form10q_a.htm

Page 10 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED

Note A – Basis of Presentation

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

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

The results of operations for the periods ended September 30, 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 materially affect the Corporation's financial position or results of operations 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 for 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 the Corporation's condensed consolidated financial statements upon implementation in 2011 of the deferred disclosure requirements.

Page 11 of 56

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 did not 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 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 regarding 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 ending March 31, 2011. Management does not expect this new guidance will have an effect on the Corporation's annual and interim consolidated financial statements upon implementation except for expanded disclosures therein.

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Page 12 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities

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

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

	September 30, 2010				December 31, 2009(1)
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available for sale:
United States treasury	$	504	$	508	$	1,500	$	1,500
United States government agency		21,381		21,448		12,956		12,939
Mortgage-backed		4,656		4,876		24,690		24,598
Municipalities		411		421		727		739
		26,952		27,253		39,873		39,776
Held for long-term investment:
Capitol Development Bancorp Limited III		484		484		672		672
Corporate		2,789		2,789		5,119		5,119
Other		149		149
		3,422		3,422		5,791		5,791

	$	30,374	$	30,675	$	45,664	$	45,567

(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 those investments are outside the scope of such accounting rules, they are included in Capitol's investment securities for financial reporting purposes to summarize all such investment securities together for reporting purposes.

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

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

United States treasury	$	4	$	--
United States government agency		67			$	5	$	22
Mortgage-backed		219				122		214
Municipalities		11				12		--

	$	301	$	--	$	139	$	236

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

Page 13 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note C – Investment Securities – Continued

Gross unrealized losses and carrying value (at estimated fair value) of securities available for sale at December 31, 2009 (none at September 30, 2010), all of which relate to securities with maturities of one year or less, are summarized below (in $1,000s):

	Unrealized Loss		Carrying Value

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 September 30, 2010 were as follows (in $1,000s):

	Amortized Cost		Estimated Fair Value

Due in one year or less	$	5,136	$	5,138
After one year, through five years		16,548		16,615
After five years, through ten years		784		819
After ten years		4,484		4,681
Securities held for long-term
investment without stated
maturities		3,422		3,422

	$	30,374	$	30,675

Note D – Discontinued Operations

Through September 30, 2010, Capitol completed the following sales of bank subsidiaries (in $1,000s):

		Sale
	Date Sold	Proceeds		Gain (Loss)
Bank of Belleville(1)	April 27, 2010	$	4,990	$	1,233
Napa Community Bank(1)(3)	April 30, 2010		21,574		7,372
Ohio Commerce Bank(2)	June 30, 2010		6,520		1,478
Community Bank of Lincoln(2)	July 30, 2010		3,750		1,268
USNY Bank(2)	August 20, 2010		2,700		(271	)
Adams Dairy Bank(2)	August 30, 2010		4,335		559
Bank of San Francisco(1)	September 27, 2010		6,604		1,740

		$	50,473	$	13,379

(1)

Previously a majority-owned subsidiary of Capitol.

(2)

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

(3)

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.

Page 14 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note D – Discontinued Operations – Continued

Capitol's consolidated results of operations would not have been materially different if the sales of these banks had occurred at the beginning of the periods presented; however, such sales are reflected on that basis in the pro forma condensed consolidated financial statements on page 49 of this document.

The results of operations of Adams Dairy Bank, Bank of Belleville, Bank of San Francisco, Community Bank of Lincoln, Napa Community Bank, Ohio Commerce Bank and USNY Bank, together with the results of operations of Bank of Santa Barbara and Yuma Community Bank which were sold in 2009, and Community Bank of Rowan and Summit Bank of Kansas City which were deconsolidated on September 30, 2009, are classified as discontinued operations for the periods presented and include the following components (in $1,000s):

	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009

Interest income	$	2,577		$	11,025		$	14,629		$	32,767
Interest expense		479			2,952			3,119			9,485
Net interest income		2,098			8,073			11,510			23,282
Provision for loan losses		235			2,853			2,341			5,507
Net interest income after provision
for loan losses		1,863			5,220			9,169			17,775
Noninterest income		148			1,101			1,319			2,871
Gain on sale of bank subsidiaries		3,296			1,187			13,379			1,187
Noninterest expense		1,743			6,527			9,634			20,179
Income before income taxes		3,564			981			14,233			1,654
Less income tax expense		1,292			6,274			5,159			6,618
Net income (loss) from discontinued
operations		2,272			(5,293	)		9,074			(4,964	)
Net loss (income) attributable to
noncontrolling interests in
consolidated subsidiaries		(53	)		5,304			(183	)		6,081
Net income from discontinued
operations attributable to Capitol
Bancorp Limited	$	2,219		$	11		$	8,891		$	1,117
Net income from discontinued
operations per common share
attributable to Capitol Bancorp
Limited	$	0.10		$	--		$	0.45		$	0.06

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

Assets:				Liabilities:
Cash and cash equivalents	$	77,023		Noninterest-bearing
Loans held for sale		5,014		deposits	$	101,242
Portfolio loans		468,101		Interest-bearing deposits		367,012
Less allowance for loan losses		(8,480	)	Total deposits		468,254
Net portfolio loans		459,621		Debt obligations		32,411
Premises and equipment		3,607		Other liabilities		940
Other assets		14,866
					$	501,605
	$	560,131

Page 15 of 56

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 September 30, 2010. Fair value is based on independent quoted market prices, where applicable, or the prices for other whole mortgage loans with similar characteristics.

Loans: The Corporation does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments for collateral-dependent loans are recorded to reflect partial write-downs 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-lived 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 September 30, 2010 were as follows (in $1,000s):

	Total		Significant Other Observable Inputs (Level 2)

Investment securities available for sale:
United States treasury	$	508	$	508
United States government agency		21,448		21,448
Mortgage-backed		4,876		4,876
Municipalities		421		421

	$	27,253	$	27,253

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Page 16 of 56

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 September 30, 2010 were as follows (in $1,000s):

	Total		Significant Unobservable Inputs (Level 3)

Impaired loans(1)	$	341,317	$	341,317

Other real estate owned(1)	$	108,424	$	108,424

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

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)	$	136,506	$	136,506

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

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

(2)	Excludes impaired loans approximating $2,476,000 and other real estate owned approximating $718,000 related to discontinued operations.

Page 17 of 56

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. Updated appraisals are also obtained from time to time for loans secured by real estate which are not deemed impaired or classified as nonperforming.

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 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 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 18 of 56

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):

	September 30, 2010 (As Revised)						December 31, 2009
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	813,513		$	813,513		$	731,899		$	731,899
Loans held for sale		7,736			7,736			11,119			11,119
Investment securities:
Available for sale		27,253			27,253			39,776			39,776
Held for long-term investment		3,422			3,422			5,791			5,791
		30,675			30,675			45,567			45,567
Federal Home Loan Bank and Federal Reserve Bank stock		22,020			22,020			21,646			21,646
Portfolio loans:
Loans secured by real estate:
Commercial		1,699,958			1,630,108			1,812,387			1,732,535
Residential (including multi-family)		648,507			618,514			679,847			644,894
Construction, land development and other land		357,587			320,827			444,420			371,339
Total loans secured by real estate		2,706,052			2,569,449			2,936,654			2,748,768
Commercial and other business-purpose loans		488,300			475,090			580,524			564,028
Consumer		32,308			32,399			37,336			37,692
Other		25,282			23,821			24,486			22,770
Total portfolio loans		3,251,942			3,100,759			3,579,000			3,373,258
Less allowance for loan losses		(160,502	)		(160,502	)		(136,184	)		(136,184	)
Net portfolio loans		3,091,440			2,940,257			3,442,816			3,237,074

Financial liabilities:
Deposits:
Noninterest-bearing		648,416			648,416			577,858			577,858
Interest-bearing:
Demand accounts		1,137,476			1,137,476			1,142,961			1,142,961
Time certificates of less than $100,000		889,007			894,498			858,412			860,235
Time certificates of $100,000 or more		1,121,649			1,127,719			1,363,148			1,365,032
Total interest-bearing		3,148,132			3,159,693			3,364,521			3,368,228
Total deposits		3,796,548			3,808,109			3,942,379			3,946,086
Notes payable and other borrowings		144,282			145,108			243,747			243,765
Subordinated debentures		167,550			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 table above are based upon a comparison of current interest rates on financial instruments and the timing of related scheduled cash flows to the estimated present value of such cash flows using current estimated market rates of interest (unless quoted market values or other fair value information is more readily available, except certain subordinated debentures, as indicated above, for which the fair value is based on the liquidation or principal amount outstanding). For example, the estimated fair value of portfolio loans is based on discounted cash flow computations. Similarly, the estimated fair values of time deposits, notes payable and other borrowings were determined through discounted cash flow computations. Such estimates of

Page 19 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note E – Fair Value – Continued

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.

Given current economic conditions, the majority of the loan portfolio is not readily marketable and, accordingly, market prices may not exist. Capitol has not attempted to market the loan portfolio to potential buyers, if any exist, to determine the fair value of those instruments. Since negotiated prices, if any, in illiquid markets depend upon the then present motivations of the buyer and seller, it is reasonable to assume that potential sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates commensurate with risk may dramatically impact the value of financial instruments at any time. Accordingly, fair value measurements for loans included in the 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		(779,553	)	16.40 to 46.20			25.22

Outstanding at September 30, 2010		1,921,586		$	1.78 to $ 46.20	$	22.05

Stock options were granted during the nine months ended September 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 nine months ended September 30, 2010 and 2009 approximated $242,000 and $342,000, respectively.

As of September 30, 2010, stock options outstanding had a weighted average remaining contractual life of 2.13 years and, due to the exercise price being greater than the fair value of Capitol's common stock, had no intrinsic value at that date. The following table summarizes stock options outstanding segregated by exercise price range as of September 30, 2010:

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

$	1.00 to 14.99		566,105	$	2.48	3.02 years
$	15.00 to 19.99		66,883		16.40	1.03 years
$	20.00 to 24.99		205,953		22.02	3.79 years
$	25.00 to 29.99		252,483		26.78	0.39 years
$	30.00 to 34.99		472,164		31.78	1.38 years
$	35.00 or more		357,998		37.89	2.18 years

Total outstanding			1,921,586	$	22.05

Page 20 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

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

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

	Three Month Period						Nine Month Period
	2010			2009			2010			2009
	(As Revised)						(As Revised)

Numerator—net loss attributable to Capitol Bancorp Limited for the period	$	(52,166	)	$	(82,689	)	$	(141,051	)	$	(119,667	)

Denominator:
Weighted average number of common shares outstanding, excluding unvested restricted shares of common stock (denominator for basic and diluted earnings per share)		21,300			17,398			19,810			17,269

Number of antidilutive stock options excluded from diluted net loss per share computation		1,922			2,375			1,922			2,375

Number of antidilutive unvested restricted shares excluded from diluted net loss per share computation		318			109			318			109

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 on those securities may be deferred for periods up to five years. During such deferral periods, Capitol is prohibited from paying dividends on its common stock (subject to certain exceptions) and is further restricted by Capitol's written agreement with the Federal Reserve Bank of Chicago which prohibits both payment of interest on the trust-preferred securities and cash dividends without prior written approval by that agency. Accrued interest payable on such securities approximated $21.7 million and $11.2 million at September 30, 2010 and December 31, 2009, respectively. Holders of the trust-preferred securities will recognize current taxable income relating to the deferred interest payments.

Earlier in 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 proposed exchange offer was terminated in October 2010 without accepting or exchanging any securities.

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. 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 a bank-development company which is an unconsolidated affiliate of Capitol. The liquidation preference of the shares issued is $100.00 per share, with an aggregate issuance 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 shares are payable only when and if declared by Capitol's board of directors based on an annual rate of 6%.

Page 21 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note J – Pending Sale of Subsidiary Banks

In addition to completed sales of certain bank subsidiaries (see Note D), Capitol has entered into definitive agreements to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institutions which were pending at September 30, 2010: 1st Commerce Bank, Bank of Fort Bend, Bank of Tucson – Tucson location, Evansville Commerce Bank, Southern Arizona Community Bank and three banks located in Colorado (see following paragraph). The financial statement impact of the potential divestiture of these institutions is set forth in the accompanying pro forma condensed consolidated financial statements on pages 48 and 49 of this document.

On October 29, 2010, the sale of Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce, previously majority-owned subsidiaries of Capitol, was completed. Capitol received cash consideration of $14.5 million and realized a gain of approximately $1.3 million. Capitol's consolidated results of operations would not have been materially different if the sale of those banks 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 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 terminated plans to complete the proposed spin-off.

Note L – Regulatory and Operating Matters

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

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

Page 22 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note L – Regulatory and Operating Matters – Continued

Regulatory capital matters are set forth in Note N.

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

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which are discussed on page 44 of this document, as well as a variety of risk factors discussed elsewhere in this document and Capitol's other filings with the Securities and Exchange Commission.

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.

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Page 23 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note N –Regulatory Capital Matters

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

	September 30,				December 31,
	2010				2009
		(As Revised)
Tier 1 capital to average adjusted total assets:
Minimum required amount	≥	$	178,290		≥	$	210,651
Actual amount		$	14,439			$	242,547
Ratio			0.32	%			4.61	%

Tier 1 capital to risk-weighted assets:
Minimum required amount(1)	≥	$	126,948		≥	$	162,089
Actual amount		$	14,439			$	242,547
Ratio			0.45	%			5.99	%

Combined Tier 1 and Tier 2 capital to risk- weighted assets:
Minimum required amount(2)	≥	$	253,896		≥	$	324,177
Actual amount		$	28,878			$	383,449
Ratio			0.91	%			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 preceding summary indicates that Capitol, on a consolidated basis, was classified as less than adequately-capitalized at September 30, 2010 for regulatory purposes. In addition, several of its bank subsidiaries had capital levels resulting in classification as undercapitalized or significantly-undercapitalized at that date. Banks and bank holding companies which are less than adequately-capitalized are subject to increased regulatory oversight, requirements and limitations. Regarding banks classified as undercapitalized or significantly-undercapitalized, or otherwise noncompliant with formal regulatory agreements, management is taking appropriate action to improve such capital classifications and related compliance in the future.

Note O – Subsequent Events

On October 29, 2010, the controlling interest in Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce was sold (see Note J).

The pending sales of 1st Commerce Bank and Evansville Commerce Bank (see Note J), which are subject to definitive agreements entered into after September 30, 2010, are expected to result in a net loss if consummated. An estimated loss on those pending transactions, approximating $1.5 million, has been accrued and reflected in results of operations for the periods ended September 30, 2010.

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Page 24 of 56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED – Continued

Note P – Revision of Previously-Issued Financial Statements

The unaudited condensed consolidated financial statements as of and for the three months and nine months ended September 30, 2010 have been revised to reflect an additional provision for loan losses of $11.7 million resulting from Michigan Commerce Bank's amended regulatory financial statements as of and for the period ended September 30, 2010 filed in February 2011. Michigan Commerce Bank is a significant subsidiary of Capitol.

The following table summarizes the revisions to Capitol's unaudited condensed consolidated financial statements for each affected line item (in $1,000s, except per-share data):

	For the Three Months Ended September 30, 2010									As of and for the Nine Months Ended September 30, 2010
	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised

Net portfolio loans										$	3,103,165		$	(11,725	)	$	3,091,440
Total assets											4,237,588			(11,725	)		4,225,863
Retained-earnings deficit											(245,397	)		(11,405	)		(256,802	)
Total Capitol Bancorp Limited stockholders' equity											47,372			(11,405	)		35,967
Noncontrolling interests in consolidated subsidiaries											30,312			(320	)		29,992

Provision for loan losses	$	34,160		$	11,725		$	45,885			126,918			11,725			138,643
Loss before income taxes		(47,735	)		(11,725	)		(59,460	)		(164,710	)		(11,725	)		(176,435	)
Net loss		(45,519	)		(11,725	)		(57,244	)		(151,378	)		(11,725	)		(163,103	)
Net losses attributable to noncontrolling interests in consolidated subsidiaries		4,758			320			5,078			21,732			320			22,052
Net loss attributable to Capitol Bancorp Limited		(40,761	)		(11,405	)		(52,166	)		(129,646	)		(11,405	)		(141,051	)
Net loss per common share attributable to Capitol Bancorp Limited	$	(1.91	)	$	(0.54	)	$	(2.45	)	$	(6.54	)	$	(0.58	)	$	(7.12	)

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Page 25 of 56

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 elsewhere herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, some of which are material to Capitol and its subsidiaries. Capitol's actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report. Please refer to the commentary regarding forward-looking statements appearing on page 3 of this document.

As discussed in Capitol's various SEC filings, regulatory agencies may require Capitol or its banks to increase their provision for loan losses or to recognize loan charge-offs based upon judgments different from those of management. Any increase in the allowance for loan losses required by regulatory agencies could adversely impact Capitol's operating results and financial position. The allowance for loan losses requires significant judgment, is an estimate and is one of Capitol's critical accounting policies.

Capitol's unaudited condensed consolidated financial statements for the three months and nine months ended September 30, 2010 have been revised to reflect an additional provision for loan losses of $11.7 million resulting from Michigan Commerce Bank's amended regulatory financial statements as of and for the period ended September 30, 2010 filed on February 22, 2011. Michigan Commerce Bank is a significant subsidiary of Capitol. Prior to Michigan Commerce Bank's filing of such amended regulatory financial statements, its allowance for loan losses was believed by management to be appropriate based on information known at the time of the bank's original filing of its regulatory financial statements as of September 30, 2010.

Michigan Commerce Bank's amendment of its regulatory financial statements as of and for the period ended September 30, 2010 to increase its allowance for loan losses and related provision for loan losses in the amount of $11.7 million, resulted from a recently-completed joint examination of the bank by the Federal Deposit Insurance Corporation and the Office of Financial and Insurance Regulation of the State of Michigan. Such examination commenced in September 2010. The bank's decision to amend its interim financial statements was based on discussion with those regulatory agencies regarding expectations that certain examination findings, including a change in estimate regarding the bank's allowance for loan losses as of September 30, 2010, would require such amendment; however, the bank has not yet received the related examination report. Michigan Commerce Bank is a significant subsidiary of Capitol and, accordingly, a material change in its interim financial statements is deemed to have a material effect on Capitol's condensed consolidated financial statements as of and for the three months and nine months ended September 30, 2010. Capitol's consolidated allowance for loan losses and related provision for loan losses have been similarly increased as of and for the three months and nine months ended September 30, 2010.

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Page 26 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition

Total assets approximated $4.2 billion at September 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:

	September 30, 2010		December 31, 2009
	(As Revised)
Arizona Region:
Bank of Tucson	$	214,864	$	204,933
Central Arizona Bank		72,636		95,303
Southern Arizona Community Bank		92,645		94,585
Sunrise Bank of Albuquerque		75,173		78,930
Sunrise Bank of Arizona		396,559		495,168
Arizona Region Total		851,877		968,919

California Region:
Bank of Feather River		40,878		33,693
Bank of San Francisco(8)				87,740
Napa Community Bank(8)				166,873
Sunrise Bank(4)(9)		262,321		296,197
California Region Total		303,199		584,503

Colorado Region:
Fort Collins Commerce Bank		105,074		93,908
Larimer Bank of Commerce		98,048		89,623
Loveland Bank of Commerce		40,462		40,032
Mountain View Bank of Commerce		55,485		50,621
Colorado Region Total		299,069		274,184

Great Lakes Region:
Bank of Maumee		42,595		46,796
Bank of Michigan		86,592		99,344
Capitol National Bank		170,858		200,597
Evansville Commerce Bank		52,901		56,392
Indiana Community Bank(5)(9)		152,078		175,407
Michigan Commerce Bank(1)(9)		1,014,154		1,233,289
Ohio Commerce Bank(8)				66,175
Great Lakes Region Total		1,519,178		1,878,000

Midwest Region:
Adams Dairy Bank(8)				44,309
Bank of Belleville(8)				70,502
Community Bank of Lincoln(8)				60,356
Midwest Region Total				175,167

Nevada Region:
1st Commerce Bank		43,891		38,811
Bank of Las Vegas(2)(9)		459,271		488,786
Nevada Region Total		503,162		527,597

Northeast Region:
USNY Bank(8)				64,176

Northwest Region:
Bank of the Northwest(3)(9)		154,110		174,005
High Desert Bank		36,970		41,849
Northwest Region Total		191,080		215,854

Southeast Region:
Community Bank of Rowan(6)		149,547
First Carolina State Bank		114,676		115,716
Pisgah Community Bank		53,238		62,773
Sunrise Bank(7)(9)		120,552		137,320
Southeast Region Total		438,013		315,809

Page 27 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Summary of total assets – continued:

	September 30, 2010		December 31, 2009
	(As Revised)
Texas Region:
Bank of Fort Bend	$	38,041	$	31,548
Bank of Las Colinas		45,169		43,003
Texas Region Total		83,210		74,551

Parent company and other, net		37,075		53,180

Consolidated Totals	$	4,225,863	$	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)	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.
(8)	Capitol's interest in this bank subsidiary was sold during the nine months ended September 30, 2010.
(9)	For purposes of this presentation, such merger has been reflected as if it occurred on December 31, 2009.

Total assets decreased $906 million during the nine months ended September 30, 2010, of which $560 million related to bank subsidiaries sold during the period.

Portfolio loans, the single largest asset category (77% of total assets at September 30, 2010), decreased during the nine months ended September 30, 2010 by approximately $795 million (of which $468 million related to bank subsidiaries sold), compared to a decrease of about $548 million during the corresponding period of 2009. The portfolio decrease is in response to the need to preserve liquidity and capital in the current economic climate and the general economic slowdown occurring nationally. Because portfolio loans compose the largest portion of assets, most of this section of the narrative is devoted to loans and asset quality.

Geographic diversification of Capitol's balance sheet is important. Prior to 1996, all of Capitol's banking operations were located in Michigan. As of September 30, 2010, 39% of the consolidated loan portfolio relates to banks located within the Great Lakes Region (44% at December 31, 2009) and 61% of the consolidated loan portfolio relates to banks located in other regions of the country (56% at December 31, 2009). This is important because Capitol's diversification efforts lessen disproportionate geographic concentration within a specific region.

Page 28 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

The consolidated allowance for loan losses at September 30, 2010 approximated $160.5 million or 4.94% of total portfolio loans, a significant increase from the 3.81% ratio at the beginning of the year (excluding discontinued operations), resulting from continued deterioration in economic conditions and adverse changes in 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 an estimate based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio and other factors. The allowance is increased by provisions for loan losses charged to operations and reduced by net charge-offs. The table below summarizes activity in the allowance for loan losses (in $1,000s) and the ratio of net charge-offs to average portfolio loans outstanding:

	Periods Ended September 30
	Three Month Period						Nine Month Period
	2010			2009(1)			2010			2009(1)
	(As Revised)						(As Revised)

Allowance for loan losses at beginning of period	$	155,468		$	102,535		$	136,184		$	82,666

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

Loans charged-off:
Loans secured by real estate:
Commercial		(21,556	)		(5,757	)		(47,747	)		(11,367	)
Residential (including multi-family)		(9,193	)		(5,026	)		(28,165	)		(19,869	)
Construction, land development and other land		(6,268	)		(11,239	)		(28,887	)		(24,586	)
Total loans secured by real estate		(37,017	)		(22,022	)		(104,799	)		(55,822	)
Commercial and other business-purpose loans		(6,950	)		(7,149	)		(20,706	)		(19,164	)
Consumer		(875	)		(430	)		(1,295	)		(972	)
Other		--			(34	)		--			(34	)
Total charge-offs		(44,842	)		(29,635	)		(126,800	)		(75,992	)
Recoveries:
Loans secured by real estate:
Commercial		754			29			1,495			151
Residential (including multi-family)		1,043			51			1,666			252
Construction, land development and other land		1,743			385			5,349			506
Total loans secured by real estate		3,540			465			8,510			909
Commercial and other business-purpose loans		423			161			2,100			994
Consumer		28			88			96			117
Total recoveries		3,991			714			10,706			2,020
Net charge-offs		(40,851	)		(28,921	)		(116,094	)		(73,972	)
Additions to allowance charged to expense (provision for
for loan losses)		45,885			44,482			138,643			109,402

Allowance for loan losses at end of period	$	160,502		$	118,096		$	160,502		$	118,096

Average total portfolio loans outstanding	$	3,338,447		$	3,797,021		$	3,439,705		$	3,911,639

Ratio of net charge-offs (annualized) to average portfolio loans outstanding		4.89	%		3.05	%		4.50	%		2.52	%

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

Page 29 of 56

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 related primarily to Michigan, Arizona and Nevada banks, due to year-to-date 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:

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



	(As Revised)

Loans secured by real estate:
Commercial	$	55,267		1.70	%	$	54,396		1.52	%
Residential (including multi-family)		44,742		1.37	%		26,754		0.75	%
Construction, land development and other land		23,643		0.73	%		21,416		0.60	%
Total loans secured by real estate		123,652		3.80	%		102,566		2.87	%
Commercial and other business-purpose loans		35,470		1.09	%		32,238		0.90	%
Consumer		1,195		0.04	%		1,294		0.04	%
Other		185		0.01	%		86		--

Total allowance for loan losses	$	160,502		4.94	%	$	136,184		3.81	%

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

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Page 30 of 56

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):

	September 30, 2010		June 30, 2010(1)		March 31, 2010(1)		December 31, 2009(1)
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	161,371	$	161,996	$	151,615	$	129,401
Residential (including multi-family)		65,480		57,095		63,356		55,347
Construction, land development and other land		78,697		92,053		80,161		81,261
Total loans secured by real estate		305,548		311,144		295,132		266,009
Commercial and other business-purpose loans		30,065		30,494		27,102		23,063
Consumer		725		1,463		495		335
Total nonaccrual loans		336,338		343,101		322,729		289,407

Past due (>90 days) loans and accruing interest:
Loans secured by real estate:
Commercial		2,523		5,544		5,796		6,234
Residential (including multi-family)		855		2,508		768		228
Construction, land development and other land		18		2,113		3,035		3,713
Total loans secured by real estate		3,396		10,165		9,599		10,175
Commercial and other business-purpose loans		387		1,344		2,101		1,546
Consumer		38		32		12		534
Total past due loans		3,821		11,541		11,712		12,255

Total nonperforming loans	$	340,159	$	354,642	$	334,441	$	301,662

Real estate owned and other repossessed assets		108,425		108,633		109,702		111,167

Total nonperforming assets	$	448,584	$	463,275	$	444,143	$	412,829

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

Nonperforming loans increased $38.5 million or 13% during the nine months ended September 30, 2010, compared to a much larger increase of $105.4 million or 62% in the corresponding period of 2009. More importantly, the pace of growth in nonperforming loans in the first half of 2010 continued to slow and, for the three months ended September 30, 2010, nonperforming loans decreased.

Nonperforming assets decreased $14.7 million for the three months ended September 30, 2010, compared to a $19.1 million increase in the immediately preceding quarterly period. Proceeds from sales of other real estate owned increased during the interim 2010 periods more than 200% over 2009 interim levels, although at a modest loss.

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

Page 31 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

Nonperforming loans at September 30, 2010 approximated 10.46% of total portfolio loans, a further increase from the December 31, 2009 ratio of 8.4% (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 ($327 million). Nonperforming loans increased $53.0 million during the first half of 2010 while a $14.5 million decrease occurred during the three months ended September 30, 2010. Notably, the pace of growth in nonperforming loans decreased through June 30, 2010 for a third consecutive quarterly period, before this most recent reduction in nonperforming loans. Of the nonperforming loans at September 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 that time and, accordingly, had loss exposure which would have been expected to be minimal; however, underlying real estate values depend upon current economic conditions and liquidation strategies. Most other nonperforming loans were generally secured by other business assets. Nonperforming loans at September 30, 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.

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):

	September 30, 2010		December 31, 2009(1)
Impaired loans:
Loans which have an allowance requirement	$	132,961	$	112,804
Loans which do not have an allowance requirement		263,215		212,244

Total impaired loans	$	396,176	$	325,048

Allowance for loan losses related to impaired loans	$	24,944	$	19,609

(1)

Excludes impaired loans of $7,683 and allowance for loan losses related to impaired loans of $529 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 allowance for loan losses as a percentage of nonperforming loans approximated 47% at September 30, 2010, compared to 45% at the beginning of the year (excluding operations discontinued in 2010).

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

Updated appraisals are generally obtained when it has been determined that a collateral-dependent loan has become impaired or when it is likely a 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.

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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 to 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 $340 million at September 30, 2010. Of that total, $158 million or 46% (including some loans carried at the parent level) were originated by banks located within the Great Lakes Region, primarily in Michigan. Nonperforming loans have increased materially during the nine months ended September 30, 2010 within other regions, such as the Arizona Region ($7.9 million increase) and the Nevada Region ($13.6 million increase) to 9% and 23% 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.

Responsive to the elevated level of nonperforming loans, higher levels of allowances for loan losses have been established for the Great Lakes Region, Arizona Region and the Nevada Region, approximating 6.34%, 4.23% and 6.17% of portfolio loans for the respective region on a combined basis as of September 30, 2010. The allowance for loan losses levels range as high as 7.48% at Michigan Commerce Bank, 6.60% at Sunrise Bank of Arizona and 6.42% at Bank of Las Vegas. Those ratios can be contrasted with some other banks and geographic regions within the Corporation with lower levels of nonperforming loans.

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

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

At September 30, 2010, problem and potential-problem loans (including the previously-discussed nonperforming loans) approximated $817 million or about 25% of total consolidated portfolio loans, compared to approximately $801 million or about 22% at December 31, 2009. Interim 2010 increases in these totals resulted from continued concerns about borrower performance, 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. Nonperforming loans, as previously discussed, are primarily secured by real estate which is subject to fair value estimates and related loss recognition. Management believes, however, that current general economic

Page 33 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

conditions in some markets may result in higher levels of future loan losses in comparison to previous years, as experienced in the first nine months of 2010.

Regarding other real estate owned and collateral-dependent loans in Michigan (about 31% of consolidated totals), foreclosure laws in that state generally favor borrowers rather than lenders and, accordingly, foreclosure and redemption periods (i.e., the number of months it takes for a financial institution to obtain clear title to freely market the real estate) take much longer than in many other states. Further, once a property is available to the bank for sale or liquidation, market conditions, as they are currently (particularly in Michigan, Arizona and Nevada), 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
	Sept 30, 2010		Dec 31, 2009		Sept 30, 2010		Dec 31, 2009		Sept 30, 2010		Dec 31, 2009		Sept 30, 2010			Dec 31, 2009
					(As Revised)								(As Revised)
Arizona Region:
Bank of Tucson	$	147,632	$	168,809	$	2,326	$	1,904	$	7,842	$	5,110		1.58	%		1.13	%
Central Arizona Bank		58,570		66,058		2,535		3,389		3,710		3,132		4.33	%		5.13	%
Southern Arizona Community Bank		76,965		79,190		1,100		1,150		787		848		1.43	%		1.45	%
Sunrise Bank of Albuquerque		54,920		61,077		1,606		1,256		4,958		3,436		2.92	%		2.06	%
Sunrise Bank of Arizona		284,901		346,134		18,800		17,382		36,064		32,929		6.60	%		5.02	%
Arizona Region Total		622,988		721,268		26,367		25,081		53,361		45,455		4.23	%		3.48	%

California Region:
Bank of Feather River		33,514		26,941		445		347						1.33	%		1.29	%
Bank of San Francisco(8)				74,782				1,384				243					1.85	%
Napa Community Bank(8)				139,497				2,493				3,746					1.79	%
Sunrise Bank(4)(9)		194,004		214,682		7,292		6,731		11,200		8,692		3.76	%		3.14	%
California Region Total		227,518		455,902		7,737		10,955		11,200		12,681		3.40	%		2.40	%

Colorado Region:
Fort Collins Commerce Bank		86,839		83,047		1,644		1,308		1,681		1,291		1.89	%		1.58	%
Larimer Bank of Commerce		84,316		79,239		1,820		1,467		1,188				2.16	%		1.85	%
Loveland Bank of Commerce		35,046		33,582		672		560				156		1.92	%		1.67	%
Mountain View Bank of Commerce		44,168		40,201		789		621		889				1.79	%		1.54	%
Colorado Region Total		250,369		236,069		4,925		3,956		3,758		1,447		1.97	%		1.68	%

Great Lakes Region:
Bank of Maumee		35,292		40,269		1,745		918		60		810		4.94	%		2.28	%
Bank of Michigan		62,432		64,374		1,308		1,172		2,722		844		2.10	%		1.82	%
Capitol National Bank		146,657		173,338		6,574		7,920		19,665		21,346		4.48	%		4.57	%
Evansville Commerce Bank		39,468		44,179		1,139		1,338		1,990		1,244		2.89	%		3.03	%
Indiana Community Bank(5)(9)		117,426		133,051		4,716		4,130		8,026		9,278		4.05	%		3.10	%
Michigan Commerce Bank(1)(9)		871,115		1,045,285		65,141		53,953		122,428		117,806		7.48	%		5.16	%
Ohio Commerce Bank(8)				56,739				910				206					1.60	%
Great Lakes Region Total		1,272,390		1,557,235		80,623		70,341		154,891		151,534		6.34	%		4.52	%

Midwest Region:
Adams Dairy Bank(8)				35,860				655									1.83	%
Bank of Belleville(8)				58,510				938									1.60	%
Community Bank of Lincoln(8)				44,864				1,195				1,661					2.66	%
Midwest Region Total				139,234				2,788				1,661					2.00	%

Nevada Region:
1st Commerce Bank		26,612		33,482		846		1,910		5,874		7,531		3.18	%		5.70	%
Bank of Las Vegas(2)(9)		324,797		370,285		20,838		11,952		74,472		59,219		6.42	%		3.23	%
Nevada Region Total		351,409		403,767		21,684		13,862		80,346		66,750		6.17	%		3.43	%

Northeast Region:
USNY Bank(8)				57,849				905									1.56	%

Page 34 of 56

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
	Sept 30, 2010		Dec 31, 2009			Sept 30, 2010		Dec 31, 2009			Sept 30, 2010		Dec 31, 2009			Sept 30, 2010			Dec 31, 2009
						(As Revised)										(As Revised)
Northwest Region:
Bank of the Northwest(3)(9)	$	117,040	$	134,669		$	3,934	$	4,985		$	6,815	$	9,614			3.36	%		3.70	%
High Desert Bank		30,206		34,203			1,350		805			963		644			4.47	%		2.35	%
Northwest Region Total		147,246		168,872			5,284		5,790			7,778		10,258			3.59	%		3.43	%

Southeast Region:
Community Bank of Rowan(6)		108,912					1,900					3,535					1.74	%
First Carolina State Bank		83,721		90,919			1,867		1,554			5,114		6,161			2.23	%		1.71	%
Pisgah Community Bank		30,383		45,094			1,280		1,168			5,251		401			4.21	%		2.59	%
Sunrise Bank(7)(9)		84,102		103,925			3,929		4,152			10,524		7,928			4.67	%		4.00	%
Southeast Region Total		307,118		239,938			8,976		6,874			24,424		14,490			2.92	%		2.86	%

Texas Region:
Bank of Fort Bend		30,454		29,215			570		485			292					1.87	%		1.66	%
Bank of Las Colinas		40,581		34,725			737		731			933					1.82	%		2.11	%
Texas Region Total		71,035		63,940			1,307		1,216			1,225					1.84	%		1.90	%

Parent company and other, net		1,869		3,027			3,599		2,896			3,176		3,242		n.m.			n.m.
Less discontinued operations(8)				(468,101	)				(8,480	)				(5,856	)					(1.81	)%

Consolidated totals relating to continuing operations	$	3,251,942	$	3,579,000		$	160,502	$	136,184		$	340,159	$	301,662			4.94	%		3.81	%

(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)	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.
(8)	Includes assets of banks sold in 2010.
(9)	For purposes of this presentation, such merger has been reflected as if it occurred on December 31, 2009.
n.m.	Not meaningful.

As previously discussed, the allowance for loan losses is an estimate 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., the allowance for loan losses as a percentage of nonperforming loans). Several factors may contribute to this occurrence. For example, estimated losses relating to impaired collateral-dependent loans are generally reflected as direct write-downs to those loans (and, accordingly, there is no related allowance for loan losses allocation necessary). Further, some collateral-dependent loans may have minimal or no loss potential which would negate a computational comparison between the allowance for loan losses and such nonperforming loans.

Page 35 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Financial Condition – Continued

At September 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. 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. An interim review for potential goodwill impairment is deemed necessary when events or circumstances have changed significantly. During the interim 2010 periods, Capitol determined there were no significant events or circumstances warranting an interim impairment test of goodwill. 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. In early August 2010, a federal income tax refund approximating $43 million, relating to net operating losses from 2009 carried back to previous years, was received as expected. Due to the size of that refund, it is subject to audit by the Internal Revenue Service.

At September 30, 2010, Capitol had a deferred tax asset approximating $172.4 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. Due to continuing operating losses during the 2010 interim periods, management reviewed the potential realization of net deferred tax assets as of September 30, 2010 and increased the related valuation allowance to $169.3 million, reducing the net deferred tax asset to approximately $3.1 million. The net deferred tax asset ($3.1 million and $5.4 million at September 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 third quarter 2010 net loss attributable to Capitol approximated $52.2 million compared to $41.0 million in the preceding quarterly period and $82.7 million for the third quarter of 2009. The net loss per share attributable to Capitol was $2.45 for the three months ended September 30, 2010 compared to $1.98 in the preceding quarterly period and $4.75 in the third quarter of 2009. The net loss attributable to Capitol for the nine months ended September 30, 2010 approximated $141.1 million compared to $119.7 million in the corresponding period of 2009. The net loss per share attributable to Capitol was $7.12 for the nine months ended September 30, 2010 compared to $6.93 in the corresponding 2009 period. Net income relating to discontinued operations was not material to the periods presented except for the gain on sale of bank subsidiaries which approximated $13.4 million for the nine months ended September 30, 2010 and $3.3 million in the most recent quarterly period.

The primary reasons for the interim 2010 net losses were large provisions for loan losses as the Corporation continued to carefully assess the implications and impact of declining property values, weak bank performance and continued adverse valuation of other real estate owned, holding costs and related losses on sale of properties. The provision for loan losses increased $29.2 million to $138.6 million for the nine months ended September 30, 2010 compared to a provision of $109.4 million for the corresponding period of 2009 (excluding discontinued operations). The provision for loan losses for the most recent quarterly period was about $1.4 million more than the corresponding period of 2009 and $1.3 million more than the immediately-preceding quarterly period in 2010.

Page 36 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

Analytical Review

The provision for loan losses increased significantly for the nine months ended September 30, 2010 due to higher levels of loan charge-offs, changes in nonperforming loans and adverse changes in valuation of collateral-dependent loans, primarily secured by real estate. Of the provision for loan losses for the nine months ended September 30, 2010, a portion was attributable to a significant further increase in the allowance for loan losses as a percentage of portfolio loans from 3.81% to 4.94% as provisions for loan losses exceeded net loan charge-offs while portfolio loans decreased. Provisions for loan losses are estimates based upon management's analysis of the adequacy of the allowance for loan losses, as previously discussed. The significant increase in the provision for loan losses compared to the preceding year had a material adverse effect on interim 2010 operating results.

Net interest income for the nine-month 2010 period totaled $92.7 million, a 2.2% decrease compared to $94.8 million in 2009. Net interest income for the three months ended September 30, 2010 totaled $31.3 million, a 2.2% decrease compared to $32.0 million in 2009. The net interest margin approximated 3.01% for the three months ended September 30, 2010, a 13 basis-point increase compared to 2.88% for the three months ended June 30, 2010, and a slight increase compared to 3.00% for the three months ended September 30, 2009. Several factors impacted the 2010 margin, including further growth in nonperforming loans in the first half of 2010, substantially higher levels of cash and cash equivalents which have minimal interest rates and other changes in 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.

While net interest income was relatively stable and slightly lower during the interim 2010 periods compared to 2009 (due to the smaller balance sheet and growth in nonearning assets), provisions for loan losses exceeded net interest income for the interim periods for both 2010 and 2009.

Noninterest income for the nine months ended September 30, 2010 approximated $18.7 million, a 23.9% increase compared to $15.1 million for the same period in 2009, including a gain on debt extinguishment. Noninterest income for the three months ended September 30, 2010 totaled $6.9 million, a 41.5% increase compared to $4.9 million for the same period in 2009. In the interim 2010 periods, the realized gain on sale of government-guaranteed loans increased about 50% over 2009 levels, as pricing on such transactions improved. Fees from origination of non-portfolio residential mortgage loans totaled $1.4 million for the nine months ended September 30, 2010, a large decrease from $2.4 million for the comparable period in 2009, due to substantially lower loan origination volume of $89.1 million compared to $261.9 million, respectively.

Noninterest expense totaled $149.1 million for the nine-month 2010 period compared to $137.2 million for the comparable period of 2009. That increase resulted from costs associated with foreclosed properties and other real estate owned and FDIC insurance premiums and other regulatory fees. Costs associated with foreclosed properties and other real estate increased $17.5 million (98%) to $35.4 million in the nine-month 2010 period ($17.9 million in the corresponding 2009 period) due to adverse valuations and holding costs of other real estate owned. The cost of FDIC insurance and other regulatory fees also increased $2.2 million (22%) to $12.1 million ($10.0 million in the 2009 period).

The largest element of noninterest expense is salaries and employee benefits, which approximated $57.9 million for the nine months ended September 30, 2010, a decrease of 15.3% from $68.3 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.

Page 37 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

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

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

Legal fees	$	1,138	$	962	$	3,589	$	1,945
Other professional fees		582		729		3,462		1,344
Loan and collection expense		976		742		2,583		1,868
Directors' fees		427		456		1,365		1,582
Insurance		592		175		1,353		472
Advertising		336		410		1,215		1,229
Paper, printing and supplies		346		428		1,178		1,272
Travel, lodging and meals		377		393		1,051		1,150
Bank services (ATMs, telephone banking and Internet banking)		414		517		1,046		1,671
Communications		326		341		1,006		1,139
Postage		218		267		741		804
Taxes other than income taxes		161		152		528		537
Dues and memberships		165		179		509		553
Courier service		159		165		472		485
Contracted labor		95		101		269		163
Publications		49		40		150		146
Other		1,557		2,011		2,660		3,210

Total	$	7,918	$	8,068	$	23,177	$	19,570

(1)

Excludes amounts related to operations discontinued in 2010.

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Page 38 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Results of Operations – Continued

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

	Total Revenues				Net Income (Loss)(1)						Return on Average Equity(2)						Return on Average Assets(2)
	2010		2009		2010			2009			2010			2009			2010			2009
					(As Revised)
Arizona Region:
Bank of Tucson	$	9,268	$	9,513	$	1,369		$	1,467			9.64	%		11.04	%		0.84	%		0.97	%
Central Arizona Bank		2,730		3,050		(3,461	)		(4,977	)
Southern Arizona Community Bank		3,977		3,903		262			237			3.52	%		3.51	%		0.36	%		0.35	%
Sunrise Bank of Albuquerque		2,769		3,155		(3,030	)		(1,173	)
Sunrise Bank of Arizona		14,721		20,892		(34,218	)		(30,196	)
Yuma Community Bank(3)(12)				3,225					372						7.69	%					0.78	%
Arizona Region Total		33,465		43,738		(39,078	)		(34,270	)

California Region:
Bank of Feather River		1,835		1,560		88			(716	)		1.87	%					0.32	%
Bank of San Francisco(12)		4,119		3,415		559			(973	)		9.55	%					0.89	%
Bank of Santa Barbara(4)(12)				2,571					(1,300	)
Napa Community Bank(12)		2,947		6,801		(77	)		1,224						10.26	%					1.11	%
Sunrise Bank(8)(13)		10,018		11,187		(3,884	)		(6,955	)
California Region Total		18,919		25,534		(3,314	)		(8,720	)

Colorado Region:
Fort Collins Commerce Bank		4,695		3,860		382			262			5.25	%		3.63	%		0.52	%		0.42	%
Larimer Bank of Commerce		4,076		4,030		601			326			9.88	%		5.40	%		0.86	%		0.49	%
Loveland Bank of Commerce		1,887		1,531		195			(900	)		4.12	%					0.65	%
Mountain View Bank of Commerce		2,079		1,711		98			(608	)		1.81	%					0.25	%
Colorado Region Total		12,737		11,132		1,276			(920	)

Great Lakes Region:
Bank of Maumee		1,818		1,973		(1,234	)		(2,336	)
Bank of Michigan		3,388		3,556		(335	)		(505	)
Capitol National Bank		7,440		9,281		(2,722	)		(4,005	)
Evansville Commerce Bank		2,127		2,640		(296	)		(1,509	)
Indiana Community Bank(9)(13)		5,886		6,854		(2,514	)		(3,674	)
Michigan Commerce Bank(5)(13)		46,460		55,261		(63,966	)		(60,199	)
Ohio Commerce Bank(12)		1,934		2,292		226			(560	)		5.68	%					0.78	%
Great Lakes Region Total		69,053		81,857		(70,841	)		(72,788	)

Midwest Region
Adams Dairy Bank(12)		1,681		1,704		(36	)		(587	)
Bank of Belleville(12)		1,048		2,839		18			(808	)		1.02	%					0.10	%
Community Bank of Lincoln(12)		1,508		2,694		(872	)		(1,243	)
Summit Bank of Kansas City(4)				2,780					(978	)
Midwest Region Total		4,237		10,017		(890	)		(3,616	)

Nevada Region:
1st Commerce Bank		1,255		1,814		(2,979	)		(2,046	)
Bank of Las Vegas(6)(13)		14,501		20,010		(33,696	)		(6,953	)
Nevada Region Total		15,756		21,824		(36,675	)		(8,999	)

Northeast Region:
USNY Bank(12)		2,712		2,316		560			(1,340	)		17.81	%					1.44	%

Northwest Region:
Bank of the Northwest(7)(13)		5,962		7,129		(1,105	)		(7,399	)
High Desert Bank		1,702		1,820		(827	)		(2,726	)
Northwest Region Total		7,664		8,949		(1,932	)		(10,125	)

Southeast Region:
Community Bank of Rowan(11)		1,666		4,962		59			459			0.76	%		5.73	%		0.05	%		0.47	%
First Carolina State Bank		3,547		4,183		(2,410	)		(976	)
Pisgah Community Bank		1,502		1,739		(8,691	)		(1,187	)
Sunrise Bank(10)(13)		4,847		6,049		(6,452	)		(5,126	)
Southeast Region Total		11,562		16,933		(17,494	)		(6,830	)

Page 39 of 56

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
							(As Revised)
Texas Region:
Bank of Fort Bend	$	1,551		$	1,122		$	(14	)	$	(1,278	)
Bank of Las Colinas		1,672			1,435			(13	)		(1,162	)
Texas Region Total		3,223			2,557			(27	)		(2,440	)

Parent company and other, net		2,557			9,179			5,312			(28,934	)
Less discontinued operations		(15,949	)		(27,857	)		(9,074	)		4,964

Consolidated totals for continuing operations	$	165,936		$	187,821		$	(172,177	)	$	(174,018	)	--	--	--	--

(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 III (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)	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.
(11)	As of December 31, 2009, Community Bank of Rowan (CBR) was a majority-owned subsidiary of 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.
(12)	Total revenues and net income (loss) of these banks are reflected as discontinued operations.
(13)	For purposes of this presentation, such merger has been reflected as if it occurred on December 31, 2009.

Liquidity and Capital Resources

The principal funding source for banks is deposits. Total deposits (excluding discontinued operations) decreased $145.8 million during the nine months ended September 30, 2010 compared to a $219.9 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 $389 million as of September 30, 2010, or about 10.2% of total deposits, a decrease of $347 million during the nine-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 September 30, 2010 include about $61 million of relationship-based structured time accounts. Banks that are classified as less than well-capitalized are required to obtain approval from the FDIC to renew or obtain new brokered deposits and, for banks classified as less than adequately-capitalized, renewal of brokered deposits is generally prohibited.

Noninterest-bearing deposits approximated 17.1% of total deposits at September 30, 2010, an increase from 14.7% at December 31, 2009, and an increase of $70.6 million in the 2010 interim period compared to a decrease of $22.4 million during the 2009 period (excluding discontinued operations). Levels of noninterest-bearing deposits

Page 40 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

can, however, fluctuate based on customers' transaction activity. During the 2010 period, however, interest-bearing deposits decreased about $216.4 million, mostly related to the previously-mentioned reduction in brokered deposits.

Cash and cash equivalents amounted to $813.5 million or 19% of total assets at September 30, 2010, compared to $731.9 million or 14% of total assets at December 31, 2009 as reductions in portfolio loans (principally from repayments) and proceeds from sales and maturities of investment securities, government-guaranteed loans and other real estate owned were used to reduce debt obligations or deployed into liquid assets. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Liquidity levels have been increased by management in response to regulatory guidance coupled with limited opportunities to deploy funds into investment securities during a low interest-rate environment and a cautious approach to making new loans in an uncertain economy. Management believes the banks' liquidity position at September 30, 2010 is adequate to fund loan demand and meet depositor needs.

In addition to cash and cash equivalents, an additional source of long-term liquidity is the banks' marketable investment securities. Liquidity needs have not historically necessitated the sale of investments in order to meet funding requirements and the banks have not engaged in active trading of their investments. At September 30, 2010, Capitol's banks had approximately $27.3 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 $136.9 million at September 30, 2010 and additional borrowing capacity approximated $247.5 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 banks and related matters. Total notes payable and other borrowings were $144.3 million at September 30, 2010, a reduction of $99.5 million from the beginning of the year, as sources of funds enabled repayment of select borrowings in addition to an extinguishment of debt in exchange for common stock earlier in 2010.

Capitol Bancorp Limited stockholders' equity, as a percentage of total assets, approximated 0.85% at September 30, 2010 and 3.14% at December 31, 2009. As of September 30, 2010, total capital funds (i.e., the sum of Capitol Bancorp Limited stockholders' equity, noncontrolling interests in consolidated subsidiaries and subordinated debentures) approximated $233.5 million or 5.53% of total assets. Capitol's capital ratios declined significantly during the interim 2010 period due to the large loss incurred from operations. In addition, Capitol's tangible stockholders' equity (i.e., stockholders' equity less recorded goodwill) became negative for the first time in the Corporation's history at September 30, 2010.

Page 41 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

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 based on the Corporation and its consolidated banks as of September 30, 2010 (excludes banks sold thus far in 2010):

	Tier 1 Leverage						Tier 1 Risk-Based						Total Risk-Based
	Ratio(1)(5)						Capital Ratio(1)(5)						Capital Ratio(2)(5)						Regulatory Classification(3)
	Sept 30, 2010			Dec 31, 2009			Sep 30, 2010			Dec 31, 2009			Sept 30, 2010			Dec 31, 2009			Sept 30, 2010	Dec 31, 2009
Arizona Region:
Bank of Tucson		5.54	%		9.67	%		9.90	%		10.78	%		11.15	%		11.86	%	well-capitalized	well-capitalized
Central Arizona Bank		2.19	%		5.13	%		2.81	%		7.13	%		4.10	%		8.42	%	significantly-undercapitalized	adequately-capitalized
Southern Arizona Community Bank		9.39	%		9.47	%		11.69	%		11.03	%		12.94	%		12.28	%	well-capitalized	well-capitalized
Sunrise Bank of Albuquerque		2.53	%		6.27	%		3.43	%		8.07	%		4.70	%		9.33	%	significantly-undercapitalized	adequately-capitalized(6)
Sunrise Bank of Arizona		2.03	%		3.62	%		2.70	%		5.01	%		4.01	%		6.30	%	significantly-undercapitalized	undercapitalized

California Region:
Bank of Feather River(4)		15.18	%		18.59	%		21.71	%		25.84	%		22.96	%		27.09	%	well-capitalized	well-capitalized
Sunrise Bank(10)(14)		7.59	%		7.97	%		10.25	%		10.57	%		11.53	%		11.83	%	adequately-capitalized(6)	well-capitalized

Colorado Region:
Fort Collins Commerce Bank		9.62	%		10.35	%		11.78	%		11.77	%		13.04	%		13.03	%	well-capitalized	well-capitalized
Larimer Bank of Commerce		8.94	%		8.70	%		11.07	%		10.96	%		12.33	%		12.22	%	well-capitalized	well-capitalized
Loveland Bank of Commerce(4)		15.78	%		15.48	%		19.04	%		18.01	%		20.30	%		19.26	%	well-capitalized	well-capitalized
Mountain View Bank of Commerce(4)		13.46	%		14.20	%		17.38	%		17.99	%		18.64	%		19.24	%	well-capitalized	well-capitalized

Great Lakes Region:
Bank of Maumee		6.60	%		8.50	%		8.94	%		10.42	%		10.24	%		11.68	%	well-capitalized	well-capitalized
Bank of Michigan		6.88	%		7.11	%		10.73	%		11.19	%		11.99	%		12.44	%	well-capitalized	well-capitalized
Capitol National Bank		5.67	%		6.45	%		7.26	%		8.15	%		8.55	%		9.44	%	adequately-capitalized	adequately-capitalized(6)
Evansville Commerce Bank		8.58	%		8.01	%		11.95	%		11.28	%		13.22	%		12.55	%	well-capitalized	well-capitalized
Indiana Community Bank(11)(14)		5.33	%		8.11	%		7.92	%		10.81	%		9.21	%		12.08	%	adequately-capitalized	adequately-capitalized(6)
Michigan Commerce Bank(7)(13)(14)		1.04	%(15)		4.03	%		1.38	%(15)		5.00	%		2.71	%(15)		6.30	%	critically undercapitalized(16)	undercapitalized

Nevada Region:
1st Commerce Bank		3.06	%		7.08	%		5.00	%		8.89	%		6.27	%		10.20	%	undercapitalized	well-capitalized
Bank of Las Vegas(8)(14)		1.21	%(15)		5.08	%		1.74	%(15)		6.25	%		3.06	%(15)		7.51	%	critically undercapitalized(16)	undercapitalized

Northwest Region:
Bank of the Northwest(9)(14)		9.91	%		15.16	%		13.42	%		20.75	%		14.70	%		22.01	%	adequately-capitalized(6)	well-capitalized
High Desert Bank		7.68	%		8.45	%		10.12	%		11.28	%		11.41	%		12.55	%	adequately-capitalized(6)	adequately-capitalized(6)

Southeast Region:
Community Bank of Rowan		7.00	%		8.17	%		9.82	%		10.52	%		11.07	%		11.77	%	well-capitalized	well-capitalized
First Carolina State Bank		5.01	%		7.08	%		6.96	%		9.18	%		8.22	%		10.44	%	adequately-capitalized	well-capitalized
Pisgah Community Bank(4)		2.66	%		10.17	%		4.76	%		14.39	%		6.04	%		15.66	%	significantly-undercapitalized	well-capitalized
Sunrise Bank(12)(14)		3.16	%		7.12	%		4.91	%		11.19	%		6.21	%		12.46	%	undercapitalized	adequately-capitalized(6)

Page 42 of 56

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)
	Sept 30, 2010			Dec 31, 2009			Sept 30, 2010			Dec 31, 2009			Sept 30, 2010			Dec 31, 2009			Sept 30, 2010	Dec 31, 2009
Texas Region:
Bank of Fort Bend(4)		14.40	%		16.05	%		19.46	%		19.76	%		20.72	%		21.01	%	well-capitalized	well-capitalized
Bank of Las Colinas(4)		11.97	%		12.56	%		14.38	%		16.54	%		15.64	%		17.81	%	well-capitalized	well-capitalized

Consolidated totals		0.32	%(15)		4.61	%		0.45	%(15)		5.99	%		0.91	%(15)		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 three years of operations.
(5)	Ratios are based on the banks' regulatory reports filed on or before October 30, 2010, unless otherwise indicated.
(6)	The institution is subject to a regulatory agreement and, accordingly, cannot be classified better than adequately-capitalized even though the risk-based capital ratios would otherwise suggest well-capitalized classification.
(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.
(13)	On September 30, 2010, Capitol transferred its Operations and Technology Group (OTG) with an estimated fair value of approximately $8 million to Michigan Commerce Bank (MCB), pursuant to an order from Michigan's Office of Financial and Insurance Regulation (OFIR) which approved the transaction as a non-cash capital contribution to MCB's surplus and Tier 1 capital. Pursuant to an amended order from OFIR, the value ascribed to such transfer was reduced to approximately $4.7 million, Capitol's prior carrying value of the OTG. MCB's regulatory capital position at September 30, 2010 reflects a $4.7 million addition to Tier 1 capital pursuant to that amended order.
(14)	For purposes of this presentation, such merger has been reflected as if it occurred on December 31, 2009.
(15)	Based on amended regulatory financial reports filed in February 2011.
(16)	Subsequent capital contributions made by the banks' parent eliminated the banks' classification as critically-undercapitalized in December 2010, as to Bank of Las Vegas, and January 2011, as to Michigan Commerce Bank.

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 September 30, 2010.

Capitol's total risk-based capital ratio at September 30, 2010 was adversely impacted by the exclusion of approximately $173.9 million of previously-qualifying Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital. Tier 1 capital decreased during the nine months ended September 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 prior to 2010.

Page 43 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Liquidity and Capital Resources – Continued

In addition to Capitol's consolidated regulatory capital classification at September 30, 2010, several of its bank subsidiaries had capital levels resulting in classification as undercapitalized, significantly-undercapitalized or critically-undercapitalized at that date. Regarding banks classified as less than adequately-capitalized, and/or otherwise noncompliant with formal regulatory agreements, management is taking appropriate action to improve such capital classifications and related compliance in the future.

Proceeds from sale of banks through September 30, 2010 have been deployed as additional capital in the remaining banks pursuant to requirements imposed by the FDIC. Capitol anticipates augmenting the capital levels of its less than adequately-capitalized bank subsidiaries further 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.

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 coupled with elevated costs and adverse valuation of other real estate owned. These 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 from other sources at the parent-company level;

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

·	Future reduction in operating expenses;

·	Future improvement in net interest margin and sources of noninterest income; and

·	Future conversion of nonperforming assets into earning assets.

As noted elsewhere in this narrative, Capitol has experienced adverse trends in its results of operations, asset quality, valuation of collateral-dependent loans and other real estate owned and capital adequacy. Capitol continues to focus on its efforts to mitigate those adverse trends through a multifaceted approach to raise and redeploy capital funds, merge bank subsidiaries on a regional basis to achieve operational efficiencies, reduce operating expenses, reduce staffing levels, implement hiring and compensation freezes, sale of banks and suspension of employer contributions to retirement plans, among other things. Capitol continues to explore other ideas to improve operating results and capital adequacy.

Page 44 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Trends Affecting Operations – Continued

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

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

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

Changes in interest rates, either up or down, have an impact on net interest income (plus or minus), depending on the direction and timing of such changes. At any point in time, there is a difference between interest rate-sensitive assets and interest rate-sensitive liabilities. 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 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 future outlook on interest rates and their impact on Capitol's interest income, interest expense and net interest income is uncertain.

General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions. As mentioned previously, general economic conditions within the states of Michigan, Arizona and Nevada and the national economic recession are uncertain and are likely to continue to have an adverse impact on Capitol, its banks and bank 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 increased; it is likely levels of nonperforming assets and related loan losses may increase further as economic conditions, locally and nationally, evolve.

Through September 30, 2010, mergers of some of Capitol's banking subsidiaries have been completed in Arizona, southern California, Georgia, 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.

Page 45 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Proposed Spin-off of Michigan Commerce Bancorp Limited

Divestiture of Banks

Through September 30, 2010, Capitol completed the following sales of bank subsidiaries (in $1,000s):

		Sale
	Date Sold	Proceeds		Gain (Loss)
Bank of Belleville(1)	April 27, 2010	$	4,990	$	1,233
Napa Community Bank(1)(3)	April 30, 2010		21,574		7,372
Ohio Commerce Bank(2)	June 30, 2010		6,520		1,478
Community Bank of Lincoln(2)	July 30, 2010		3,750		1,268
USNY Bank(2)	August 20, 2010		2,700		(271	)
Adams Dairy Bank(2)	August 30, 2010		4,335		559
Bank of San Francisco(1)	September 27, 2010		6,604		1,740

		$	50,473	$	13,379

(1)

Previously a majority-owned subsidiary of Capitol.

(2)

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

(3)

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.

In addition to completed sales transactions, Capitol has entered into definitive agreements to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institutions which were pending as of September 30, 2010: 1st Commerce Bank, Bank of Fort Bend, Bank of Tucson – Tucson location, Evansville Commerce Bank, Southern Arizona Community Bank and three banks located in Colorado (see following paragraph). 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 48 and 49 of this document. Total proceeds from those pending sales are expected to approximate $50.3 million, resulting in a gain of $6.7 million ($0.34 per share) and are expected to be consummated throughout the remainder of 2010 or early 2011, subject to regulatory approval and other significant contingencies.

On October 29, 2010 the sale of Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce was completed with aggregate proceeds of $14.5 million and realized a gain of approximately $1.3 million, which will be reflected in Capitol's fourth quarter 2010 financial statements along with any other sales completed during that period.

Regulatory Matters

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

Page 46 of 56

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS – Continued

Regulatory Matters – Continued

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

Many of Capitol's bank subsidiaries have entered into formal agreements 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 42-43 of this document.

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

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

[The remainder of this page intentionally left blank]

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 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 £ (Do not check if a smaller reporting company)			Smaller reporting company T

Class		Outstanding at October 31, 2010
Common Stock, No par value		21,622,856 shares

Item 1.	Financial Statements (unaudited):	Page
	Condensed consolidated balance sheets – September 30, 2010 and December 31, 2009.	7
	Condensed consolidated statements of operations – Three months and nine months ended September 30, 2010 and 2009.	8
	Condensed consolidated statements of changes in equity – Nine months ended September 30, 2010 and 2009.	9
	Condensed consolidated statements of cash flows – Nine months ended September 30, 2010 and 2009.	10
	Notes to condensed consolidated financial statements.	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	51
Item 4.	Controls and Procedures.	51
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	52
Item 1A.	Risk Factors.	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	52
Item 3.	Defaults Upon Senior Securities.	52
Item 4.	[Removed and Reserved.]	52
Item 5.	Other Information.	52
Item 6.	Exhibits.	54
SIGNATURES		55
EXHIBIT INDEX		56

PART I, ITEM 1

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

		(Unaudited)
		September 30,			December 31,
		2010			2009
		(As Revised--Note P)
ASSETS
Cash and due from banks		$	86,917		$	69,190
Money market and interest-bearing deposits			725,141			657,846
Federal funds sold			1,455			4,863
	Cash and cash equivalents		813,513			731,899
Loans held for sale			7,736			11,119
Investment securities -- Note C:
Available for sale, carried at fair value			27,253			39,776
Held for long-term investment, carried at
amortized cost which approximates fair value			3,422			5,791
	Total investment securities		30,675			45,567
Federal Home Loan Bank and Federal Reserve
Bank stock (carried on the basis of cost) -- Note C			22,020			21,646
Portfolio loans:
Loans secured by real estate:
Commercial			1,699,958			1,812,387
Residential (including multi-family)			648,507			679,847
Construction, land development and other land			357,587			444,420
	Total loans secured by real estate		2,706,052			2,936,654
Commercial and other business-purpose loans			488,300			580,524
Consumer			32,308			37,336
Other			25,282			24,486
	Total portfolio loans		3,251,942			3,579,000
Less allowance for loan losses			(160,502	)		(136,184	)
	Net portfolio loans		3,091,440			3,442,816
Premises and equipment			42,281			44,779
Accrued interest income			11,582			13,893
Goodwill			66,105			66,126
Other real estate owned			108,424			111,102
Recoverable income taxes			1,825			43,763
Other assets			30,262			39,099
Assets of discontinued operations -- Note D			--			560,131

TOTAL ASSETS		$	4,225,863		$	5,131,940

LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing		$	648,416		$	577,858
Interest-bearing			3,148,132			3,364,521
	Total deposits		3,796,548			3,942,379
Debt obligations:
Notes payable and other borrowings			144,282			243,747
Subordinated debentures -- Note H			167,550			167,441
	Total debt obligations		311,832			411,188
Accrued interest on deposits and other liabilities			51,524			43,162
Liabilities of discontinued operations -- Note D			--			501,605
	Total liabilities		4,159,904			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 - 21,623,056 shares
2009 - 17,545,631 shares			288,031			277,707
Retained-earnings deficit			(256,802	)		(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)			198			(63	)
Total Capitol Bancorp Limited stockholders' equity			35,967			161,335
Noncontrolling interests in consolidated subsidiaries			29,992			72,271
	Total equity		65,959			233,606

TOTAL LIABILITIES AND EQUITY		$	4,225,863		$	5,131,940

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

	Three Month Period						Nine Month Period
	2010			2009			2010			2009
	(As Revised--Note P)						(As Revised--Note P)
Interest income:
Portfolio loans (including fees)	$	47,527		$	55,640		$	144,781		$	170,792
Loans held for sale		72			136			194			515
Taxable investment securities		126			89			437			262
Federal funds sold		2			16			10			53
Other		682			439			1,856			1,144
Total interest income		48,409			56,320			147,278			172,766
Interest expense:
Deposits		13,027			18,585			41,648			60,640
Debt obligations and other		4,098			5,756			12,931			17,317
Total interest expense		17,125			24,341			54,579			77,957
Net interest income		31,284			31,979			92,699			94,809
Provision for loan losses		45,885			44,482			138,643			109,402
Net interest income deficiency after
provision for loan losses		(14,601	)		(12,503	)		(45,944	)		(14,593	)
Noninterest income:
Service charges on deposit accounts		1,071			1,339			3,225			3,922
Trust and wealth-management revenue		960			1,288			3,282			3,811
Fees from origination of non-portfolio residential
mortgage loans		617			624			1,427			2,402
Gain on sale of government-guaranteed loans		901			643			1,508			919
Realized gain (loss) on sale of investment securities
available for sale		(4	)		41			10			42
Gain on debt extinguishment								1,255
Other		3,353			939			7,951			3,959
Total noninterest income		6,898			4,874			18,658			15,055
Noninterest expense:
Salaries and employee benefits		18,989			20,705			57,871			68,343
Occupancy		4,103			4,187			12,592			12,613
Equipment rent, depreciation and maintenance		2,369			2,765			7,987			8,806
Costs associated with foreclosed properties and other
real estate owned		14,645			9,577			35,386			17,916
FDIC insurance premiums and other regulatory fees		3,733			3,455			12,136			9,964
Other		7,918			8,068			23,177			19,570
Total noninterest expense		51,757			48,757			149,149			137,212
Loss before income taxes		(59,460	)		(56,386	)		(176,435	)		(136,750	)
Income taxes (benefit)		56			66,436			(4,258	)		37,268
Loss from continuing operations		(59,516	)		(122,822	)		(172,177	)		(174,018	)
Discontinued operations -- Note D:
Income (loss) from operations of bank subsidiaries sold		268			(206	)		854			467
Gain on sale of bank subsidiaries		3,296			1,187			13,379			1,187
Less income tax expense		1,292			6,274			5,159			6,618
Income (loss) from discontinued operations		2,272			(5,293	)		9,074			(4,964	)
NET LOSS		(57,244	)		(128,115	)		(163,103	)		(178,982	)
Net losses attributable to noncontrolling interests in
consolidated subsidiaries		5,078			45,426			22,052			59,315

NET LOSS ATTRIBUTABLE TO CAPITOL
BANCORP LIMITED	$	(52,166	)	$	(82,689	)	$	(141,051	)	$	(119,667	)

NET LOSS PER COMMON SHARE ATTRIBUTABLE
TO CAPITOL BANCORP LIMITED -- Note G	$	(2.45	)	$	(4.75	)	$	(7.12	)	$	(6.93	)

See notes to condensed consolidated financial statements.

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

	2010			2009
	(As Revised--Note P)

OPERATING ACTIVITIES
Net loss	$	(163,103	)	$	(178,982	)
Adjustments to reconcile net loss to net cash provided
by operating activities (including discontinued operations):
Provision for loan losses		140,984			114,909
Depreciation of premises and equipment		6,305			7,841
Amortization of intangibles		169			2,486
Net amortization (accretion) of investment security premiums (discounts)		281			(38	)
Loss on sale of premises and equipment		258			107
Gain on sale of government-guaranteed loans		(1,869	)		(1,887	)
Gain on sale of bank subsidiaries		(13,379	)		(1,187	)
Gain on debt extinguishment		(1,255	)		--
Realized gain on sale of investment securities available for sale		(10	)		(42	)
Loss on sale of other real estate owned		1,744			1,007
Write-down of other real estate owned		25,804			13,002
Amortization of issuance costs of subordinated debentures		109			109
Share-based compensation expense		435			719
Deferred income tax credit		(47,933	)		(48,907	)
Valuation allowance for deferred income tax assets		49,393			55,992
Originations and purchases of loans held for sale		(89,100	)		(261,950	)
Proceeds from sales of loans held for sale		91,994			257,552
Decrease in accrued interest income and other assets		62,201			59,940
Increase in accrued interest expense on deposits and other liabilities		9,086			2,751

NET CASH PROVIDED BY OPERATING ACTIVITIES		72,114			23,422

INVESTING ACTIVITIES
Cash equivalents of acquired bank affiliate		18,949			--
Proceeds from sales of investment securities available for sale		22,075			916
Proceeds from calls, prepayments and maturities of investment
securities		14,935			14,529
Purchases of investment securities		(22,298	)		(32,111	)
Purchase of Federal Home Loan Bank stock		(1,411	)		(1,672	)
Redemption of Federal Home Loan Bank stock by issuer		1,169			637
Net decrease in portfolio loans		130,227			105,141
Proceeds from sales of government-guaranteed loans		15,192			25,500
Proceeds from sales of premises and equipment		3,742			1,974
Purchases of premises and equipment		(7,420	)		(3,655	)
Proceeds from sales of bank subsidiaries		33,084			9,506
Proceeds from sales of other real estate owned		35,590			11,182

NET CASH PROVIDED BY INVESTING ACTIVITIES		243,834			131,947

FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts		76,222			295,852
Net decrease in certificates of deposit		(187,619	)		(27,992	)
Net borrowings from (payments on) debt obligations		(1,548	)		953
Proceeds from Federal Home Loan Bank borrowings		541,480			2,768,830
Payments on Federal Home Loan Bank borrowings		(649,067	)		(2,876,522	)
Resources provided by noncontrolling interests		--			134
Net proceeds from issuance of common stock		6,870			--
Tax effect of share-based payments		(293	)		(169	)
Cash dividends paid		--			(864	)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(213,955	)		160,222

INCREASE IN CASH AND CASH EQUIVALENTS		101,993			315,591

Change in cash and cash equivalents of discontinued operations		(20,379	)		(10,913	)

Cash and cash equivalents at beginning of period		731,899			519,436

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	813,513		$	824,114

Supplemental disclosures:
Cash paid during the period for interest on deposits and debt obligations	$	58,451		$	88,356
Transfers of loans to other real estate owned		60,239			80,991
Surrender of common stock to facilitate exercise of stock options
and vesting of restricted stock		13			23

See notes to condensed consolidated financial statements.

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 nine months ended September 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 from other sources at the parent-company level; · Future abatement of loan losses and losses associated with other nonperforming assets; · Future reduction in operating expenses; · Future improvement in net interest margin and sources of noninterest income; and · Future conversion of nonperforming assets into earning assets.
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.
	On November 15, 2010, following prior approval by the Compensation Committee of the Board of Directors, the employment agreements with the following three named executive officers (the NEOs) of Capitol were amended and restated in substantially the same identical form of amended and restated employment agreements, a copy of which filed hereto as Exhibit 10.1 and incorporated herein by reference:

Name of NEO	Title	Date

Cristin K. Reid	Corporate President	November 15, 2010
Lee W. Hendrickson	Chief Financial Officer	November 15, 2010
Bruce A. Thomas	President of Bank Operations	November 15, 2010

(a)	(b)
Exhibit No.	Description of Exhibit
10.1	Form of Employment Agreement
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: March 3, 2011	/s/ Joseph D. Reid Joseph D. Reid Chairman and CEO (principal executive officer)
Date: March 3, 2011	/s/ Lee W. Hendrickson Lee W. Hendrickson (principal financial officer/ principal accounting officer)