EXHIBIT 13

                  F i n a n c i a l  I n f o r m a t i o n

Table of Contents

Selected Consolidated Financial Data	F-2
Information Regarding Capitol's Common Stock	F-3
Executive Officer Certifications	F-5
Availability of Form 10-K and Certain Other Reports	F-5
Other Corporate Information	F-5
Shareholder Information	F-6
Cautions Regarding Forward-Looking Statements	F-6
Management's Discussion and Analysis of Capitol's Business, Financial Condition and     Results of Operations:
Summary and Overview	F-10
Capitol's Approach to Community Banking	F-10
Changes to Capitol's Community Banking Network and Financial Position	F-11
Capitol's Community Banking Regions and Summary Financial Information	F-13
Capitol's Results of Operations	F-15
Capitol's Financial Position	F-21
Other Assets	F-32
Liquidity, Capital Resources and Capital Adequacy	F-32
Certain Regulatory Matters	F-39
Going-Concern Considerations	F-42
Trends Affecting Operations	F-43
Quantitative and Qualitative Disclosure About Market Risk	F-43
Divestitures of Banks	F-47
Critical Accounting Policies Affecting Capitol's Financial Statements	F-47
Use of Estimates in Determining the Allowance for Loan Losses	F-47
Accounting for Goodwill and Other Intangibles	F-49
Accounting for Income Taxes	F-49
Consolidation Policy	F-50
New Accounting Standards	F-50
Risk Factors Affecting Capitol and its Banks	F-50
Management's Report on Internal Control Over Financial Reporting	F-52
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	F-55
Consolidated Balance Sheets	F-56
Consolidated Statements of Operations	F-57
Consolidated Statements of Changes in Equity	F-58
Consolidated Statements of Cash Flows	F-60
Notes to Consolidated Financial Statements	F-61

F-1

Selected Consolidated Financial Data

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

	As of and for the Year Ended December 31
	2011(1)			2010(2)			2009(3)			2008(4)			2007(5)
For the year:
Interest income(6)	$	103,793		$	128,828		$	163,920		$	203,265		$	240,354
Interest expense(6)		36,568			57,063			82,786			105,632			116,410
Net interest income(6)		67,225			71,765			81,134			97,633			123,944
Provision for loan losses(6)		41,362			148,275			158,589			70,903			17,888
Noninterest income(6)		41,743			22,462			20,517			20,425			19,317
Noninterest expense(6)		128,618			217,681			189,248			137,844			118,351
Income (loss) from continuing operations before income taxes		(61,012	)		(271,729	)		(246,186	)		(90,689	)		7,022
Income (loss) from discontinued operations		5,948			10,111			(10,813	)		7,409			(972	)
Net income (loss)		(51,926	)		(254,364	)		(264,540	)		(52,451	)		3,334
Net income (loss) attributable to Capitol Bancorp Limited		(45,427	)		(225,215	)		(195,169	)		(28,607	)		21,937
Net income (loss) per share attributable to Capitol Bancorp
Limited:
Basic		(1.17	)		(11.16	)		(11.28	)		(1.67	)		1.29
Diluted		(1.17	)		(11.16	)		(11.28	)		(1.67	)		1.27
Cash dividends paid per share		--			--			0.05			0.50			1.00
At end of year:
Total assets	$	2,205,265		$	3,540,214		$	5,131,940		$	5,654,836		$	4,901,763
Total earning assets(6)		2,052,089			2,501,366			3,154,913			3,407,818			3,150,706
Portfolio loans(6)		1,664,209			2,084,176			2,610,686			3,083,135			3,079,484
Deposits(6)		2,009,847			2,369,072			2,929,348			2,949,650			2,659,759
Notes payable and short-term borrowings(6)		60,178			107,789			178,375			279,688			272,176
Subordinated debentures		149,156			167,586			167,441			167,293			156,130
Noncontrolling interests in consolidated subsidiaries		(563	)		23,173			72,271			159,220			156,198
Capitol Bancorp Limited stockholders' equity (deficit)		(108,084	)		(61,854	)		161,335			353,848			389,145

				Quarterly Results of Operations (unaudited)
	Total for the Year			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Year ended December 31, 2011:(1)
Interest income(6)	$	103,793		$	23,618		$	25,353		$	26,463		$	28,359
Interest expense(6)		36,568			8,233			8,830			9,364			10,141
Net interest income(6)		67,225			15,385			16,523			17,099			18,218
Provision for loan losses(6)		41,362			4,259			17,448			6,226			13,429
Net loss		(51,926	)		(6,878	)		(24,768	)		(17,506	)		(2,774	)
Net income (loss) attributable to Capitol Bancorp Limited		(45,427	)		(6,516	)		(22,762	)		(16,438	)		289
Net income (loss) per share attributable to Capitol Bancorp Limited – basic and diluted(7)		(1.17	)		(0.16	)		(0.55	)		(0.40	)		0.01
Cash dividends paid per share		--			--			--			--			--
Year ended December 31, 2010:(1)
Interest income(6)	$	128,828		$	29,432		$	31,710		$	32,819		$	34,867
Interest expense(6)		57,063			12,198			13,800			14,883			16,182
Net interest income(6)		71,765			17,234			17,910			17,936			18,685
Provision for loan losses(6)		148,275			19,206			42,276			41,384			45,409
Net loss		(254,364	)		(91,261	)		(57,244	)		(43,919	)		(61,940	)
Net income (loss) attributable to Capitol Bancorp Limited		(225,215	)		(84,164	)		(52,166	)		(41,003	)		(47,882	)
Net income (loss) per share attributable to Capitol Bancorp Limited – basic and diluted(7)		(11.16	)		(3.95	)		(2.45	)		(1.98	)		(2.75	)
Cash dividends paid per share		--			--			--			--			--

(1)	Capitol sold its ownership in Mountain View Bank of Commerce effective January 30, 2012; Bank of Las Colinas effective October 27, 2011; Evansville Commerce Bank effective October 7, 2011; Bank of Feather River effective October 3, 2011; Bank of the Northwest and Sunrise Bank effective July 28, 2011; Community Bank of Rowan effective April 19, 2011; Bank of Fort Bend effective March 30, 2011 and Bank of Tucson effective January 24, 2011.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.
(2)	Capitol sold its ownership in Southern Arizona Community Bank effective December 10, 2010; Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce effective October 29, 2010; Bank of San Francisco effective September 28, 2010; Adams Dairy Bank effective August 31, 2010; USNY Bank effective August 23, 2010; Community Bank of Lincoln effective July 30, 2010; Ohio Commerce Bank effective June 30, 2010; Napa Community Bank effective April 30, 2010 and Bank of Belleville effective April 27, 2010.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale; however, are included in discontinued operations.
(3)	Includes Yuma Community Bank's operations through September 21, 2009 (date at which Capitol sold its ownership of that bank) and Bank of Santa Barbara, Community Bank of Rowan ("CBR"), Summit Bank of Kansas City and Capitol Development Bancorp Limited III's ("CDBL III") operations through September 30, 2009 (the date when these entities ceased to be consolidated with Capitol due to a change in control).  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.
(4)	Includes Adams Dairy Bank, effective January 2008 (located in Blue Springs, Missouri), Mountain View Bank of Commerce, effective February 2008 (located in Westminster, Colorado), Colonia Bank, effective April 2008 (located in Phoenix, Arizona) and Pisgah Community Bank, effective May 2008 (located in Asheville, North Carolina).
(5)	Includes Bank of Tacoma, effective January 2007 (located in Tacoma, Washington), Sunrise Community Bank, effective February 2007 (located in Palm Desert, California), Larimer Bank of Commerce, effective May 2007 (located in Fort Collins, Colorado), Issaquah Community Bank (located in Issaquah, Washington) and USNY Bank (located in Geneva, New York), both effective July 2007, High Desert Bank, effective September 2007 (located in Bend, Oregon), Loveland Bank of Commerce, effective October 2007 (located in Loveland, Colorado), Bank of Feather River, effective November 2007 (located in Yuba City, California) and Community Bank of Lincoln (located in Lincoln, Nebraska), Bank of Fort Bend (located in Sugar Land, Texas) and Bank of Las Colinas (located in Irving, Texas), each effective December 2007.
(6)	Excludes amounts related to banks reclassified as discontinued operations.
(7)	Each period's computation of net income (loss) per share is performed independently and, accordingly, net income per share for the year (basic and diluted) may not equal the sum of the amounts shown for the quarterly periods.

F-2

INFORMATION REGARDING CAPITOL'S COMMON STOCK

Capitol's common stock was traded on the New York Stock Exchange (the "NYSE") under the symbol "CBC" prior to late January 2011.  On January 27, 2011, Capitol's common stock began being quoted through the facilities of OTC Markets Group under the symbol "CBCR."  It is currently being categorized under the OTCQB tier, which identifies issuers that are registered and reporting with the Securities and Exchange Commission.  Market quotations regarding the range of high and low sales prices of Capitol's common stock, as reported by the OTC Markets Group for 2011 and the NYSE for 2010, were as follows:

	2011				2010
	Low		High		Low		High
Quarter Ended:
March 31	$	0.13	$	0.64	$	1.95	$	3.55
June 30		0.11		0.24		1.23		3.79
September 30		0.07		0.15		0.95		1.58
December 31		0.04		0.12		0.37		1.32

Below is a graph which summarizes the cumulative return earned by Capitol's shareholders over the last five years compared with the SNL (SNL Financial LC) Bank Pink >$500M Asset-Size Index (SNL) and the cumulative total return on the Russell 2000 Index (R-2000).  This presentation assumes the initial value of an investment in Capitol's common stock and each index was $100 on December 31, 2006 and that any subsequent cash dividends were reinvested.

	Period Ending
Index	12/31/06	12/31/07	12/31/08	12/31/09	12/31/10	12/31/11
Capitol Bancorp Ltd.	100.00	45.26	18.15	4.61	1.22	0.21
Russell 2000	100.00	98.43	65.18	82.89	105.14	100.75
SNL Bank Pink > $500M	100.00	92.14	66.86	57.16	60.39	59.37

F-3

INFORMATION REGARDING CAPITOL'S COMMON STOCK—Continued

Beginning in September 2009, the payment of dividends became subject to prior approval of the Federal Reserve, Capitol's primary federal regulator (see subsequent discussion of certain regulatory matters in the section captioned "Management's Discussion and Analysis of Capitol's Business, Financial Condition and Results of Operations").  In the first quarter of 2009, Capitol paid a cash dividend of $0.05 per share.  During 2008, Capitol paid quarterly cash dividends of $0.25 per share for the first quarter, $0.15 in the second quarter and $0.05 in the third and fourth quarters.

As of March 16, 2012, there were 9,410 holders of Capitol's common stock, based on information supplied to Capitol from its stock transfer agent and other sources.

At March 16, 2012, 41,038,908 shares of common stock were outstanding.  Capitol's stock transfer agent is Computershare (formerly BNY Mellon Shareowner Services), 480 Washington Blvd., Jersey City, NJ 07310 (telephone 866-205-7090).  The website for Computershare is http://www.bnymellon.com/shareowner/isd.

Capitol has a direct purchase and dividend reinvestment plan, the Capitol Bancorp Limited Direct Purchase and Dividend Reinvestment Plan ("Capitol Bancorp Direct"), which offers a variety of convenient features including certain fee-free transactions, certificate safekeeping and other benefits.  For a copy of the Capitol Bancorp Direct prospectus, informational brochure and enrollment materials, contact Computershare at 866-205-7090 or Capitol at 517-487-6555.

In addition to Capitol's common stock, trust-preferred securities of Capitol Trust I and Capitol Trust XII (each a subsidiary of Capitol) are quoted on the OTCQB tier of the OTC Markets Group under the symbol "CBCRP" and "CBCRO," respectively, commencing in late January 2011.  Those trust-preferred securities have a liquidation amount of $10 per preferred security and are guaranteed by Capitol.  Capitol Trust I consists of 1,349,398, 8.5% cumulative preferred securities scheduled to mature in 2027, which are currently callable and may be extended to 2036 if certain conditions are met.  Capitol Trust XII consists of 3,031,066, 10.5% cumulative preferred securities scheduled to mature in 2038 and become callable in 2013.  In 2009, Capitol 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.  Holders of the trust-preferred securities will continue to recognize current taxable income relating to the deferred interest payments.  Payment of interest on the trust-preferred securities is subject to approval of the Federal Reserve (see subsequent discussion of certain regulatory matters in the section captioned "Management's Discussion and Analysis of Capitol's Business, Financial Condition and Results of Operations").

F-4

EXECUTIVE OFFICER CERTIFICATIONS

Capitol has filed with the U.S. Securities and Exchange Commission (the "SEC") all required certifications regarding the quality of Capitol's public disclosures upon filing of Capitol's 2011 Report on Form 10-K.  Further, Capitol has filed certifications with the SEC in accordance with the Sarbanes-Oxley Act of 2002 as exhibits to Capitol's 2011 Report on Form 10-K.

AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS

A copy of Capitol's 2011 Annual Report on Form 10-K, without exhibits, will be available to holders of its common stock or trust-preferred securities without charge, upon written request.  Form 10-K includes certain statistical and other information regarding Capitol and its business.  Requests to obtain a copy of Form 10-K should be addressed to Investor Relations, Capitol Bancorp Limited, Capitol Bancorp Center, 200 N. Washington Square, Lansing, Michigan 48933.

Form 10-K and certain other periodic reports have been or will be filed with the SEC.  The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding companies which file electronically (which includes Capitol).  The SEC's website address is http://www.sec.gov.  Capitol's filings with the SEC are also available at Capitol's website, http://www.capitolbancorp.com.

OTHER CORPORATE INFORMATION

EXECUTIVE OFFICE

Capitol Bancorp Center

200 N. Washington Square

Lansing, Michigan 48933

517-487-6555

website:  www.capitolbancorp.com

INDEPENDENT AUDITORS

BDO USA, LLP

Grand Rapids, Michigan

F-5

SHAREHOLDER INFORMATION

DIRECT PURCHASE AND DIVIDEND REINVESTMENT PLAN

Capitol offers an easy and affordable way to invest in Capitol's common stock through its direct purchase and dividend reinvestment plan, Capitol Bancorp Direct.  Capitol Bancorp Direct's benefits include the ability to make an initial investment in common stock with as little as $50, reinvestment of dividends in additional common stock (if and when paid), direct deposit of dividends (if and when paid), ability to purchase common stock as frequently as once a month, and the option to make transfers or gifts of Capitol's common stock to another person.  Participation in Capitol Bancorp Direct is voluntary and shareholders and prospective investors are eligible.  Purchases under Capitol Bancorp Direct are not currently subject to any brokerage fees or commissions.  For further information regarding Capitol Bancorp Direct or for a copy of Capitol Bancorp Direct's prospectus, informational brochure and enrollment materials, please contact Computershare at 866-205-7090 or Capitol at 517-487-6555.

TRUST-PREFERRED SECURITIES TRADING INFORMATION

Preferred securities of Capitol Trust I and Capitol Trust XII (each a subsidiary of Capitol) are quoted on the OTC Markets Group under the trading symbols "CBCRP" and "CBCRO," respectively.

TRUST-PREFERRED SECURITIES TRUSTEE

Capitol Trust I:  Bank of New York Mellon – Chicago, Illinois

Capitol Trust XII:  M&T Trust Company of Delaware

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this annual report, including Capitol's consolidated financial statements, Management's Discussion and Analysis of Capitol's Business, Financial Condition and Results of Operations and in documents incorporated into this document by reference that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of Capitol and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements.  The words "intend," "expect," "project," "estimate," "predict," "anticipate," "should," "could," "believe," "may," "might," and similar expressions also are intended to identify forward-looking statements.  Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to:

·The risks associated with implementing Capitol's business strategy, including its ability to preserve and access sufficient capital to execute its strategy;

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

F-6

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS—Continued

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

·The risk that Capitol will not be able to complete its various proposed divestitures, mergers and consolidations of certain of its banking subsidiaries or, if completed, realize the anticipated benefits of the proposed mergers and/or consolidations;

·The risk of additional future losses if the proceeds Capitol receives upon the liquidation of assets are less than the carrying value of such assets;

·Restrictions or limitations on access to funds from subsidiaries and potential obligations to contribute additional capital to Capitol's subsidiaries, which may restrict its ability to make payments on its obligations;

·Administrative or enforcement actions of banking regulators in connection with any material failure of Capitol or its banking subsidiaries to comply with banking laws, rules or regulations or formal agreements with regulatory agencies;

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

·The possibility of the FDIC assessing Capitol's banking subsidiaries for any cross-guaranty liability;

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

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

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

·The risk that Capitol could have an "ownership change" under Section 382 of the Internal Revenue Code, which could impair its ability to timely and fully utilize its net operating losses for tax purposes and so-called built-in losses that may exist if such an "ownership change" occurs;

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

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

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

·The failure of assumptions underlying estimates for the allowance for loan losses and estimation of values of collateral or cash flow projections related to collateral-dependent loans;

F-7

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS—Continued

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

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

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

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

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

·Management's ability to effectively manage interest rate risk and the impact of interest rates in general on the volatility of Capitol's net interest income;

·The ability to successfully execute strategies to increase noninterest income;

·The impact of possible future material impairment charges;

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

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

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

·A continuation of unprecedented volatility in the capital markets;

·The decline in commercial and residential real estate values and sales volume and the likely potential for continuing illiquidity in the real estate market;

·The uncertainties in estimating the fair value of developed real estate and undeveloped land relating to collateral-dependent loans and other real estate owned in light of declining demand for such assets, falling prices and continuing illiquidity in the real estate market;

·Negative developments and disruptions in the credit and lending markets, including the impact of the ongoing credit crisis on Capitol's business and on the businesses of its customers as well as other banks and lending institutions with which Capitol has commercial relationships;

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

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

F-8

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS—Continued

·The effects of competition from other commercial banks, savings associations, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds, and other financial institutions operating in Capitol's market or elsewhere or providing similar services;

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

·The impact on Capitol's financial results, reputation and business if it is unable to comply with all applicable federal and state regulations and applicable formal agreements, consent orders, other regulatory actions and any related capital requirements;

·The effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009, the implementation by the Department of the U.S. Treasury and federal banking regulators of a number of programs to address capital and liquidity issues within the banking system and additional programs that may apply to Capitol in the future, all of which may have significant effects on Capitol and the financial services industry;

·Governmental monetary and fiscal policies, as well as legislative and regulatory changes, that may result in the imposition of costs and constraints on Capitol through higher FDIC insurance premiums, significant fluctuations in market interest rates, increases in capital requirements and operational limitations;

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

·Acts of war or terrorism; and

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

For a discussion of these and other risks that may cause actual results to differ from expectations, you should refer to the risk factors and other information in this Annual Report and Capitol's other periodic filings, including quarterly reports on Form 10-Q and current reports on Form 8-K, that Capitol files from time to time with the SEC.  All written or oral forward-looking statements that are made by or are attributable to Capitol are expressly qualified by this cautionary notice.  You should not place undue reliance on any forward-looking statements, since those statements speak only as of the date on which the statements are made.  Capitol undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of new information or unanticipated events, except as may otherwise be required by law.

F-9

Management's Discussion and Analysis of Capitol's Business,

Financial Condition and Results of Operations

Summary and Overview

This section of the Annual Report is intended to discuss, from management's perspective, matters of importance regarding Capitol's operations, financial position and other matters which have a significant effect on Capitol, its business and its banks.  This narrative includes some comments about future events and other forward-looking statements, and readers are advised to carefully read the cautionary statement about forward-looking statements which is on page F-6 of this Annual Report.

Capitol operates community banks in a wide variety of markets in nine states, and operates in one business segment, community banking.  Capitol's banks are staffed with banking professionals, serving customers who desire professional banking services delivered personally.

Capitol's Approach to Community Banking

Each bank began as a single-location office, led by a bank president and a team of banking professionals with significant local experience, overseen by an independent board of directors composed of business leaders drawn from the local community.  Generally, each bank has significant on-site authority to make decisions which directly affect the customer, such as credit approval and the pricing and structure of both loans and deposits.  The philosophy of banking as a profession is key to Capitol's model where its banks' customers seek relationships with banking professionals to meet their needs, as opposed to transaction-oriented financial institutions pushing financial products at customers and emphasizing market share.

With Capitol's customer-focused professional banking model, bank development on a national scale has been a natural extension of this business philosophy.  Bank development consists of management and oversight of banks in which Capitol has a direct or indirect controlling interest and, through mid-2008, included formation of start-up banks.  Capitol's banks were formed with a portion of their start-up capital provided by local investors in the communities of those banks.

Notably, 'market size' is not a strategic factor in Capitol's approach to community banking.  Rather, the critical factor is 'people'.  Capitol has recognized from its beginning that its banking focus is, and always will be, a people business.  Its banks are small in market stature in relation to their competitors, emphasizing personalized banking relationships.

Capitol's community bank model, in a stable economic environment, is intended to maintain a scalable, low overhead structure focused on delivering return-on-equity results, while empowering its individual banks with operating autonomy in all areas impacting the customer relationship.  Capitol's centralized 'back-office' functions, which support the banks, are capable of adjusting coverage in concert with the evolution of its banking subsidiaries.

F-10

Capitol's relationship with its banks is multidimensional as an investor, mentor and service provider.  As an investor, Capitol closely monitors the financial performance of its bank subsidiaries.  This mentoring role of providing assistance and guidance when and where necessary to help enhance bank performance is most important for its youngest affiliates where guidance is needed during their early formative stages.  As a service provider, Capitol provides efficient back-office support services which can be performed centrally for all of its banks and which do not involve a direct interface with the bank customer, such as:

·Accounting and taxation services

·Management reporting and budgeting

·Asset/liability management and reporting

·Capital management

·Credit administration support

·Data processing

·Human resources administration

·Internal audit

·Legal support

·Regulatory compliance and risk management

Some of these functions are performed nationally from a single location, while others are performed regionally, where it is more efficient to have personnel located geographically based on their respective responsibilities in relation to the physical location of the banks.

Changes to Capitol's Community Banking Network and Financial Position

Like many community banks, Capitol's banking affiliates have been impacted by the national recession and the resulting dramatic slowdown in economic activity as well as declines in real estate values.  Capitol's consolidated financial position has been significantly adversely affected by large losses from operations in 2011, 2010 and 2009.  Such operating losses resulted primarily from especially large provisions for loan losses and significantly elevated maintenance and collateral protection costs associated with foreclosed properties and other real estate owned.  Those operating losses have resulted in an equity-deficit as of December 31, 2011 and 2010 and a regulatory-capital classification as less than "adequately-capitalized."  In addition, numerous banking subsidiaries of Capitol have regulatory capital classifications as "undercapitalized" or "significantly-undercapitalized" at December 31, 2011, due to significant operating losses and capital infusions from Capitol in amounts insufficient to improve their regulatory classification and compliance with the terms of various regulatory agreements between the banks and/or Capitol and their respective regulatory agencies.

F-11

In ongoing capital preservation efforts, cost savings continue to be achieved through expense reductions and infrastructure adjustments, as Capitol has merged or divested of 49 community banks since 2009.  In 2010 and 2011, significant reductions in compensation costs were achieved, following efforts which began in 2009, to combine certain banking subsidiaries and reduce staffing.  To further streamline bank operations and reduce expenses, Capitol had also consolidated some of its individual bank charters regionally and has plans for potential further charter-consolidation activities in 2012.

In mid-2009, as part of its capital strategies and restructuring activities, Capitol announced plans to selectively divest some of its banks as a means to raise additional capital and redeploy capital resources to its remaining banks.  Thirteen bank divestitures were completed prior to 2011, eight bank divestitures and one branch sale were completed during 2011 and an additional divestiture was completed in early 2012.  Several additional divestiture transactions have been announced and are expected to be completed in 2012, subject to regulatory approval and other contingencies.

These changes and structural matters are discussed in further detail later in this narrative.

[The remainder of this page intentionally left blank]

F-12

Capitol's Community Banking Regions and Summary Financial Information

Total assets and revenues of each bank within Capitol's market regions are summarized below as of and for the years ended December 31, 2011 and 2010 (in $1,000s):

	Total Assets				Total Revenues(10)
	2011		2010		2011		2010
Arizona Region:
Bank of Tucson(1)(12)			$	222,882			$	12,232
Central Arizona Bank	$	41,976		75,590	$	2,952		3,529
Southern Arizona Community Bank(2)(12)								4,841
Sunrise Bank of Albuquerque		60,063		73,539		3,022		3,638
Sunrise Bank of Arizona		303,513		353,154		18,420		18,593
Arizona Region Total		405,552		725,165		24,394		42,833
California Region:
Bank of Feather River(1)(12)				38,930		2,440		2,561
Bank of San Francisco(2)(12)								4,119
Napa Community Bank(2)(12)								2,947
Sunrise Bank(1)(6)(12)				231,836		6,663		12,968
California Region Total				270,766		9,103		22,595
Colorado Region:
Fort Collins Commerce Bank(2)(12)								5,211
Larimer Bank of Commerce(2)(12)								4,555
Loveland Bank of Commerce(2)(12)								1,979
Mountain View Bank of Commerce(1)(12)		51,665		60,303		2,717		2,896
Colorado Region Total		51,665		60,303		2,717		14,641
Great Lakes Region:
Bank of Maumee		33,495		40,300		1,904		2,402
Bank of Michigan		85,664		81,873		5,048		4,680
Capitol National Bank		153,938		157,606		8,537		9,734
Evansville Commerce Bank(1)(12)				52,506		1,808		2,783
Indiana Community Bank(5)		119,372		128,728		6,269		7,670
Michigan Commerce Bank(4)		776,289		933,698		53,329		60,609
Ohio Commerce Bank(2)(12)								1,934
Great Lakes Region Total		1,168,758		1,394,711		76,895		89,812
Midwest Region:
Adams Dairy Bank(2)(12)								1,681
Bank of Belleville(2)(12)								1,048
Community Bank of Lincoln(2)(12)								1,508
Midwest Region Total								4,237
Nevada Region:
1st Commerce Bank		26,375		39,555		1,185		1,625
Bank of Las Vegas(8)		318,174		375,084		13,630		18,628
Nevada Region Total		344,549		414,639		14,815		20,253
Northeast Region:
USNY Bank(2)(12)								2,712
Northwest Region:
Bank of the Northwest(1)(7)(12)				145,540		4,310		7,880
High Desert Bank		31,020		37,967		1,870		2,272
Northwest Region Total		31,020		183,507		6,180		10,152
Southeast Region:
Community Bank of Rowan(1)(9)(12)				140,276		2,123		3,392
First Carolina State Bank		85,169		103,254		3,894		4,765
Pisgah Community Bank		28,120		43,125		1,178		1,878
Sunrise Bank(3)(12)		81,119		112,718		4,580		6,087
Southeast Region Total		194,408		399,373		11,775		16,122

F-13

Summary of total assets and revenues – continued:

	Total Assets						Total Revenues(10)
	2011			2010			2011			2010
Texas Region:
Bank of Fort Bend(1)(12)				$	35,375		$	720		$	2,037
Bank of Las Colinas(1)(12)					44,767			2,063			2,331
Texas Region Total					80,142			2,783			4,368
Parent company and other, net(11)	$	9,313			11,608			25,213			20,964
Consolidated totals		2,205,265			3,540,214			173,875			248,689
Less discontinued operations		(51,665	)		(972,414	)		(28,339	)		(97,399	)
Consolidated totals--continuing
operations	$	2,153,600		$	2,567,800		$	145,536		$	151,290

(1)	Capitol sold its ownership in Mountain View Bank of Commerce effective January 30, 2012; Bank of Las Colinas effective October 27, 2011; Evansville Commerce Bank effective October 7, 2011; Bank of Feather River effective October 3, 2011; Bank of the Northwest and Sunrise Bank effective July 28, 2011; Community Bank of Rowan effective April 19, 2011; Bank of Fort Bend effective March 30, 2011 and Bank of Tucson effective January 24, 2011. The banks' operations and corresponding total revenues have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.
(2)	Capitol sold its ownership in Southern Arizona community Bank effective December 10, 2010; Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce effective October 29, 2010; Bank of San Francisco effective September 28, 2010; Adams Dairy Bank effective August 31, 2010; USNY Bank effective August 23, 2010; Community Bank of Lincoln effective July 30, 2010; Ohio Commerce Bank effective June 30, 2010; Napa Community Bank effective April 30, 2010 and Bank of Belleville effective April 27, 2010.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.
(3)	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 bank 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 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.
(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 bank was a wholly-owned subsidiary of Capitol.
(6)	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 bank was either a wholly-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(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 bank 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 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 bank was a wholly-owned subsidiary of Capitol.
(9)	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, became 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.
(10)	Total revenues is the sum of interest income and noninterest income.
(11)	Includes corporate and other nonbank entities.
(12)	Total assets and revenues of these banks are reflected as discontinued operations.

F-14

Capitol's Results of Operations

For 2011, a net loss attributable to Capitol approximating $45.4 million ($1.17 per share) was recorded, compared to a net loss of $225.2 million ($11.16 per share) in 2010 and $195.2 million ($11.28 per share) in 2009.  As previously mentioned, Capitol incurred operating losses attributed primarily to significant provisions for loan losses and costs associated with foreclosed properties and other real estate owned.  Further, in 2010 a goodwill impairment charge of $64.5 million was recorded, and in 2009 income tax expense included approximately $104.5 million related to establishing a valuation allowance for deferred tax assets.

The table below presents operating results of each bank without regard to Capitol's direct or indirect ownership percentage (in $1,000s) and, where applicable, the related rates of return on average equity and assets:

	Net Income (Loss)									Return on Average Equity									Return on Average Assets
	2011			2010			2009			2011			2010			2009			2011			2010			2009
Arizona Region:
Bank of Tucson(1)(16)				$	54		$	1,724						0.30	%		10.12	%					0.02	%		0.91	%
Central Arizona Bank	$	(1,797	)		(5,592	)		(6,085	)
Southern Arizona Community Bank(2)(16)					290			434						3.17	%		4.73	%					0.33	%		0.48	%
Sunrise Bank of Albuquerque		(1,871	)		(4,189	)		(1,781	)
Sunrise Bank of Arizona(11)		(14,443	)		(41,500	)		(48,628	)
Yuma Community Bank(13)(16)								372									7.69	%								0.78	%
Arizona Region Total		(18,111	)		(50,937	)		(53,964	)
California Region:
Bank of Feather River(1)(16)		336			194			(714	)		6.85	%		3.09	%					1.03	%		0.51	%
Bank of San Francisco(2)(16)					559			52						8.01	%		0.63	%					0.75	%		0.06	%
Bank of Santa Barbara(12)(16)								(1,300	)
Napa Community Bank(2)(16)					(77	)		485									3.01	%								0.32	%
Sunrise Bank(1)(6)(9)(16)		(791	)		(10,358	)		(8,315	)
California Region Total		(455	)		(9,682	)		(9,792	)
Colorado Region:
Fort Collins Commerce Bank(2)(16)					484			15						6.65	%		0.15	%					0.66	%		0.02	%
Larimer Bank of Commerce(2)(16)					730			57						12.00	%		0.70	%					1.05	%		0.06	%
Loveland Bank of Commerce(2)(16)					253			(872	)					5.34	%								0.84	%
Mountain View Bank of Commerce(1)(16)		194			183			(31	)		2.60	%		2.52	%					0.35	%		0.34	%
Colorado Region Total		194			1,650			(831	)
Great Lakes Region:
Bank of Maumee		(1,089	)		(1,254	)		(2,834	)
Bank of Michigan		426			(267	)		152			5.94	%					2.16	%		0.52	%					0.16	%
Capitol National Bank		386			(2,753	)		(8,150	)		3.63	%								0.24	%
Evansville Commerce Bank(1)(16)		(84	)		(260	)		(1,644	)
Indiana Community Bank(5)(9)		(596	)		(5,063	)		(3,574	)
Michigan Commerce Bank(4)(9)(14)		(20,326	)		(73,686	)		(81,910	)
Ohio Commerce Bank(2)(16)					226			206						4.54	%		2.24	%					0.62	%		0.33	%
Great Lakes Region Total		(21,283	)		(83,057	)		(97,754	)
Midwest Region
Adams Dairy Bank(2)(16)					(36	)		(66	)
Bank of Belleville(2)(16)					18			122						0.68	%		1.79	%					0.07	%		0.17	%
Community Bank of Lincoln(2)(16)					(872	)		(1,516	)
Summit Bank of Kansas City(12)(16)								(978	)
Midwest Region Total					(890	)		(2,438	)
Nevada Region:
1st Commerce Bank		(3,788	)		(3,299	)		(3,009	)
Bank of Las Vegas(8)(9)		(8,033	)		(51,713	)		(12,688	)
Nevada Region Total		(11,821	)		(55,012	)		(15,697	)

F-15

Operating results and, where applicable, the related rates of return on average equity and assets – continued:

	Net Income (Loss)									Return on Average Equity									Return on Average Assets
	2011			2010			2009			2011			2010			2009			2011			2010			2009
Northeast Region:
USNY Bank(2)(16)				$	560		$	(1,188	)					16.70	%								1.35	%
Northwest Region:
Bank of the Northwest(1)(7)(9)(16)		(664	)		(1,446	)		(9,889	)
High Desert Bank		(801	)		(863	)		(2,948	)
Northwest Region Total		(1,465	)		(2,309	)		(12,837	)
Southeast Region:
Community Bank of Rowan(1)(10)(16)		46			(401	)		459			1.88	%					5.73	%		0.14	%					0.47	%
First Carolina State Bank		(6,711	)		(8,258	)		(1,926	)
Pisgah Community Bank		(3,787	)		(9,569	)		(1,417	)
Sunrise Bank(3)(9)(17)		(5,604	)		(8,451	)		(8,222	)
Southeast Region Total		(16,056	)		(26,679	)		(11,106	)
Texas Region:
Bank of Fort Bend(1)(16)		128			(116	)		(1,268	)		14.82	%								2.27	%
Bank of Las Colinas(1)(16)		205			106			(1,259	)		4.35	%		1.94	%					0.51	%		0.24	%
Texas Region Total		333			(10	)		(2,527	)
Parent company and other, net(15)		16,738			(27,998	)		(56,406	)
Consolidated totals		(51,926	)		(254,364	)		(264,540	)
Less discontinued operations		5,948			10,111			(10,813	)
Consolidated totals--
continuing operations	$	(57,874	)	$	(264,475	)	$	(253,727	)

(1)	Capitol sold its ownership in Mountain View Bank of Commerce effective January 30, 2012; Bank of Las Colinas effective October 27, 2011; Evansville Commerce Bank effective October 7, 2011; Bank of Feather River effective October 3, 2011; Bank of the Northwest and Sunrise Bank effective July 28, 2011; Community Bank of Rowan effective April 19, 2011; Bank of Fort Bend effective March 30, 2011 and Bank of Tucson effective January 24, 2011.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.
(2)	Capitol sold its ownership in Southern Arizona Community Bank effective December 10, 2010; Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce effective October 29, 2010; Bank of San Francisco effective September 28, 2010; Adams Dairy Bank effective August 31, 2010; USNY Bank effective August 23, 2010; Community Bank of Lincoln effective July 30, 2010; Ohio Commerce Bank effective June 30, 2010; Napa Community Bank effective April 30, 2010 and Bank of Belleville effective April 27, 2010.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.
(3)	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 bank 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 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.
(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 bank was a wholly-owned subsidiary of Capitol.
(6)	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 bank was either a wholly-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(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 bank 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 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 bank was a wholly-owned subsidiary of Capitol.
(9)	For purposes of this presentation, such merger has been reflected as if it occurred December 31, 2009.
(10)	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.
(11)	Effective December 14, 2009, Arrowhead Community Bank, Asian Bank of Arizona, Colonia Bank, Mesa Bank and Sunrise Bank of Arizona merged with and into Camelback Community Bank.  Upon completion of the merger, the surviving bank was renamed Sunrise Bank of Arizona. Prior to the merger, each bank was either a wholly-owned subsidiary of Capitol or majority-owned by a bank development subsidiary in which Capitol holds a controlling interest.

F-16

Footnotes – continued:

(12)	Bank of Santa Barbara and Summit Bank of Kansas City are majority-owned subsidiaries of CDBL III of which Capitol ceased to have a majority voting control effective September 30, 2009; consequently those banks and CDBL III ceased to be consolidated subsidiaries of Capitol.  CDBL III's ownership interest in Bank of Santa Barbara was sold in November 2009.
(13)	Yuma Community Bank was sold effective September 21, 2009.  The bank's operations are included in Capitol's consolidated totals up to the date of the sale.
(14)	Effective March 31, 2009, Brighton Commerce Bank, Detroit Commerce Bank, Grand Haven Bank, Kent Commerce Bank, Macomb Community Bank, Muskegon Commerce Bank, Oakland Commerce Bank and Portage Commerce Bank merged with and into Ann Arbor Commerce Bank.  Upon completion of the merger, the surviving bank was renamed Michigan Commerce Bank.  Prior to the merger, each bank was a wholly-owned subsidiary of Capitol.
(15)	Includes corporate and other nonbank entities.
(16)	Net income (loss) of these banks is reflected as discontinued operations.

Significant operating losses were incurred at banks located within the Great Lakes, Arizona, Southeast, and Nevada Regions.  Dominating the Great Lakes Region are Capitol's three mature, majority-owned banks located in Michigan.  Operating results of this Michigan-based group of banks amounted to a net loss of $19.5 million in 2011, compared to a net loss of $76.7 million in 2010 and $89.9 million in 2009.  Two of the three Michigan banks returned to profitability in 2011, while the largest banking affiliate, Michigan Commerce Bank, posted a 72.4% reduction in net operating losses compared to 2010.

Capitol's other banks showed similar signs of improvement compared to 2010 and 2009, despite most posting net operating losses in 2011.  Losses continue to be primarily the result of large provisions for loan losses, compressed net interest margins, and elevated costs associated with foreclosure and other real estate owned properties.

Most of the amounts discussed in this narrative are based upon the "continuing operations" of Capitol and its consolidated banking subsidiaries.  Results of operations for 2010 and 2009 in this report have been adjusted to reflect 2011 and early 2012 sales of banking subsidiaries as "discontinued operations" in order to present operating results on a comparable basis.

The principal revenue sources for Capitol's banks is interest income from loans, noninterest income comprised primarily of service charges on deposit accounts, fees on trust and wealth management accounts, fees on the origination of loans and gains on the sale of mortgage and government guaranteed commercial loans.  Net interest income is the total of all interest income less interest expense and is an important measure used to help determine the amount of net operating revenue for financial institutions.  Net operating revenue is the sum of net interest income and noninterest income.

Net interest income totaled $67.2 million in 2011, a 6.3% decrease from the $71.8 million reported in 2010, compared to an 11.5% decrease in 2010 versus a 16.9% decrease in 2009.  Decreases in net interest income were due primarily to a reduction in interest earning assets, attributed to a shrinking balance sheet, but also due to adverse levels of nonperforming loans, increasing levels of liquidity,  and a challenging interest rate environment which reduced the spread between interest earned on performing loans and rates paid on deposits.  The net interest margin was 2.93% for 2011, as compared to 2.50% and 2.40% for 2010 and 2009, respectively.  The net interest margin improvement in 2011 was due primarily to an extremely low interest rate environment in 2011 following unprecedented large rate cuts made by the Federal Reserve

F-17

to the point of bringing short-term interbank rates to near zero.  Capitol's banks benefitted from these rate cuts and the overall lower rate environment by operating with a liability sensitive position of more deposits and other short-term funding liabilities repricing at the lower rates than interest rate sensitive assets.  In addition, Capitol's banks were able to improve loan yields slightly with improved pricing discipline, as well as stabilizing credit quality and nonaccrual loans in 2011 as compared to 2010 and 2009.

Net interest income after the provision for loan losses amounted to $25.9 million in 2011, a significant improvement compared to 2010 and 2009, when deficiencies resulted as net interest income in those years was insufficient to offset the provision for loan losses.  The provision for loan losses approximated $41.4 million, $148.3 million and $158.6 million in 2011, 2010 and 2009, respectively.  The provision for loan losses in 2011 decreased by $107 million, or 72%, from 2010, reflecting decreased levels of nonperforming loans and reductions in net charge-offs, as Capitol began to experience signs of stabilizing real estate values and moderately improving levels of economic activity throughout the banking regions most adversely impacted in those years.  The lower provision for loan losses is also a result of a $420.0 million decrease in the overall loan portfolio from December 31, 2010 to December 31, 2011 due to normal loan curtailment.  The amount of the provision for loan losses is determined based on management's analysis of amounts necessary for the allowance for loan losses; this is discussed in greater detail later in the Capitol's Financial Position section of this narrative.

Total consolidated net operating revenues climbed to approximately $109.0 million in 2011, compared to $94.2 million in 2010 and $101.7 million in 2009, driven primarily from an 86% increase in noninterest income in 2011.  Noninterest income for these years was $41.7 million, $22.5 million and $20.5 million, respectively.  In the first quarter of 2011, Capitol recorded a $16.9 million gain on exchange of trust-preferred securities (see Note J to the consolidated financial statements), and 2010 included a gain on exchange of promissory notes for common stock of $1.3 million.  When excluding each of these gains, noninterest income increased 17.3% in 2011 compared to 2010, and 3.4% in 2010 compared to 2009.

Service charges on deposit accounts stabilized at approximately $3.3 million in 2011, compared with $3.4 million in 2010 and $4.2 million in 2009.  Revenue from trust and wealth management activities decreased about $1.0 million in 2011, or 23%, compared to 2010, following a decrease of 15% in 2010 and 20% in 2009.  Large decreases in this revenue source in 2011 and 2010 were the result of lower levels of client account balances in the midst of an uncertain economic environment.  Wealth advisors are located at several of Capitol's banking subsidiaries to work closely with their traditional banking colleagues in providing financial services to the banks' clientele and increasing noninterest revenues.

Revenue from the origination and sale of residential mortgage loans, included in other noninterest income, amounted to $1.0 million in 2011, $1.6 million in 2010 and $2.3 million in 2009.  Loan originations decreased significantly in 2011 and 2010, as residential real estate market conditions and the credit worthiness of borrowers adversely impacted volume.

F-18

Due to the nature of other categories of noninterest income, including gain on the sales of government-guaranteed loans and other service fee income, amounts can vary significantly from year to year depending on interest rates, business opportunities and other factors.

Noninterest expense totaled $128.6 million, $157.9 million and $185.8 million in 2011, 2010 and 2009, respectively, exclusive of goodwill impairment charges of $59.7 million and $3.4 million in 2010 and 2009, respectively (none in 2011).  Such expenses decreased 18.6% in 2011 and 15.0% in 2010, exclusive of the charges related to goodwill impairment.  As previously mentioned, in mid-2009 and continuing through 2010 and 2011, as part of its capital strategies and restructuring activities, Capitol selectively divested of many of its banks as a means to redeploy capital resources to the remaining banks.  These restructuring activities also necessitated right-sizing adjustments to Capitol's infrastructure, and resulted in commensurate operating expense reductions.  Capitol continued to preserve capital in 2011 by undertaking additional cost containment measures and further right-sizing of its infrastructure as 49 community banks were either merged or divested of since 2009.  In concert with the streamlining of Capitol's infrastructure and operations at its banks and corporate office, salaries and employee benefits have decreased significantly.  Other components of noninterest expense associated with Capitol's infrastructure and operations, such as occupancy and equipment rental and maintenance costs, also decreased in 2011 and 2010 commensurate with bank mergers and divestitures.  Primarily as a result of reduced nonperforming assets, costs associated with foreclosed properties and other real estate owned decreased as well in 2011 and 2010.

After performing an annual review for potential goodwill impairment in the fourth quarter of 2010, Capitol concluded that all of its recorded goodwill (approximately $64.5 million, including $4.8 million from discontinued operations) was deemed to be impaired.  Accordingly, such amount was written off as of December 31, 2010.

With the exception of 2010, which included the aforementioned goodwill impairment charge, the largest component of noninterest expense is salaries and employee benefits, which approximated $49.9 million, $58.1 million and $71.6 million in 2011, 2010 and 2009, respectively.  Salaries and employee benefits decreased $8.2 million, or 14%, in 2011, $13.6 million, or 19%, in 2010 and $8.3 million, or 10.4%, in 2009.  As previously mentioned, employee compensation costs decreased through employee attrition and as a result of Capitol's efforts to reduce and streamline staffing at its banks and corporate office, as well as through the mergers of banking subsidiaries in Capitol's larger markets.

Occupancy costs decreased $2.1 million, or 17%, in 2011, and fluctuated within a narrow range in 2010 and 2009.  Equipment rent, depreciation and maintenance expense decreased $1.2 million (13.9%) in 2011, and $7.9 million (47.7%) in 2010, primarily related to certain lease-related costs incurred in 2009 which had resulted in an increase of about 74% in that year.

F-19

Costs associated with foreclosed properties and other real estate owned were reduced in 2011 to $29.4 million, compared to $38.9 million in 2010 and $44.2 million in 2009.  The decrease in these costs was attributed primarily to fewer and smaller valuation adjustments associated with other real estate owned.  Since its peak in 2009 of over $104 million, other real estate owned has declined to $100.5 million at December 31, 2011.  Due primarily to declining levels of nonperforming assets, these costs decreased $9.5 million, or 24.5%, in 2011, compared to a decrease of $5.3 million, or 12%, in 2010, and an increase of 559%, or $37.5 million, in 2009.  Most of the costs associated with foreclosed properties and other real estate owned resulted from adverse valuation adjustments in an adverse real estate market environment.

FDIC insurance premiums previously ranged from .07% to .78% of average domestic deposits, depending on an institution's risk classification and other factors.  Effective April 1, 2011, banks were charged FDIC insurance premiums based on net assets (defined by the FDIC for assessment purposes as quarter-to-date average daily total assets less the corresponding amount of Tier 1 capital) rather than based on average deposits.  Initial base assessment rates ranged from .05% to .35% of net assets and may be adjusted for certain factors.  Future assessment rates and methodology are difficult to predict.  FDIC insurance premiums and other regulatory fees amounted to $9.5 million in 2011, a decrease of $4.3 million, or 31%, compared to 2010, reflecting lower net assets due to overall portfolio shrinkage.  These costs increased $2.5 million in 2010 and $8.5 million in 2009.

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

	2011		2010		2009
Attorney fees	$	3,612	$	4,497	$	2,595
Insurance		2,428		1,618		1,033
Other professional fees		2,336		3,648		2,452
Loan and collection expense		1,725		2,470		1,958
Bank services (ATMs, telephone banking     and Internet banking)		1,220		1,302		1,736
Directors' fees		1,137		1,538		1,742
Communications		933		1,042		1,219
Travel, lodging and meals		892		1,051		1,263
Paper, printing and supplies		829		1,106		1,367
Advertising		684		912		1,091
Other		6,466		7,066		13,153
Total	$	22,262	$	26,250	$	29,609

Professional service fees, including attorney and accounting fees, declined in 2011 compared to 2010 due to lower levels of nonperforming assets, reduced foreclosures and fewer bank divestitures.  With the exception of insurance expense, which increased due to increased real estate owned property insurance costs, other components of noninterest expense detailed above also declined in 2011 commensurate with ongoing cost containment efforts, staffing reductions and streamlining of operations, as previously discussed.

F-20

In 2011 and 2010, an income tax benefit from continuing operations of $3.1 million and $7.3 million, respectively, was recognized, related primarily to the intraperiod allocation of income tax expense associated with the gain on sale of bank subsidiaries and the reversal of related income tax valuation allowances associated with the sale of these bank subsidiaries included in discontinued operations.  In 2011, Capitol recorded additional income tax expense in the amount of $6.5 million for a liability pertaining to expense deductions as a result of an Internal Revenue Service examination of a prior year, which is pending conclusion in 2012.  Income tax expense related to continuing operations approximated $7.5 million in 2009, primarily from the effect of recording a valuation allowance for deferred income tax assets at December 31, 2009 ($104.5 million).  A valuation allowance for most deferred income tax assets has been maintained at December 31, 2011 ($206 million), based on management's assessment of the realizability of such assets not meeting the requisite more-likely-than-not criteria.  The valuation allowance for deferred income tax assets may reduce income tax expense requirements to the extent of Capitol's profitability in future periods.  A very limited amount of deferred tax assets is deemed to be more-likely-than-not realizable as of December 31, 2011 and 2010 for a few less than 80%- owned bank subsidiaries that file a separate federal income tax return.

Income from discontinued operations decreased in 2011 compared to 2010, due to fewer bank divestitures (eight) with a corresponding gain on sale of $5.5 million.  This income increased significantly in 2010, with the divestiture of eleven bank subsidiaries resulting in an approximate gain on sale of $15.8 million, as compared to the divestiture of two bank subsidiaries in 2009 resulting in a gain on sale of approximately $1.2 million.  Pending bank divestiture activity is discussed later in this narrative.

Capitol's Financial Position

Consolidated total assets decreased to $2.2 billion in 2011 from $3.5 billion at the end of 2010.  The 2011 decrease in total assets resulted primarily from Capitol's previously mentioned divestitures of bank subsidiaries, right-sizing its infrastructure, and ongoing efforts to deleverage its consolidated balance sheet through reductions in portfolio loans and borrowings.

Most of the amounts discussed in this narrative are based upon the "continuing operations" of Capitol and its consolidated bank subsidiaries.  Asset and liability balances as of December 31, 2010 and 2009 have been adjusted to reflect recent sales of banking subsidiaries as "discontinued operations" in order to present Capitol's financial position on a comparable basis.

Key to the balance sheet of Capitol is an understanding of its capital position in terms of stated amounts (including any deficit amounts), regulatory capital levels and ratios and the regulatory classification of Capitol and its banking subsidiaries based upon those amounts and ratios, and liquidity (cash and cash equivalents) at December 31, 2011.  Both of those important elements are discussed in a later section of this narrative, Liquidity, Capital Resources and Capital Adequacy.

F-21

Relative to Capitol's financial position, as shown on its consolidated balance sheet, the single largest asset category is portfolio loans.  Accordingly, the narrative in this section is devoted primarily to loans and related aspects of asset quality.

Net portfolio loans (total portfolio loans after deducting the allowance for loan losses) approximated $1.6 billion at December 31, 2011 and $2.0 billion at December 31, 2010 (excluding discontinued operations).  These amounts approximated 73.0% of total consolidated assets (excluding discontinued operations) at December 31, 2011 and 76.1% at December 31, 2010.  The 2011 decrease in net portfolio loans is significant and is the result of Capitol's efforts to reduce its balance sheet by its discontinued operations, as previously mentioned, and to preserve liquidity and capital to the extent reasonably possible in the current weakened economic climate.

Capitol's banking subsidiaries have focused on offering commercial loans, consistent with their emphasis on lending to local entrepreneurs, professional service firms and other businesses.  All of Capitol's banks use a common credit policy; however, most credit decisions are made locally at the banks.  Utilization of an enterprise-wide credit policy has several key benefits, such as providing procedural guidance to the banks in the following areas:

· Loan underwriting and documentation;

· Credit-granting authority;

· Acceptable collateral and loan structuring;

· Loan participations amongst bank affiliates or external funding sources when proposals exceed an individual bank's limitations;

· Collections and workouts;

· Troubled debt restructuring;

· Documentation, methodology, process and evaluation of the adequacy of the allowance for loan losses; and

· Establishing corporate credit administration resources to aid the banks when needed.

Underwriting standards followed for loans secured by real estate are basic credit granting fundamentals which would be applicable to any extension of credit by a bank.  For construction loans, which have largely been eliminated in the current adverse economic environment, the banks subscribe to and follow general underwriting policies enhanced by keen awareness of increased risks of such loans.

General underwriting policies on all construction, commercial real estate, and commercial and industrial loans include analyzing and documenting:

· Borrower and project financial data;

· Contingent liabilities and related cash flows;

· Adequacy of liquidity and the components of borrowers' and guarantors' net worth;

· Historic and projected cash flow data, including debt service and vacancy rate sensitivity analysis;

F-22

· Character and credit history of borrowers and guarantors, and ability of management regarding the borrower's enterprise;

· Appraisal market valuation, evaluation of local market conditions and related volatility; and

· Proposed use of loan proceeds and potential future uses of the property (for loans secured by real estate).

Additional lending requirements include regulatory loan-to-value guidelines, which are calculated based on current appraised value for loans that finance properties acquired by the borrower.

Variable-rate commercial loans are preferred in the current low interest rate environment.  Most variable-rate commercial loans have stated minimums and are underwritten with ongoing evaluation, including stress testing the borrower's repayment ability by increasing the interest rate to a level as much as 2% above the borrower's current rate.  Since substantially all residential mortgage loan origination volume is underwritten to secondary-market standards and sold into those markets without recourse, Capitol and its banks have no material exposure to hybrid loans such as option-ARMs or subprime credits.

As part of the banks' emphasis on commercial lending, commercial real estate has been sought as the primary source of collateral where possible.  This emphasis on commercial real estate as collateral has been a consistent practice of Capitol and its banks from their earliest days of operation, based on the use of appropriate loan-to-value ratios at the time of loan origination, avoidance of large real estate development projects and the belief that, even in volatile economies, commercial real estate tends to experience substantially less loss potential than other types of business-asset collateral, such as receivables, inventory and equipment, which can completely evaporate during periods of severe operational stress for small business enterprises.

In the current troubled economic environment, market conditions and values of real estate as collateral have deteriorated significantly, as evidenced by adverse asset quality trends since 2007, resulting in large provisions for loan losses, charge-offs of uncollectible loans and materially negative valuation adjustments of other real estate owned.  Other real estate owned arises from a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.  Those properties are held for sale at the lower of cost or fair value, less estimated costs to sell, and are reviewed periodically for subsequent impairment.

Loans may be deemed collateral-dependent when repayment is expected solely from liquidation of the loan's collateral.  Many of the banking subsidiaries' collateral-dependent impaired loans are located in severely depressed real estate markets, such as Michigan, Arizona and Nevada.  In those markets, appraisal data may reflect less useful information than in other real estate markets in estimating fair value because "comparable" sale transactions, generally used as important points of reference in such appraisals, are infrequent, may not be "orderly" and may be the result of distressed or forced sale transactions.  Further, the number of such comparable sale transactions may be fewer, or result in substantially less sales proceeds than could be realized in orderly (and not distressed or forced) sales between the owner/occupant

F-23

and a future user of the property.  Bank regulatory agencies have encouraged Capitol's banks to base their fair value estimates upon appraisal data in substantially all valuations of real estate.  As of December 31, 2011 and 2010, such estimates of fair value for collateral-dependent loans and other real estate owned were based on appraisal data or other independent estimates, such as broker price opinions.

There is significant uncertainty in current and future real estate values, appraisal results and the resulting potential impact on both the 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 primarily upon obtaining appraisals of the underlying property value from independent appraisers, in accordance with professional and licensing requirements for the persons performing those appraisals.  Management cautiously monitors real estate and related appraisal data when evaluating the fair value of real estate collateral.

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

When a borrower's performance has deteriorated (for example, the borrower has become delinquent on required payments, the borrower's updated financial information received indicates adverse financial trends or sales/leasing activity is less than expected in the case of multi-unit properties), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered.  In the period between a loan being recognized as impaired and receipt of an updated appraisal, the loan will be included within loss contingency pools, in conjunction with estimating the bank's requirements for its allowance for loan losses.  Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, the loan will be further evaluated for appropriate write-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, as a partial write-down/charge-off, on a timely basis after the appraisal has been received and reviewed.  Occasionally, additional potential loss amounts may be included if circumstances exist which may further adversely impact fair value estimates.  Internally-developed evaluations may be used when the amount of a loan is less than $250,000.  Internally-prepared evaluations may also be used when the most recent appraisal date is within a year to estimate the current effect of economic conditions or deterioration.  Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

F-24

A potentially negative aspect of real estate as a primary source of collateral for commercial loans, among other things, is that when some commercial loans develop performance difficulties and reach nonperforming status (i.e., become 90 days past due or placed on nonaccrual status), the resolution period will likely involve an extended period of time due to the foreclosure process, and may be further extended if the real estate sales volume is weak or nonexistent, as in the current economic environment.  In contrast, a commercial loan secured by receivables, inventory or equipment, which becomes nonperforming, tends to have a higher loss potential due to the probable rapid dissipation of collateral value.

At December 31, 2011, the allowance for loan losses approximated $92.5 million, or 5.56%, of total portfolio loans outstanding, compared with $130.1 million, or 6.24%, at December 31, 2010.  As stated earlier, the allowance is based on significant judgment and management's analysis of inherent losses in the loan portfolio at the balance-sheet date.  The level of the allowance for loan losses in recent periods, and the percentage relationship to portfolio loans, exceeds past experience at Capitol, its banks and the banking industry as a result of the unprecedented and volatile economic environment in the United States.

As also discussed more extensively in the Critical Accounting Policies section, which appears later in this narrative, the use of estimates in determining the adequacy of the allowance for loan losses is extremely important to an understanding of Capitol's consolidated financial statements.

Capitol had 14 separately-chartered banks at year-end 2011.  Each bank separately computes and documents the adequacy of its respective allowance for loan losses.  The process to evaluate and determine the adequacy of the allowance for loan losses at each individual bank and on a consolidated basis is labor intensive and requires a high degree of judgment.  It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.

The allowance for loan losses reflects management's judgment of probable loan losses inherent in the loan portfolio at the balance-sheet date.  Management uses a disciplined process to establish the allowance for loan losses each quarter, which includes estimating the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis for probable future losses.  Loans are also categorized based on the type of collateral which secures such loans.  The allowance for loan losses consists of amounts applicable to each of the following categories: (i) the commercial loan portfolio; (ii) the construction loan portfolio; (iii) the residential real estate portfolio; and (iv) the consumer loan portfolio.  Additions to the allowance for loan losses are made by charges to the provision for loan losses.  Credit exposures deemed to be uncollectible are charged against the allowance for loan losses, and recoveries of previously charged-off amounts are credited to the allowance for loan losses.

F-25

The establishment of the allowance for loan losses relies on a consistent estimation process that requires multiple layers of management review and judgment, and factors in changes in economic conditions, loan volume and concentrations and collateral values, among other influences.  The banks' allowance for loan losses is also dependent on, and sensitive to, risk ratings assigned to all loans, especially those that are individually evaluated, as well as economic assumptions and delinquency trends driving historical loss experience.  Individual loan risk ratings are evaluated based on each lending relationship and situation by experienced senior credit officers.  Furthermore, management closely monitors differences between estimated and actual incurred loan losses.  This monitoring process includes periodic assessments by senior management of loan portfolios and the models used to estimate incurred losses in those portfolios.

To determine the balance of the allowance for loan losses, loans are pooled by class on the basis of collateral types.  Losses are modeled using historical experience and quantitative and other mathematical techniques, including an approach called migration analysis, over the loss emergence period.  Capitol uses internally developed models in this process that have been validated by independent accounting and consulting firms for conformity with regulatory and authoritative accounting guidance, as well as leading industry practice.  The models were dependently validated and reviewed to ensure that their theoretical foundation, assumptions, data integrity, computational processes, reporting practices and end-user controls are appropriate and properly documented.  Management exercises significant judgment to determine the estimation method and other additional inputs in the modeling process that fit the credit risk characteristics within each portfolio segment.  Management must also use judgment in establishing additional input metrics which serve to adjust the historical loss experience for qualitative environmental factors.  From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts to, or when appropriate release balances from, the allowance for loan losses account, although at the current time a release of reserves may be prohibited and would be subject to intense regulatory scrutiny and approval.

In addition, bank regulatory agencies have the authority to review the adequacy of the allowance for loan losses during their periodic examinations of the banks, and to require changes to the recorded allowance for loan losses, superseding management's judgment.  Those changes or adjustments could involve directing the banks to increase their allowance for loan losses and the banks may be required to reflect the changes or adjustments retroactively.  Such changes or adjustments may be required to be made long after management completed its process for the evaluation and documentation of the adequacy of the allowance for loan losses, based on information which was not available at the time that process was completed.

F-26

During 2011, Capitol received regulatory guidance regarding the methodology used to determine the allowance for loan losses at its largest banks.  The guidance recommended that the banks' methodology be modified such that higher loss rates, in part derived from loan charge-off history on the substandard risk rated loan pools, be applied to the "watch" rated loans as well as the "pass" (or acceptable credit quality) rated loan pool, the largest category of loans in the banks' portfolios.  Corporate management evaluated this guidance for determining the allowance for loan losses and discussed it with regulatory authorities.  While evaluating this guidance, management also retained three independent professional accounting and consulting firms to validate the banks' methodology.  Each of these independent firms concluded that the banks used a valid methodology for determining the allowance for loan losses, and that the banks' methodologies were in conformity with regulatory and authoritative accounting guidance, as well as leading industry practice.  Based on management's judgment and analysis, and supported by the three separate firms' validation results, the Corporation believes that its banks' existing methodologies used in determining their allowance for loan losses meets both regulatory guidance and requirements under generally accepted accounting principles, and represents management's best estimate of probable incurred losses in the loan portfolio.  Nonetheless, the impact of the regulatory guidance has been incorporated in the provision for loan losses recorded in 2011 and is included in the allowance for loan losses as of December 31, 2011.

[The remainder of this page intentionally left blank]

F-27

The following table summarizes portfolio loans, the allowance for loan losses and nonperforming loans for each of the banks, regionally and on a consolidated basis, as of December 31 (in $1,000s):

	Total Portfolio Loans						Allowance for Loan Losses						Nonperforming Loans						Allowance as a % of Total Portfolio Loans
	2011			2010			2011			2010			2011			2010			2011			2010
Arizona Region:
Bank of Tucson(1)(10)				$	159,334					$	2,380					$	7,711						1.49	%
Central Arizona Bank	$	33,108			52,844		$	1,801			2,552		$	4,069			5,092			5.44	%		4.83	%
Southern Arizona Community Bank(2)(10)
Sunrise Bank of Albuquerque		45,924			52,502			2,013			2,499			4,077			4,731			4.38	%		4.76	%
Sunrise Bank of Arizona		237,914			264,181			11,126			16,700			24,038			29,936			4.68	%		6.32	%
Arizona Region Total		316,946			528,861			14,940			24,131			32,184			47,470			4.71	%		4.56	%
California Region:
Bank of Feather River(1)(10)					31,297						479												1.53	%
Bank of San Francisco(2)(10)
Napa Community Bank(2)(10)
Sunrise Bank(1)(6)(10)					183,641						7,815						8,529						4.26	%
California Region Total					214,938						8,294						8,529						3.86	%
Colorado Region:
Fort Collins Commerce Bank(2)(10)
Larimer Bank of Commerce(2)(10)
Loveland Bank of Commerce(2)(10)
Mountain View Bank of Commerce(1)(10)		40,060			41,087			751			789			22			883			1.87	%		1.92	%
Colorado Region Total		40,060			41,087			751			789			22			883			1.87	%		1.92	%
Great Lakes Region:
Bank of Maumee		26,334			33,558			1,084			1,427			988			442			4.12	%		4.25	%
Bank of Michigan		64,970			64,278			1,505			1,368			715			2,312			2.32	%		2.13	%
Capitol National Bank		119,929			138,251			3,681			5,976			12,423			13,616			3.07	%		4.32	%
Evansville Commerce Bank(1)(10)					38,609						1,103						1,801						2.86	%
Indiana Community Bank(5)		92,257			112,986			3,346			3,703			7,803			8,358			3.63	%		3.28	%
Michigan Commerce Bank(4)		618,852			812,088			41,653			57,381			86,179			114,937			6.73	%		7.07	%
Great Lakes Region Total		922,342			1,199,770			51,269			70,958			108,108			141,466			5.56	%		5.91	%
Nevada Region:
1st Commerce Bank		18,542			25,521			1,634			624			3,998			5,611			8.81	%		2.45	%
Bank of Las Vegas(8)		240,110			306,802			13,440			25,235			61,908			82,042			5.60	%		8.23	%
Nevada Region Total		258,652			332,323			15,074			25,859			65,906			87,653			5.83	%		7.78	%
Northwest Region:
Bank of the Northwest(1)(7)(10)					118,755						4,000						6,609						3.37	%
High Desert Bank		25,913			29,872			957			1,350						1,053			3.69	%		4.52	%
Northwest Region Total		25,913			148,627			957			5,350						7,662			3.69	%		3.60	%
Southeast Region:
Community Bank of Rowan(1)(9)(10)					102,926						1,736						3,441						1.69	%
First Carolina State Bank		58,126			77,797			4,279			2,389			5,280			6,560			7.36	%		3.07	%
Pisgah Community Bank		19,753			28,071			1,925			1,511			3,717			6,968			9.75	%		5.38	%
Sunrise Bank(3)		62,207			79,558			4,084			4,374			8,395			10,452			6.57	%		5.50	%
Southeast Region Total		140,086			288,352			10,288			10,010			17,392			27,421			7.34	%		3.47	%
Texas Region:
Bank of Fort Bend(1)(10)					29,788						700						419						2.35	%
Bank of Las Colinas(1)(10)					41,434						737						907						1.78	%
Texas Region Total					71,222						1,437						1,326						2.02	%
Other, net		270			5,866			1			2,973			265			3,170			0.37	%	N.M.
Consolidated totals		1,704,269			2,831,046			93,280			149,801			223,877			325,580			5.47	%		5.29	%
Less discontinued operations		(40,060	)		(746,870	)		(751	)		(19,739	)		(22	)		(30,300	)		1.87	%		(4.06	)%
Consolidated totals relating to
continued operations	$	1,664,209		$	2,084,176		$	92,529		$	130,062		$	223,855		$	295,280			5.56	%		6.24	%

F-28

Footnotes to summary of loan information:

(1)	Capitol sold its ownership in Mountain View Bank of Commerce effective January 30, 2012; Bank of Las Colinas effective October 27, 2011; Evansville Commerce Bank effective October 7, 2011; Bank of Feather River effective October 3, 2011; Bank of the Northwest and Sunrise Bank effective July 28, 2011; Community Bank of Rowan effective April 19, 2011; Bank of Fort Bend effective March 30, 2011 and Bank of Tucson effective January 24, 2011.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.
(2)	Capitol sold its ownership in Southern Arizona Community Bank effective December 10, 2010; Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce effective October 29, 2010; Bank of San Francisco effective September 28, 2010; Adams Dairy Bank effective August 31, 2010; USNY Bank effective August 23, 2010; Community Bank of Lincoln effective July 30, 2010; Ohio Commerce Bank effective June 30, 2010; Napa Community Bank effective April 30, 2010 and Bank of Belleville effective April 27, 2010.  The banks' operations have been included in Capitol's consolidated totals up to the date of sale as part of discontinued operations.
(3)	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 bank 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 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.
(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 bank was a wholly-owned subsidiary of Capitol.
(6)	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 bank was either a wholly-owned subsidiary of Capitol or majority-owned by a bank-development subsidiary in which Capitol holds a controlling interest.
(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 bank 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 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 bank was a wholly-owned subsidiary of Capitol.
(9)	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, became 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.
(10)	Assets of these banks are reflected in discontinued operations.
N.M.	Not meaningful

Nonperforming loans approximated $223.9 million and $295.3 million at December 31, 2011 and 2010, or 13.5% and 14.2% of portfolio loans, respectively.  Of the nonperforming loans at December 31, 2011, approximately 87% were real-estate secured, consistent with prior years.  At December 31, 2011, about 44.5% of total nonperforming loans were Michigan-based, a decrease of $34.5 million, or 25.7%, since year-end 2010.  In concert with elevated levels of nonperforming loans at Michigan banks, their combined allowance ratio (about 5.83% and 6.38% of portfolio loans at year-end 2011 and 2010, respectively), has been maintained at a higher level than Capitol's consolidated ratio, and one bank had an allowance ratio slightly more than 6.7%.  Had nonperforming loans performed in accordance with their contractual terms during the year, estimated additional interest income of $17.8 million, $17.6 million and $16.8 million would have been recorded in 2011, 2010 and 2009, respectively.  Interest income recognized on loans in nonaccrual status in 2011, 2010 and 2009 operations is estimated to be $720,000, $407,000 and $1.0 million, respectively.

At December 31, 2011, the "coverage" ratio of the allowance for loan losses to nonperforming loans (i.e., the allowance as a percentage of nonperforming loans) was 41.3%, compared to 44% at the beginning of the year.  A coverage ratio below 50% is viewed by management as being appropriate, inasmuch as many nonperforming loans already reflect partial write-downs based on the estimated fair value of the underlying real estate (less estimated costs to sell) for collateral-dependent nonperforming loans.  Comparison of the coverage ratio of the allowance

F-29

to nonperforming loans is complicated by the accounting rules for loss recognition of impaired loans.  For example, when an impaired, collateral-dependent loan is evaluated based on its fair value as of a particular balance-sheet date, any estimated loss is included as an element of the requirements for the allowance for loan losses.  At the subsequent balance-sheet date, that earlier loss estimate is generally charged against the allowance for loan losses via direct write-down of the impaired collateral-dependent loan and, accordingly, no allowance for loan losses component is needed until it is determined that the fair value estimate requires further revision.  As a result, many nonperforming loans are carried at a written-down level and no allowance component may be necessary at the balance-sheet date.

Directional consistency in the allowance for loan losses, loan charge-offs (including partial write-downs resulting from impairment analyses, as discussed above) and asset quality is important in evaluating the allowance for loan losses.  During 2011, impaired loans decreased 6% from $340.2 million at December 31, 2010 to $320.4 million at December 31, 2011.  The amount of the allowance for loan losses allocable to impaired loans at December 31, 2011 of $25.9 million reflected a decrease of approximately 36% from the year-end 2010 amount of $40.5 million.  This was due to a $66.8 million (23%) decrease in nonaccrual loans included within impaired loans at December 31, 2011 as compared to December 31, 2010.  Impaired loans which do not have an allowance requirement include collateral-dependent loans for which direct write-downs (or charge-offs) have been made and, accordingly, no allowance requirement or allocation is necessary.  During 2011, 2010 and 2009, the average recorded investment in impaired loans approximated $331.5 million, $335.8 million and $223.0 million, respectively.  Interest income is recorded on impaired loans that are not on nonaccrual status, or may be recorded on a cash basis in some circumstances.  In 2011, 2010 and 2009, interest income recorded on impaired loans approximated $13.8 million, $4.2 million and $1.0 million, respectively.

Included in total impaired loans as of December 31, 2011 and 2010 is $217.5 million and $112.7 million, respectively, of loans modified as troubled debt restructurings.  The large increase in the volume of loans constituting troubled debt restructurings (over 92% from 2010) is attributed primarily to the implementation of the new accounting guidance issued in April 2011, which clarified the definition of a troubled debt restructuring.  Most of the $105 million net increase in troubled debt restructurings in 2011 represents substandard accruing loans that were renewed, which under the new guidance in 2011, constitute troubled debt restructurings.

Loan modifications or restructurings are accounted for as troubled debt restructurings if, for economic or legal reasons, it has been determined a borrower is experiencing financial difficulties and the bank grants a "concession" to the borrower that it would not otherwise consider.  A troubled debt restructuring may involve a modification of terms, such as a reduction of the stated interest rate or loan balance, a reduction of accrued interest, an extension of the maturity date at an interest rate lower than a current market rate for a new loan with similar risk, or some combination thereof involving a concession to the borrower in order to facilitate repayment.  Loans modified and classified as troubled debt restructurings are impaired loans.  Such loans generally remain classified as impaired until the borrower has demonstrated timely payment performance for a period of time, pursuant to the modified terms

F-30

of the loan, and the loan is renewed at an interest rate that is a market rate for loans with similar risk characteristics.

The provision for loan losses decreased by $106.9 million, or 72.1%, to $41.4 million in 2011, following significant amounts in 2010 and 2009 of $148.3 million and $158.6 million, respectively.  The sharp decrease in the provision for loan losses in 2011 primarily reflected decreased levels of nonperforming loans and reductions in net charge-offs, as Capitol had begun to experience less significant declines in real estate valuations compared to 2010 and 2009, and moderately improving levels of economic activity throughout the banking regions most adversely impacted in 2010 and 2009.  Fluctuations in provision for loan losses amounts is caused by numerous factors, including the timing of loan charge-offs in relation to the timing of the provisions for loan losses.  As previously discussed, loss estimation and monitoring of collateral values is an ongoing process.

Due to the continued recessionary economic climate and its effect on commercial real estate collateral, resolution of nonperforming loans and other real estate loans may take an extended period of time.  Levels of nonperforming loans could increase further if general economic conditions do not recover in the foreseeable future.

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

Potential problem loans include loans which are generally performing as agreed; however, because of loan review's and/or lending staff's risk assessment, increased monitoring is deemed appropriate (i.e., "watch" and "substandard, accrual" loans).  In addition, some loans with specific performance issues or other risk factors are assigned a more adverse rating, requiring closer management attention and the development of specific remedial action plans.

At December 31, 2011, problem loans (i.e., substandard, nonaccrual loans) and potential problem loans approximated $530.4 million, or 32%, of total consolidated portfolio loans, whereas problem and potential problem loans, excluding nonaccrual loans, approximated $306.5 million, or 18%, of total consolidated loans.  Such loans are an important component of management's ongoing and proactive loan review activities, which are designed to early-identify loans which warrant close monitoring at both the bank and corporate credit administration levels.  It is important to note that these potential problem loans do not necessarily have significant loss exposure, but rather are identified by management in this manner to aid in loan administration and risk management.  These loans are considered in management's evaluation of the adequacy of the allowance for loan losses.

F-31

Other Assets

There are several other asset categories.  Loans held for sale ($2.9 million and $5.6 million at December 31, 2011 and 2010, respectively) are residential mortgages which are sold into the secondary market, generally within 30-60 days of closing (discussed in more detail in the following section of this narrative).  A modest amount of investment securities are also reflected on the balance sheet ($27.8 million and $18.4 million at December 31, 2011 and 2010, respectively).

Other real estate owned approximated $100.5 million at December 31, 2011, a decrease from the year-end 2010 level of $101.5 million.  Other real estate owned amounts stabilized in 2011 and 2010 after a dramatic increase in 2009, primarily in Michigan and Arizona, due to borrower difficulties, foreclosures and lack of sales activity.  Other real estate owned at December 31, 2011 primarily consists of commercial properties.  Continued deterioration of real estate market conditions for commercial and residential properties has negative implications on future sales and valuation of other real estate owned, as well as on collateral-dependent impaired loans secured by real estate.  In 2011, however, Capitol and its banking subsidiaries have observed stabilizing real estate values and some sales activity, although economic conditions remain weak and improvements marginal.

Foreclosure laws in Michigan generally favor borrowers rather than lenders and, accordingly, foreclosure and redemption periods (i.e., the number of months it takes for a financial institution to obtain clear title to freely market the real estate) take much longer than many other states.  Further, once the property is available to the bank for sale or liquidation, market conditions, as they are currently (particularly in Michigan, Arizona and Nevada), are not conducive to rapid marketing or near-term sale of the properties.

The primary source for the funding of loans is deposits, which is discussed in the next section of this narrative.

Liquidity, Capital Resources and Capital Adequacy

In a volatile economic environment, financial institution liquidity is especially important.  Liquidity for financial institutions typically consists of cash and cash equivalents and assets which may be quickly converted to cash, such as loans held for sale and investment securities available for sale.  These assets totaled $415.2 million at year-end 2011, or about 19.3% of total assets, excluding discontinued operations, and $442.4 million, or about 17.2%, at year-end 2010, both of which marked high levels of liquidity compared to previous years when capital ratios were stronger and the banks' loan portfolios were growing.  Liquidity can vary significantly on a daily basis, based on customer activity and funding sources.  The increased liquidity position at year-end 2011 is the result of management's ongoing efforts to respond to regulatory guidance, coupled with limited opportunities to deploy funds in growing loan portfolios due to lower capital ratios and a very cautious approach to making loans in an uncertain and weakened economy.  Liquidity is important for financial institutions because of the need to meet depositor withdrawal requests and to fund loan and various other

F-32

commitments.  Management believes the banks' liquidity position at December 31, 2011 is adequate to meet depository needs and fund loan demand.

Most of the investment securities portfolio, approximating $25.1 million at December 31, 2011 and $15.5 million at year-end 2010, has been classified as available for sale.  During 2010, approximately $26 million of investment securities were sold primarily to facilitate changes in risk management strategies and liquidity needs.  In 2011 and 2009, there were no significant sales of investment securities available for sale to meet liquidity needs or for other purposes.

Loans held for sale, as previously mentioned, approximated $2.9 million at December 31, 2011, compared to $5.6 million at year-end 2010.  These are residential real estate mortgages originated by the banks and subsequently sold into the secondary market, rather than being held in the banks' portfolios, in order to reduce interest rate and related credit risk.  Mortgage loan origination volume in 2011 decreased to approximately $44 million, compared to $117 million in 2010 ($311 million in 2009).  Future mortgage origination volume will depend in large part on interest rates, real estate valuation and the relative strength of residential real estate market conditions, as well as on the creditworthiness of borrowers.  Also, to the extent warranted, the banks may sell other loans from time to time.

The primary source of funds for Capitol's banks is deposits.  The banks rely upon interest-bearing time deposits as a key part of their funding strategy.  The banks also use noninterest-bearing deposits, or checking accounts, which reduce their cost of funds.  Noninterest-bearing deposits were about 17.4% of total deposits at year-end 2011 (about 15.6% at year-end 2010).  This ratio is significant inasmuch as a lower percentage of noninterest-bearing deposits has the effect of increasing a bank's funding costs and, accordingly, reducing net interest income.

In recent periods, many banks within the industry have experienced competitive challenges in obtaining additional deposits for liquidity purposes.  Capitol's banks have experienced similar challenges in their individual markets.  As depositors have wider access to the internet and other real-time interest rate monitoring resources, deposit sourcing and pricing have become increasingly competitive.  Deposits currently require competitive and often aggressive pricing, adversely impacting net interest margins, especially during these recent periods of very low interest rates.  As interest rates have remained at record low levels, customers are more attracted to aggressively-priced time deposits, and both growth in deposits and retention of deposits is difficult to achieve in a challenging economic environment.  Capitol's banks have decreased the use of brokered deposits as a funding source in response to requirements of regulatory agreements (approximately $36.9 million at year-end 2011, or 1.8% of deposits, compared to $223.3 million, or 9.4%, at year-end 2010).  Banks under such agreements are prohibited from renewing brokered deposits as they mature.  Deposits obtained from internet-based sources (which are not classified as brokered deposits) have increased significantly in recent years.

To supplement their funding sources, some of the banks have lines of credit with the Federal Home Loan Bank (FHLB) system.  At year-end 2011, a total of approximately $47 million was borrowed under FHLB facilities ($98 million at year-end 2010) and additional borrowing

F-33

availability approximated $124 million.  The $51 million decrease in the amount of FHLB borrowings is the result of Capitol's efforts to reduce debt obligations of its banking subsidiaries and shrink its balance sheet.  Borrowings under those facilities are generally at short-term market rates of interest and, although the repayment dates can be extended, are generally outstanding for brief periods of time.  The FHLB may accelerate due dates of these borrowings under certain circumstances, which could have a material adverse impact on liquidity.

Capitol's longer term contractual obligations are disclosed in the notes to the accompanying consolidated financial statements.  At December 31, 2011, such obligations consist principally of time deposits, debt and lease obligations and trust-preferred securities, which are summarized as follows (in $1,000s):

			Payments Due by Period
			Within		Within		Within		After
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Deposits without a stated
maturity	$	882,249	$	882,249
Time deposits		1,127,598		823,037	$	249,345	$	54,484	$	732
Accrued interest		28,746		1,065		27,681
Debt obligations		60,178		41,321		12,084		1,773		5,000
Rent commitments under
noncancelable leases		37,066		7,138		12,138		9,063		8,727
Subordinated debentures		149,156								149,156
Total	$	2,284,993	$	1,754,810	$	301,248	$	65,320	$	163,615

During 2008, Capitol completed a private offering of $14 million of promissory notes which were purchased by accredited investors.  The promissory notes became callable in 2010, mature in 2013 and bear interest at 9%.  In 2010, Capitol converted approximately $4.6 million of those notes into approximately 1.4 million shares of common stock in a private-placement transaction.

Loan commitments of Capitol's banks (stand-by letters of credit and unfunded loans) generally expire within one year.  Other than the items set forth in the table above, there are no individually material contractual obligations, such as purchase obligations.

A significant source of capital in prior years was investments in start-up banks made by community investors, or noncontrolling interests, in those subsidiaries which are consolidated for financial reporting purposes.  Total noncontrolling interests, included as a component of equity, amounted to an equity deficit of $563,000 at year-end 2011, a net decrease of $23.7 million from $23.2 million at year-end 2010.  The net decrease in noncontrolling interests in 2011 resulted from operating losses and bank divestitures.

Capitol has several bank development subsidiaries, each originally capitalized with two classes of common stock, voting and nonvoting.  Capitol purchased all of the initial voting shares of common stock of these entities while the nonvoting shares were sold in private offerings to

F-34

accredited investors, some of whom are related parties of Capitol.  Those entities had been engaged in bank development activities, through Capitol, consisting of formation and investment in start-up banks and management of their investments in young banks.  Bank start-up activities were suspended in mid-2008 when the regulatory and capital raising environment for new banks became unfavorable.  Each of these entities bear a similar name, Capitol Development Bancorp Limited (each a "CDBL"), numbered in their sequential formation, CDBL I through CDBL VIII.

CDBL I became wholly-owned by Capitol in 2006 and CDBL II became wholly-owned in February 2007.  Both were subsequently merged with and into Capitol.  CDBL III ceased to be a controlled subsidiary in 2009 and, accordingly, its consolidated financial position and results of operations were deconsolidated effective September 30, 2009.  Effective December 31, 2009, Capitol increased its ownership in some of the CDBLs through the conversion of intercompany indebtedness to voting common stock of the CDBLs in order to maintain a controlling (>50%) interest in anticipation of conversion of those CDBLs' nonvoting shares to voting shares.  In 2011, Capitol exchanged a portion of its ownership in one of its wholly-owned banks for CDBL III shares and increased its ownership of that CDBL.

Prior to 2009, Capitol raised a total of $167 million of capital through issuance of trust-preferred securities.  Most were obtained through private placements of pooled trust-preferred securities.  Trust-preferred securities are long-term debt obligations which may be treated as elements of capital for regulatory purposes.  When these securities were issued, all were included as an element of the Corporation's regulatory capital.  Currently, none of those securities are included due to the Corporation's capital position.  As noted in the accompanying financial statements, the trusts relating to Capitol's trust-preferred securities are classified as debt obligations on the consolidated balance sheet.  Future availability of trust-preferred securities as a near-term capital resource is unlikely, due to the instability of U.S. capital markets and recent bank regulatory reform pursuant to the July 2010 Dodd-Frank Act.

In April 2009, the Corporation determined that it would commence the deferral of interest payments on its various trust-preferred securities, as is permitted under the terms of the securities, to conserve cash and capital resources.  The payment of interest may be deferred for periods up to five years.  During such deferral periods, Capitol will continue to accrue interest payable on such securities and is generally prohibited from paying dividends on its common stock.  Holders of the trust-preferred securities will continue to recognize current taxable income relating to the deferred interest payments.  Payment of interest on the trust-preferred securities is also not permitted without prior approval of the Federal Reserve (see subsequent discussion in the Certain Regulatory Matters section of this narrative).

On January 31, 2011, Capitol accepted for exchange 1,180,602 of the 2,530,000 outstanding shares of trust-preferred securities of Capitol Trust I and 773,934 of the 1,454,100 outstanding shares of trust-preferred securities of Capitol Trust XII and, pursuant to the related exchange offer, issued approximately 19.5 million previously-unissued shares of Capitol's common stock.  This exchange resulted in the retirement of approximately $19.5 million aggregate liquidation amount of the trust-preferred securities on a combined basis and eliminated

F-35

approximately $3.4 million of accrued interest payable associated with the retired securities, which collectively increased Capitol's equity and regulatory capital by $21.9 million, including a gain on the transaction of approximately $16.9 million.

The stockholders' equity deficit attributable to Capitol approximated $108.1 million at year-end 2011, as compared to $61.9 million at year-end 2010.  The significant 2011 decrease of $46.2 million resulted primarily from the net loss from operations attributable to Capitol for the year.  The equity deficit at December 31, 2011, coupled with adverse classification of Capitol and many of its banks on the basis of their regulatory capital levels, among other things, raises some level of doubt as to Capitol's ability to continue as a going concern, as discussed in the Going-Concern Considerations section of this narrative.  Additionally, Capitol and many of its banking subsidiaries are operating under various formal and informal regulatory agreements (see subsequent discussion in the Certain Regulatory Matters section of this narrative).

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.

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 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 the date of issuance at $100 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%.

Capitol and each of its bank subsidiaries are subject to a complex series of regulatory rules and requirements which require specific levels of capital adequacy at both the bank level and on a consolidated basis.  Under those rules and regulations, banks are categorized as "well-capitalized," "adequately-capitalized" or "under-capitalized" using several ratio measurements, including a risk-weighting approach to assets and financial commitments.  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 remainder of this page intentionally left blank]

F-36

The following table summarizes the amounts (in $1,000s) and related ratios of Capitol's consolidated regulatory capital position at December 31, 2011, and the amounts of "deficiency" that exist between the Corporation's current deficit position and levels required in order to be considered "adequately-capitalized":

Tier 1 capital to average adjusted total assets:
Minimum required amount	≥	$	92,356
Actual amount		$	(109,146	)
Ratio			(4.73	)%
Deficiency		$	201,502
Tier 1 capital to risk-weighted assets:
Minimum required amount(1)	≥	$	68,615
Actual amount		$	(109,146	)
Ratio			(6.36	)%
Deficiency		$	177,761
Combined Tier 1 and Tier 2 capital to risk-weighted assets:
Minimum required amount(2)	≥	$	137,231
Actual amount		$	(109,146	)
Ratio			(6.36	)%
Deficiency		$	246,377

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

Capitol's total risk-based capital ratio at December 31, 2011 and 2010 was materially and adversely impacted by the exclusion of approximately $171.5 million and $203.7 million, respectively, of previously-qualifying Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital, primarily trust-preferred securities and a portion of the allowance for loan losses.  The Tier 1 capital deficit beginning with year-end 2010 resulted from operating losses; however, a Tier 2 limitation, primarily due to the exclusion of trust-preferred securities, did not apply to Capitol's regulatory capital computations for measurement dates prior to 2010.  Capitol's Tier 1 capital will need to increase to a positive level in order to allow for the inclusion of trust-preferred securities in Tier 2 capital for regulatory capital computation purposes.

The preceding summary indicates that Capitol, on a consolidated basis, was classified as less than "adequately-capitalized" at December 31, 2011.  As indicated above, such classification is based upon certain stated ratio minimums at the "adequately-capitalized" level.  There is, however, no assurance that regulatory agencies may not impose a higher threshold for Capitol and/or its banks at any time.

Several of Capitol's bank subsidiaries had capital levels resulting in classification as "undercapitalized" or "significantly-undercapitalized" at December 31, 2011.  Banks and bank holding companies which are less than "adequately-capitalized" are subject to increased regulatory oversight, intervention, requirements and limitations.  Regarding banks classified as less than "adequately-capitalized," or otherwise noncompliant with formal regulatory agreements, management is continuing to pursue various strategies to improve such capital classifications and related compliance in the future, subject to the availability of capital and continued cooperation by regulatory agencies.

F-37

The following comparative analysis summarizes each bank's regulatory capital position as of December 31:

							Tier 1 Risk-Based						Total Risk-Based
	Tier 1 Leverage Ratio(1)(4)						Capital Ratio(1)(4)						Capital Ratio(2)(4)						Regulatory Classification(3)
	2011			2010			2011			2010			2011			2010			2011	2010
Arizona Region:
Central Arizona Bank		2.01	%		2.24	%		2.65	%		3.20	%		3.95	%		4.49	%	significantly- undercapitalized	significantly- undercapitalized
Sunrise Bank of Albuquerque		2.43	%		2.43	%		3.22	%		3.39	%		4.50	%		4.68	%	significantly- undercapitalized	significantly- undercapitalized
Sunrise Bank of Arizona		2.03	%		0.69	%		2.56	%		0.92	%		3.85	%		1.84	%	significantly- undercapitalized	critically- undercapitalized(6)
Colorado Region:
Mountain View Bank of Commerce		14.05	%		12.02	%		17.84	%		17.99	%		19.10	%		19.25	%	well-capitalized	well-capitalized
Great Lakes Region:
Bank of Maumee		5.41	%		7.00	%		7.56	%		9.43	%		8.85	%		10.72	%	adequately- capitalized	well-capitalized
Bank of Michigan		8.80	%		7.67	%		11.31	%		10.33	%		12.58	%		11.59	%	well-capitalized	well-capitalized
Capitol National Bank		6.90	%		6.10	%		9.15	%		7.74	%		10.42	%		9.03	%	adequately- capitalized(5)	adequately- capitalized
Indiana Community Bank		6.66	%		6.34	%		9.35	%		8.19	%		10.63	%		9.47	%	adequately- capitalized(5)	adequately- capitalized
Michigan Commerce Bank		2.17	%		1.15	%		2.84	%		1.46	%		4.16	%		2.78	%	significantly- undercapitalized	critically- undercapitalized(6)
Nevada Region:
1st Commerce Bank		2.30	%		2.48	%		3.88	%		3.94	%		5.22	%		5.20	%	significantly- undercapitalized	significantly- undercapitalized
Bank of Las Vegas		2.16	%		2.06	%		2.90	%		2.93	%		4.20	%		4.27	%	significantly- undercapitalized	significantly- undercapitalized
Northwest Region:
High Desert Bank		6.47	%		7.83	%		8.72	%		10.07	%		10.00	%		11.36	%	adequately- capitalized(5)	adequately- capitalized(5)
Southeast Region:
First Carolina State Bank		2.08	%		3.11	%		3.09	%		4.75	%		4.41	%		6.02	%	significantly- undercapitalized	undercapitalized
Pisgah Community Bank		2.09	%		2.03	%		2.93	%		3.52	%		4.28	%		4.82	%	significantly- undercapitalized	significantly- undercapitalized
Sunrise Bank		2.16	%		2.14	%		2.97	%		3.29	%		4.29	%		4.59	%	significantly- undercapitalized	significantly- undercapitalized
Consolidated totals		(4.73	)%		(1.03	)%		(6.36	)%		(1.44	)%		(6.36	)%		(1.44	)%	less than adequately- capitalized	less than adequately- capitalized

Footnotes to regulatory capital position:

(1)	The minimum required Tier 1 leverage ratio and Tier 1 risk-based capital ratio is 4%.
(2)	The minimum required total risk-based capital ratio is 8%.
(3)	Regulatory capital classifications are defined as follows: Well-Capitalized – Total risk-based capital ratio must be 10% or more, and Tier 1 risk-based capital ratio must be 6% or more, and Tier 1 leverage ratio must be 5% or more, and the bank must not be subject to formal regulatory enforcement action requiring non-standard capital ratios. Adequately-Capitalized – Does not meet the criteria for "well-capitalized," but has total risk-based capital ratio of 8% or more, and Tier 1 risk-based capital ratio of 4% or more, and Tier 1 leverage ratio of 4% or more. Undercapitalized – Does not meet the criteria for "adequately-capitalized," but has total risk-based capital ratio of 6% or more, and Tier 1 risk-based capital ratio of 3% or more, and Tier 1 leverage ratio of 3% or more. Significantly-Undercapitalized – Does not meet the criteria for "undercapitalized," but has Tier 1 leverage ratio of 2% or more.  Institutions with a Tier 1 leverage ratio below 2% are classified as "critically-undercapitalized."
(4)	Ratios are based on the banks' regulatory reports filed at original due date on or before January 30, 2012.
(5)	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.
(6)	Subsequent capital contributions in January 2011 eliminated the banks' classification as "critically-undercapitalized" in 2011.

F-38

Future regulatory capital compliance, classification and related ratios are difficult to predict and are subject to significant contingencies.  There is also no assurance that regulatory agencies may not impose higher ratio thresholds at any time.

Proceeds from the sale of banks in 2011 have been deployed as additional capital in Capitol's 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 additional divestitures of certain bank subsidiaries which were pending at December 31, 2011.  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 divestitures of bank subsidiaries and other initiatives, as discussed further on page F-43.

Certain Regulatory Matters

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

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

F-39

Many of Capitol's bank subsidiaries have entered into formal agreements (as well as informal agreements) with their applicable regulatory agencies.  Those agreements provide for certain restrictions and other guidelines and/or limitations to be followed by the banks.  The banks generally subject to such agreements are noted as such in the regulatory capital summary appearing on page F-38 of this document.  In all instances where Capitol or its banks are subject to formal or informal agreements, corporate and/or bank management, as the case may be, and their boards of directors are fully committed and working proactively towards achieving compliance with those agreements and improving their entity's financial condition.

The FDIC may issue Prompt Corrective Action Notifications ("PCAN") to banking subsidiaries falling below the "adequately-capitalized" regulatory-capital classification, and subsequently may issue Prompt Correction Action Directives ("PCAD").  PCADs may be issued when a bank, which has previously received a PCAN, has submitted two consecutive capital restoration plans which have been rejected by the FDIC.

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

Michigan Commerce Bank

Bank of Las Vegas

Sunrise Bank of Arizona

Sunrise Bank

First Carolina State Bank

Central Arizona Bank

Sunrise Bank of Albuquerque

1st Commerce Bank

Pisgah Community Bank

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

Generally, banks are subject to cross-guaranty liability regarding other financial institutions the FDIC determines are controlled by any multibank holding company.  Pursuant to federal regulations, an insured depository institution may be liable for any loss the FDIC has incurred or expects to incur in connection with the failure of a former affiliate institution and, if the FDIC determines that remaining affiliates have a liability to the FDIC, then they would be required to pay that liability to the FDIC.  Payment of a cross-guaranty liability to the FDIC could have a material adverse impact on the results of operations, capital adequacy and financial position of Capitol and its banking subsidiaries.  To date, none of Capitol's subsidiary banks have received any notice of assessment of cross-guaranty liability.  Capitol's banks have, however, received notice from the FDIC that the FDIC may assess a cross-guaranty liability relating to a failed community bank in Florida which ceased operations in November 2009.  The FDIC alleges that the Florida bank was an affiliated institution of Capitol, although Capitol owned no securities of that bank or otherwise controlled the failed institution.  The aggregate loss to the FDIC of that failed bank approximated $23.6 million.  Previously, the

F-40

FDIC had until November 2011, two years from the date of such notice, to determine whether to assess that potential cross-guaranty liability, if any.  In November 2011, the FDIC and Capitol's banks entered into a mutual tolling agreement, which both extends the ability of the FDIC to impose the cross-guaranty liability, and extends the statute of limitations for the banks to take action against the FDIC for two additional years, ending in November 2013.

In addition to the previously mentioned potential cross-guaranty liability, some of Capitol's banking subsidiaries were advised in December 2009 that, to mitigate the effects of any possible assessment arising from potential cross-guaranty liability, they should develop a plan to arrange a sale, merger or recapitalization such that Capitol no longer controls the bank.  This guidance was preceded by Capitol's previously announced plans to selectively divest some of its bank subsidiaries in conjunction with reallocating capital resources to its remaining banks.  Capitol's pending divestitures are subject to regulatory approval which may take an extended period of time to obtain.

On July 21, 2010, the Dodd-Frank Act (the "DFA") was signed into law, which is significantly impacting the regulation of financial institutions and the financial services industry.  The DFA 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 DFA 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 DFA includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards and prepayments.  Management is continuing to evaluate the provisions of the DFA and assessing its probable impact on the Corporation's business, financial condition and results of operations.  However, the ultimate effect of the DFA on the financial services industry in general, and on the Corporation in particular, currently remains uncertain.

One particularly important aspect of the DFA (as amended) is that certain trust-preferred securities issued by bank holding companies with total assets less than $10 billion, such as Capitol, are permitted to be included as an element of qualifying capital for regulatory capital-adequacy purposes.  Accordingly, Capitol's trust preferred securities may be included in regulatory capital measurements in the future, subject to certain limitations, although none of those securities are currently included, as discussed earlier.

F-41

Going-Concern Considerations

As of December 31, 2011, there are several significant adverse aspects of Capitol's consolidated financial position and results of operations which include, but are not limited to, the following:

·   An equity deficit approximating $108.7 million;

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

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

·   Certain banking subsidiaries which are generally subject to formal regulatory agreements have received "prompt corrective action" notifications and/or directives from the FDIC, which require timely action by bank management and the respective boards of directors to resolve regulatory capital ratios which result in classification as less than "adequately-capitalized" (the basis of a PCAN) or to submit an acceptable capital restoration plan to the FDIC (the basis of a PCAD), and it is likely additional PCANs and/or PCADs may be issued in the future and/or the banking subsidiaries may be unable to satisfactorily resolve such notices and/or directives;

·   In 2010 and 2011, Capitol sold several of its banking subsidiaries and has other divestiture transactions pending (see Note L to the accompanying consolidated financial statements).  The proceeds from those divestitures have been redeployed at certain remaining banking subsidiaries which have experienced a significant erosion of capital due to operating losses.  While such proceeds have been a significant source of funds for redeployment, the Corporation will need to raise significant other sources of new capital in the future;

·   The Corporation and substantially all of its banking subsidiaries are operating under various regulatory agreements (formal and informal) which place a number of restrictions on them and impose other requirements limiting activities, requiring preservation of capital and improvement in regulatory capital measures, reduction of nonperforming assets and other things for which the entities have not achieved full compliance;

·   Continued elevated levels of nonperforming loans and other nonperforming assets as a percentage of consolidated loans and total assets, respectively; and

·   Significant losses from operations in 2011, 2010 and 2009, resulting primarily from provisions for loan losses, costs associated with foreclosed properties and other real estate owned and, in 2010, an impairment charge to operations for the write-off of previously-recorded goodwill ($64.5 million).

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

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

F-42

In 2011, a partial exchange of trust-preferred securities was completed and the Corporation's stockholders approved an amendment to the articles of incorporation to increase its authorized common stock and authorize its board of directors to proceed with a rights offering and reverse stock split, in addition to a potential share-exchange regarding second-tier bank-development subsidiaries.

Improvement in Capitol's and its banking subsidiaries' capitalization, financial position, asset quality and results of operations requires multi-faceted efforts, which are currently being pursued aggressively in the following areas, among others:

·   Raising significant amounts of new equity capital;

·   Completion of divestitures which are currently pending;

·   Further reductions in nonperforming assets;

·   Stabilization of provisions for loan losses and impairment losses;

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

·   Further reductions in operating expenses through mergers of bank subsidiaries.

Capitol's ability to continue as a going concern is contingent on the successful achievement of the items listed above.  Capitol's board of directors and management are fully engaged and committed to successful completion of those items, with a clear sense of urgency, subject to the availability of capital and continued cooperation by regulatory agencies.

Trends Affecting Operations

The most significant trends which can impact the financial condition and results of operations of financial institutions are changes in market rates of interest and changes in general economic conditions.

Quantitative and Qualitative Disclosure About Market Risk

Changes in interest rates, either up or down, have an impact on net interest income (plus or minus), depending upon the direction and timing of such changes.  At any point in time, there is an imbalance 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.  This timing difference between interest rate-sensitive assets and interest rate-sensitive liabilities is characterized as a "gap" which is quantified by the distribution of rate-sensitive amounts within various time periods in which they reprice or mature.

F-43

The following table summarizes the consolidated financial position in relation to the "gap" at December 31, 2011 (in $1,000s):

	Interest Rate Sensitivity
	0 to 3 Months			4 to 12 Months			1 to 5 Years			Over 5 Years			Total
ASSETS
Money market and interest-bearing deposits	$	327,591		$	14,776		$	1,244					$	343,611
Loans held for sale		2,936												2,936
Investment securities		12,140			8,659			3,022		$	3,998			27,819
Federal Home Loan Bank & Federal Reserve    Bank stock		13,514												13,514
Portfolio loans		494,864			317,081			571,885			280,379			1,664,209
Nonearning assets														153,176
Total assets	$	851,045		$	340,516		$	576,151		$	284,377		$	2,205,265
LIABILITIES AND EQUITY
Interest-bearing deposits:
Time deposits under $100,000	$	126,753		$	217,729		$	147,470		$	578		$	492,530
Time deposits $100,000 and over		168,636			309,919			156,359			154			635,068
All other interest-bearing deposits		354,942			82,838			3,308			92,344			533,432
Total interest-bearing deposits		650,331			610,486			307,137			93,076			1,661,030
Notes payable and short-term borrowings		20,899			20,422			13,857			5,000			60,178
Subordinated debentures		100,139						9,891			39,126			149,156
Noninterest-bearing liabilities														443,548
Total liabilities														2,313,912
Equity:
Capitol Bancorp stockholders' equity														(108,084	)
Noncontrolling interests in consolidated    subsidiaries														(563	)
Total equity deficit														(108,647	)
Total liabilities and equity	$	771,369		$	630,908		$	330,885		$	137,202		$	2,205,265
Interest rate sensitive period gap	$	79,676		$	(290,392	)	$	245,266		$	147,175
Interest rate sensitive cumulative gap	$	79,676		$	(210,716	)	$	34,550		$	181,725
Period rate sensitive assets/period rate sensitive liabilities		1.10			0.54			1.74			2.07
Cumulative rate sensitive assets/cumulative rate sensitive liabilities		1.10			0.85			1.02			1.10
Cumulative gap to total assets		3.61	%		(9.56	)%		1.57	%		8.24	%

The preceding table indicates that, in the immediate short-term, Capitol is slightly "asset sensitive" (i.e., interest-rate sensitive assets exceed interest-rate sensitive liabilities) and, accordingly, if interest rates increase, it would favorably impact interest income.  Reality in 2011, however, was an extremely low rate environment following unprecedented large rate cuts made by the Federal Reserve to the point of bringing short-term interbank rates to near zero.  The "gap" changes daily based upon changes in the underlying assets and liabilities at the banks.  Analyzing exposure to interest rate risk is prone to imprecision because the "gap" is constantly changing, the "gap" differs at each of the banks and it is difficult to predict the timing, amount and direction of future changes in market interest rates and the potential corresponding effect on customers' balances and transactions.

F-44

The banks endeavor to manage and monitor interest rate risk in concert with market conditions and risk parameters.  Management strives to maintain a reasonably balanced position of interest rate-sensitive assets and liabilities.  Capitol and its banks have not engaged in speculative positions, for example, through the use of derivatives, in anticipation of interest rate movements.  In periods of relatively lower interest rates, the banks emphasize variable rate loans and time deposits to the extent possible in a competitive environment; however, competitive influences often result in making fixed rate loans, although the banks seek to limit the duration of such loans.  Similarly, low interest rates generally make competition more intense for deposits since loan demand will typically increase during periods of lower rates and, accordingly, result in higher interest costs on deposits as competitors bid-up rates, adversely impacting interest margins.  Future interest rates and the impact on earnings are difficult to predict.  In addition to interest rate risk relating to interest-bearing assets and liabilities, changes in interest rates also can impact future transaction volume of loans and deposits at the banks.  For activities which are influenced by levels of interest rates for transaction volume (for example, origination of residential mortgage loans), pricing margins and demand can become impacted significantly by changes in interest rates.

As a means of monitoring and managing exposure to interest rate risk, management uses a computerized simulation model which is intended to estimate pro forma effects of changes in interest rates.  Using the simulation model, the following table illustrates, on a consolidated basis, changes which would occur in annual levels of interest income, interest expense and net interest income (in $1,000s) assuming 100, 200 and 300 basis point ("bp") increases and a 100 basis point decrease in interest rates:

									Pro Forma
	Pro Forma								Effect of
	Assuming No		Pro Forma Effect of						Interest Rate
	Change in		Interest Rate Increases						Decreases
	Interest Rates		+100 bp		+200 bp		+300 bp		-100 bp
Interest income	$	94,088	$	102,856	$	111,927	$	121,521	$	88,046
Interest expense		25,991		35,663		45,496		55,329		20,146
Net interest income	$	68,097	$	67,193	$	66,431	$	66,192	$	67,900

The preceding pro forma analysis is intended to quantify theoretical changes in interest income based on stated assumptions.  The pro forma analysis excludes the effect of numerous other variables such as borrowers' ability to repay loans, the ability of banks to obtain deposits in a radically changed interest rate environment, and how management would revise its asset and liability management priorities in concert with rate changes.

While the pro forma analysis is intended to estimate the impact of immediate changes in rates, actual results will be different.  Those results will differ (and may be materially different) because a change in market rates does not result in an instantaneous parallel shift in rates on loans and deposits at banks.  Further, any financial model intended to estimate the impact of interest rate changes will not necessarily incorporate other variables, including management's efforts to manage its asset and liability interest rate sensitivity or customer behavior.

F-45

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

General economic conditions also have a significant impact on both the results of operations and the financial condition of financial institutions.  As mentioned previously, general economic conditions and economic conditions within Capitol's primary banking regions in particular, including Michigan, Arizona, and Nevada, are uncertain and could continue to have an adverse effect on Capitol's banks and their customers.  It is likely that, absent significant catalysts, these states' economic recoveries in particular may take an extended period of time.

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

Capitol's geographic footprint serves to minimize a concentration of assets in a particular region.  However, the Great Lakes Region comprised 53% and 39% of consolidated assets at December 31, 2011 and 2010, respectively, and continues to be disproportionate to other geographic regions of Capitol.

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

F-46

Divestitures of Banks

In 2011, Capitol completed the following sales of bank subsidiaries (in $1,000s):

		Sale
	Date Sold	Proceeds		Gain (Loss)
Bank of Tucson – main office(1)	January 24, 2011	$	4,567	$	4,418
Bank of Fort Bend(2)	March 30, 2011		4,315		1,445
Community Bank of Rowan(3)	April 19, 2011		4,845		(1,298	)
Bank of the Northwest/Sunrise Bank(3)	July 28, 2011		24,113		184
Bank of Feather River(2)	October 3, 2011		3,272		(240	)
Evansville Commerce Bank(2)	October 7, 2011		2,321		48
Bank of Las Colinas(2)	October 27, 2011		3,884		938
		$	47,317	$	5,495

(1) Previously a wholly-owned subsidiary of Capitol.  Sale proceeds represent the net premium received from the assumption of liabilities and acquisition of assets transaction.

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

(3) Previously a majority-owned subsidiary of Capitol.

In addition to the completed transactions summarized above, Capitol has entered into definitive agreements to sell its interests (or controlling interests held by bank-development subsidiaries) in the following institutions, and sales are pending:  Bank of Maumee, Bank of Michigan, First Carolina State Bank and Pisgah Community Bank.  Pending bank sale transactions are subject to regulatory approval and other contingencies.  If completed, the divestitures would result in Capitol receiving estimated proceeds approximating $6 million.

Critical Accounting Policies Affecting Capitol's Financial Statements

Note B of the notes to the consolidated financial statements is captioned Significant Accounting Policies.  That disclosure spans numerous pages, all of which are deemed "significant" and are required disclosures under generally accepted accounting principles ("GAAP").  For purposes of this narrative, current SEC guidance requires the selection of a few of those for discussion as "critical accounting policies."  The selection of which few will differ from company to company, even within a common industry, such as within the business of banking.  Capitol considers its critical accounting policies to include the following:

Use of Estimates in Determining the Allowance for Loan Losses.  Bank regulatory agencies, accounting standard setters and the SEC have all issued extensive commentary, guidance and a variety of rule-making releases on how financial institutions are to determine the amount of their allowance for loan losses.  Determining the allowance is a comprehensive and inherently subjective process, which requires management's judgment as to how to estimate losses incurred, and when to record a loss allowance or 'reserve' for loans.  It is not a process or methodology which can be merely reduced to a strict absolute computation, like a mathematical formula to compute taxes.  The process and methodology will differ from one

F-47

financial institution to another and there is no 'one size fits all' format or approach to loss reserving.

The consolidated allowance for loan losses is based on the individual allowances for loan losses of each bank and any allowance amount or related adjustments at the parent-company level.

As previously discussed, the establishment of the allowance for loan losses relies on an estimation process at each bank that requires management review and judgment and factors in changes in economic conditions, loan volume and concentrations and collateral values, among other influences.  The allowance for loan losses is also dependent on and sensitive to risk ratings assigned to all loans, especially those that are individually evaluated, as well as on economic assumptions and delinquency trends driving historical loss experience.  Individual loan risk ratings are evaluated by experienced senior credit officers based on each lending relationship and situation.

Using models and other mathematical methodologies, each bank develops overall loss factors based on historical loss experience and on loan volume, loan quality trends, staffing levels and experience, past loss experience and current economic conditions.  In addition to the historical loss experience used in each bank's allowance computation, each bank documents local and regional environmental considerations which include, but are not limited to, levels of unemployment and jobless claims and anecdotal data regarding real estate market conditions, in addition to consideration of loan concentrations and the levels of experience and expertise of credit personnel at the banks.  These allowance for loan losses computations and related documentation are prepared quarterly.  Historical loss factors have been appropriately adjusted to reflect economic and other qualitative environmental conditions at the banks and throughout all regions.

In addition to the banks' allowance computations, adjustments or allowance amounts at the parent level are necessary from time to time.  At December 31, 2011, the parent had a negligible allowance related to loans carried on its books, following completion of a bulk sale of loans in late 2011.

Management believes its process and methodology for determining the allowance for loan losses is appropriate and adequate to properly estimate losses inherent in the loan portfolio at the balance-sheet date; however, actual future losses will differ from amounts considered in the allowance methodology.

Bank regulatory agencies may have differing perspectives on the process, methodology and adequacy of the allowance for loan losses when examining the banks and, in addition, such agencies' examination teams may not be consistent in their review and conclusions from one bank to another.  Bank regulatory agencies have the authority to require adjustments or other changes to the recorded allowance for loan losses as a result of their examinations, superseding management's earlier judgment as to the adequacy and amount of the allowance for loan losses.  These regulatory agencies may require such changes or adjustments retroactively.  The

F-48

changes or adjustments may be required to be made long after management completed its process for the evaluation and documentation of the adequacy of the allowance for loan losses, based on information not available to management at the time that process was completed.

The process of determining the level of the allowance for loan losses at each individual bank, and on a consolidated basis, requires a high degree of subjective judgment.  It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.  At December 31, 2011, Capitol's allowance for loan losses approximated 5.56% of portfolio loans outstanding.  Based on portfolio loans outstanding at that date, any one basis-point (.01%) change in the allowance would have an approximate $166,000 impact on both the allowance for loan losses and pre-tax income (loss).

Accounting for Goodwill and Other Intangibles.  At December 31, 2011 and 2010, Capitol had no remaining goodwill and other intangibles ($65.2 million at December 31, 2009).  Goodwill arose from acquisitions occurring in prior years, from transactions in which Capitol issued shares of its common stock at a premium over the book value of the noncontrolling interest of a subsidiary bank's shares.  Resulting goodwill was recorded at the entity to which the goodwill related.  Current accounting rules require at least an annual review of goodwill for potential impairment, which Capitol most recently conducted as of November 30, 2010.  Amounts recorded as goodwill impairment are reflected within noninterest expense as a non-cash charge to operations, when determined.

As discussed earlier in this narrative, all previously recorded goodwill was written-off as of December 31, 2010.

Accounting for Income Taxes.  Accounting for income taxes requires significant estimates and management judgment.  At December 31, 2011, Capitol had a net deferred income tax asset approximating $206.8 million, before consideration of the related 2011 valuation allowance ($205.9 million at December 31, 2011).  When it is determined that realization of the deferred income 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.

As of December 31, 2011, the consolidated deferred income tax asset, excluding the related valuation allowance, consisted primarily of components relating to provisions for loan losses and net operating losses of consolidated subsidiaries.

Due to continuing operating losses, management reassessed the potential realization of the deferred tax asset during 2011 and increased the valuation allowance to $205.9 million, to reduce the net deferred income tax asset to approximately $1.0 million, which represents the amount of the asset estimated to be more-likely-than-not realizable.  Such valuation allowance approximated $190.3 million at December 31, 2010.  The potential realization of the deferred tax asset will continue to be assessed for future changes affecting realizability, and the valuation allowance may be adjusted in future periods accordingly.  The ultimate realization of these deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences become deductible.  Changes in existing tax laws could

F-49

also affect actual tax results and the valuation of deferred tax assets over time.  The accounting for deferred taxes is based, in part, on an estimate of future results.  Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on Capitol's consolidated results of operations or financial position.

Consolidation Policy.  Current accounting rules require consolidation of entities which are majority-owned or controlled by Capitol.  This means that majority-owned banks and bank-development subsidiaries are combined with Capitol for financial reporting purposes, along with banks and other subsidiaries which are wholly-owned.  The consolidated balance sheet includes all assets and liabilities of those entities.  However, after giving effect to the noncontrolling interests in net income or losses of consolidated subsidiaries, net income (loss) attributable to Capitol only includes the entities' net income or loss to the extent of Capitol's ownership.  Reported results would be materially different if Capitol had 100% ownership of those entities.

New Accounting Standards

Certain new accounting standards were issued or became effective in 2011, in addition to some which have later effective dates.  Those are listed and discussed in Note B of the consolidated financial statements, beginning on page F-69.

Risk Factors Affecting Capitol and its Banks

The summary below is not a complete list of all risk factors identified by management.  Readers are encouraged to review Capitol's Form 10-K (Item 1A), Capitol's cautions regarding forward-looking statements appearing on page F-6 of this Annual Report and other SEC filings, particularly registration statements, for a more comprehensive review of risk factors, which include the following, among others:

· Some doubt (potentially significant doubt) exists as to Capitol's ability to continue as a going concern  

· The regulatory environment for the banking industry could change significantly and adversely, and Capitol and its banking subsidiaries are dependent upon continued cooperation by regulatory agencies  

· The FDIC could assess the potential cross-guaranty liability for the failed Florida institution prior to its expiration in November 2013  

· A weakened economic environment may slow further, resulting in higher levels of nonperforming loans and loan losses  

· The current environment for raising capital is unstable and may limit growth plans and operations  

· Changes in regulations or regulatory action regarding Capitol or its banks could limit future expansion plans and operations  

F-50

· The allowance for loan losses is based on estimates and actual losses and regulatory determinations may differ materially from those estimates  

· Concentrations in loans secured by commercial real estate could limit or delay future expansion plans and loss estimates could change significantly if real estate market conditions deteriorate further  

· Loss estimates for real estate collateral-dependent loans are based on independent appraisals which are subject to change  

· Investments in Federal Home Loan Bank stock are carried at cost and are a restricted security which may be redeemed only by the issuer; the issuer's future ability to redeem the security is subject to its liquidity and capital adequacy  

· The complexity of Capitol's structure (a mixture of partially-owned and wholly-owned banks and related entities) complicates financial analysis

In addition to the items listed above, of course, changes in interest rates can have a pervasive impact on Capitol and its banks.

Capitol has a risk management program in place which endeavors to manage these and other risks.

[The remainder of this page intentionally left blank]

F-51

Management's Report on

Internal Control Over Financial Reporting

Capitol Bancorp Ltd. ("Capitol") is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report.  The consolidated financial statements and notes included in this annual report have been prepared in conformity with generally accepted accounting principles in the United States of America and necessarily include some amounts that are based on management's best estimates and judgments.

We, as management of Capitol, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with generally accepted accounting principles in the United States of America.  The system of internal control over financial reporting, as it relates to the financial statements, is evaluated for effectiveness by management and tested for reliability through a program of internal audits.  Actions are taken to correct potential deficiencies as they are identified.  Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected.  Also, because of changes in conditions, internal control effectiveness may vary over time.  Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Capitol's Audit Committee, consisting entirely of independent directors, meets regularly with management, internal auditors and the independent registered public accounting firm, and reviews audit plans and results, as well as management's actions taken in discharging responsibilities for accounting, financial reporting and internal control.  BDO USA, LLP, independent registered public accounting firm, and the internal auditors have direct and confidential access to Capitol's Audit Committee at all times to discuss the results of their examinations.

Management assessed Capitol's system of internal control over financial reporting as of December 31, 2011, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management concluded that, as of December 31, 2011, Capitol's system of internal control over financial reporting was effective.

As discussed elsewhere in this annual report, regulatory agencies may require Capitol or its banking subsidiaries 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 process of determining the level of the allowance for loan losses at each individual bank and on a consolidated basis requires a high degree of subjective judgment, is an estimate and is a critical accounting policy of Capitol.  It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.  Further, regulatory agencies

F-52

examining financial institutions often utilize information available to them long after the balance-sheet date in conjunction with their assessment of the allowance for loan losses.

As previously disclosed, Capitol's unaudited condensed consolidated financial statements as of and for the three months and nine months ended September 30, 2010 were revised on March 3, 2011 to reflect an additional provision for loan losses resulting from Michigan Commerce Bank's amended regulatory financial statements encompassing that period.  Whenever a public company revises its previously-issued financial statements, the facts and circumstances of such a restatement must also be evaluated in the context of internal control over financial reporting.  Generally, a restatement is viewed as a strong indicator of a material weakness in internal control over financial reporting.  Capitol has carefully reevaluated its internal control over financial reporting as it relates to the process and methodology for estimating the requirements for the bank-level, as well as the consolidated allowance for loan losses.

Capitol determined that the restatement resulted in the identification of a material weakness in internal control at December 31, 2010.  All aspects of that restatement were remediated in 2011.  Such remediation consisted of fully incorporating all regulatory-agency imposed requirements in the computations and internal control process for estimation of allowance for loan losses requirements both at the bank level and on a consolidated basis.  In addition, under the direction of an executive management group at Capitol, a working group of corporate senior managers that also included senior managers of the three largest banking affiliates was formed to evaluate the overall process for the determination of the allowance for loan losses in connection with the impact on financial reporting.  This group, working in conjunction with the banks during the year ended December 31, 2011, implemented process changes and procedures that served to remediate the material weakness in internal controls over financial reporting surrounding the determination of the adequacy of the allowance for loan losses.  This management review process constitutes a key internal control over financial reporting involving the determination and adequacy of the allowance for loan losses.

Capitol and its banking subsidiaries have extensive policies, processes and procedures in place to appropriately estimate requirements for the allowance for loan losses.  The consolidated allowance for loan losses is believed by Capitol to be adequate and appropriate at December 31, 2011.

        Joseph D. Reid Chairman and CEO   Lansing, Michigan March 30, 2012     Nicholas G. Hahn Interim Chief Financial Officer

F-53

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009

CAPITOL BANCORP LIMITED

F-54

      Tel:  616 774 7000 Fax:  616 776 3680 www.bdo.com  99 Monroe Avenue NW, Suite 800 Grand Rapids, Michigan 49503-2654

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Capitol Bancorp Ltd.

We have audited the accompanying consolidated balance sheets of Capitol Bancorp Ltd. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2011.  These financial statements are the responsibility of the Corporation's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capitol Bancorp Ltd. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Corporation will continue as a going concern.  As discussed in Note U to the consolidated financial statements, the Corporation and substantially all of its subsidiary banks have suffered significant losses from operations in 2011, 2010, 2009 and 2008 primarily from large provisions for loan losses and costs associated with nonperforming assets, suffered a decline in regulatory capital, and experienced regulatory issues that raise substantial doubt about the Corporation's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note U.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

March 30, 2012

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO is the brand name for the BDO network and for each of the BDO Member Firms.

F-55

Capitol Bancorp Limited
Consolidated Balance Sheets
	-December 31-
	2011			2010
	(in $1,000s)
ASSETS
Cash and due from banks	$	43,613		$	43,328
Money market and interest-bearing deposits		343,611			377,966
Federal funds sold		--			50
Cash and cash equivalents		387,224			421,344
Loans held for sale		2,936			5,587
Investment securities—Note C:
Available for sale, carried at fair value		25,082			15,489
Held for long-term investment, carried at
amortized cost which approximates fair value		2,737			2,893
Total investment securities		27,819			18,382
Federal Home Loan Bank and Federal Reserve
Bank stock (carried on the basis of cost)—Note C		13,514			15,205
Portfolio loans, less allowance for loan losses of $92,529 in
2011 and $130,062 in 2010—Note D		1,571,680			1,954,114
Premises and equipment—Note F		27,420			31,715
Accrued interest income		5,507			6,721
Other real estate owned		100,463			101,497
Other assets		17,037			13,235
Assets of discontinued operations—Note L		51,665			972,414
TOTAL ASSETS	$	2,205,265		$	3,540,214
LIABILITIES AND EQUITY
Deposits:
Noninterest-bearing	$	348,817		$	368,674
Interest-bearing—Note H		1,661,030			2,000,398
Total deposits		2,009,847			2,369,072
Debt obligations:
Notes payable and short-term borrowings—Note I		60,178			107,789
Subordinated debentures—Note J		149,156			167,586
Total debt obligations		209,334			275,375
Accrued interest on deposits and other liabilities		50,593			49,638
Liabilities of discontinued operations—Note L		44,138			884,810
Total liabilities		2,313,912			3,578,895
EQUITY—Notes B, K and R
Capitol Bancorp Limited stockholders' equity:
Preferred stock (Series A), 700,000 shares authorized
($100 liquidation preference per share); 50,980 shares
issued and outstanding		5,098			5,098
Preferred stock (for potential future issuance),
19,300,000 shares authorized (none issued and outstanding)		--			--
Common stock, no par value, 1,500,000,000 shares authorized;
issued and outstanding:   2011 - 41,039,767 shares
2010 - 21,614,856 shares		292,135			287,190
Retained-earnings deficit		(404,846	)		(353,757	)
Undistributed common stock held by employee-benefit trust		(541	)		(541	)
Fair value adjustment (net of tax effect) for investment securities
available for sale (accumulated other comprehensive income/loss)		70			156
Total Capitol Bancorp Limited stockholders' equity (deficit)		(108,084	)		(61,854	)
Noncontrolling interests in consolidated subsidiaries		(563	)		23,173
Total equity (deficit)		(108,647	)		(38,681	)
TOTAL LIABILITIES AND EQUITY	$	2,205,265		$	3,540,214
See notes to consolidated financial statements.

F-56

Capitol Bancorp Limited
Consolidated Statements of Operations
	-Year Ended December 31-
	2011			2010			2009
	(in $1,000s except per share data)
Interest income:
Portfolio loans (including fees)	$	102,099		$	126,435		$	161,856
Loans held for sale		86			210			494
Taxable investment securities		233			359			370
Federal funds sold		9			10			17
Other		1,366			1,814			1,183
Total interest income		103,793			128,828			163,920
Interest expense:
Deposits		24,215			41,065			62,405
Debt obligations and other		12,353			15,998			20,381
Total interest expense		36,568			57,063			82,786
Net interest income		67,225			71,765			81,134
Provision for loan losses—Note D		41,362			148,275			158,589
Net interest income (deficiency) after
provision for loan losses		25,863			(76,510	)		(77,455	)
Noninterest income:
Service charges on deposit accounts		3,256			3,373			4,209
Trust and wealth-management revenue		3,246			4,200			4,957
Fees from origination of non-portfolio residential
mortgage loans		994			1,643			2,324
Gain on sales of government-guaranteed loans		1,552			818			864
Gain on debt extinguishment—Notes I and J		16,861			1,255			--
Realized gains (losses) on sale of investment securities
available for sale		(10	)		(351	)		7
Other		15,844			11,524			8,156
Total noninterest income		41,743			22,462			20,517
Noninterest expense:
Salaries and employee benefits		49,851			58,099			71,649
Occupancy		10,200			12,300			12,497
Equipment rent, depreciation and maintenance		7,468			8,678			16,585
Costs associated with foreclosed properties and other
real estate owned		29,380			38,911			44,231
FDIC insurance premiums and other regulatory fees		9,457			13,709			11,246
Goodwill impairment—Note G		--			59,734			3,431
Other		22,262			26,250			29,609
Total noninterest expense		128,618			217,681			189,248
Loss before income taxes (benefit)		(61,012	)		(271,729	)		(246,186	)
Income tax expense (benefit)—Note N		(3,138	)		(7,254	)		7,541
Loss from continuing operations		(57,874	)		(264,475	)		(253,727	)
Discontinued operations—Note L:
Income (loss) from operations of bank subsidiaries sold		2,582			3,641			(1,123	)
Gain on sale of bank subsidiaries		5,495			15,784			1,187
Less income tax expense—Note N		2,129			9,314			10,877
Income (loss) from discontinued operations		5,948			10,111			(10,813	)
NET LOSS		(51,926	)		(254,364	)		(264,540	)
Net losses attributable to noncontrolling interests in
consolidated subsidiaries		6,499			29,149			69,371
NET LOSS ATTRIBUTABLE TO CAPITOL
BANCORP LIMITED	$	(45,427	)	$	(225,215	)	$	(195,169	)
NET LOSS PER SHARE ATTRIBUTABLE
TO CAPITOL BANCORP LIMITED—Note O:	$	(1.17	)	$	(11.16	)	$	(11.28	)
See notes to consolidated financial statements.

F-57

F-58

F-59

Capitol Bancorp Limited
Consolidated Statements of Cash Flows
	-Year Ended December 31-
	2011			2010			2009
	(in $1,000s)
OPERATING ACTIVITIES
Net loss	$	(51,926	)	$	(254,364	)	$	(264,540	)
Adjustments to reconcile net loss to net cash provided
by operating activities (including discontinued operations):
Provision for loan losses		43,876			164,352			190,680
Depreciation of premises and equipment		5,454			7,933			10,084
Amortization and write-down of intangibles		--			219			838
Goodwill impairment		--			64,505			3,431
Net amortization (accretion) of investment security premiums (discounts)		215			298			(33	)
Loss on sales of premises and equipment		69			393			254
Gain on sales of government-guaranteed loans		(2,392	)		(2,504	)		(2,811	)
Gain on sales of bank subsidiaries		(5,495	)		(15,784	)		(1,187	)
Gain on debt extinguishment		(16,861	)		(1,255	)		--
Realized loss (gain) on sales of investment securities available for sale		10			351			(7	)
Loss (gain) on sales of other real estate owned		(510	)		(125	)		4,400
Write-down of other real estate owned		20,773			30,352			32,315
Amortization of issuance costs of subordinated debentures		101			145			148
Share-based compensation expense (benefit)		131			(389	)		1,350
Deferred income tax credit		(1,892	)		(2,123	)		(43,354	)
Valuation allowance for deferred income tax assets		--			--			104,498
Originations and purchases of loans held for sale		(44,439	)		(116,829	)		(311,179	)
Proceeds from sales of loans held for sale		48,544			119,924			305,080
Decrease (increase) in accrued interest income and other assets		14,115			55,742			(30,722	)
Increase in accrued interest expense on deposits and other liabilities		8,799			9,337			15,363
NET CASH PROVIDED BY OPERATING ACTIVITIES		18,572			60,178			14,608
INVESTING ACTIVITIES
Cash equivalents of acquired bank affiliate		--			18,949			--
Proceeds from sales of investment securities available for sale		497			25,964			798
Proceeds from calls, prepayments and maturities of investment
securities		11,379			22,175			15,596
Purchases of investment securities		(21,050	)		(34,678	)		(56,225	)
Purchase of Federal Home Loan Bank stock		(820	)		(1,527	)		(2,294	)
Redemption of Federal Home Loan Bank stock by issuer		2,586			2,563			1,340
Net decrease in portfolio loans		274,896			208,376			155,438
Proceeds from sales of government-guaranteed loans		30,356			27,981			39,429
Proceeds from sales of premises and equipment		441			416			2,033
Purchases of premises and equipment		(1,068	)		(4,038	)		(5,137	)
Proceeds from sales of bank subsidiaries		47,308			76,101			9,506
Payments received on other real estate owned		268			2,192			6
Proceeds from sales of other real estate owned		32,386			45,145			17,716
NET CASH PROVIDED BY INVESTING ACTIVITIES		377,179			389,619			178,206
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts		204,838			333,177			157,850
Net increase (decrease) in certificates of deposit		(553,127	)		(718,579	)		12,300
Net borrowings from (payments on) debt obligations		(512	)		(1,372	)		1,484
Proceeds from Federal Home Loan Bank borrowings		217,850			613,230			3,146,430
Payments on Federal Home Loan Bank borrowings		(273,406	)		(728,417	)		(3,278,820	)
Resources provided by noncontrolling interests		9,000			--			3,794
Net proceeds from issuance of common stock		--			6,870			--
Tax effect of share-based payments		(256	)		(293	)		(169	)
Cash dividends paid		--			--			(864	)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(395,613	)		(495,384	)		42,005
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		138			(45,587	)		234,819
Change in cash and cash equivalents of discontinued operations		(34,258	)		(56,308	)		(85,148	)
Cash and cash equivalents at beginning of year		421,344			523,239			373,568
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	387,224		$	421,344		$	523,239
Supplemental disclosures:
Cash paid during the year for interest	$	40,738		$	74,288		$	114,693
Transfers of loans to other real estate owned		49,685			73,156			102,487
Surrender of common stock to facilitate exercise of stock options
and vesting of restricted stock		12			13			23
See notes to condensed consolidated financial statements.

F-60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE A—NATURE OF OPERATIONS, BASIS OF PRESENTATION AND

PRINCIPLES OF CONSOLIDATION

Capitol Bancorp Limited ("Capitol" or the "Corporation") is a multibank holding company.  Consolidated bank subsidiaries consist of the following as of December 31, 2011:

Affiliate	Location	Percentage Owned by Capitol			Percentage Owned by Subsidiaries Controlled by Capitol			Year Formed or Acquired
Arizona Region:
Central Arizona Bank	Casa Grande, Arizona		63	%		34	%		1997
Sunrise Bank of Albuquerque	Albuquerque, New Mexico		75	%		25	%		2000
Sunrise Bank of Arizona	Phoenix, Arizona		96	%		4	%		1998
Great Lakes Region:
Bank of Maumee	Maumee, Ohio		(1	)		51	%		2006
Bank of Michigan	Farmington Hills, Michigan		51	%					2005
Capitol National Bank(2)	Lansing, Michigan		51	%					1982
Indiana Community Bank	Goshen, Indiana		100	%					2000
Michigan Commerce Bank	Ann Arbor, Michigan		(1	)		100	%		1990
Nevada Region:
1st Commerce Bank	North Las Vegas, Nevada		2	%		97	%		2006
Bank of Las Vegas	Las Vegas, Nevada		95	%		5	%		2002
Northwest Region:
High Desert Bank	Bend, Oregon		(1	)		55	%		2007
Southeast Region:
First Carolina State Bank	Rocky Mount, North Carolina		84	%		13	%		2004
Pisgah Community Bank	Asheville, North Carolina		83	%		13	%		2008
Sunrise Bank	Atlanta, Georgia		71	%		25	%		2006

(1)	Majority-owned by a bank-development subsidiary (second-tier bank holding company) in which Capitol holds a controlling interest.
(2)	Effective December 31, 2011, Capitol entered into a share exchange agreement with certain shareholders of Capitol Development Bancorp Limited III ("CDBL III"), whereby Capitol exchanged 49% of its voting interest in Capitol National Bank for an additional 22% ownership interest in CDBL III.

F-61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE A—NATURE OF OPERATIONS, BASIS OF PRESENTATION AND

PRINCIPLES OF CONSOLIDATION—Continued

Capitol has several bank-development subsidiaries, each originally capitalized with two classes of common stock, voting and nonvoting.  Capitol purchased all of the initial voting shares of common stock of these entities while the nonvoting shares were sold in private offerings to accredited investors, some of whom are related parties of Capitol.  Those entities have been engaged in bank development activities, through Capitol, consisting of formation and investment in start-up banks and management of their investments in young banks.  Bank start-up activities were suspended in mid-2008 when the regulatory and capital-raising environment for new banks became unfavorable.  Each of these entities bear a similar name, Capitol Development Bancorp Limited (each a "CDBL"), numbered in their sequential formation, CDBL I through CDBL VIII.  CDBL I and CDBL II became wholly-owned by Capitol effective November 30, 2006 and February 9, 2007, respectively, and were merged with and into Capitol in 2007.  CDBL III ceased to be a controlled subsidiary of Capitol in 2009.

Capitol views itself as a community-banking company.  Bank development consists of management and oversight of banks in which Capitol has a direct or indirect controlling interest and, through mid-2008, included formation of start-up banks.  Some of Capitol's banks were formed with a portion of their start-up capital provided by local investors in the communities of those banks.  When  de novo banks have achieved certain developmental milestones (age, cumulative profitability, return on equity or other measures), Capitol may offer the bank's noncontrolling shareholders an opportunity to exchange their bank shares for shares of Capitol's common stock.  Capitol has made similar share-exchange proposals regarding the noncontrolling interests of some of its prior bank-development company subsidiaries which, after the share exchange, were merged with and into Capitol.  In eachinstance, however, Capitol is under no obligation to offer such proposals and such share-exchange proposals, if and when offered, are generally subject to approval by the subsidiaries' noncontrolling shareholders in each proposed transaction.  In mid-2009, due to a depressed market environment for securities of financial institutions, Capitol suspended share-exchange activities.  Further, as a means to raise and reallocate capital, Capitol commenced an initiative in 2009 to selectively divest some of its community banks (see Note L).

Capitol and its subsidiaries are engaged in a single business activity--banking.  Capitol's bank affiliates provide a full range of banking services to individuals, businesses and other customers located in the respective communities of the bank.  Many operate from a single location and all are primarily commercially-focused (as contrasted to retail or transaction-oriented banks) on meeting the various credit and other financial needs of entrepreneurs, professionals and other businesses and individuals.  A variety of deposit products are offered, including checking, savings, money market, certificates of deposit and individual retirement accounts.  In addition, wealth-management, trust and investment services are offered through

F-62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE A—NATURE OF OPERATIONS, BASIS OF PRESENTATION AND

PRINCIPLES OF CONSOLIDATION—Continued

a wealth-management subsidiary.  The principal markets for the banks' financial services are the communities in which the banks are located and the areas immediately surrounding those communities.  The majority of Capitol's banks are state-chartered institutions, some have been chartered as federal savings banks and one has a national bank charter.

In addition to banking units, mortgage banking activities are offered through Amera Mortgage Corporation, a less than 50%-owned affiliate, which is accounted for under the equity method.  Trust and wealth-management products are offered through Capitol Wealth, Inc., a controlled subsidiary.

Each bank is viewed by management as being a separately identifiable business or segment from the perspective of monitoring performance and allocation of financial resources.  Although the banks operate and are managed and monitored separately, each bank is substantially similar in terms of business focus, type of customers, products, services and economic characteristics.  Further, each of the banks and the Corporation are subject to substantially similar laws and regulations unique to the financial institution industry.  Accordingly, the Corporation's consolidated financial statements reflect the presentation of segment information on an aggregated basis.

The consolidated financial statements include the accounts of the Corporation and its majority-owned and/or otherwise controlled subsidiaries, after elimination of intercompany accounts and transactions and after giving effect to applicable noncontrolling interests.  Banks formed or acquired are included in the consolidated financial statements for periods after joining the consolidated group.

NOTE B—SIGNIFICANT ACCOUNTING POLICIES

Reclassifications:  Certain 2010 and 2009 amounts have been reclassified to conform to the 2011 presentation, primarily related to discontinued operations (see Note L).

Estimates:  The preparation of consolidated financial statements, in conformity with generally accepted accounting principles in the United States of America, requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results will differ from those estimates because of the inherent subjectivity and inaccuracy of any estimation.

Cash and Cash Equivalents:  Cash and cash equivalents include cash on hand, amounts due from banks (interest-bearing and noninterest-bearing), money-market funds and federal funds sold.  Generally, federal funds transactions are entered into for a one-day period.

F-63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

Loans Held For Sale:  Loans held for sale represent residential real estate mortgage loans held for sale into the secondary market.  Loans held for sale are stated at the aggregate lower of cost or market.  Fees from the origination of loans held for sale are recognized in the period the loans are originated.  Government-guaranteed loans which may be sold after origination are not classified as held-for-sale inasmuch as sale of such loans is largely dependent upon the extent to which gains may be realized.

Derivatives:Residential real estate mortgage loans held for sale are originated by Capitol's banks.  When a customer has locked the interest rate on a mortgage application, and the banks have approved a loan commitment, the interest rate lock agreement is treated as a derivative, and a firm loan commitment.  The banks use forward delivery commitments to sell the mortgage loans into the secondary market.  The interest rate lock and forward delivery commitments are derivatives, and are offsetting agreements that serve as a hedge of the banks' exposure to interest rate changes and the resulting fluctuation of the commitments.  The fair value of the commitments are netted and recorded in the balance sheet with changes in fair value recorded in the statement of operations.

Investment Securities:  Investment securities available for sale are carried at fair value with unrealized gains and losses reported as a separate component of stockholders' equity, net of tax effect (accumulated other comprehensive income).  All other investment securities are classified as held for long-term investment and are carried at amortized cost which approximates fair value (see Note C).

Investments are classified at the date of purchase based on management's analysis of liquidity and other factors.  The adjusted cost of the specific securities sold is used to compute realized gains or losses.  Premiums and discounts are recognized in interest income using the interest method over the period to maturity.

Loans, Credit Risk and Allowance for Loan Losses:  Portfolio loans are carried at their principal balance based on management's intent and ability to hold such loans for the foreseeable future until maturity or repayment.  Capitol primarily presents its portfolio loan information on a segment basis that is further subdivided into classes on the basis of collateral types.

Credit risk arises from making loans and loan commitments in the ordinary course of business.  Substantially all portfolio loans are made to borrowers in the banks' communities.  Consistent with the banks' emphasis on business lending, there are concentrations of credit risk in loans secured by commercial real estate and less significant levels of concentration risk may exist in loans secured by equipment and other business assets.  The maximum potential credit risk to Capitol, without regard to underlying collateral and guarantees, is the total of loans and loan commitments outstanding.  Management reduces exposure to losses

F-64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

from credit risk by requiring collateral and/or guarantees for loans and by monitoring concentrations of credit, in addition to recording provisions for loan losses and maintaining an allowance for loan losses.

The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated losses inherent in the portfolio at the balance-sheet date.  Management's determination of the adequacy of the allowance for loan losses 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, loan commitments outstanding and other factors.  The allowance is increased by provisions for loan losses charged to operations and reduced by net charge-offs.  Delinquent loans are charged-off at 120 days past due for closed-end loans and 180 days past due for revolving lines of credit or at an earlier time if a loss-confirming event has occurred, unless the loan is both well-secured and in process of collection.  Because the allowance for loan losses is based on significant estimates, actual future loan losses will differ from such estimates.

The allowance for loan losses consists of specific and general components.  The specific component relates to loans that are individually classified as impaired, including loans which are considered to be troubled debt restructurings.  The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative environmental factors.  The Corporation maintains a loss history analysis that tracks loan losses and recoveries based on loan class as well as the loan risk grade assignment.

For all classes of loans, a loan is placed into nonaccrual status generally before the loan becomes 90 days past due if it becomes probable that the borrower cannot make all scheduled payments, full repayment of principal and interest is not expected or the loan is identified as having loss elements or when any loan becomes past due 90 days or more.  Loans are returned to accrual status when all of the principal and interest amounts contractually due have been brought current, have demonstrated timely payment performance for a period of time and future payments are reasonably assured.

For all classes of loans, a loan is 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.  All loans greater than $500,000 or $250,000 (based on aggregate relationship) are individually evaluated for impairment for banking subsidiaries with total assets of $200 million or more or less than $200 million, respectively.  If an individual loan is considered impaired, a specific allowance allocation may be recorded, generally followed by a subsequent charge-down in the amount of the impairment to reduce the loan to its net realizable value.  If an individual loan is not considered individually impaired, the loan is included in the specific or general reserve

F-65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

allocation process for like-graded credits, unless such loan has had an impairment analysis performed and no impairment amount exists (in which case no general reserve allocation is considered necessary).  Groups of smaller-balance homogeneous loans are collectively evaluated for impairment and, accordingly, these loans are not generally separately identified for impairment evaluation.

Loan modifications or restructurings are accounted for as troubled debt restructurings if, for economic or legal reasons, it has been determined that a borrower is experiencing financial difficulties and the bank grants a "concession" to the borrower that it would not otherwise consider.  For all classes of loans, a troubled debt restructuring may involve a modification of terms such as a reduction of the stated interest rate or loan balance, a reduction of accrued interest, an extension of the maturity date at an interest rate lower than a current market rate for a new loan with similar risk, or some combination thereof involving a concession to the borrower to facilitate repayment.  Loans modified and classified as troubled debt restructurings are impaired loans.  Troubled debt restructurings generally remain classified as impaired until the borrower has demonstrated timely payment performance for a period of time pursuant to the modified terms of the loan, and the loans are renewed at an interest rate that is at a market rate for loans with similar risk characteristics.

Capitol's banks have stand-by letters of credit outstanding that, when issued, commit the banks to make payments on behalf of customers if certain specified future events occur, generally being nonpayment by the customer to a counterparty.  These obligations generally expire within one year and require collateral and/or personal guarantees by the borrower and its principals based on management's assessment of loss exposure.  The maximum credit risk associated with these instruments equals their contractual amounts, assuming that the borrower defaults and related collateral proves to be worthless.  The total contractual amounts do not necessarily represent future cash requirements since many of those guarantees expire without being drawn upon.

Credit risk also arises from amounts of funds on deposit at other financial institutions (i.e., due from banks) to the extent balances exceed the limits of deposit insurance.  Capitol periodically monitors the financial position of such financial institutions to evaluate credit risk.

Interest and Fees on Loans:  Interest income on loans is recognized based upon the principal balance of loans outstanding.  Loan origination fees and direct loan origination costs are deferred and amortized over the life of the related loans as an adjustment of yield.  Direct costs of successful origination of portfolio loans generally exceed fees from loan originations (net deferred costs approximated $1.8 million and $4.7 million at December 31, 2011 and 2010, respectively).

F-66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

For all classes of loans, the accrual of interest is generally discontinued when a loan becomes 90 days past due as to interest (i.e., placed on nonaccrual status).  When interest accruals are discontinued, interest previously accrued (but unpaid) is reversed against interest income.  Interest payments subsequently received on such loans may be accounted for on a cash basis as to interest income, provided that collectability of principal is expected and until the loan qualifies for being returned to accrual status.  If collectability of principal is not expected, subsequent payments of interest are applied to principal.  Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest and the loan is in the process of collection.

Transfers of Financial Assets:  Transfers of financial assets are accounted for as sales when control over the transferred asset has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the bank and are presumptively beyond the reach of the bank and its creditors (even in bankruptcy or other receivership), (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the bank does not maintain effective control over the transferred asset through an agreement to repurchase it before maturity or the ability to unilaterally cause the holder to return specific assets.  Transfers of financial assets are generally limited to participating interests in commercial loans sold as well as sale of government-guaranteed loans and the sale of residential mortgage loans into the secondary market, the extent of which is disclosed in the consolidated statements of cash flows.

Premises and Equipment:  Premises and equipment are stated on the basis of cost.  Depreciation, which relates primarily to equipment, furniture and software with estimated useful lives of approximately three to seven years, is computed principally by the straight-line method.  Buildings are generally depreciated on a straight-line basis with estimated useful lives of approximately 40 years.  Leasehold improvements are generally depreciated over the shorter of the respective lease term or estimated useful life.

Other Real Estate:  Other real estate is comprised of properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure.  At the time of foreclosure, the carrying value of such properties is adjusted to estimated fair value (less estimated costs to sell) when transferred from portfolio loans to other real estate owned, establishing a new cost-basis.  These properties held for sale are subsequently carried at the lower of the new cost-basis or estimated fair value (less estimated costs to sell) and are periodically reviewed for subsequent impairment.

Fair Values of Financial Instruments:  Fair values of financial instruments are estimated using market information and other assumptions and involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, assumptions and other

F-67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

factors, especially in the absence of broad markets for particular items.  Changes in assumptions or market conditions could significantly affect such estimates.

Share-Based Compensation:  Stock options state a specific exercise price and expiration date and may be exercised by the optionee upon payment of the exercise price and related taxes due from the optionee; the Corporation, in its discretion, may permit cashless exercises of stock options.  Generally, previously unissued shares of common stock are issued upon exercise of stock options.  Compensation expense for stock option awards is recognized ratably over the vesting period of the award based on the fair value of the option, computed using a Black-Scholes valuation model.  Compensation expense for awards of restricted common stock is recognized ratably over the vesting periods of such awards (generally ranging from four to fifteen years), based on the fair value of the common stock on the date of grant.  Stock price volatility used in a Black-Scholes valuation model for stock options is based on historical volatility.  The risk-free interest rate is based on the yield of U.S. government securities with a maturity date consistent with the expected option life.  The expected option life is estimated based on past exercise behavior of optionees and the related option term.

Trust Assets and Related Income:  Customer property, other than funds on deposit, held in a fiduciary or agency capacity by Capitol's banks is not included in the consolidated balance sheet because it is not an asset of the banks or Capitol.  Trust and wealth-management revenue are recorded on the accrual method.

Federal Income Taxes:  Capitol and its subsidiaries which are owned 80% or more by Capitol file a consolidated federal income tax return.  Deferred federal income taxes are recognized for the tax consequences of temporary differences by applying enacted tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.  When it is determined that realization of deferred tax assets may be in doubt, a valuation allowance is recorded to reduce those assets to the amount which is more-likely-than-not realizable.  The effect on income taxes of a change in tax laws or rates is recognized in operations in the period that includes the enactment date.

Net Loss Per Share Attributable to Capitol:  Basic net loss per share attributable to Capitol is computed by dividing net loss attributable to Capitol by the weighted-average number of common shares outstanding, exclusive of unvested restricted shares outstanding.  Diluted net loss per share attributable to Capitol is based on the weighted-average number of common shares outstanding, plus common share equivalents calculated for stock options, warrants and restricted common stock outstanding using the treasury stock method.  Common stock equivalents are excluded from per-share computations to the extent they are antidilutive.

F-68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

Comprehensive Loss:  Comprehensive loss is the sum of net loss and certain items which are charged or credited to stockholders' equity which, for Capitol, is the net change in the fair value adjustment for investment securities available for sale.  Accordingly, the elements and total of comprehensive loss are shown within the statement of changes in stockholders' equity.

New Accounting Standards:  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 became effective beginning January 1, 2011.  These new disclosures did not have a material effect on the Corporation's consolidated financial statements upon implementation.

In July 2010, an accounting standards update was issued which requires 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 are required by class 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, are also 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 under this new guidance, which are required as of the end of a reporting period, were first implemented in 2010 and are set forth in Note D.  The disclosure about activities that occur during a reporting period became effective January 1, 2011 and the disclosures about troubled debt restructurings became effective in the third quarter of 2011.  The adoption of the new guidance did not have an effect on the Corporation's consolidated financial statements upon implementation except for expanded disclosures therein as set forth in Note D.

F-69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

In April 2011, an accounting standards update was issued clarifying what constitutes a troubled debt restructuring.  When performing the evaluation of whether a loan modification or restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the debtor is experiencing financial difficulties as defined by the guidance, and (2) the modification constitutes a concession.  This guidance also clarifies that a creditor is precluded from using the borrower's effective interest rate test when performing this evaluation.  For identification and disclosure purposes, this new guidance became effective beginning in the third quarter of 2011 and was applied retrospectively to modifications occurring on or after January 1, 2011.  As a result of implementing this new guidance in the third quarter of 2011, the Corporation reassessed all loan modifications or restructurings that occurred on or after January 1, 2011 to determine whether those loans are now considered troubled debt restructurings.  The implementation of this new guidance did not have a material effect on the Corporation's consolidated financial statements upon implementation except for expanded disclosures therein as set forth in Note D.

In April 2011, an accounting standards update was issued to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets on substantially the agreed upon terms.  This standard eliminates consideration of the transferor's ability to fulfill its contractual rights and obligations from the criteria, as well as related implementation guidance (i.e., that it possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets), in determining effective control, even in the event of default by the transferee.  Other criteria applicable to the assessment of effective control are not changed by this new guidance.  This new guidance will become effective January 1, 2012 and management does not expect it to have a material effect on the Corporation's consolidated financial statements upon implementation.

In May 2011, an accounting standards update was issued to amend the fair value measurement and disclosure requirements to explain how to measure fair value in certain instances, but it does not require additional fair value measurements.  Some of the amendments include clarification regarding the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity's stockholders' equity, measuring the fair value of financial instruments that are managed within a portfolio, application of premiums and discounts in a fair value measurement and expanded disclosure requirements to include quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy, as well as qualitative discussion about the sensitivity of recurring Level 3 fair value measurements.  This new guidance is effective prospectively beginning January 1, 2012 and management does not expect it will have a material effect on the Corporation's consolidated financial statements upon implementation.

F-70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE B—SIGNIFICANT ACCOUNTING POLICIES—Continued

In June 2011, an accounting standards update was issued to amend the options available for the presentation of other comprehensive income.  An entity will have the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  An entity will no longer be able to present the components of comprehensive income as part of the statement of stockholders' equity.  Regardless of which presentation method an entity chooses, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s), where the components of net income and the components of other comprehensive income are presented.  This new guidance is effective retrospectively for all annual and interim periods presented beginning January 1, 2012 and management does not expect it will have a material effect on the Corporation's consolidated financial statements upon implementation.  In October 2011, the FASB decided to defer the presentation of reclassification adjustments until further consideration.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies.  Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Corporation's consolidated financial statements.

[The remainder of this page intentionally left blank]

F-71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE C—INVESTMENT SECURITIES

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

Investment securities consisted of the following at December 31 (in $1,000s):

	2011				2010(1)
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available for sale securities:
United States treasury	$	4,004	$	4,013	$	503	$	506
United States government agencies		9,805		9,819		12,664		12,681
Mortgage-backed		10,894		10,972		1,808		1,924
Municipalities		275		278		371		378
		24,978		25,082		15,346		15,489
Held for long-term investment:
CDBL III		973		973		463		463
Corporate		1,764		1,764		2,430		2,430
		2,737		2,737		2,893		2,893
	$	27,715	$	27,819	$	18,239	$	18,382

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

At December 31, 2011, securities with a fair value approximating $1.0 million were pledged to secure public and trust deposits and securities with a fair value approximating $2.9 million were pledged for other purposes as required by law.  As discussed in Note I, investment securities with a fair value approximating $6.7 million were also pledged against short-term borrowings.

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

F-72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE C—INVESTMENT SECURITIES—Continued

Gross unrealized gains and losses on investment securities available for sale were as follows at December 31 (in $1,000s):

	2011				2010(1)
	Gains		Losses		Gains		Losses
United States treasury	$	9			$	3
United States government agencies		16	$	2		18	$	1
Mortgage-backed		93		16		116
Municipalities		4				7
	$	122	$	18	$	144	$	1

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

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

	2011				2010
	Unrealized Loss		Carrying Value		Unrealized Loss		Carrying Value
One year or less:
United States government agencies	$	2	$	3,247	$	1	$	4,797
Mortgage-backed		16		6,680
	$	18	$	9,927	$	1	$	4,797

Management does not believe any individual unrealized loss as of December 31, 2011 represents an other-than-temporary loss (primarily due to such amounts being attributable to changes in interest rates).  Further, it does not intend to sell such securities and believes it is unlikely a sale would become required before the amortized cost can be recovered.

[The remainder of this page intentionally left blank]

F-73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE C—INVESTMENT SECURITIES—Continued

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

Scheduled maturities of investment securities held as of December 31, 2011 were as follows (in $1,000s):

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	9,230	$	9,253
After one year, through five years		4,876		4,882
After five years, through ten years		338		359
After ten years		10,534		10,588
Securities held for long-term investment, without stated maturities		2,737		2,737
	$	27,715	$	27,819

NOTE D—LOANS

Portfolio loans consisted of the following at December 31 (in $1,000s):

	2011			2010(1)
Loans secured by real estate:
Commercial	$	973,045		$	1,164,488
Residential (including multi-family)		363,802			437,411
Construction, land development and other land		117,736			178,214
Total loans secured by real estate		1,454,583			1,780,113
Commercial and other business-purpose loans		192,851			280,352
Consumer		13,813			18,500
Other		2,962			5,211
Total portfolio loans		1,664,209			2,084,176
Less allowance for loan losses		(92,529	)		(130,062	)
Net portfolio loans	$	1,571,680		$	1,954,114

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

Loans serviced for the benefit of others, which are not recorded on the consolidated balance sheet, approximated $75.5 million and $105 million at December 31, 2011 and 2010, respectively.  Loan servicing assets are not material.

F-74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

The following tables present the allowance for loan losses and the carrying amount of loans based on management's overall assessment of probable incurred losses, and should not be interpreted as an indication of future charge-offs:

	December 31, 2011
	Secured by Real Estate
	Commercial		Residential (including multi- family)		Construction, Land Development and Other Land		Commercial and Other Business- Purpose Loans		Consumer		Other		Total
Allowance for loan losses:
Individually evaluated
for impairment	$	11,141	$	4,305	$	3,434	$	3,740	$	29			$	22,649
Collectively evaluated
for probable incurred
losses		30,806		17,804		8,770		11,714		758	$	28		69,880
Total allowance for
loan losses	$	41,947	$	22,109	$	12,204	$	15,454	$	787	$	28	$	92,529
Portfolio loans:
Individually evaluated
for impairment	$	173,165	$	59,371	$	40,013	$	23,796	$	63			$	296,408
Collectively evaluated
for probable incurred
losses		799,880		304,431		77,723		169,055		13,750	$	2,962		1,367,801
Total portfolio loans	$	973,045	$	363,802	$	117,736	$	192,851	$	13,813	$	2,962	$	1,664,209

	December 31, 2010(1)
	Secured by Real Estate
	Commercial		Residential (including multi- family)		Construction, Land Development and Other Land		Commercial and Other Business- Purpose Loans		Consumer		Other		Total
Allowance for loan losses:
Individually evaluated
for impairment	$	9,800	$	5,568	$	6,415	$	6,055					$	27,838
Collectively evaluated
for probable incurred
losses		40,217		30,154		12,452		18,605	$	709	$	87		102,224
Total allowance for
loan losses	$	50,017	$	35,722	$	18,867	$	24,660	$	709	$	87	$	130,062
Portfolio loans:
Individually evaluated
for impairment	$	171,362	$	54,442	$	52,734	$	25,558	$	22			$	304,118
Collectively evaluated
for probable incurred
losses		993,126		382,969		125,480		254,794		18,478	$	5,211		1,780,058
Total portfolio loans	$	1,164,488	$	437,411	$	178,214	$	280,352	$	18,500	$	5,211	$	2,084,176

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

F-75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

Activity within the allowance for loan losses is summarized below (in $1,000s):

	2011			2010(1)			2009(1)
Balance at beginning of year	$	130,062		$	114,557		$	69,065
Allowance for loan losses of acquired bank affiliate		2,380
Provision for loan losses charged to operations		41,362			148,275			158,589
Net charge-offs:
Loans charged-off (deduction)		(97,658	)		(147,383	)		(115,694	)
Recoveries		16,383			14,613			2,597
Net charge-offs		(81,275	)		(132,770	)		(113,097	)
Balance at end of year	$	92,529		$	130,062		$	114,557

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

	Year Ended December 31, 2011
	Secured by Real Estate
	Commercial			Residential (including multi- family)			Construction, Land Development and Other Land			Commercial and Other Business- Purpose Loans			Consumer			Other			Total
Beginning balance	$	50,017		$	35,722		$	18,867		$	24,660		$	709		$	87		$	130,062
Acquired loan loss reserve		1,043			117			651			500			68			1			2,380
Charge-offs		(34,558	)		(20,486	)		(22,774	)		(18,805	)		(1,033	)		(2	)		(97,658	)
Recoveries		5,033			2,898			4,462			3,746			238			6			16,383
Net charge-offs		(29,525	)		(17,588	)		(18,312	)		(15,059	)		(795	)		4			(81,275	)
Provision for loan
losses		20,412			3,858			10,998			5,353			805			(64	)		41,362
Ending balance	$	41,947		$	22,109		$	12,204		$	15,454		$	787		$	28		$	92,529

[The remainder of this page intentionally left blank]

F-76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) at December 31 are summarized as follows (in $1,000s):

	2011		2010(1)
Nonaccrual loans:
Loans secured by real estate:
Commercial	$	122,481	$	147,852
Residential (including multi-family)		47,728		57,899
Construction, land development and other land		31,297		51,621
Total loans secured by real estate		201,506		257,372
Commercial and other business-purpose loans		18,002		28,926
Consumer		124		132
Total nonaccrual loans		219,632		286,430
Past due (>90 days) loans and accruing interest:
Loans secured by real estate:
Commercial		3,778		2,875
Residential (including multi-family)		259		1,484
Construction, land development and other land		--		2,380
Total loans secured by real estate		4,037		6,739
Commercial and other business-purpose loans		148		2,073
Consumer		38		38
Total past due loans		4,223		8,850
Total nonperforming loans	$	223,855	$	295,280

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

If nonperforming loans had performed in accordance with their contractual terms during the year, estimated additional interest income of $17.8 million, $17.6 million and $16.8 million would have been recorded in 2011, 2010 and 2009, respectively.  Estimated interest income recognized on loans in nonaccrual status in 2011, 2010 and 2009 operations approximated $720,000, $407,000 and $1.0 million, respectively.

Impaired loans, which do not have an allowance requirement, include collateral-dependent loans for which direct write-downs have been made and, accordingly, no allowance requirement or allocation is necessary.  During 2011, 2010 and 2009, the average recorded investment in impaired loans approximated $331.5 million, $335.8 million and $223.0 million, respectively.  Interest income is recorded on impaired loans if not on nonaccrual status, or may be recorded on a cash basis in some circumstances, if such payments are not credited to principal.  In 2011, 2010 and 2009, interest income recorded on impaired loans approximated $13.8 million, $4.2 million and $1.0 million, respectively.

F-77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

Impaired loans are summarized in the following tables (in $1,000s), based on loans which either have an allowance for loan losses recorded or no such allowance as of December 31, 2011 and 2010:

	December 31, 2011
	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	72,164	$	83,433	$	11,533
Residential (including multi-family)		33,649		38,238		5,744
Construction, land development and other land		16,980		22,940		3,764
Total loans secured by real estate		122,793		144,611		21,041
Commercial and other business-purpose loans		16,120		17,506		4,728
Consumer		166		173		95
		139,079		162,290		25,864
With no related allowance recorded:
Loans secured by real estate:
Commercial		107,709		148,926
Residential (including multi-family)		35,695		48,220
Construction, land development and other land		26,064		42,309
Total loans secured by real estate		169,468		239,455
Commercial and other business-purpose loans		11,828		17,146
Consumer		12		48
		181,308		256,649
Total	$	320,387	$	418,939	$	25,864

[The remainder of this page intentionally left blank]

F-78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

	December 31, 2010(1)
	Carrying Value		Unpaid Principal Balance		Related Allowance for Loan Losses
With an allowance recorded:
Loans secured by real estate:
Commercial	$	78,873	$	128,277	$	12,560
Residential (including multi-family)		38,671		46,250		10,881
Construction, land development and other land		22,997		46,770		8,032
Total loans secured by real estate		140,541		221,297		31,473
Commercial and other business-purpose loans		20,836		33,499		8,948
Consumer		155		181		96
		161,532		254,977		40,517
With no related allowance recorded:
Loans secured by real estate:
Commercial		103,355		167,864
Residential (including multi-family)		29,274		48,992
Construction, land development and other land		32,669		52,713
Total loans secured by real estate		165,298		269,569
Commercial and other business-purpose loans		13,343		22,333
Consumer		18		42
		178,659		291,944
Total	$	340,191	$	546,921	$	40,517

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

Included in total impaired loans as of December 31, 2011 and 2010 is $217.5 million and $112.7 million, respectively, of loans modified as troubled debt restructurings (see further discussion under troubled debt restructurings section of this Note).

For the year ended December 31, 2011, the average recorded investment in impaired loans and interest income recorded on impaired loans were as follows (in $1,000s):

	Average		Interest
	Recorded		Income
	Investment		Recorded
Commercial	$	184,413	$	7,616
Residential (including multi-family)		66,124		3,355
Construction, land development and other land		49,987		1,393
Total loans secured by real estate		300,524		12,364
Commercial and other business-purpose loans		30,618		1,375
Consumer		314		21
Other		1
Total	$	331,457	$	13,760

F-79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

The following tables summarize the aging and amounts of past due loans as of December 31, 2011 and 2010 (in $1,000s):

	December 31, 2011
	Past Due Loans						Total
	(based on payment due dates)						Amount of
					Loans on		Loans More		Loans Either
	More Than				Nonaccrual		Than 29 Days		Current or
	29 Days,		More Than		Status		Past Due or on		Less Than		Total
	and Less Than		89 Days		(Generally, 90		Nonaccrual		30 Days		Portfolio
	90 Days		(Accruing)		Days or More)		Status		Past Due		Loans
Loans secured by real estate:
Commercial	$	18,127	$	3,778	$	122,481	$	144,386	$	828,659	$	973,045
Residential (including multi-
family)		5,376		259		47,728		53,363		310,439		363,802
Construction, land development
and other land		4,634				31,297		35,931		81,805		117,736
Total loans secured by real    estate		28,137		4,037		201,506		233,680		1,220,903		1,454,583
Commercial and other business-
purpose loans		3,958		148		18,002		22,108		170,743		192,851
Consumer		479		38		124		641		13,172		13,813
Other										2,962		2,962
Total	$	32,574	$	4,223	$	219,632	$	256,429	$	1,407,780	$	1,664,209

	December 31, 2010(1)
	Past Due Loans						Total
	(based on payment due dates)						Amount of
					Loans on		Loans More		Loans Either
	More Than				Nonaccrual		Than 29 Days		Current or
	29 Days,		More Than		Status		Past Due or on		Less Than		Total
	and Less Than		89 Days		(Generally, 90		Nonaccrual		30 Days		Portfolio
	90 Days		(Accruing)		Days or More)		Status		Past Due		Loans
Loans secured by real estate:
Commercial	$	26,929	$	2,875	$	147,852	$	177,656	$	986,832	$	1,164,488
Residential (including multi-
family)		12,381		1,484		57,899		71,764		365,647		437,411
Construction, land development
and other land		6,046		2,380		51,620		60,046		118,168		178,214
Total loans secured by real    estate		45,356		6,739		257,371		309,466		1,470,647		1,780,113
Commercial and other business-
purpose loans		8,288		2,073		28,926		39,287		241,065		280,352
Consumer		548		38		132		718		17,782		18,500
Other										5,211		5,211
Total	$	54,192	$	8,850	$	286,429	$	349,471	$	1,734,705	$	2,084,176

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

F-80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

Capitol categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt obligations based on:  current financial information, aging analysis, historical payment experience, credit documentation and public information, among other factors.  Capitol analyzes loans individually by dollar value and by classifying the loans as to credit risk.  This analysis generally includes all loans and is generally performed at least quarterly.  Capitol uses the following definitions for its loan risk ratings:

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

Watch.  Loans classified as watch have a potential weakness that deserves management's close attention.  If not improved, those potential weaknesses may result in deterioration of the repayment prospects for the loan in the future.

Substandard.  Loans classified as substandard are inadequately protected by the borrower's current net worth, paying capacity of the borrower or the fair value of collateral.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt obligation by the borrower.  These are characterized by the reasonable possibility that some loss will be sustained if the deficiencies are not favorably resolved.

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

	December 31, 2011
	Pass						Total Portfolio Loans
			Watch		Substandard
Loans secured by real estate:
Commercial	$	662,963	$	94,151	$	215,931	$	973,045
Residential (including multi-family		250,750		32,631		80,421		363,802
Construction, land development
and other land		59,249		12,592		45,895		117,736
Total loans secured by real estate		972,962		139,374		342,247		1,454,583
Commercial and other business-
purpose loans		145,498		14,641		32,712		192,851
Consumer		12,715		578		520		13,813
Other		2,668		294				2,962
Total	$	1,133,843	$	154,887	$	375,479	$	1,664,209

F-81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

	December 31, 2010(1)
	Pass						Total Portfolio Loans
			Watch		Substandard
Loans secured by real estate:
Commercial	$	805,100	$	109,065	$	250,323	$	1,164,488
Residential (including multi-family		309,289		34,334		93,788		437,411
Construction, land development
and other land		86,612		22,595		69,007		178,214
Total loans secured by real estate		1,201,001		165,994		413,118		1,780,113
Commercial and other business-
purpose loans		200,570		22,166		57,616		280,352
Consumer		17,134		967		399		18,500
Other		4,871		340				5,211
Total	$	1,423,576	$	189,467	$	471,133	$	2,084,176

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

Troubled Debt Restructurings

Capitol has designated a troubled debt restructuring as a loan that has been modified because the borrower is experiencing financial difficulty and the loan meets one or more of the following criteria:

1.   An extension or renewal of a substandard rated loan with no change in rate or terms, and the terms provided are not representative of current market rates for credits with similar risk characteristics;

2.   A loan modification where the repayment terms are modified for a specific period of time in order to allow the borrower to liquidate or dispose of the related collateral to provide the ability to pay the loan off in full;

3.   Modification of the interest rate for a defined period of time in order to allow the borrower to repay the debt, based on current cash flow sources;

4.   A loan modified to an "interest only" structure for a period of time that will result in the loan being paid off, returned to the contracted terms or refinanced; or

5.   A modification of a loan into an A/B note structure, where the A note is at market rate terms and conditions, and the B note has been charged off.

F-82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

Loans modified and classified as troubled debt restructurings are impaired loans.  Each loan that is designated as a troubled debt restructuring is individually evaluated for impairment to determine the specific reserve to be established.  The specific reserve is determined using the discounted cash flow method, the collateral dependency method or, when available, the observable market price method, and is calculated as the difference between the carrying value of the loan and the result of the impairment measurement method.

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

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

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

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

F-83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

The following table summarizes loans modified as troubled debt restructurings during the year ended December 31, 2011 (in $1,000s):

	Number of Contracts		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Loan Loss Reserve
Troubled debt restructurings:
Loans secured by real estate:
Commercial		207	$	103,032	$	76,572	$	4,654
Residential		209		39,060		34,183		2,686
Construction, land development
and other		54		15,148		11,809		1,052
Total loans secured by
real estate		470		157,240		122,564		8,392
Commercial and other business-
purpose loans		125		17,367		12,548		2,414
Consumer		6		325		54		12
Total		601	$	174,932	$	135,166	$	10,818

Of the amounts in the table above, approximately $74 million, or 55%, and 283 contracts, or 47%, are substandard rated loans that were extended or renewed with no change in rate or terms, and the terms provided were not representative of current market rates for loans with similar risk characteristics.  The remainder of the troubled debt restructuring pool constitutes loans where repayment terms and/or interest rates were modified, or the loan was modified to an "interest only" structure.

A payment default is determined when a loan is 90 days or more past due.  The following table summarizes loans modified as troubled debt restructurings in the last twelve months for which there was a payment default during the year ended December 31, 2011 (in $1,000s):

	Number of Contracts		Recorded Investment
Troubled debt restructurings that
subsequently defaulted:
Loans secured by real estate:
Commercial		62	$	25,946
Residential		60		8,857
Construction, land development
and other		25		5,806
Total loans secured by
real estate		147		40,609
Commercial and other business-
purpose loans		20		3,558
Total		167	$	44,167

F-84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE D—LOANS—Continued

Troubled debt restructurings which have a payment default are subject to a similar credit risk evaluation as other loans that are in default.  Generally, loans that are in payment default are moved to collateral dependency as the source of repayment, and the determination of the specific reserve for these loans is based on the net value of the collateral held.

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

	Troubled Debt Restructurings at December 31, 2011
	On Non-Accrual Status		On Accrual Status		Total
Loans secured by real estate:
Commercial	$	65,814	$	57,392	$	123,206
Residential (including multi-family)		27,105		21,616		48,721
Construction, land development and
other land		15,475		11,748		27,223
Total loans secured by real estate		108,394		90,756		199,150
Commercial and other business-purpose
loans		8,336		9,945		18,281
Consumer				54		54
Total	$	116,730	$	100,755	$	217,485

NOTE E—RELATED PARTY TRANSACTIONS

In the ordinary course of business, Capitol's banking subsidiaries make loans to officers and directors of the Corporation and its subsidiaries, including their immediate families and companies in which they are principal owners.  At December 31, 2011 and 2010, total loans outstanding to these persons were $44.2 million and $56.1 million, respectively.  During 2011, $16.1 million of new loans were made to these persons, and repayments and other reductions (including bank divestitures) totaled $28.0 million.  Such loans were made at the banking subsidiaries' normal credit terms.

Officers and directors of Capitol (and their associates, family and/or affiliates) are also depositors of the banking subsidiaries.  Such deposits, which approximated $28.5 million and $27.6 million at December 31, 2011 and 2010, respectively, are accepted based upon the banks' normal terms as to interest rate, term and deposit insurance.

During 2009, certain subsidiaries ceased to be controlled by Capitol and, accordingly, were deconsolidated (see Note T) although such subsidiaries continue to be related parties of Capitol.

F-85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE F—PREMISES AND EQUIPMENT

Major classes of premises and equipment consisted of the following at December 31 (in $1,000s):

	2011			2010(1)
Land, buildings and improvements	$	19,544		$	19,546
Leasehold improvements		16,819			17,016
Equipment, furniture and software		37,631			38,396
		73,994			74,958
Less accumulated depreciation		(46,574	)		(43,243	)
	$	27,420		$	31,715

(1)    For comparative purposes, original balances as previously reported have been adjusted to exclude

amounts related to discontinued operations.

Capitol and certain subsidiaries rent office space and equipment under operating leases.  Rent expense (net of sublease income) under these lease agreements approximated $5.9 million, $7.6 million and $7.4 million in 2011, 2010 and 2009, respectively (including rent expense approximating $2.2 million, $1.8 million and $1.7 million in 2011, 2010 and 2009, under leases with related parties).

At December 31, 2011, future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year were as follows (in $1,000s):

2012	$	7,138
2013		6,252
2014		5,886
2015		5,095
2016		3,968
2017 and thereafter		8,727
	$	37,066

NOTE G—GOODWILL

Capitol's review for potential goodwill impairment has been performed annually as of November 30th by comparing estimated entity fair value to its net assets.  This review was performed at the applicable subsidiary reporting-unit level which has recorded goodwill resulting from specific share-exchange transactions or acquisitions and on a consolidated basis.  An interim review for potential goodwill impairment becomes necessary when events or changes in circumstances indicate potential for impairment between annual review dates.

Capitol's annual review for potential goodwill impairment in 2010 concluded that all of its recorded goodwill (approximately $64.5 million, including $4.8 million from discontinued operations) was deemed to be impaired.  Accordingly, such amount was written-off as of December 31, 2010.

F-86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE G—GOODWILL—Continued

Management's decision to write-off all goodwill as being impaired at that date was based, in part, upon the following macro-basis considerations:

·   A dramatic decline in Capitol's aggregate market-capitalization, i.e., the computational result of multiplying the number of Capitol's common shares outstanding by the per-share market price of such common stock (estimated fair value).

·   Capitol's tangible-equity deficit (total equity, less goodwill, prior to recording any goodwill impairment for 2010).

·   Pricing information from merger and acquisition transactions within the banking industry in the United States of America during 2010, as a multiple of tangible equity, and application of such multiple to Capitol's tangible-equity deficit prior to recording any goodwill impairment for 2010.

Management also evaluated whether events or circumstances earlier in 2010 suggested an interim review for impairment might be necessary.  An interim review for potential impairment was not considered necessary due to the absence of events or changes in Capitol's and its subsidiary reporting units' circumstances (since the preceding annual review in late 2009).  Such conclusion was confirmed by the macro-basis considerations discussed in the preceding paragraph, in addition to reporting unit-level (subsidiaries) analyses, which did not arise until the fourth quarter of 2010.

In 2009, however, events or changes in circumstances warranted an interim review for potential impairment of goodwill, which concluded that an interim write-down of goodwill of $1.5 million was appropriate.  The total amount of goodwill impairment recorded for the year ended December 31, 2009 approximated $3.4 million.

Amounts recorded as goodwill impairment are reflected within noninterest expense as a non-cash charge to operations, when determined.

NOTE H—DEPOSITS

The aggregate amount of time deposits of $100,000 or more approximated $635 million and $765 million as of December 31, 2011 and 2010, respectively.

At December 31, 2011, scheduled maturities of time deposits were as follows (in $1,000s):

2012	$	823,037
2013		197,989
2014		51,356
2015		31,712
2016		22,772
2017 and thereafter		732
	$	1,127,598

F-87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE I—NOTES PAYABLE AND SHORT-TERM BORROWINGS

Notes payable and short-term borrowings consisted of the following at December 31 (in $1,000s):

	2011		2010(1)
FHLB borrowings	$	46,955	$	98,221
Promissory notes		12,490		8,431
Repurchase agreements		733		1,137
	$	60,178	$	107,789

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

related to discontinued operations.

FHLB borrowings represent advances secured by certain portfolio loans and other eligible collateral.  Such advances become due at varying dates and bear interest at market short-term rates (approximately 1.58% at December 31, 2011).  At December 31, 2011, unused lines of credit under these facilities approximated $123.9 million.  Assets pledged to secure these credit facilities consisted of portfolio loans in the amount of $328.6 million and investment securities with a market value of $4.6 million at December 31, 2011.  Continued availability of the FHLB credit facilities is subject to the FHLB's review of the banks' credit worthiness.  Assets pledged to secure the repurchase agreements consisted of investment securities with a fair market value of $2.1 million at December 31, 2011.

During 2008, Capitol completed a private offering of 9% promissory notes.  The promissory notes were purchased by accredited investors, including certain related parties of Capitol.  The promissory notes mature in 2013.  Interest is payable quarterly and the promissory notes became callable in 2010.  In 2010, Capitol extinguished approximately $4.6 million in promissory notes in exchange for 1,374,000 shares of common stock resulting in a gain of $1.3 million.  At December 31, 2011 and 2010, the balance of these promissory notes was approximately $8.4 million.

In October 2011, Capitol terminated an aircraft lease and issued a promissory note for the remaining balance of that lease.  Interest is payable monthly at an annual rate of 10% and the note matures in 2016.  At December 31, 2011, the balance of this promissory note was approximately $4.1 million.

At December 31, 2011, scheduled debt maturities of notes payable and short-term borrowings were as follows (in $1,000s):

2012	$	41,321
2013		11,194
2014		890
2015		927
2016		846
2017 and thereafter		5,000
	$	60,178

F-88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE J—SUBORDINATED DEBENTURES

Subordinated debt relates to trust-preferred securities issued by Capitol which are summarized as follows at December 31 (in $1,000s):

			Aggregate
	Current	Scheduled	Liquidation		Net Carrying Amount
	Interest Rate	Maturity	Amount		2011		2010
Capitol Trust I	8.50% fixed	2027	$	13,494	$	13,186	$	24,687
Capitol Trust II	10.25% fixed	2031		10,000		9,803		9,793
Capitol Statutory Trust III	4.01% variable	2031		15,000		14,706		14,691
Capitol Trust IV	4.05% variable	2032		3,000		2,931		2,928
Capitol Trust VI	3.70% variable	2033		10,000		9,787		9,777
Capitol Trust VII	7.78% fixed	2033		10,000		9,891		9,886
Capitol Statutory Trust VIII	3.51% variable	2033		20,000		19,715		19,702
Capitol Trust IX	7.69% fixed	2034		10,000		9,952		9,950
Capitol Trust X	6.55% fixed	2037		33,000		33,000		33,000
Capitol Trust XI	2.20% variable	2037		20,000		20,000		20,000
Capitol Trust XII	10.50% fixed	2038		6,802		6,185		13,172
			$	151,296	$	149,156	$	167,586

Securities of Capitol Trust I and XII were issued in public offerings in 1997 and 2008, respectively.  All other Capitol Trust securities were formed in conjunction with private placements of trust-preferred securities.  Each of these securities has similar terms and, subject to certain provisions, may be called by Capitol five years after issuance.  The liquidation amount of these securities is guaranteed by Capitol.

On January 31, 2011, Capitol accepted for exchange 1,180,602 of the 2,530,000 outstanding shares of trust-preferred securities of Capitol Trust I and 773,934 of the 1,454,100 outstanding shares of trust-preferred securities of Capitol Trust XII and, pursuant to the related exchange offer, issued approximately 19.5 million previously-unissued shares of Capitol's common stock.  This exchange resulted in the retirement of approximately $19.5 million aggregate liquidation amount of the trust-preferred securities on a combined basis and eliminated approximately $3.4 million of accrued interest payable associated with the retired securities, which collectively increased Capitol's equity and regulatory capital by $21.9 million, including a gain on the transaction of approximately $16.9 million.

Interest paid to the trusts by Capitol (which is recorded as interest expense in its consolidated financial statements) is distributed by the trusts to the holders of the trust-preferred securities.  Under certain conditions, Capitol may defer payment of interest on the subordinated debentures for periods of up to five years and, in 2009, Capitol elected to defer such interest payments.  During deferral periods, Capitol is prohibited from paying dividends on its common stock (subject to certain exceptions) and continues to accrue interest payable on such securities.  As of December 31, 2011 and 2010, accrued interest on such securities approximated $27.6 million and $20.8 million, respectively.  Holders of the trust-preferred

F-89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE J—SUBORDINATED DEBENTURES—Continued

securities will recognize current taxable income relating to the deferred interest payments.  Pursuant to a regulatory agreement, Capitol is currently prohibited from payment of interest on its trust-preferred securities without prior approval (see Note R).

Upon termination of a deferral-period, all prior accrued and unpaid interest becomes immediately due and payable to holders of the securities at that time.

Documents governing the trusts give holders of the securities preference on liquidation over the holders of Capitol's common stock.  Under current regulatory guidelines, none of Capitol's trust-preferred securities are included as qualifying regulatory capital as of December 31, 2011 and 2010.  When the trust-preferred securities were issued, and at December 31, 2009, they were treated as qualifying regulatory capital.

NOTE K—STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

In March 2011, Capitol's articles of incorporation were amended to increase its number of authorized shares from 70 million to 1.52 billion, of which 1.5 billion shares are classified as common stock and 20 million are classified as preferred stock.  Such amendment was approved at a special meeting of holders of the Corporation's common stock.  At that special meeting, a future reverse stock split at a later date was authorized, subject to the discretion of Capitol's board of directors as to the provisions of such reverse stock split, if any.

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 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 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%.

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.

Warrants for the purchase of 75,719 shares of Capitol's common stock, which were issued in 2009, were outstanding at December 31, 2011 and expire May 31, 2012.  The exercise price is $20.37 per warrant.

F-90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE K—STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

Continued

Shares of restricted common stock of the Corporation have been granted to certain officers.  Compensation expense related to such restricted stock approximated $323,000 in 2011, $655,000 in 2010 and $495,000 in 2009.  There were no tax benefits associated with such compensation expense in 2011, 2010 and 2009.  Future compensation expense related to unvested restricted common stock grants as of December 31, 2011 approximates $174,000 (based on grants through December 31, 2011), to be recorded ratably over a period of approximately 4.0 years, based on the weighted-average remaining vesting period at that date.

Activity in unvested restricted common stock is summarized as follows:

	2011					2010					2009
	Restricted Shares			Weighted- Average Grant Date Fair Value		Restricted Shares			Weighted- Average Grant Date Fair Value		Restricted Shares			Weighted- Average Grant Date Fair Value
Unvested at January 1		310,216		$	5.58		144,943		$	22.14		136,490		$	29.55
Granted		--			--		224,720			1.38		37,000			1.70
Vested		(240,794	)		3.58		(28,372	)		31.25		(19,847	)		29.53
Forfeited		(48,600	)		10.52		(31,075	)		29.00		(8,700	)		34.69
Unvested at December 31		20,822		$	17.21		310,216		$	5.58		144,943		$	22.14

Stock options have been granted to certain officers and directors which provide for the purchase of shares of the Corporation's common stock.  Generally, stock options are granted at an exercise price equal to the fair value of common stock on the grant date.  All such stock options expire at varying periods up to seven years after the grant date.  Stock option activity is summarized as follows:

	Number Outstanding			Exercise Price Range					Weighted Average Exercise Price
Outstanding at January 1, 2009		2,374,159		$	13.50	to	$	46.20	$	28.28
Granted in 2009		404,022			2.01	to		6.04		2.70
Cancelled or expired in 2009		(273,698	)		13.50	to		34.52		24.03
Outstanding at December 31, 2009		2,504,483			2.01	to		46.20		24.61
Granted in 2010		206,656			1.78	to		1.96		1.95
Exercised in 2010		(10,000	)		2.01	to		2.01		2.01
Cancelled or expired in 2010		(955,537	)		2.01	to		46.20		25.57
Outstanding at December 31, 2010		1,745,602			1.78	to		46.20		21.53
Granted in 2011		755,000			0.06	to		0.09		0.06
Cancelled or expired in 2011		(337,168	)		1.78	to		37.48		24.32
Outstanding at December 31, 2011		2,163,434		$	0.06	to	$	46.20	$	13.61

F-91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE K—STOCKHOLDERS' EQUITY AND STOCK-BASED COMPENSATION

Continued

There was no aggregate intrinsic value of exercised stock options as of December 31, 2011, 2010 and 2009.

Stock options with an aggregate fair value of $33,000 and $255,000 were granted in 2011 and 2010, respectively.  Fair value was computed using a Black-Scholes valuation model.

Fair value assumptions included the following:

	2011	2010	2009
Risk-free interest rate	0.85% and 0.88%	2.01% and 2.62%	2.62%
Stock price volatility	0.99 and 1.23	0.85 and 0.76	0.76
Dividend yield	--	--	--
Expected option life	5 years and 3.37 years	4.5 years and 5 years	5 years

Compensation expense related to stock options approximated $16,000 in 2011, $301,000 in 2010 and $855,000 in 2009, and associated tax benefits approximated $6,000 in 2011, $106,000 in 2010 and $299,000 in 2009 (before valuation allowance, see Note N).  Future compensation expense relating to stock options outstanding as of December 31, 2011 is insignificant.

As of December 31, 2011, substantially all outstanding stock options were vested, currently exercisable and had a weighted average remaining contractual life of 2.61 years (except for stock options granted in 2011 which become vested and exercisable in 2012).  The following table summarizes stock options outstanding and segregated by exercise price range as of December 31, 2011:

				Weighted Average
Exercise Price Range		Number Outstanding		Exercise Price		Remaining Contractual Life
$	0.00 to   5.99		1,220,740	$	0.80	3.55 years
$	6.00 to   9.99		69,521		6.04	4.10 years
$	15.00 to 19.99		79		16.40	0.21 years
$	20.00 to 24.99		196,200		21.91	2.69 years
$	30.00 to 34.99		341,898		32.31	0.42 years
$	35.00 or more		334,996		37.91	1.05 years
			2,163,434	$	13.61

Cash received from optionees upon exercise of stock options approximated $20,000 in 2010 (none in 2011 and 2009) and there were no tax benefits realized in 2011, 2010 and 2009.

F-92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE L—DIVESTITURES OF BANKS AND DISCONTINUED OPERATIONS

In 2011, Capitol completed the following sales of bank subsidiaries (in $1,000s):

		Sale
	Date Sold	Proceeds		Gain (Loss)
Bank of Tucson – main office(1)	January 24, 2011	$	4,567	$	4,418
Bank of Fort Bend(2)	March 30, 2011		4,315		1,445
Community Bank of Rowan(3)	April 19, 2011		4,845		(1,298	)
Bank of the Northwest/Sunrise Bank(3)	July 28, 2011		24,113		184
Bank of Feather River(2)	October 3, 2011		3,272		(240	)
Evansville Commerce Bank(2)	October 7, 2011		2,321		48
Bank of Las Colinas(2)	October 27, 2011		3,884		938
		$	47,317	$	5,495

(1) Previously a wholly-owned subsidiary of Capitol.  Sale proceeds represent the net premium received from the assumption of liabilities and acquisition of assets transaction.

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

(3) Previously a majority-owned subsidiary of Capitol.

In 2010, Capitol completed the sale of 11 bank subsidiaries for $76.1 million in sales proceeds and a net gain of $15.8 million.  In 2009, Capitol completed the sale of one bank subsidiary for $9.5 million in sale proceeds and a net gain of $1.2 million.

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 are pending:  Bank of Maumee, Bank of Michigan, First Carolina State Bank and Pisgah Community Bank.  The pending bank sales are subject to regulatory approval and other contingencies.  If completed, those pending bank divestitures would result in Capitol receiving estimated proceeds approximating $5.7 million and an estimated loss on sale of approximately $1.2 million.

In January 2012, Capitol completed the sale of Mountain View Bank of Commerce with aggregate proceeds of $4.1 million and an approximate gain of $126,000.  Assets, liabilities and results of operations of Mountain View Bank of Commerce are reflected as part of discontinued operations for the periods presented.

[The remainder of this page intentionally left blank]

F-93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE L—DIVESTITURES OF BANKS AND DISCONTINUED OPERATIONS—

Continued

The results of operations of bank subsidiaries sold in 2011 (and Mountain View Bank of Commerce sold in early 2012), summarized in the preceding table, together with the results of operations of Adams Dairy Bank, Bank of Belleville, Bank of San Francisco, Community Bank of Lincoln, Fort Collins Commerce Bank, Larimer Bank of Commerce, Loveland Bank of Commerce, Napa Community Bank, Ohio Commerce Bank, Southern Arizona Community Bank and USNY Bank which were sold in 2010, and Bank of Santa Barbara and Yuma Community Bank which were sold in 2009, and Summit Bank of Kansas City which was deconsolidated on September 30, 2009, are classified as discontinued operations, which include the following components on a combined basis (in $1,000s):

	2011			2010		2009
Interest income	$	21,030		$	76,457	$	102,979
Interest expense		3,203			15,085		27,731
Net interest income		17,827			61,372		75,248
Provision for loan losses		2,514			16,077		32,091
Net interest income after provision
for loan losses		15,313			45,295		43,157
Noninterest income, excluding gain
on sale of bank subsidiaries		1,815			5,158		7,069
Gain on sale of bank subsidiaries		5,495			15,784		1,187
Noninterest expense		14,546			46,812		51,349
Income before income taxes		8,077			19,425		64
Less income tax expense		2,129			9,314		10,877
Net income (loss) from discontinued
operations		5,948			10,111		(10,813	)
Net loss (income) attributable to
noncontrolling interests		(23	)		1,928		22,902
Net income from discontinued
operations attributable to Capitol
Bancorp Limited	$	5,925		$	12,039	$	12,089
Net income from discontinued
operations per common share
attributable to Capitol Bancorp
Limited	$	0.15		$	0.60	$	0.70

[The remainder of this page intentionally left blank]

F-94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE L—DIVESTITURES OF BANKS AND DISCONTINUED OPERATIONS—

Continued

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

	2011			2010				2011		2010
Assets:							Liabilities:
Cash and cash equivalents	$	9,898		$	200,164		Noninterest-bearing
Investment securities					12,657		deposits	$	7,371	$	216,975
Federal Home Loan Bank							Interest-bearing deposits		34,336		650,772
stock		293			3,708		Total deposits		41,707		867,747
Portfolio loans		40,060			746,870		Debt obligations
Less allowance for loan							Other liabilities		2,431		17,063
losses		(751	)		(19,739	)
Net portfolio loans		39,309			727,131			$	44,138	$	884,810
Premises and equipment		381			7,657
Other real estate owned		1,009			7,563
Other assets		775			13,534
	$	51,665		$	972,414

NOTE M—EMPLOYEE RETIREMENT PLANS

The Corporation has a contributory employee retirement savings 401(k) plan (the "Plan") which covers substantially all full-time employees, over age 21, of Capitol and certain subsidiaries.  The Plan provides for employer contributions in amounts determined annually by Capitol's board of directors.  Eligible employees make voluntary contributions to the Plan.  Employer contributions to the Plan, a partial match based on employee contributions (1%, subject to certain limitations in 2011; none in 2010 and 2009), charged to expense for the year ended December 31, 2011 approximated $312,000 (none in 2010 and 2009).

Prior to 2011, Capitol also had a defined contribution employee stock ownership plan ("ESOP") which covered substantially all employees of Capitol and certain subsidiaries.  Effective January 1, 2011, the ESOP was merged with and into Capitol's 401(k) plan to reduce future administrative and compliance costs.  There were no ESOP contributions charged to expense in 2010 and 2009.

[The remainder of this page intentionally left blank]

F-95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE N—INCOME TAXES

Income taxes include the following components (in $1,000s):

	2011			2010			2009
Federal:
Current expense (benefit)	$	1,532		$	3,638		$	(43,594	)
Deferred expense (benefit)		(1,082	)		(1,403	)		(39,173	)
		450			2,235			(82,767	)
State:
Current expense (benefit)		(649	)		545			868
Deferred expense (benefit)		(810	)		(720	)		(4,181	)
		(1,459	)		(175	)		(3,313	)
		(1,009	)		2,060			(86,080	)
Establishment of valuation allowance for     deferred tax assets not meeting the more-     likely-than-not criteria for realization								104,498
Income tax expense (benefit)	$	(1,009	)	$	2,060		$	18,418

In addition to state income taxes, certain states in which the banks operate impose taxes based on measures other than income.  Tax expense associated with those jurisdictions approximated $464,500 in 2011 ($670,000 in 2010 and $646,000 in 2009) and is excluded from income tax expense (included as a component of other noninterest expense).

Federal income taxes paid in 2011, 2010 and 2009 approximated $278,000, $715,000 and $1.0 million, respectively.  State income taxes approximating $84,000 were paid in 2011 ($62,000 was paid in 2010 and $85,000 was paid in 2009).

Differences between income tax expense recorded and amounts computed using the statutory tax rate (in $1,000s) are reconciled below based on operating results (including discontinued operations):

	2011			2010			2009
Federal income tax benefit computed at     statutory rate of 35%	$	(18,527	)	$	(88,306	)	$	(86,143	)
State income taxes benefit		(9,744	)		(10,297	)		(3,313	)
Valuation allowance on deferred state     income tax assets		8,285			10,122			8,622
Federal tax effect of:
Amortization of intangibles								1,213
State income taxes		3,411			3,604			1,160
Valuation allowance on state taxes		(2,900	)		(3,543	)		(3,018	)
Valuation allowance recorded for     deferred federal income tax assets		23,559			78,162			95,876
Other		(5,093	)		12,318			4,021
Total income tax expense (benefit)	$	(1,009	)	$	2,060		$	18,418

F-96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE N—INCOME TAXES—Continued

Capitol had a valuation allowance for deferred income tax assets to reduce such net assets to an amount which was deemed to be realizable on a more-likely-than-not basis as of December 31, 2011 and 2010.  The valuation allowance may reduce income tax expense accrual requirements to the extent of Capitol's profitability in future periods.

Net deferred income tax assets, a component of other assets, consisted of the following at December 31 (in $1,000s):

	2011			2010
Allowance for loan losses	$	37,086		$	57,556
Net operating losses of subsidiaries		124,613			97,739
Deferred compensation		1,060			2,519
Depreciation		(1,858	)		(2,827	)
Start-up costs of de novo banks		1,043			2,597
Fair value adjustment for investment securities available for sale		(36	)		(81	)
Other real estate owned		16,585			14,159
Net deferred costs of loan originations		(448	)		(1,740	)
Unaccrued interest income on nonperforming loans		7,021			7,466
Other, net		21,766			14,729
		206,832			192,117
Less valuation allowance		(205,875	)		(190,308	)
	$	957		$	1,809

Capitol and most of its subsidiaries have federal and state net operating loss carryforwards which may reduce income taxes payable in future periods, which have been recognized for deferred tax purposes (subject to a valuation allowance) and, as of December 31, 2011, expire as follows (in $1,000s):

	Federal		State
2013-2015			$	107,082
2016-2018				24,962
2019-2021	$	12		2,922
2022-2024		496		7,453
2025-2027		19,404		28,845
2028-2031		292,210		19,660
	$	312,122	$	190,924

In conjunction with its annual review, management concluded that there were no significant uncertain tax positions requiring recognition in Capitol's consolidated financial statements.  Such evaluation was performed for 2008, 2009, 2010 and 2011, which are the tax years which remain subject to examination by major tax jurisdictions, updated as of December 31, 2011.

F-97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE N—INCOME TAXES—Continued

Capitol's consolidated federal tax returns for 2004 through 2009 were selected for examination by the Internal Revenue Service (the "IRS") due to the reporting of significant operating loss carry backs from 2008 and 2009, and subsequent refund received in 2010.  As a result of this examination, Capitol recorded a liability approximating $6.5 million in 2011.  As the formal process of assessing the liability has not yet concluded, potential interest charges related to the final assessed liability cannot be determined.  Management does not believe any penalties will be assessed in connection with this liability based on discussions with the IRS.

Capitol may from time to time be assessed interest or penalties associated with tax liabilities by major tax jurisdictions, although any such assessments would likely be immaterial.  To the extent Capitol may receive an assessment for interest and/or penalties, it would be classified in the consolidated statements of operations as a component of other noninterest expense; such amounts have been negligible during the periods presented.

NOTE O—NET LOSS PER SHARE ATTRIBUTABLE TO CAPITOL BANCORP LIMITED

The computations of net loss per share were as follows (in 1,000s):

	2011			2010			2009
Numerator—net loss attributable to Capitol Bancorp Limited	$	(45,427	)	$	(225,215	)	$	(195,169	)
Denominator for basic and diluted net loss per share— weighted average number of common shares outstanding, excluding unvested restricted shares of common stock		38,817			20,186			17,302
Number of antidilutive stock options excluded from diluted net loss per share computation		2,163			1,746			2,504
Number of antidilutive unvested restricted shares of common stock excluded from basic and diluted net loss per share computation		21			310			145
Number of antidilutive warrants to purchase common stock excluded from diluted net loss per share computation		1,326			1,326			76
Net income (loss) per common share attributable to Capitol Bancorp Limited:
From continuing operations	$	(1.32	)	$	(11.76	)	$	(11.98	)
From discontinued operations		0.15			0.60			0.70
Total net loss per common share attributable to    Capitol Bancorp Limited	$	(1.17	)	$	(11.16	)	$	(11.28	)

Additional disclosures regarding restricted shares of common stock, warrants to purchase common stock and stock options are set forth in Note K.

F-98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE P—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.  If quoted prices are not available, fair values are measured using independent pricing models.

Mortgage loans held for sale:  Mortgage loans held for sale are carried at the lower of aggregate cost or fair value and are measured on a nonrecurring basis.  Mortgage loans held for sale written down to fair value would be included in the table below (none at December 31, 2011 and 2010).  Fair value is based on independent quoted market prices, where applicable, or the prices for other whole mortgage loans with similar characteristics.

Portfolio loans:  The Corporation does not record portfolio loans at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments to collateral-dependent loans are recorded to reflect partial write-downs or specific reserves based on the observable market price or 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 carrying value.  The Corporation subsequently adjusts fair value on other real estate owned on a nonrecurring basis to reflect partial write-downs based on the observable market price or current appraisal data.

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

Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, which are based primarily upon estimates, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors.  Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.  Additionally, there may be inherent weaknesses in any calculation technique and, further, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

As of December 31, 2011 and 2010, there were no liabilities measured at fair value on either a recurring or nonrecurring basis.

F-99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE P—FAIR VALUE—Continued

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

	2011				2010(1)
	Total		Significant Other Observable Inputs (Level 2)		Total		Significant Other Observable Inputs (Level 2)
Investment securities available for sale:
United States treasury	$	4,013	$	4,013	$	506	$	506
United States government agencies		9,819		9,819		12,681		12,681
Mortgage-backed		10,972		10,972		1,924		1,924
Municipalities		278		278		378		378
	$	25,082	$	25,082	$	15,489	$	15,489

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

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

	2011				2010(2)
	Total		Significant Unobservable Inputs (Level 3)		Total		Significant Unobservable Inputs (Level 3)
Impaired loans (1)	$	181,308	$	181,308	$	178,659	$	178,659
Other real estate owned (1)	$	100,463	$	100,463	$	101,497	$	101,497

(1)   Represents carrying value based on the appraised value of the applicable collateral or other real estate owned or other estimates of fair value (less estimated cost to sell).

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

Many of Capitol's collateral-dependent impaired loans and other real estate owned are located in severely depressed real estate markets.  In those markets, appraisal data may be of limited usefulness in estimating fair value because comparable sale transactions are infrequent, not orderly and are often distressed or forced.  Further, such comparable sale transactions may be lower, or substantially less than amounts which could be realized in orderly (and not distressed or forced) sales between the owner/occupant and a future user of the property.

F-100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE P—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 loan secured by real estate will be foreclosed.  Adjustments to the loan's carrying value (or requirements for an allocation of the allowance for loan losses) are made, when appropriate, after review of appraisal data or, in the absence of a recent appraisal, if market conditions significantly decline further.  The timing of when a collateral-dependent loan should be classified as a nonperforming credit is contingent upon several factors, including the performance of the loan, payment history and/or results of the bank's review of updated borrower financial information.

When a borrower's performance has deteriorated (for example, the borrower has become delinquent on required payments, the borrower's updated financial information received indicates adverse financial trends or sales/leasing activity is less than expected in the case of multi-unit properties), the loan will be downgraded and, if appropriate, an updated appraisal will be ordered.  In the period between a loan being recognized as impaired and receipt of an updated appraisal, the loan will be included within loss contingency pools, in conjunction with estimating the bank's requirements for its allowance for loan losses.  Upon receipt and review of updated appraisal data and after any further fair value analysis is completed, the loan will be further evaluated for appropriate write-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, as a partial write-down/charge-off, on a timely basis after the appraisal has been received and reviewed.  Occasionally, additional potential loss amounts may be included if circumstances exist which may further adversely impact fair value estimates.  Internally-developed evaluations may be used when the amount of a loan is less than $250,000.  Internally-prepared evaluations may also be used when the most recent appraisal date is within a year to estimate the current effect of economic conditions or deterioration.  Updated fair value information is generally obtained at least annually for collateral-dependent loans and other real estate owned.

[The remainder of this page intentionally left blank]

F-101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE P—FAIR VALUE—Continued

Carrying values and estimated fair values of financial instruments based upon the accounting guidance set forth in Accounting Standards Codification 825-10 were as follows at December 31 (in $1,000s):

	2011						2010(2)
	Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	387,224		$	387,224		$	421,344		$	421,344
Loans held for sale		2,936			2,936			5,587			5,587
Investment securities:
Available for sale		25,082			25,082			15,489			15,489
Held for long-term investment		2,737			2,737			2,893			2,893
		27,819			27,819			18,382			18,382
Federal Home Loan Bank and Federal Reserve
Bank stock		13,514			13,514			15,205			15,205
Portfolio loans:
Loans secured by real estate:
Commercial		973,045			969,531			1,164,488			1,170,864
Residential (including multi-family)		363,802			363,233			437,411			436,981
Construction, land development and other land		117,736			117,714			178,214			178,467
Total loans secured by real estate		1,454,583			1,450,478			1,780,113			1,786,312
Commercial and other business-purpose loans		192,851			192,880			280,352			281,065
Consumer		13,813			14,010			18,500			18,678
Other		2,962			2,727			5,211			5,122
Total portfolio loans		1,664,209			1,660,095			2,084,176			2,091,177
Less allowance for loan losses		(92,529	)		(92,529	)		(130,062	)		(130,062	)
Net portfolio loans		1,571,680			1,567,566			1,954,114			1,961,115
Financial liabilities:
Deposits:
Noninterest-bearing		348,817			348,817			368,674			368,675
Interest-bearing:
Demand accounts		533,432			533,432			592,141			592,141
Time certificates of less than $100,000		492,530			497,931			642,912			646,580
Time certificates of $100,000 or more		635,068			639,504			765,343			768,864
Total interest-bearing deposits		1,661,030			1,670,867			2,000,396			2,007,585
Total deposits		2,009,847			2,019,684			2,369,070			2,376,260
Notes payable and short-term borrowings		60,178			61,351			107,789			100,607
Subordinated debentures		149,156			151,296	(1)		167,586			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.

F-102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE P—FAIR VALUE—Continued

Estimated fair values of financial assets and liabilities in the preceding table are based upon a comparison of current interest rates on financial instruments and the timing of related scheduled cash flows to the estimated present value of such cash flows using current estimated market rates of interest (unless quoted market values or other fair value information is more readily available, except certain subordinated debentures, as indicated in the preceding table, 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 value of time deposits, notes payable and other borrowings were determined through discounted cash flow computations.  Such estimates of fair value are not intended to represent portfolio liquidation value and, accordingly, only represent an estimate of fair value based on current financial reporting requirements.

Given current market conditions, a portion of the loan portfolio is not readily marketable and, accordingly, market prices may not exist.  Capitol has not attempted to market the loan portfolio to potential buyers, if any exist, to determine the fair value of those instruments.  Since negotiated prices, if any, in illiquid markets depend upon the then-present motivations of the buyer and seller, it is reasonable to assume that potential sales prices could vary widely from any estimate of fair value made without the benefit of negotiations.  Additionally, changes in market interest rates commensurate with risk may dramatically impact the value of financial instruments at any time.  Accordingly, fair value measurements for loans included in the preceding table are unlikely to represent the instruments' liquidation values.

NOTE Q—COMMITMENTS, GUARANTEES AND OTHER CONTINGENCIES

In the ordinary course of business, loan commitments are made to accommodate the financial needs of bank customers.  Loan commitments include stand-by letters of credit, lines of credit, and other commitments for commercial, installment and mortgage loans.  Stand-by letters of credit, when issued, commit the bank to make payments on behalf of customers if certain specified future events occur and are used infrequently by the banks ($5.1 million and $4.4 million outstanding at December 31, 2011 and 2010, respectively).  Other loan commitments outstanding consist of unused lines of credit and approved, but unfunded, specific loan commitments ($112.6 million and $153.1 million at December 31, 2011 and 2010, respectively).  Those loan commitments (stand-by letters of credit and unfunded loans) generally expire within one year and are reviewed periodically for continuance or renewal.

All loan commitments have credit risk essentially the same as that involved in routinely making loans to customers and are made subject to the banks' normal credit policies.  In making these loan commitments, collateral and/or personal guarantees of the borrowers are generally obtained based on management's credit assessment.

F-103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE Q—COMMITMENTS, GUARANTEES AND OTHER CONTINGENCIES—

Continued

Capitol's banking subsidiaries are required to maintain average reserve balances in the form of cash on hand and balances due from the Federal Reserve Bank and correspondent banks.  The amount of reserve balances required as of December 31, 2011 and 2010 was $25,000 and $79,000, respectively.

Deposits at the banking subsidiaries are insured up to the maximum amount covered by FDIC insurance ($250,000 per relationship at December 31, 2011).  From December 31, 2010 through December 31, 2012, all noninterest-bearing transaction deposit accounts are fully insured regardless of the amount and account ownership, separate from and in addition to the FDIC insurance coverage provided for the depositors' other accounts.

Capitol has guaranteed up to $2.5 million of secured borrowings by Amera Mortgage Corporation, a less than 50%-owned affiliate.  As of December 31, 2011, management has evaluated the risk and potential loss in connection with this guarantee and concluded that no liability exists.

Generally, banks are subject to cross-guaranty liability regarding other financial institutions the FDIC determines are controlled by any multibank holding company.  Pursuant to federal regulations, an insured depository institution may be liable for any loss the FDIC has incurred or expects to incur in connection with the failure of a former affiliate institution and, if the FDIC determines that remaining affiliates have a liability to the FDIC, then they would be required to pay that liability to the FDIC.  Payment of a cross-guaranty liability to the FDIC could have a material adverse impact on the results of operations, capital adequacy and financial position of Capitol and its banking subsidiaries.

To date, none of Capitol's subsidiary banks have received any notice of assessment of cross-guaranty liability.  Capitol's banks have, however, received notice from the FDIC that the FDIC may assess a cross-guaranty liability relating to a failed community bank in Florida which ceased operations in November 2009.  The FDIC alleges that the Florida bank was an affiliated institution of Capitol, although Capitol owned no securities of that bank or otherwise controlled the failed institution.  The aggregate loss to the FDIC of that failed bank approximated $23.6 million.  Previously, the FDIC had until November 2011, two years from the date of such notice, to determine whether to assess that potential cross-guaranty liability, if any.  In November 2011, the FDIC and Capitol's banks entered into a mutual tolling agreement which extends the ability of the FDIC to impose the cross-guaranty liability, as well as extends the statute of limitations for the banks to take action against the FDIC for two additional years, ending in November 2013.

In addition to the above-mentioned potential cross-guaranty liability, some of Capitol's banking subsidiaries were advised in December 2009 that, to mitigate the effects of any possible assessment arising from potential cross-guaranty liability, they should develop a

F-104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE Q—COMMITMENTS, GUARANTEES AND OTHER CONTINGENCIES—

Continued

plan to arrange a sale, merger or recapitalization such that Capitol no longer controls the bank.  This guidance was preceded by Capitol's previously-announced plans to selectively divest some of its bank subsidiaries in conjunction with reallocating capital resources to the remaining banks.  Capitol's pending divestitures are subject to regulatory approval which may take an extended period of time to obtain.

As of December 31, 2011 and 2010, there were no material pending legal proceedings to which Capitol or its subsidiaries were a party, or to which any of its property was subject, except for proceedings arising in the ordinary course of business.  Management believes that pending legal proceedings will not have a material effect on the consolidated financial position or results of operations of Capitol.

NOTE R—CAPITAL REQUIREMENTS AND RELATED REGULATORY MATTERS

Current banking regulations restrict the ability to transfer funds from subsidiaries to their parent in the form of cash dividends, loans or advances.  As of December 31, 2011, Capitol's bank subsidiaries were prohibited from making dividend payments to the Corporation without prior regulatory approval.

Each bank and Capitol are subject to complex capital requirements.  Federal financial institution regulatory agencies impose certain risk-based capital requirements on financial institutions and bank holding companies.  Those guidelines require all banks and bank holding companies to maintain certain minimum ratios and related amounts based on 'Tier 1' and 'Tier 2' capital and 'risk-weighted assets' as defined and periodically prescribed by the respective regulatory agencies.  Failure to meet these capital requirements can result in severe regulatory enforcement action or other adverse consequences for a depository institution and, accordingly, could have a material impact on Capitol's consolidated financial statements and financial position.

Under the regulatory capital adequacy requirements and related framework for prompt corrective action, the specific capital requirements involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices.  The capital amounts and classifications are also subject to qualitative judgments by regulatory agencies with regard to components, risk weighting and other factors.

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

F-105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE R—CAPITAL REQUIREMENTS AND RELATED REGULATORY MATTERS—

Continued

regulator that limits the payment of dividends or other intercorporate payments; (iii) make any distributions of interest, principal, or other sums on subordinated debentures or trust-preferred securities; (iv) incur, increase or guarantee any debt; or (v) purchase or redeem any shares of the stock of Capitol, the second-tier bank holding companies, nonbank subsidiaries or any of the subsidiary banks that are held by shareholders other than Capitol.

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

Many of Capitol's bank subsidiaries have entered into formal agreements (as well as informal agreements) with their applicable regulatory agencies.  Those agreements provide for certain restrictions and other guidelines and/or limitations to be followed by the banks.  The banks generally subject to such agreements are noted as such in the regulatory capital summary appearing on page F-38 of this document.

The FDIC may issue Prompt Corrective Action Notifications ("PCAN") to banking subsidiaries falling below the "adequately-capitalized" regulatory-capital classification, and subsequently may issue Prompt Correction Action Directives ("PCAD").  PCADs may be issued when a bank, which has previously received a PCAN, has submitted two consecutive capital restoration plans which have been rejected by the FDIC.

Certain banking subsidiaries have received a PCAD, which are listed on page F-40 of this document.  These banks are striving to develop and implement capital restoration plans which may be acceptable to the FDIC.

F-106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE R—CAPITAL REQUIREMENTS AND RELATED REGULATORY MATTERS—

Continued

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

	December 31
		2011				2010
Tier 1 capital to average adjusted total assets:
Minimum required amount	≥	$	92,356		≥	$	155,224
Actual amount		$	(109,146	)		$	(39,980	)
Ratio			(4.73	)%			(1.03	)%
Tier 1 capital to risk-weighted assets:
Minimum required amount(1)	≥	$	68,615		≥	$	110,909
Actual amount		$	(109,146	)		$	(39,980	)
Ratio			(6.36	)%			(1.44	)%
Combined Tier 1 and Tier 2 capital to risk- weighted assets:
Minimum required amount(2)	≥	$	137,231		≥	$	221,818
Actual amount		$	(109,146	)		$	(39,980	)
Ratio			(6.36	)%			(1.44	)%

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

Capitol's total risk-based capital ratio at December 31, 2011 and 2010 was materially and adversely impacted by the exclusion of approximately $171.5 million and $203.7 million, respectively, of previously-qualifying Tier 2 capital, inasmuch as Tier 2 capital is limited to 100% of Tier 1 capital, primarily trust-preferred securities and a portion of the allowance for loan losses.  The Tier 1 capital deficit beginning with the year-end 2010 resulted from operating losses; however, a Tier 2 limitation, primarily due to the exclusion of trust-preferred securities, did not apply to Capitol's regulatory capital computations at earlier measurement dates prior to 2010.

The preceding summary indicates that Capitol, on a consolidated basis, was classified as less than "adequately-capitalized" at December 31, 2011.  In addition, several of its bank subsidiaries had capital levels resulting in classification as "undercapitalized" or "significantly-undercapitalized" at that date.

F-107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE R—CAPITAL REQUIREMENTS AND RELATED REGULATORY MATTERS—

Continued

Banks and bank holding companies which are less than "adequately-capitalized" are subject to increased regulatory oversight, intervention, requirements and limitations.  Regarding banks classified as less than "adequately-capitalized," or otherwise noncompliant with formal regulatory agreements, management is taking action to improve such capital classifications and related compliance in the future, subject to the availability of capital and continued cooperation by regulatory agencies (see Note U).

NOTE S—PARENT COMPANY FINANCIAL INFORMATION

Condensed Balance Sheets

	-December 31-
	2011			2010
	(in $1,000s)
Assets
Cash on deposit, principally with subsidiary banks	$	1,411		$	1,370
Money market funds on deposit, principally with subsidiary banks		3,234			6,535
Cash and cash equivalents		4,645			7,905
Investment securities		82			719
Loans, net		269			5,004
Investments in and advances to subsidiaries		111,583			162,639
Investment in and advances to Amera Mortgage Corporation		434			478
Investment in and advances to CDBL III		1,896			1,340
Equipment, software and furniture, net		1,717			1,998
Other assets		3,053			936
Total assets	$	123,679		$	181,019
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	38,290		$	35,270
Debt obligations		12,731			8,431
Subordinated debentures		180,742			199,172
Total liabilities		231,763			242,873
Stockholders' equity deficit		(108,084	)		(61,854	)
Total liabilities and stockholders' equity	$	123,679		$	181,019

F-108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE S—PARENT COMPANY FINANCIAL INFORMATION—Continued

Condensed Statements of Operations

	-Year Ended December 31-
	2011			2010			2009
	(in $1,000s)
Income:
Intercompany fees	$	11,120		$	22,057		$	35,243
Dividends from subsidiaries		11,000			5,000			964
Interest		2,561			996			1,596
Gain (loss) on sales of bank subsidiaries		(1,949	)		12,749			1,187
Gain on debt extinguishment		16,861			1,255
Other		6,219			(704	)		2,034
Total income		45,812			41,353			41,024
Expenses:
Interest		6,450			15,427			15,292
Salaries and employee benefits		8,087			14,771			24,032
Occupancy		1,254			2,264			2,297
Equipment rent and depreciation		407			3,205			6,236
Goodwill impairment					38,718
Other		6,373			9,236			8,995
Total expenses		22,571			83,621			56,852
Income (loss) before equity in undistributed net losses of consolidated subsidiaries and income taxes		23,241			(42,268	)		(15,828	)
Equity in net losses of consolidated subsidiaries		(69,464	)		(189,553	)		(176,669	)
Loss before income taxes		(46,223	)		(231,821	)		(192,497	)
Income taxes (credit)		(796	)		(6,606	)		2,672
Net loss	$	(45,427	)	$	(225,215	)	$	(195,169	)

[The remainder of this page intentionally left blank]

F-109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE S—PARENT COMPANY FINANCIAL INFORMATION—Continued

Condensed Statements of Cash Flows

	-Year Ended December 31-
	2011			2010			2009
	(in $1,000s)
OPERATING ACTIVITIES
Net loss	$	(45,427	)	$	(225,215	)	$	(195,169	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Equity in net losses of consolidated subsidiaries		69,464			189,553			176,669
Depreciation and amortization of intangibles		450			1,690			2,624
Goodwill impairment					38,718
Loss on sale of equipment and furniture		2			4			116
Loss (gain) on sales of bank subsidiaries		1,949			(12,749	)		(1,187	)
Gain on debt extinguishment		(16,861	)		(1,255	)
Realized loss on sale of investment securities					362
Decrease (increase) in amounts due from subsidiaries and other assets		(2,366	)		9,367			(7,819	)
Increase in accounts payable, accrued expenses and other liabilities		6,433			8,784			15,784
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		13,644			9,259			(8,982	)
INVESTING ACTIVITIES
Net cash investments in subsidiaries		(48,262	)		(79,084	)		(25,073	)
Proceeds from sale of investment securities		507			2,102
Purchases of investment securities					(100	)		(772	)
Net decrease in loans		4,735			4,927			8,760
Proceeds from sales of equipment and furniture		4			3,707			35
Purchases of equipment and furniture		(175	)		(240	)		(575	)
Proceeds from sales of bank subsidiaries		26,543			58,796			9,506
NET CASH USED BY INVESTING ACTIVITIES		(16,648	)		(9,892	)		(8,119	)
FINANCING ACTIVITIES
Net payments on debt obligations					(1,000	)		(6,000	)
Net proceeds from issuance of common stock					6,870
Tax benefit (effect) from share-based payments		(256	)		(293	)		(169	)
Cash dividends paid								(864	)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(256	)		5,577			(7,033	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,260	)		4,944			(24,134	)
Cash and cash equivalents at beginning of year		7,905			2,961			27,095
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	4,645		$	7,905		$	2,961

F-110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE T—DECONSOLIDATION OF SUBSIDIARIES

As of December 31, 2009, Community Bank of Rowan ("CBR") and Summit Bank of Kansas City were majority-owned subsidiaries of CDBL III of which Capitol ceased to have majority voting control effective September 30, 2009 when the previously-nonvoting Class B shares of CDBL III became voting.  Accordingly, those banks and CDBL III ceased to be consolidated subsidiaries of Capitol and assets approximating $257.7 million and related equity amounts were removed from the consolidated balance sheet.  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.  CBR was sold in 2011 (see Note L).

NOTE U—GOING-CONCERN CONSIDERATIONS

As of December 31, 2011, there are several significant adverse aspects of Capitol's consolidated financial position and results of operations which include, but are not limited to, the following:

·   An equity deficit approximating $108.7 million;

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

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

·   Certain banking subsidiaries which are generally subject to formal regulatory agreements have received "prompt corrective action" notifications and/or directives from the FDIC, which require timely action by bank management and the respective boards of directors to resolve regulatory capital ratios which result in classification as less than "adequately-capitalized" (the basis of a PCAN) or to submit an acceptable capital restoration plan to the FDIC (the basis of a PCAD), and it is likely additional PCANs and/or PCADs may be issued in the future and/or the banking subsidiaries may be unable to satisfactorily resolve such notices and/or directives;

·   In 2010 and 2011, Capitol sold several of its banking subsidiaries and has other divestiture transactions pending (see Note L).  The proceeds from those divestitures have been redeployed at certain remaining banking subsidiaries which have experienced a significant erosion of capital due to operating losses.  While such proceeds have been a significant source of funds for redeployment, the Corporation will need to raise significant other sources of new capital in the future;

·   The Corporation and substantially all of its banking subsidiaries are operating under various regulatory agreements (formal and informal) which place a number of restrictions on them and impose other requirements limiting activities, requiring preservation of capital, improvement in regulatory capital measures, reduction of nonperforming assets and other things for which the entities have not achieved full compliance;

F-111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Capitol Bancorp Limited

NOTE U—GOING-CONCERN CONSIDERATIONS—Continued

·   Continued elevated levels of nonperforming loans and other nonperforming assets as a percentage of consolidated loans and total assets, respectively; and

·   Significant losses from operations in 2011, 2010, 2009 and 2008, resulting primarily from provisions for loan losses, costs associated with foreclosed properties and other real estate owned and, in 2010, an impairment charge to operations for the write-off of previously-recorded goodwill ($64.5 million).

The foregoing considerations raise some level of doubt (potentially substantial doubt) as to the Corporation's ability to continue as a going concern.  Such substantial doubt is discussed in the Report of Independent Registered Public Accounting Firm set forth on page F-55.

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

In early 2011, a partial exchange of trust-preferred securities was completed and the Corporation's stockholders approved the amendment to the articles of incorporation to increase its authorized common stock and authorize its board of directors to proceed with a rights offering and reverse stock split, in addition to a potential share-exchange regarding second-tier bank-development subsidiaries.

Improvement in Capitol's and its banking subsidiaries' capitalization, financial position, asset quality and results of operations requires multi-faceted efforts, which are currently being considered in the following areas, among others:

·   Raising significant amounts of new equity capital;

·   Completion of divestitures which are currently pending;

·   Further reductions in nonperforming assets;

·   Stabilization of provisions for loan losses and impairment losses;

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

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

Capitol's ability to continue as a going concern is contingent on the successful achievement of the items listed above.  Capitol's board of directors and management are fully engaged and committed to successful completion of those items, with a clear sense of urgency, subject to the availability of capital and continued cooperation by regulatory agencies.

F-112