Note M – Regulatory and Operating Matters

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

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

Many of Capitol's bank subsidiaries have entered into formal enforcement actions (as well as informal agreements) with their applicable regulatory agencies. Those enforcement actions provide for certain restrictions and other guidelines and/or limitations to be followed by the banks.

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

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

Michigan Commerce Bank
Bank of Las Vegas
Sunrise Bank of Arizona
Sunrise Bank of Albuquerque

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note M – Regulatory and Operating Matters – Continued

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

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

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

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

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

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

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

Regulatory capital matters are set forth in Note N.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note M – Regulatory and Operating Matters – Continued

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

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

In July 2011, Capitol adopted a Tax Benefits Preservation Plan (the "Plan") designed to preserve substantial tax assets. Capitol's tax attributes include net operating losses that could be utilized in certain circumstances to offset taxable income and to reduce federal income tax liability. Capitol's ability to use these tax attributes would be substantially limited if an "ownership change" was to occur, as defined under Section 382 of the Internal Revenue Code and related Internal Revenue Service pronouncements. In accordance with the provisions of the Plan, Capitol's board of directors declared a dividend of one preferred share purchase right for each outstanding share of its common stock distributable to shareholders of record as of August 1, 2011, as well as to holders of common stock issued subsequent to that date, which would only be activated if triggered under the Plan.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)