most recent appraisal date is within a year and economic conditions have had corrections or deterioration. Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

Total nonperforming loans approximated $359 million at June 30, 2010. Of that total, $155 million or 43% (including some loans carried at the parent level) were originated by banks located within the Great Lakes Region, primarily in Michigan. Within the Great Lakes Region, nonperforming loans approximated 11% of portfolio loans at June 30, 2010. Responsive to the elevated level of nonperforming loans within the Great Lakes Region, higher levels of allowances for loan losses have been established, approximating 5.9% of portfolio loans for the region on a combined basis as of June 30, 2010 and as high as 6.58% at Michigan Commerce Bank. Those ratios can be contrasted with some other banks and geographic regions within the Corporation with lower levels of nonperforming loans. Nonperform ing loans have increased materially during the six months ended June 30, 2010 within other regions, such as the Arizona Region ($15 million increase) and the Nevada Region ($27 million increase) to 9.2% and 25.2% of those regions' portfolio loans, respectively, as the effects of the recession have had an adverse and evolving significant effect on banks located within those regions. The most recent significant growth in nonperforming loans in the Nevada Region is the result of continuing economic distress in the greater Las Vegas community.

In addition to the identification of nonperforming loans involving borrowers with payment performance difficulties (i.e., nonaccrual loans and loans past due 90 days or more), management utilizes an internal loan review process to identify other potential problem loans which may warrant additional monitoring or other intervention. This loan review process is a continuous activity which periodically updates internal loan ratings. At inception, all loans are individually assigned a rating which grades the credits on a risk basis, based on the financial strength of the borrower and guarantors and other factors such as nature of the borrower's business climate, local economic conditions and other subjective factors. The loan rating process is fluid and subjective.

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

At June 30, 2010, problem and potential-problem loans (including the previously-mentioned nonperforming loans) approximated $849 million or about 23% of total consolidated portfolio loans, compared to approximately $826 million or about 20% at December 31, 2009. Interim 2010 increases in these totals resulted from continued concerns about borrower performance, future collateral valuation and the continued uncertain economy. These potential problem loans (exclusive of nonperforming loans) do not necessarily have significant loss exposure (nor are they necessarily deemed 'impaired'), but rather are identified by management in this manner to aid in loan administration and risk management. Management has considered these loans in its evaluation of the adequacy of the allowance for loan losses. Non performing loans, as previously discussed, are generally secured by real estate which is subject to fair value estimates and related loss recognition. Management believes, however, that current general economic conditions in some markets may result in higher levels of future loan losses in comparison to previous years, as experienced in the first six months of 2010.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Regarding other real estate owned and collateral-dependent loans in Michigan (about 31% of consolidated totals), 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 than many other states. Further, once the property is available to the bank for sale or liquidation, market conditions, as they are currently (particularly in Michigan and some western communities), may not be conducive to rapid marketing or near-term sale of the properties.

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

					Allowance for								Allowance as a Percentage
	Total Portfolio Loans				Loan Losses				Nonperforming Loans				of Total Portfolio Loans
	June 30, 2010		Dec 31, 2009		June 30, 2010		Dec 31, 2009		June 30, 2010		Dec 31, 2009		June 30, 2010			Dec 31, 2009
Arizona Region:
Bank of Tucson	$	154,913	$	168,809	$	2,257	$	1,904	$	4,889	$	5,110		1.46	%		1.13	%
Central Arizona Bank		59,178		66,058		2,210		3,389		3,702		3,132		3.73	%		5.13	%
Southern Arizona Community Bank		76,969		79,190		1,100		1,150		726		848		1.43	%		1.45	%
Sunrise Bank of Albuquerque		57,896		61,077		1,628		1,256		4,911		3,436		2.81	%		2.06	%
Sunrise Bank of Arizona		306,070		346,134		19,257		17,382		46,311		32,929		6.29	%		5.02	%
Arizona Region Total		655,026		721,268		26,452		25,081		60,539		45,455		4.04	%		3.48	%

California Region:
Bank of Feather River		32,325		26,941		375		347						1.16	%		1.29	%
Bank of San Francisco		76,879		74,782		1,625		1,384		451		243		2.11	%		1.85	%
Napa Community Bank(6)				139,497				2,493				3,746					1.79	%
Sunrise Bank(4)		203,488		214,682		7,480		6,731		7,950		8,692		3.68	%		3.14	%
California Region Total		312,692		455,902		9,480		10,955		8,401		12,681		3.03	%		2.40	%

Colorado Region:
Fort Collins Commerce Bank		83,813		83,047		1,365		1,308		1,548		1,291		1.63	%		1.58	%
Larimer Bank of Commerce		82,940		79,239		1,685		1,467		993				2.03	%		1.85	%
Loveland Bank of Commerce		33,471		33,582		560		560				156		1.67	%		1.67	%
Mountain View Bank of Commerce		42,602		40,201		768		621						1.80	%		1.54	%
Colorado Region Total		242,826		236,069		4,378		3,956		2,541		1,447		1.80	%		1.68	%

Great Lakes Region:
Bank of Maumee		36,918		40,269		1,938		918		751		810		5.25	%		2.28	%
Bank of Michigan		61,624		64,374		1,214		1,172		3,213		844		1.97	%		1.82	%
Capitol National Bank		153,424		173,338		9,039		7,920		21,019		21,346		5.89	%		4.57	%
Evansville Commerce Bank		39,766		44,179		1,147		1,338		1,991		1,244		2.88	%		3.03	%
Indiana Community Bank(5)		120,527		133,051		4,593		4,130		8,532		9,278		3.81	%		3.10	%
Michigan Commerce Bank(1)		934,283		1,045,285		61,484		53,953		114,765		117,806		6.58	%		5.16	%
Ohio Commerce Bank(6)				56,739				910				206					1.60	%
Great Lakes Region Total		1,346,542		1,557,235		79,415		70,341		150,271		151,534		5.90	%		4.52	%

Midwest Region:
Adams Dairy Bank		37,817		35,860		874		655		1,964				2.31	%		1.83	%
Bank of Belleville(6)				58,510				938									1.60	%
Community Bank of Lincoln		38,964		44,864		1,490		1,195		2,216		1,661		3.82	%		2.66	%
Midwest Region Total		76,781		139,234		2,364		2,788		4,180		1,661		3.08	%		2.00	%

Nevada Region:
1st Commerce Bank		29,621		33,482		1,450		1,910		8,738		7,531		4.90	%		5.70	%
Bank of Las Vegas(2)		341,398		370,285		15,945		11,952		84,861		59,219		4.67	%		3.23	%
Nevada Region Total		371,019		403,767		17,395		13,862		93,599		66,750		4.69	%		3.43	%

Northeast Region:
USNY Bank		63,889		57,849		1,025		905						1.60	%		1.56	%

Northwest Region:
Bank of the Northwest(3)		120,266		134,669		4,878		4,985		6,761		9,614		4.06	%		3.70	%
High Desert Bank		32,268		34,203		1,070		805		1,445		644		3.32	%		2.35	%
Northwest Region Total		152,534		168,872		5,948		5,790		8,206		10,258		3.90	%		3.43	%

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of loan information – continued:

						Allowance for										Allowance as a Percentage
	Total Portfolio Loans					Loan Losses					Nonperforming Loans					of Total Portfolio Loans
	June 30, 2010		Dec 31, 2009			June 30, 2010		Dec 31, 2009			June 30, 2010		Dec 31, 2009			June 30, 2010			Dec 31, 2009
Southeast Region:
Bank of Valdosta	$	37,390	$	42,052		$	1,051	$	1,002		$	2,243	$	1,186			2.81	%		2.38	%
Community Bank of Rowan(7)		107,883					1,769					3,621					1.64	%
First Carolina State Bank		84,257		90,919			1,711		1,554			4,095		6,161			2.03	%		1.71	%
Peoples State Bank		16,705		18,706			441		539			1,364		1,075			2.64	%		2.88	%
Pisgah Community Bank		34,106		45,094			1,554		1,168			8,163		401			4.56	%		2.59	%
Sunrise Bank of Atlanta		36,436		43,167			2,698		2,611			7,235		5,667			7.40	%		6.05	%
Southeast Region Total		316,777		239,938			9,224		6,874			26,721		14,490			2.91	%		2.86	%

Texas Region:
Bank of Fort Bend		31,857		29,215			566		485								1.78	%		1.66	%
Bank of Las Colinas		38,633		34,725			784		731								2.03	%		2.11	%
Texas Region Total		70,490		63,940			1,350		1,216								1.92	%		1.90	%

Parent company and other, net		8,788		3,027			3,451		2,896			4,816		3,241			39.27	%		95.67	%
Less discontinued operations(6)				(254,746	)				(4,341	)				(3,952	)

Consolidated totals relating to continuing operations	$	3,617,364	$	3,792,355		$	160,482	$	140,323		$	359,274	$	303,565			4.44	%		3.70	%

(1)	Effective March 31, 2010, Bank of Auburn Hills and Paragon Bank & Trust merged with and into Michigan Commerce Bank. Prior to the merger, Bank of Auburn Hills and Paragon Bank & Trust were wholly-owned subsidiaries of Capitol.
(2)	Effective January 29, 2010, Black Mountain Community Bank, Desert Community Bank and Red Rock Community Bank merged with and into Bank of Las Vegas. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(3)	Effective February 19, 2010, Bank of Bellevue, Bank of Everett and Bank of Tacoma merged with and into Issaquah Community Bank. Upon completion of the merger, the surviving bank was renamed Bank of the Northwest. Prior to the merger, each of the banks was either a majority-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(4)	Effective March 5, 2010, Bank of Escondido, Sunrise Bank of San Diego and Sunrise Community Bank merged with and into Point Loma Community Bank. Upon completion of the merger, the surviving bank was renamed Sunrise Bank. Prior to the merger, each of the banks was either a wholly-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(5)	Effective March 22, 2010, Elkhart Community Bank merged with and into Goshen Community Bank. Upon completion of the merger, the surviving bank was renamed Indiana Community Bank. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(6)	Includes assets of banks sold in 2010.
(7)	As of December 31, 2009, Community Bank of Rowan (CBR) was a majority-owned subsidiary of Capitol Development Bancorp Limited III (CDBL III) which, due to a change in control effective September 30, 2009, was an unconsolidated affiliate of Capitol. Effective June 30, 2010, CDBL III transferred its controlling interest in CBR to Capitol in exchange for preferred stock of Capitol and, accordingly, CBR became a consolidated subsidiary of Capitol on that date.

As previously discussed, the adequacy of the allowance for loan losses is determined by management at the balance-sheet date. Levels of nonperforming loans may fluctuate at balance-sheet dates by amounts which are not commensurate with the ratio of the allowance for loan losses or the so-called allowance coverage ratio of nonperforming loans (i.e., nonperforming loans as a percentage of the allowance for loan losses). Several factors may contribute to this occurrence. For example, estimated losses relating to impaired collateral-dependent loans are generally reflected as direct write-downs to those loans (and, accordingly, there is no related allowance for loan losses allocation necessary). Further, some collateral-dependent loans may have no or minimal loss potential which would negate a compu tational comparison between the allowance for loan losses and such nonperforming loans.

At June 30, 2010 and December 31, 2009, Capitol had $66.1 million of goodwill which resulted principally from acquisitions of noncontrolling interests in prior years. Goodwill is carried at the entity to which it is related. Current accounting rules require an annual review of goodwill for potential impairment, which Capitol most recently conducted as of November 30, 2009. An interim review for potential goodwill impairment is deemed necessary when events or circumstances indicate potential for impairment since the annual testing date. If implied goodwill from impairment testing is less than recorded goodwill, impairment exists and the amount of shortfall between implied goodwill and recorded goodwill is the impairment amount which is to be written off in the period the determination is made.&# 160; During the six months ended June 30, 2010, Capitol determined there were no

Page 32 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

significant events or circumstances warranting an interim impairment test of goodwill due to the absence of significant changes in the operating environment and related considerations reflected in the most recent review for goodwill impairment. The potential for future impairment of recorded goodwill remains uncertain due to a continuing uncertain operating environment and economic conditions.

Accounting for income taxes requires significant estimates and management judgments. At June 30, 2010, Capitol had a deferred tax asset approximating $160.5 million ($109.9 million at December 31, 2009), subject to a related valuation allowance. When realization of the deferred tax asset is in doubt, a valuation reserve is required to reduce the deferred tax asset to the amount which is more-likely-than-not realizable. In early August 2010, a tentative federal income tax refund approximating $43 million was received as expected.

Due to continuing operating losses during the 2010 interim periods, management reviewed the potential realization of net deferred tax assets as of June 30, 2010 and increased the related valuation allowance to $154.7 million, reducing the net deferred tax asset to approximately $5.8 million. The net deferred tax asset ($5.8 million and $5.4 million at June 30, 2010 and December 31, 2009, respectively) represents the amount which is more-likely-than-not realizable at the balance-sheet date for a small group of partially-owned consolidated bank subsidiaries.

Results of Operations

Summary

The second quarter 2010 net loss attributable to Capitol was approximately $41 million (including gain on sales of bank subsidiaries approximating $10 million) compared to $47.9 million in the preceding quarterly period and $16.3 million for the second quarter of 2009. The net loss per share attributable to Capitol was $1.98 for the three months ended June 30, 2010 compared to $2.69 in the preceding quarterly period and $0.95 in the second quarter of 2009. The net loss attributable to Capitol for the six months ended June 30, 2010 approximated $88.9 million compared to $37 million in the corresponding period of 2009. The net loss per share attributable to Capitol Bancorp Limited was $4.67 for the six months ended June 30, 2010 compared to $2.15 in the corresponding 2009 period. Net income relat ing to discontinued operations was not material to the periods presented except for the aforementioned gain on sales of bank subsidiaries.

The primary reason for the interim 2010 loss was a very large provision for loan losses recorded during the six months ended June 30, 2010 as the Corporation continued to carefully assess the implications and impact of declining property values and weak bank performance, as well as continued adverse valuation of other real estate owned, holding costs and related losses on sale of properties. The provision for loan losses increased $27.5 million to $93.6 million for the six months ended June 30, 2010 compared to a provision of $66.1 million for the corresponding period of 2009 (excluding discontinued operations).

Analytical Review

The provision for loan losses increased significantly in the 2010 period due to higher levels of loan charge-offs in response to further growth in nonperforming loans. Of the provision for loan losses for the six months ended June 30, 2010, a portion was attributable to a significant further increase in the allowance for loan losses as a percentage of portfolio loans from 3.70% to 4.44% as provisions for loan losses exceeded net loan charge-offs and portfolio loans decreased. Provisions for loan losses are based upon management's analysis of the adequacy of the allowance for loan losses, as previously discussed. The significant increase in the provision for loan losses compared to the preceding year had a material adverse effect on operating results for the interim 2010 periods.

Net interest income for the six-month 2010 period totaled $66.5 million, a 4.2% decrease compared to $69.4 million in 2009. Net interest income for the three months ended June 30, 2010 totaled $32.9 million, an 8.8% decrease compared to $36.1 million in 2009. The net interest margin approximated 2.88% for the three months

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

ended June 30, 2010, a 15 basis-point decrease compared to 3.03% for the three months ended March 31, 2010, and a 14 basis-point decrease compared to 3.02% for the three months ended June 30, 2009. Several factors impacted the 2010 margin, including further growth in nonperforming loans, substantially higher levels of cash and cash equivalents which have minimal interest rates and upward pressure on the cost of funds despite a relatively stable very low interest rate environment. It is difficult to speculate on future changes in net interest margin.

Noninterest income for the six months ended June 30, 2010 approximated $12.4 million, a 9.4% increase compared to $11.4 million for the same period in 2009, primarily due to a gain on debt extinguishment resulting from the issuance of 1.4 million shares of common stock in satisfaction of $4.6 million of promissory notes. Noninterest income for the three months ended June 30, 2010 totaled $5.4 million, an 18.8% decrease compared to $6.7 million for the same period in 2009. Fees from origination of non-portfolio residential mortgage loans totaled $844,000 for the first six months of 2010, a large decrease from $2.3 million for the comparable period in 2009, due to substantially lower loan origination volume of $59.6 million compared to $204.8 million, respectively.

Noninterest expense totaled $101.9 million for the six-month 2010 period compared to $95.3 million for the comparable period of 2009. The net increase in noninterest expense related to costs associated with foreclosed properties and other real estate owned and regulatory fees. Costs associated with foreclosed properties and other real estate increased $12.4 million (148%) to $20.8 million in the six-month 2010 period ($8.4 million in the 2009 period) due to higher levels of other real estate owned. The cost of FDIC insurance and other regulatory fees also increased $1.7 million (24%) to $8.6 million ($7.0 million in the 2009 period).

The largest element of noninterest expense is salaries and employee benefits, which approximated $40.7 million for the six months ended June 30, 2010, a decrease of 19.5% from $50.6 million in the corresponding period of 2009, as a result of Capitol's efforts to reduce and streamline staffing at its banks and corporate offices.

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

	Three Month Period(1)				Six Month Period(1)
	2010		2009		2010		2009

Professional fees, excluding legal	$	926	$	365	$	3,117	$	656
Legal fees		1,513		553		2,510		1,002
Loan and collection expense		624		649		1,649		1,228
Directors' fees		525		541		983		1,183
Advertising		463		468		942		929
Paper, printing and supplies		475		473		876		928
Insurance		473		160		799		323
Bank services (ATMs, telephone banking and Internet banking)		356		671		729		1,327
Travel, lodging and meals		448		465		744		836
Communications		379		398		725		864
Postage		246		287		549		578
Taxes other than income taxes		212		232		386		422
Dues and memberships		162		206		356		397
Courier service		163		169		320		335
Contracted labor		73		35		191		75
Publications		51		69		106		120
Other		946		1,230		2,006		2,748

Total	$	8,035	$	6,971	$	16,988	$	13,951

(1) Excludes amounts related to operations discontinued in 2010.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

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

	Total Revenues				Net Income (Loss)(1)						Return on Average Equity(2)						Return on Average Assets(2)
	2010		2009		2010			2009			2010			2009			2010			2009
Arizona Region:
Bank of Tucson	$	6,406	$	6,428	$	1,091		$	1,066			11.00	%		12.24	%		1.03	%		1.09	%
Central Arizona Bank		1,867		2,010		(2,025	)		(1,475	)
Southern Arizona Community Bank		2,624		2,621		441			21			9.04	%		0.46	%		0.92	%		0.05	%
Sunrise Bank of Albuquerque		1,865		2,124		(2,134	)		(457	)
Sunrise Bank of Arizona		9,710		13,391		(26,673	)		(12,183	)
Yuma Community Bank(3)(10)				2,379					312						8.55	%					0.87	%
Arizona Region Total		22,472		28,953		(29,300	)		(12,716	)

California Region:
Bank of Feather River		1,164		957		42			(30	)		1.37	%					0.25	%
Bank of San Francisco		2,799		2,153		385			21			8.92	%		0.50	%		0.83	%		0.05	%
Bank of Santa Barbara(4)(10)				1,810					(638	)
Napa Community Bank(10)		2,947		4,497		(77	)		926						11.87	%					1.29	%
Sunrise Bank(8)		6,899		7,442		(2,662	)		(2,370	)
California Region Total		13,809		16,859		(2,312	)		(2,091	)

Colorado Region:
Fort Collins Commerce Bank		2,910		2,532		166			166			3.46	%		3.48	%		0.35	%		0.40	%
Larimer Bank of Commerce		2,718		2,613		355			183			8.99	%		4.60	%		0.78	%		0.42	%
Loveland Bank of Commerce		1,276		893		127			(177	)		4.06	%					0.64	%
Mountain View Bank of Commerce		1,401		1,066		47			(113	)		1.33	%					0.19	%
Colorado Region Total		8,305		7,104		695			59

Great Lakes Region:
Bank of Maumee		1,231		1,318		(1,108	)		(217	)
Bank of Michigan		2,222		2,342		(288	)		12						0.53	%					0.04	%
Capitol National Bank		5,022		6,248		(2,193	)		(1,147	)
Evansville Commerce Bank		1,420		1,789		(239	)		(245	)
Indiana Community Bank(9)		3,922		4,656		(2,454	)		(1,144	)
Michigan Commerce Bank(5)		32,181		37,820		(40,862	)		(13,871	)
Ohio Commerce Bank(10)		1,934		1,403		226			(66	)		5.68	%					0.78	%
Great Lakes Region Total		47,932		55,576		(46,918	)		(16,678	)

Midwest Region
Adams Dairy Bank		1,254		1,097		(59	)		(50	)
Bank of Belleville(10)		1,048		1,900		18			13			1.02	%		0.37	%		0.10	%		0.04	%
Community Bank of Lincoln		1,295		1,792		(678	)		(268	)
Summit Bank of Kansas City(4)				1,866					24						0.70	%					0.08	%
Midwest Region Total		3,597		6,655		(719	)		(281	)

Nevada Region:
1st Commerce Bank		912		1,252		(1,173	)		(474	)
Bank of Las Vegas(6)		9,663		13,565		(22,841	)		(2,564	)
Nevada Region Total		10,575		14,817		(24,014	)		(3,038	)

Northeast Region:
USNY Bank		1,945		1,394		434			(243	)		16.28	%					1.32	%

Northwest Region:
Bank of the Northwest(7)		4,009		4,779		(1,008	)		(2,436	)
High Desert Bank		1,154		1,178		(271	)		(829	)
Northwest Region Total		5,163		5,957		(1,279	)		(3,265	)

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Operating results – continued:

	Total Revenues						Net Income (Loss)(1)						Return on Average Equity(2)				Return on Average Assets(2)
	2010			2009			2010			2009			2010	2009			2010	2009
Southeast Region:
Bank of Valdosta	$	1,220		$	1,491		$	(1,002	)	$	(218	)
Community Bank of Rowan(11)					3,222						298				5.64	%			0.46	%
First Carolina State Bank		2,310			2,831			(1,616	)		(492	)
Peoples State Bank		601			699			(475	)		(109	)
Pisgah Community Bank		1,009			1,059			(7,773	)		(243	)
Sunrise Bank of Atlanta		1,541			1,964			(3,528	)		(215	)
Southeast Region Total		6,681			11,266			(14,394	)		(979	)

Texas Region:
Bank of Fort Bend		1,030			661			(31	)		(309	)
Bank of Las Colinas		1,070			936			(28	)		(182	)
Texas Region Total		2,100			1,597			(59	)		(491	)

Parent company and other, net		1,273			(39	)		12,007			(11,144	)
Less discontinued operations(10)		(5,929	)		(11,989	)

Consolidated totals for continuing operations	$	117,923		$	138,150		$	(105,859	)	$	(50,867	)	--		--		--		--

(1)	Excludes net losses attributable to noncontrolling interests.
(2)	Annualized for periods presented.
(3)	Capitol sold its ownership in Yuma Community Bank effective September 21, 2009. The Bank's operations are included in Capitol's consolidated totals through that date.
(4)	Bank of Santa Barbara and Summit Bank of Kansas City are majority-owned subsidiaries of Capitol Development Bancorp Limited (CDBL) III, of which Capitol ceased to have majority voting control effective September 30, 2009. Thus, effective September 30, 2009, those banks and CDBL III ceased to be consolidated subsidiaries of Capitol.
(5)	Effective March 31, 2010, Bank of Auburn Hills and Paragon Bank & Trust merged with and into Michigan Commerce Bank. Prior to the merger, Bank of Auburn Hills and Paragon Bank & Trust were wholly-owned subsidiaries of Capitol.
(6)	Effective January 29, 2010, Black Mountain Community Bank, Desert Community Bank and Red Rock Community Bank merged with and into Bank of Las Vegas. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(7)	Effective February 19, 2010, Bank of Bellevue, Bank of Everett and Bank of Tacoma merged with and into Issaquah Community Bank. Upon completion of the merger, the surviving bank was renamed Bank of the Northwest. Prior to the merger, each of the banks was either a majority-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(8)	Effective March 5, 2010, Bank of Escondido, Sunrise Bank of San Diego and Sunrise Community Bank merged with and into Point Loma Community Bank. Upon completion of the merger, the surviving bank was renamed Sunrise Bank. Prior to the merger, each of the banks was either a wholly-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(9)	Effective March 22, 2010, Elkhart Community Bank merged with and into Goshen Community Bank. Upon completion of the merger, the surviving bank was renamed Indiana Community Bank. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(10)	Total revenues of these banks are included in income from discontinued operations.
(11)	As of December 31, 2009, Community Bank of Rowan (CBR) was a majority-owned subsidiary of Capitol Development Bancorp Limited III (CDBL III) which, due to a change in control effective September 30, 2009, was an unconsolidated affiliate of Capitol. Effective June 30, 2010, CDBL III transferred its controlling interest in CBR to Capitol in exchange for preferred stock of Capitol and, accordingly, CBR became a consolidated subsidiary of Capitol on that date.

Liquidity and Capital Resources

The principal funding source for banks is deposits. Total deposits (excluding discontinued operations) increased $34.8 million during the six months ended June 30, 2010 compared to a $209 million increase in the corresponding period of 2009. Growth occurred in most interest-bearing deposit categories, with the majority coming from time deposit accounts. Brokered deposits approximated $534 million as of June 30, 2010, or about 13% of total deposits, a decrease of $246 million during the six-month 2010 period, as the banks have sought to reduce use of that funding source based on maturity and interest-rate opportunities, regulatory constraints and to aid in matching the repricing of funding sources and assets. Brokered deposits at June 30, 2010 include about $105 million of relationship-based st ructured time accounts. Banks that are classified as less than well-capitalized are required to obtain approval from the FDIC to renew or obtain new brokered deposits and, for banks classified as less than adequately-capitalized, renewal of brokered deposits is generally prohibited.

Page 36 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

Noninterest-bearing deposits approximated 16.3% of total deposits at June 30, 2010, an increase from 15.1% at December 31, 2009, and an increase of $58 million in the 2010 interim period compared to an increase of $18 million during the 2009 period (excluding discontinued operations). Levels of noninterest-bearing deposits can, however, fluctuate based on customers' transaction activity.

During the 2010 period, however, interest-bearing deposits decreased about $23.2 million. Although interest-bearing deposits decreased, higher relative rates on those balances (particularly with time deposit accounts) coupled with deployment of funds into liquid assets, net interest margins have decreased.

Interim 2010 deposit growth, coupled with funds derived from reductions in portfolio loans, were primarily used to reduce debt obligations and increase liquidity.

Cash and cash equivalents amounted to $924.6 million or 19.5% of total assets at June 30, 2010, compared to $771.1 million or 15% of total assets at December 31, 2009 as reductions in portfolio loans (principally repayments) and proceeds from sales and maturities of investment securities, government-guaranteed loans and other real estate owned 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. Management believes the banks' liquidity position at June 30, 2010 is adequate to fund loan demand and meet depositor needs. In the current low interest rate environment, deployment of deposit growth into cash and cash equivalents adversely impacts net interest margin.

In addition to cash and cash equivalents, an additional source of long-term liquidity is the banks' marketable investment securities. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements and the banks have not engaged in active trading of their investments. At June 30, 2010, Capitol's banks had approximately $24 million of investment securities classified as available for sale which may be utilized to meet various liquidity needs as they arise.

Several of Capitol's banks have secured lines of credit with regional Federal Home Loan Banks. Borrowings thereunder approximated $205 million at June 30, 2010 and additional borrowing capacity approximated $267 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 credit worthiness of Capitol's participating banks and related matters. Total notes payable and other borrowings were $215 million at June 30, 2010, a reduction of $53 million from the beginning of the year, as deposit growth and other sources of funds enabled repayment of select borrowings in addition to an extinguishment of debt in exchange for common stock.

Page 37 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

Capitol Bancorp Limited stockholders' equity, as a percentage of total assets, approximated 1.86% at June 30, 2010 and 3.14% at December 31, 2009. As of June 30, 2010, total capital funds (i.e., the sum of Capitol Bancorp Limited stockholders' equity, noncontrolling interests in consolidated subsidiaries and subordinated debentures) approximated $304 million or 6.40% of total assets. Capitol's capital ratios declined significantly during the interim 2010 period due to the large loss incurred from operations.

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.

The following comparative analysis summarizes each bank's regulatory capital position as of the dates indicated:

	Tier 1 Leverage						Tier 1 Risk-Based						Total Risk-Based
	Ratio(1)(5)						Capital Ratio(1)(5)						Capital Ratio(2)(5)						Regulatory Classification(3)
	June 30, 2010			Dec 31, 2009			June 30, 2010			Dec 31, 2009			June 30, 2010			Dec 31, 2009			June 30, 2010	Dec 31, 2009
Arizona Region:
Bank of Tucson		9.31	%		9.67	%		12.30	%		10.78	%		13.56	%		11.86	%	well-capitalized	well-capitalized
Central Arizona Bank		2.43	%		5.13	%		3.50	%		7.13	%		4.78	%		8.42	%	significantly-undercapitalized	adequately-capitalized
Southern Arizona Community Bank		9.35	%		9.47	%		11.93	%		11.03	%		13.18	%		12.28	%	well-capitalized	well-capitalized
Sunrise Bank of Albuquerque		3.55	%		6.27	%		4.85	%		8.07	%		6.12	%		9.33	%	undercapitalized	adequately-capitalized(6)
Sunrise Bank of Arizona		2.06	%		3.62	%		2.76	%		5.01	%		4.07	%		6.30	%	significantly-undercapitalized	undercapitalized

California Region:
Bank of Feather River(4)		18.41	%		18.59	%		22.44	%		25.84	%		23.69	%		27.09	%	well-capitalized	well-capitalized
Bank of San Francisco		8.85	%		9.12	%		10.36	%		10.37	%		11.62	%		11.63	%	well-capitalized	well-capitalized
Sunrise Bank(10)		7.60	%		7.97	%		10.39	%		10.57	%		11.67	%		11.83	%	adequately-capitalized(6)	well-capitalized

Colorado Region:
Fort Collins Commerce Bank		9.85	%		10.35	%		11.66	%		11.77	%		12.91	%		13.03	%	well-capitalized	well-capitalized
Larimer Bank of Commerce(4)		8.81	%		8.70	%		10.98	%		10.96	%		12.24	%		12.22	%	well-capitalized	well-capitalized
Loveland Bank of Commerce(4)		15.85	%		15.48	%		19.28	%		18.01	%		20.54	%		19.26	%	well-capitalized	well-capitalized
Mountain View Bank of Commerce(4)		13.67	%		14.20	%		17.87	%		17.99	%		19.13	%		19.24	%	well-capitalized	well-capitalized

Great Lakes Region:
Bank of Maumee(4)		6.66	%		8.50	%		8.84	%		10.42	%		10.14	%		11.68	%	well-capitalized	well-capitalized
Bank of Michigan		6.42	%		7.11	%		10.67	%		11.19	%		11.93	%		12.44	%	well-capitalized	well-capitalized
Capitol National Bank		5.63	%		6.45	%		7.28	%		8.15	%		8.59	%		9.44	%	adequately-capitalized(6)	adequately-capitalized(6)
Evansville Commerce Bank(4)		8.49	%		8.01	%		11.95	%		11.28	%		13.22	%		12.55	%	well-capitalized	well-capitalized
Indiana Community Bank(11)		5.22	%		8.11	%		7.65	%		10.81	%		8.93	%		12.08	%	adequately-capitalized(6)	adequately-capitalized(6)
Michigan Commerce Bank(7)		2.04	%		4.03	%		2.63	%		5.00	%		3.94	%		6.30	%	significantly-undercapitalized	undercapitalized

Midwest Region:
Adams Dairy Bank(4)		16.05	%		16.30	%		19.98	%		21.04	%		20.95	%		22.00	%	well-capitalized	well-capitalized
Community Bank of Lincoln(4)		8.22	%		9.11	%		13.43	%		12.82	%		14.72	%		14.09	%	well-capitalized	well-capitalized

Nevada Region:
1st Commerce Bank(4)		3.70	%		7.08	%		5.64	%		8.89	%		6.93	%		10.20	%	undercapitalized	well-capitalized
Bank of Las Vegas(8)		2.07	%		5.08	%		2.79	%		6.25	%		4.09	%		7.51	%	significantly-undercapitalized	undercapitalized

Northeast Region:
USNY Bank(4)		8.25	%		8.30	%		9.74	%		9.67	%		11.00	%		10.93	%	well-capitalized	well-capitalized

Northwest Region:
Bank of the Northwest(9)		9.58	%		15.16	%		13.25	%		20.75	%		14.53	%		22.01	%	adequately-capitalized(6)	well-capitalized
High Desert Bank(4)		9.06	%		8.45	%		11.47	%		11.28	%		12.75	%		12.55	%	adequately-capitalized(6)	adequately-capitalized(6)

Page 38 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

Regulatory capital position – continued:

	Tier 1 Leverage						Tier 1 Risk-Based						Total Risk-Based
	Ratio(1)(5)						Capital Ratio(1)(5)						Capital Ratio(2)(5)						Regulatory Classification(3)
	June 30, 2010			Dec 31, 2009			June 30, 2010			Dec 31, 2009			June 30, 2010			Dec 31, 2009			June 30, 2010	Dec 31, 2009
Southeast Region:
Bank of Valdosta(4)(12)		5.54	%		7.12	%		9.27	%		11.19	%		10.54	%		12.46	%	adequately-capitalized(6)	adequately-capitalized(6)
Community Bank of Rowan		6.98	%		8.17	%		9.74	%		10.52	%		11.00	%		11.77	%	well-capitalized	well-capitalized
First Carolina State Bank		5.78	%		7.08	%		7.89	%		9.18	%		9.15	%		10.44	%	adequately-capitalized	well-capitalized
Peoples State Bank(12)		6.74	%		8.67	%		10.63	%		13.07	%		11.90	%		14.34	%	well-capitalized	well-capitalized
Pisgah Community Bank(4)		3.03	%		10.17	%		5.34	%		14.39	%		6.63	%		15.66	%	undercapitalized	well-capitalized
Sunrise Bank of Atlanta(4)(12)		1.26	%		3.92	%		1.88	%		4.91	%		3.20	%		6.22	%	critically-undercapitalized(12)	undercapitalized

Texas Region:
Bank of Fort Bend(4)		14.35	%		16.05	%		18.47	%		19.76	%		19.73	%		21.01	%	well-capitalized	well-capitalized
Bank of Las Colinas(4)		12.12	%		12.56	%		14.94	%		16.54	%		16.20	%		17.81	%	well-capitalized	well-capitalized

Consolidated totals		2.39	%		4.61	%		3.19	%		5.99	%		6.38	%		9.46	%	undercapitalized	adequately-capitalized

(1)	The minimum required Tier 1 leverage ratio and Tier 1 risk-based capital ratio is 4% (8% for de novo institutions).
(2)	The minimum required total risk-based capital ratio is 8%.
(3)	In order to be classified as a 'well-capitalized' institution, the total risk-based capital ratio must be 10% or more. To be classified as an 'adequately-capitalized' institution, the total risk-based capital ratio must be between 8% and 10%. Institutions are classified as 'undercapitalized' when the total risk-based ratio is between 6% and 8% and 'significantly-undercapitalized' when such ratio falls below 6%. Institutions with a Tier 1 leverage ratio below 2% are classified as 'critically-undercapitalized'.
(4)	A de novo institution which is subject to higher minimum ratio requirements as noted in (1) above for up to the first five years of operations.
(5)	Ratios are based on the regulatory reports filed at original due date which is generally within 30 days after quarter-end.
(6)	The institution is subject to a regulatory agreement and, accordingly, cannot be classified better than adequately-capitalized.
(7)	Effective March 31, 2010, Bank of Auburn Hills and Paragon Bank & Trust merged with and into Michigan Commerce Bank. Prior to the merger, Bank of Auburn Hills and Paragon Bank & Trust were wholly-owned subsidiaries of Capitol.
(8)	Effective January 29, 2010, Black Mountain Community Bank, Desert Community Bank and Red Rock Community Bank merged with and into Bank of Las Vegas. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(9)	Effective February 19, 2010, Bank of Bellevue, Bank of Everett and Bank of Tacoma merged with and into Issaquah Community Bank. Upon completion of the merger, the surviving bank was renamed Bank of the Northwest. Prior to the merger, each of the banks was either a majority-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(10)	Effective March 5, 2010, Bank of Escondido, Sunrise Bank of San Diego and Sunrise Community Bank merged with and into Point Loma Community Bank. Upon completion of the merger, the surviving bank was renamed Sunrise Bank. Prior to the merger, each of the banks was either a wholly-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(11)	Effective March 22, 2010, Elkhart Community Bank merged with and into Goshen Community Bank. Upon completion of the merger, the surviving bank was renamed Indiana Community Bank. Prior to the merger, each of the banks was a wholly-owned subsidiary of Capitol.
(12)	Effective July 30, 2010, Peoples State Bank and Sunrise Bank of Atlanta merged with and into Bank of Valdosta. Upon completion of the merger, the surviving bank was renamed Sunrise Bank. Prior to the merger, each of the banks was either a majority-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest. Also upon completion of that merger, the critically-undercapitalized status of Sunrise Bank of Atlanta was satisfactorily resolved. The merged institution resulted in having a regulatory capital level such that it would be classified as undercapitalized.

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 summary above indicates that Capitol, on a consolidated basis, was classified as less than adequately-capitalized at June 30, 2010.

Capitol's total risk-based capital ratio at June 30, 2010 was adversely impacted by the exclusion of approximately $54.3 million of previously-qualifying Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital. Tier 1 capital decreased during the six months ended June 30, 2010 as a result of operating losses; however, the Tier 2 limitation did not apply to Capitol's regulatory capital computations at earlier measurement dates.

In addition to Capitol's consolidated regulatory capital classification at June 30, 2010, several of its bank subsidiaries had capital levels resulting in classification as undercapitalized or significantly-undercapitalized at that date. Further, one bank was classified as critically-undercapitalized at June 30, 2010; however, that bank's adverse

Page 39 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

capital classification was resolved on July 30, 2010 as a result of a merger transaction with other affiliated banks. Regarding banks classified as undercapitalized or significantly-undercapitalized, and otherwise noncompliant with formal regulatory agreements, management is taking appropriate action to improve such capital classifications and related compliance in the future.

Capitol anticipates augmenting the capital levels of its less than adequately-capitalized bank subsidiaries through allocation of proceeds from the pending divestiture of certain bank subsidiaries. Pending divestitures are discussed later in this narrative. Management is pursuing various strategies to increase Capitol's Tier 1 capital, including raising capital through potential equity transactions, gains on divestiture of some bank subsidiaries and other initiatives.

On June 30, 2010, Capitol issued an aggregate 95,000 shares of its Series A Noncumulative Perpetual Preferred Stock (the Series A Preferred Stock). Of that aggregate issuance, 44,020 shares were issued to a consolidated subsidiary of Capitol and, accordingly, have been eliminated in consolidation. The remaining 50,980 shares were issued to an affiliate bank-development company which is an unconsolidated affiliate of Capitol. The liquidation preference of the shares issued was $100.00 per share, for an aggregate issuance price of $9.5 million of which $4.4 million has been eliminated upon consolidation. The Series A Preferred Stock is nonvoting and callable at Capitol's option after 36 months from date of issuance at $100.00 per share plus any accrued dividends. Dividends on such sha res are payable only when and if declared by Capitol's board of directors based on an annual rate of 6%.

Trends Affecting Operations

During interim periods of 2010, Capitol has incurred significant net losses from operations, primarily resulting from additional loan losses associated with a continuing uncertain economy and operating environment. Those operating losses have resulted in a significant erosion of capital and other regulatory matters which are discussed elsewhere in this document.

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which include, but are not limited to, the following:

·	Significant proceeds from pending future bank sales to enable timely deployment to improve capital adequacy at remaining bank subsidiaries, in addition to raising additional capital at the parent-company level;

·	Future abatement of loan losses and losses associated with other nonperforming assets;

·	Future reduction in operating expenses;

·	Future improvement in net interest margin; and

·	Future conversion of nonperforming assets to earning assets.

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. This means that when interest rates change, the timing and magnitude of the effect of such interest rate changes can alter the relationship between asset yields and the cost of funds.

The Board of Governors of the Federal Reserve, which influences interest rates, has maintained interbank borrowing rates at record low levels and has also expressed concerns about a variety of macro economic issues. Home

Page 40 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Trends Affecting Operations – Continued

mortgage rates have fluctuated and residential real estate markets have deteriorated in various regions, which adversely impacts fee income from the origination of residential mortgages. There has been widespread media coverage of earlier subprime and other residential mortgage "meltdown" issues; Capitol believes its exposure to the residential real estate crisis to be generally minimal due to its practice of selling residential mortgage loan production to the secondary market. Many of Capitol's banks' commercial loans are variable-rate and, accordingly, result in lower interest income to Capitol in the near term in the current interest-rate environment; however, depositors will continue to expect reasonable rates of interest on their accounts, potentially compressing net interest margins further. The futu re outlook on interest rates and their impact on Capitol's interest income, interest expense and net interest income is uncertain.

General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions. As mentioned previously, general economic conditions within the states of Michigan, Arizona and Nevada and the national economic recession are uncertain and are likely to continue to have an adverse impact on Capitol's banks and their customers. It is likely that economic recovery may take an extended period of time.

Media reports raising questions about the health of the domestic economy and the sustained national recession have continued in 2010. During the interim 2010 period, nonperforming assets have continued to increase; it is likely levels of nonperforming assets and related loan losses may increase further as economic conditions, locally and nationally, evolve.

As of June 30, 2010, mergers of some of Capitol's banking subsidiaries have been completed in Arizona, southern California, Indiana, Michigan, Nevada and the Pacific Northwest. The resulting merged institutions have been combined on a regional basis to gain efficiencies in loan portfolio and problem asset management and general operating efficiencies in daily processing. Additional mergers and combinations of bank charters in other markets are under consideration as management evaluates potential synergies and cost savings. Effective July 30, 2010, Capitol completed the merger of three consolidated bank subsidiaries located in Georgia.

Proposed Spin-off of Michigan Commerce Bancorp Limited

In July 2009, Capitol announced its intention to formally and legally separate the operations of Michigan Commerce Bancorp Limited as an independent publicly-traded company through a spin-off transaction. Capitol has deferred plans to complete the proposed spin-off.

Pending Divestiture of Banks

Capitol has entered into definitive agreements to sell its interests (or controlling interest held by bank-development subsidiaries) in the following institutions: Adams Dairy Bank, Bank of Fort Bend, Bank of Las Colinas, Bank of San Francisco, Community Bank of Rowan, Fort Collins Commerce Bank, Larimer Bank of Commerce, Loveland Bank of Commerce, Mountain View Bank of Commerce and USNY Bank. The projected financial impact of the potential divestiture of these institutions is set forth in the accompanying pro forma condensed consolidated financial statements on pages 43 and 44. Total proceeds from the pending sales are expected to approximate $53.8 million, resulting in a gain of $10.4 million ($0.55 per share) and are expected to be consummated through out the remainder of 2010, subject to regulatory approval and other significant contingencies. The sale of Bank of Belleville was completed April 27, 2010 with aggregate proceeds of $5.0 million and a gain on sale approximating $1.2 million. The sale of Napa Community Bank was completed April 30, 2010 with aggregate proceeds of $21.6 million and a gain on sale approximating $7.4 million. Under the terms of the sale transaction, Capitol could receive additional proceeds (and a future corresponding gain, if any such additional proceeds are ultimately received) of up to $5.3 million in the future, subject to Napa Community Bank's future financial performance. The sale of Ohio Commerce Bank was completed June 30, 2010 with aggregate proceeds of $6.5 million and a gain on sale approximating $1.5 million. The sale of Community Bank of Lincoln was completed July 30, 2010 with aggregate proceeds of $3.7 million and a gain on sale approximating $1.4 million, whic h will be reflected in Capitol's third quarter 2010 financial statements with other sales completed during that period.

Page 41 of 50

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Regulatory Agreements

In September 2009, Capitol and its second-tier bank holding companies entered into a written agreement with the Reserve Bank under which Capitol has 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-ti er bank holding companies, nonbank subsidiaries or any of the subsidiary banks that are held by shareholders other than Capitol.

Capitol has also 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 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; (i v) 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.

Certain of Capitol's bank subsidiaries have entered into formal agreements with their applicable regulatory agencies. Those agreements provide for certain restrictions and other guidelines and/or limitations to be followed by the banks. The banks generally subject to such agreements are noted as such in the regulatory capital detail appearing on pages 38-39.

Recent Developments

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

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2010
	OR
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ________________ to ________________

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

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

Class		Outstanding at July 31, 2010
Common Stock, No par value		21,633,633 shares

Item 1.	Financial Statements (unaudited):	Page
	Condensed consolidated balance sheets – June 30, 2010 and December 31, 2009.	6
	Condensed consolidated statements of operations – Three months and six months ended June 30, 2010 and 2009.	7
	Condensed consolidated statements of changes in equity – Six months ended June 30, 2010 and 2009.	8
	Condensed consolidated statements of cash flows – Six months ended June 30, 2010 and 2009.	9
	Notes to condensed consolidated financial statements.	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	46
Item 4.	Controls and Procedures.	46
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	47
Item 1A.	Risk Factors.	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	47
Item 3.	Defaults Upon Senior Securities.	47
Item 4.	[Removed and Reserved.]	47
Item 5.	Other Information.	47
Item 6.	Exhibits.	48
SIGNATURES		49
EXHIBIT INDEX		50

PART I, ITEM 1

CAPITOL BANCORP LIMITED
Condensed Consolidated Balance Sheets
As of June 30, 2010 and December 31, 2009
(in $1,000s, except share and per-share data)

	(Unaudited)
	June 30,				December 31,
	2010				2009
ASSETS
Cash and due from banks		$	103,324		$	76,187
Money market and interest-bearing deposits			811,619			683,887
Federal funds sold			9,695			11,005
Cash and cash equivalents			924,638			771,079
Loans held for sale			5,931			11,621
Investment securities -- Note C:
Available for sale, carried at fair value			23,960			39,776
Held for long-term investment, carried at
amortized cost which approximates fair value			3,334			5,891
Total investment securities			27,294			45,667
Federal Home Loan Bank and Federal Reserve
Bank stock (at cost) -- Note C			24,021			23,215
Portfolio loans:
Loans secured by real estate:
Commercial			1,825,943			1,884,309
Residential (including multi-family)			720,938			727,816
Construction, land development and other land			420,318			471,121
Total loans secured by real estate			2,967,199			3,083,246
Commercial and other business-purpose loans			578,056			633,276
Consumer			38,777			42,691
Other			33,332			33,142
Total portfolio loans			3,617,364			3,792,355
Less allowance for loan losses			(160,482	)		(140,323	)
Net portfolio loans			3,456,882			3,652,032
Premises and equipment			46,290			47,017
Accrued interest income			13,074			14,709
Goodwill			66,099			66,126
Other real estate owned			108,715			111,102
Recoverable income taxes			43,248			43,763
Other assets			32,503			42,059
Assets of discontinued operations -- Note D			--			303,550

TOTAL ASSETS		$	4,748,695		$	5,131,940

LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing		$	682,736		$	624,721
Interest-bearing			3,500,481			3,523,717
Total deposits			4,183,217			4,148,438
Debt obligations:
Notes payable and other borrowings			214,983			267,659
Subordinated debentures -- Note H			167,514			167,441
Total debt obligations			382,497			435,100
Accrued interest on deposits and other liabilities			46,391			43,524
Liabilities of discontinued operations -- Note D			--			271,272
Total liabilities			4,612,105			4,898,334

EQUITY:
Capitol Bancorp Limited stockholders' equity -- Notes F and N:
Preferred stock (Series A), 700,000 shares authorized
($100 per-share liquidation preference); 50,980 shares
issued and outstanding in 2010 (none in 2009) -- Note I			5,098
Preferred stock (for potential future issuance),
19,300,000 shares authorized (none issued and outstanding)			--			--
Common stock, no par value, 50,000,000 shares authorized;
issued and outstanding: 2010 - 21,414,352 shares
2009 - 17,545,631 shares			288,186			277,707
Retained-earnings deficit			(204,636	)		(115,751	)
Undistributed common stock held by employee-benefit trust			(558	)		(558	)
Fair value adjustment (net of tax effect) for investment securities
available for sale (accumulated other comprehensive income)			207			(63	)
Total Capitol Bancorp Limited stockholders' equity			88,297			161,335
Noncontrolling interests in consolidated subsidiaries			48,293			72,271
Total equity			136,590			233,606

TOTAL LIABILITIES AND EQUITY		$	4,748,695		$	5,131,940

See notes to condensed consolidated financial statements.

CAPITOL BANCORP LIMITED
Condensed Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 2010 and 2009
(in $1,000s, except per share data)

	Three Month Period							Six Month Period
	2010				2009			2010			2009
Interest income:
Portfolio loans (including fees)		$	50,793		$	62,672		$	103,775		$	125,190
Loans held for sale			64			285			127			478
Taxable investment securities			85			150			311			302
Federal funds sold			3			23			10			56
Other			689			562			1,264			761
Total interest income			51,634			63,692			105,487			126,787
Interest expense:
Deposits			14,404			21,759			29,916			45,339
Debt obligations and other			4,310			5,826			9,097			12,036
Total interest expense			18,714			27,585			39,013			57,375
Net interest income			32,920			36,107			66,474			69,412
Provision for loan losses			44,600			32,511			93,641			66,125
Net interest income (deficiency) after
provision for loan losses			(11,680	)		3,596			(27,167	)		3,287
Noninterest income:
Service charges on deposit accounts			1,130			1,366			2,284			2,732
Trust and wealth-management revenue			1,170			1,135			2,322			2,523
Fees from origination of non-portfolio residential
mortgage loans			430			1,409			844			2,273
Gain on sales of government-guaranteed loans			476			405			774			645
Gain on debt extinguishment									1,255
Realized gain on sales of investment securities available
for sale									14			1
Other			2,221			2,370			4,943			3,189
Total noninterest income			5,427			6,685			12,436			11,363
Noninterest expense:
Salaries and employee benefits			20,089			23,019			40,720			50,574
Occupancy			4,565			4,492			8,954			9,038
Equipment rent, depreciation and maintenance			2,930			3,070			5,858			6,374
Costs associated with foreclosed properties and other
real estate owned			8,905			4,152			20,752			8,370
FDIC insurance premiums and other regulatory fees			4,187			5,021			8,645			6,987
Other			8,035			6,971			16,988			13,951
Total noninterest expense			48,711			46,725			101,917			95,294
Loss before income tax benefit			(54,964	)		(36,444	)		(116,648	)		(80,644	)
Income tax benefit			(4,246	)		(13,370	)		(4,068	)		(29,230	)
Loss from continuing operations			(50,718	)		(23,074	)		(112,580	)		(51,414	)
Discontinued operations -- Note D:
Income from operations of bank subsidiaries sold			403			202			259			953
Gain on sales of bank subsidiaries			10,083						10,083
Less income tax expense			3,687			88			3,621			406
Net income from discontinued operations			6,799			114			6,721			547
NET LOSS			(43,919	)		(22,960	)		(105,859	)		(50,867	)
Net losses attributable to noncontrolling interests in
consolidated subsidiaries			2,916			6,656			16,974			13,889

NET LOSS ATTRIBUTABLE TO CAPITOL
BANCORP LIMITED		$	(41,003	)	$	(16,304	)	$	(88,885	)	$	(36,978	)

NET LOSS PER COMMON SHARE ATTRIBUTABLE
TO CAPITOL BANCORP LIMITED -- Note G		$	(1.98	)	$	(0.95	)	$	(4.67	)	$	(2.15	)

See notes to condensed consolidated financial statements.

Unaudited Pro Forma Condensed Consolidated Balance Sheet
Capitol Bancorp Limited and Subsidiaries
June 30, 2010

(in $1,000s)
				Pending
				Future
	Historical			Sale of Bank
	Amounts			Subsidiaries			Pro Forma
	As Reported			(Note A)			Consolidated

ASSETS

Cash and cash equivalents	$	924,638		$	(69,156	)	$	855,482
Loans held for sale		5,931			(748	)		5,183
Investment securities		27,294			(11,402	)		15,892
Portfolio loans		3,617,364			(638,749	)		2,978,615
Less allowance for loan losses		(160,482	)		12,511			(147,971	)
Net portfolio loans		3,456,882			(626,238	)		2,830,644
Premises and equipment, net		46,290			(7,227	)		39,063
Goodwill		66,099			-			66,099
Other real estate owned		108,715			(1,571	)		107,144
Other assets		112,846			(10,987	)		101,859

TOTAL ASSETS	$	4,748,695		$	(727,329	)	$	4,021,366

LIABILITIES AND EQUITY

Liabilities:
Deposits	$	4,183,217		$	(650,992	)	$	3,532,225
Debt obligations		382,497			(47,616	)		334,881
Other liabilities		46,391			(1,524	)		44,867
Total liabilities		4,612,105			(700,132	)		3,911,973

Equity:
Capitol Bancorp Limited stockholders' equity:
Preferred stock		5,098						5,098
Common stock		288,186						288,186
Retained-earnings deficit--Note B		(204,636	)		10,388			(194,248	)
Other, net		(351	)					(351	)
Total Capitol Bancorp Limited stockholders' equity		88,297			10,388			98,685
Noncontrolling interests in consolidated subsidiaries		48,293			(37,585	)		10,708
Total equity		136,590			(27,197	)		109,393

TOTAL LIABILITIES AND EQUITY	$	4,748,695		$	(727,329	)	$	4,021,366


Nonperforming loans	$	359,274		$	(10,793	)	$	348,481
Real estate owned and other repossessed assets		108,815			(1,571	)		107,244
Total nonperforming assets	$	468,089		$	(12,364	)	$	455,725

Selected capital ratios:
Total equity as a percentage of total assets		2.88	%					2.72	%
Total capital as a percentage of total assets--Note C		6.40	%					6.89	%

Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet:

A--Pending future sale of Adams Dairy Bank, Bank of Fort Bend, Bank of Las Colinas, Bank of San Francisco,
Community Bank of Lincoln, Community Bank of Rowan, Fort Collins Commerce Bank, Larimer Bank of
Commerce, Loveland Bank of Commerce, Mountain View Bank of Commerce and USNY Bank.

B--Estimated gain on pending sale of banks (see Note A), less transaction expenses. Sale proceeds
are estimated to approximate $53.8 million.

C--Total capital includes trust-preferred securities (subordinated debentures) and total equity.

Item 1.	Legal Proceedings. Capitol and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on Capitol's consolidated financial position or results of operations.
Item 1A.	Risk Factors. There were no material changes from the risk factors set forth in Part I, Item 1A, "Risk Factors," of Capitol's Form 10-K for the year ended December 31, 2009 during the six months ended June 30, 2010. Refer to that section of Capitol's Form 10-K for disclosures regarding the risks and uncertainties related to Capitol's business. In addition to the foregoing, additional risk factors in the current operating environment exist: During interim periods of 2010, Capitol has incurred significant net losses from operations, primarily resulting from additional loan losses associated with a continuing uncertain economy and operating environment. Those operating losses have resulted in a significant erosion of capital and regulatory matters which are discussed elsewhere in this document. Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which include, but are not limited to, the following:
	· Significant proceeds from pending future bank sales to enable timely deployment to improve capital adequacy at remaining bank subsidiaries, in addition to raising additional capital at the parent-company level; · Future abatement of loan losses and losses associated with other nonperforming assets; · Future reduction in operating expenses; · Future improvement in net interest margin; and · Future conversion of nonperforming assets to earning assets.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.
	(a) None. (b) Not applicable. (c) None.
Item 3.	Defaults Upon Senior Securities. None.
Item 4.	[Removed and Reserved.]
Item 5.	Other Information. None.

(a)	(b)
Exhibit No.	Description of Exhibit
31.1	Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer, Joseph D. Reid, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, Lee W. Hendrickson, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	CAPITOL BANCORP LTD. (Registrant)
Date: August 16, 2010	/s/ Joseph D. Reid Joseph D. Reid Chairman and CEO (principal executive officer)
Date: August 16, 2010	/s/ Lee W. Hendrickson Lee W. Hendrickson (principal financial officer/ principal accounting officer)