10-Q 1 form10q.htm 1Q 2013 FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2013
 
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from ________________ to ________________

Commission file number:  001-31708

CAPITOL BANCORP LTD.
(Exact name of registrant as specified in its charter)

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

517-487-6555
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x
No   o

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   x
No   o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   o
No   x
 
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at April 30, 2013
Common Stock, No par value
 
41,177,479 shares
Page 1 of 59

INDEX

PART I.                          FINANCIAL INFORMATION

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

·            Capitol's ability to successfully emerge from Chapter 11 bankruptcy and  restructure its existing unsecured debt obligations;

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

·            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 may not be able to complete its various proposed divestitures, mergers and consolidations of certain of its subsidiary banks or, if completed, realize the anticipated benefits of the proposed transactions;

·            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 subsidiary banks to comply with banking laws, rules or regulations or formal enforcement actions with regulatory agencies;

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

·            The recent seizure of three of Capitol's subsidiary banks by applicable state banking regulators;

·            The possibility of the Federal Deposit Insurance Corporation ("FDIC") or an applicable state banking regulator seizing more of Capitol's subsidiary banks;

·            The possibility of the FDIC assessing Capitol's banking subsidiaries for any cross-guaranty liability for recently seized banks or losses arising from future bank closures;

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

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

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

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

Page 2 of 59

INDEX – Continued

PART I.                          FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

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

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

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

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

·            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 in order to compete effectively in the marketplace;

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

·            The ability to 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 decreased demand for such assets, falling prices and continuing illiquidity in the real estate market;

·            The impact of negative developments and disruptions in the credit and lending markets on Capitol's business and the businesses of its customers, as well as on 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;
 
 

Page 3 of 59

INDEX – Continued

PART I.                          FINANCIAL INFORMATION – Continued

Forward-Looking Statements – Continued

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

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

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

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

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

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

·            Acts of war or terrorism; and

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

For a discussion of these and other risks that may cause actual results to differ from expectations, the reader should refer to the risk factors and other information in this Form 10-Q and Capitol's other periodic filings, including its 2012 Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, that Capitol files from time to time with the SEC.  All written or oral forward-looking statements that are made by or are attributable to Capitol are expressly qualified by this cautionary notice.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.  All subsequent written or oral forward-looking statements attributable to Capitol or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors.  Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements.  Capitol undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.
 
 

Page 4 of 59

INDEX – Continued

PART I.                          FINANCIAL INFORMATION – Continued


 
Item 1.
 
Financial Statements (unaudited):
Page
 
Condensed consolidated balance sheets – March 31, 2013 and December 31, 2012.
6
 
March 31, 2013 and 2012.
 
7
 
ended March 31, 2013 and 2012.
 
8
 
March 31, 2013 and 2012.
 
9
 
Condensed consolidated statements of cash flows – Three months ended March 31,
2013 and 2012.
 
10
 
11
Item 2.
37
Item 3.
55
Item 4.
55
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
 
56
Item 1A.
56
Item 2.
56
Item 3.
56
Item 4.
56
Item 5.
57
Item 6.
57
 
 
 
58
 
 
 
59






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Page 5 of 59

 
PART I, ITEM 1 
 
 
   
 
CAPITOL BANCORP LIMITED 
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Balance Sheets
As of March 31, 2013 and December 31, 2012 
(in $1,000s, except share and per-share data)
 
 
   
 
 
 
(Unaudited)
   
 
 
 
March 31,
   
December 31,
 
 
 
2013
   
2012
 
 
 
   
As Adjusted
 
 
 
   
(Note C)
 
ASSETS
 
   
 
Cash and due from banks
 
$
31,825
   
$
56,582
 
Money market and interest-bearing deposits
   
241,182
     
270,265
 
Cash and cash equivalents
   
273,007
     
326,847
 
Loans held for sale
   
250
     
-
 
Investment securities available for sale, carried at fair value -- Note E
   
16,175
     
15,706
 
Federal Home Loan Bank and Federal Reserve Bank stock (carried
   on the basis of cost) -- Note E
   
 
9,726
     
 
10,531
 
Portfolio loans, less allowance for loan losses of $58,682 in 2013
   and $63,455 in 2012 -- Note F
   
 
995,020
     
 
1,146,262
 
Premises and equipment
   
19,394
     
20,829
 
Accrued interest income
   
3,634
     
3,964
 
Other real estate owned
   
68,795
     
80,963
 
Other assets
   
16,714
     
16,200
 
 
               
TOTAL ASSETS
 
$
1,402,715
   
$
1,621,302
 
 
               
LIABILITIES AND EQUITY
               
LIABILITIES
               
Deposits:
               
Noninterest-bearing
 
$
271,499
   
$
323,411
 
Interest-bearing
   
1,064,401
     
1,220,457
 
Total deposits
   
1,335,900
     
1,543,868
 
Notes payable and other borrowings
   
6,928
     
8,428
 
Accrued interest on deposits and other liabilities
   
6,688
     
6,261
 
Liabilities subject to compromise -- Note B
   
198,746
     
200,293
 
Total liabilities
   
1,548,262
     
1,758,850
 
 
               
EQUITY:
               
Capitol Bancorp Limited stockholders' equity -- Note N:
               
Preferred stock (Series A), 700,000 shares authorized ($100 per-share
   liquidation preference); 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:  2013 - 41,177,479 shares; 2012 - 41,177,479 shares
   
 
292,094
     
 
292,092
 
Retained-earnings deficit
   
(426,489
)
   
(424,022
)
Undistributed common stock held by employee-benefit trust
   
(541
)
   
(541
)
Accumulated other comprehensive income
   
68
     
72
 
Total Capitol Bancorp Limited stockholders' equity deficit
   
(129,770
)
   
(127,301
)
Noncontrolling interests in consolidated subsidiaries
   
(15,777
)
   
(10,247
)
Total equity deficit
   
(145,547
)
   
(137,548
)
 
               
TOTAL LIABILITIES AND EQUITY
 
$
1,402,715
   
$
1,621,302
 
 
               
See notes to condensed consolidated financial statements.
               
 
Page 6 of 59

 
CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2013 and 2012
(in $1,000s, except per-share data)
 
 
   
 
 
 
2013
   
2012
 
 
 
   
As Adjusted
 
 
 
   
(Note C)
 
Interest income:
 
   
 
Portfolio loans (including fees)
 
$
15,492
   
$
20,483
 
Loans held for sale
   
-
     
12
 
Taxable investment securities
   
36
     
51
 
Other
   
221
     
288
 
Total interest income
   
15,749
     
20,834
 
Interest expense:
               
Deposits
   
2,320
     
3,890
 
Debt obligations and other
   
107
     
3,065
 
Total interest expense
   
2,427
     
6,955
 
Net interest income
   
13,322
     
13,879
 
Provision for loan losses -- Note F
   
(571
)
   
866
 
Net interest income after provision for
   loan losses
   
 
13,893
     
 
13,013
 
Noninterest income:
               
Service charges on deposit accounts
   
523
     
665
 
Trust and wealth-management revenue
   
721
     
723
 
Fees from origination of non-portfolio residential
   mortgage loans
   
 
59
     
 
161
 
Gain on sale of government-guaranteed loans
   
-
     
195
 
Other
   
2,667
     
1,574
 
Total noninterest income
   
3,970
     
3,318
 
Noninterest expense:
               
Salaries and employee benefits
   
9,422
     
10,673
 
Occupancy
   
2,316
     
2,515
 
Equipment rent, depreciation and maintenance
   
1,202
     
1,425
 
Costs associated with foreclosed properties and other
   real estate owned
   
 
1,310
     
 
4,059
 
FDIC insurance premiums and other regulatory fees
   
1,225
     
1,653
 
Other
   
5,362
     
4,153
 
Total noninterest expense
   
20,837
     
24,478
 
Loss before reorganization items and
  income tax benefit
   
 
(2,974
 
)
   
 
(8,147
 
)
Reorganization items -- Note B
   
1,080
     
-
 
Loss before income tax benefit
   
(4,054
)
   
(8,147
)
Income tax benefit
   
(1,547
)
   
(45
)
Loss from continuing operations
   
(2,507
)
   
(8,102
)
Discontinued operations -- Note G:
               
Loss from operations of bank subsidiaries sold
   
-
     
(273
)
Gain on sale of bank subsidiaries
   
-
     
126
 
Less income tax benefit
   
-
     
(18
)
Loss from discontinued operations
   
-
     
(129
)
NET LOSS
   
(2,507
)
   
(8,231
)
Net losses attributable to noncontrolling interests in
   consolidated subsidiaries
   
 
40
     
 
1,019
 
 
               
NET LOSS ATTRIBUTABLE TO CAPITOL
   BANCORP LIMITED
 
 
$
 
(2,467
 
)
 
 
$
 
(7,212
 
)
 
               
NET LOSS PER COMMON SHARE ATTRIBUTABLE
   TO CAPITOL BANCORP LIMITED -- Note J
 
 
$
 
(0.06
 
)
 
 
$
 
(0.18
 
)
 
               
See notes to condensed consolidated financial statements.
               
 
Page 7 of 59

 
CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
For the Three Months Ended March 31, 2013 and 2012
(in $1,000s)
 
 
 
 
 
 
 
2013
 
2012
 
 
 
 
As Adjusted
 
 
 
 
(Note C)
 
 
 
   
 
NET LOSS
 
$
(2,507
)
 
$
(8,231
)
 
               
Other comprehensive loss, net of tax:
               
Unrealized losses arising during the period
   
(4
)
   
(8
)
 
               
COMPREHENSIVE LOSS
   
(2,511
)
   
(8,239
)
 
               
Comprehensive loss attributable to noncontrolling interests in
   consolidated subsidiaries
   
 
40
     
 
1,019
 
 
               
COMPREHENSIVE LOSS ATTRIBUTABLE TO
   CAPITOL BANCORP LIMITED
 
 
$
 
(2,471
 
)
 
 
$
 
(7,220
 
)
 
               
See notes to condensed consolidated financial statements.
               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page 8 of 59

 
CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Changes in Equity (Unaudited)
For the Three Months Ended March 31, 2013 and 2012
(in $1,000s, except share and per-share data)
 
 
   
   
   
   
   
   
   
 
 
 
Capitol Bancorp Limited Stockholders' Equity
   
   
 
 
 
   
   
   
Undistributed
   
   
Total Capitol
   
   
 
 
 
   
   
   
Common
   
   
Bancorp
   
   
 
 
 
   
   
   
Stock
   
Accumulated
   
Limited
   
Noncontrolling
   
 
 
 
   
   
Retained-
   
Held by
   
Other
   
Stockholders'
   
Interests in
   
Total
 
 
 
Preferred
   
Common
   
Earnings
   
Employee-
   
Comprehensive
   
Equity
   
Consolidated
   
Equity
 
 
 
Stock
   
Stock
   
(Deficit)
   
Benefit Trust
   
Income (Loss)
   
(Deficit)
   
Subsidiaries
   
(Deficit)
 
 
 
   
   
   
   
   
   
   
 
Three Months Ended March 31, 2012
 
   
   
   
   
   
   
   
 
 
 
   
   
   
   
   
   
   
 
Balances at December 31, 2011, as
previously reported
 
 
$
 
5,098
   
 
$
 
292,135
   
 
$
 
(404,846
 
)
 
 
$
 
(541
 
)
 
 
$
 
70
   
 
$
 
(108,084
 
)
 
 
$
 
(563
 
)
 
 
$
 
(108,647
 
)
 
                                                               
Cumulative effect of change in
accounting principle -- Note C
 
 
 
 
     
 
4,128
                     
 
4,128
             
 
4,128
 
 
                                                               
Balances at January 1, 2012, as adjusted
   
5,098
     
292,135
     
(400,718
)
   
(541
)
   
70
     
(103,956
)
   
(563
)
   
(104,519
)
 
                                                               
Reduction in noncontrolling interest of sold
subsidiaries
                             
 
-
     
 
(3,692
 
)
   
 
(3,692
 
)
 
                                                               
Surrender of 859 shares of common stock
to facilitate vesting of restricted stock
     
 
-
                             
 
-
             
 
-
 
 
                                                               
Recognition of compensation expense
relating to restricted common stock and
stock options
     
 
 
45
                             
 
 
45
             
 
 
45
 
 
                                                               
Tax effect of share-based payments
           
(17
)
                           
(17
)
           
(17
)
 
                                                               
Net loss
                   
(7,212
)
                   
(7,212
)
   
(1,019
)
   
(8,231
)
 
                                                               
Other comprehensive loss
                                   
(8
)
   
(8
)
           
(8
)
 
                                                               
BALANCES AT MARCH 31, 2012
 
$
5,098
   
$
292,163
   
$
(407,930
)
 
$
(541
)
 
$
62
   
$
(111,148
)
 
$
(5,274
)
 
$
(116,422
)
 
                                                               
 
                                                               
 
                                                               
Three Months Ended March 31, 2013
                                                               
 
                                                               
Balances at December 31, 2012, as
previously reported
 
 
$
 
5,098
   
 
$
 
292,092
   
 
$
 
(430,590
 
)
 
 
$
 
(541
 
)
 
 
$
 
72
   
 
$
 
(133,869
 
)
 
 
$
 
(10,247
 
)
 
 
$
 
(144,116
 
)
 
                                                               
Cumulative effect of change in
accounting principle -- Note C
 
 
 
 
     
 
6,568
                     
 
6,568
             
 
6,568
 
 
                                                               
Balances at January 1, 2013, as adjusted
   
5,098
     
292,092
     
(424,022
)
   
(541
)
   
72
     
(127,301
)
   
(10,247
)
   
(137,548
)
 
                                                               
Reduction in investment in subsidiaries due
to change in ownership
                     
 
-
     
 
(5,490
 
)
   
 
(5,490
 
)
 
                                                             
 
Recognition of compensation expense
relating to restricted common stock and
stock options
     
 
 
2
                             
 
 
2
             
 
 
2
 
 
                                                               
Net loss
                   
(2,467
)
                   
(2,467
)
   
(40
)
   
(2,507
)
 
                                                               
Other comprehensive loss
                                   
(4
)
   
(4
)
           
(4
)
 
                                                               
BALANCES AT MARCH 31, 2013
 
$
5,098
   
$
292,094
   
$
(426,489
)
 
$
(541
)
 
$
68
   
$
(129,770
)
 
$
(15,777
)
 
$
(145,547
)
 
                                                               
See notes to condensed consolidated financial statements.
                                                 
 
Page 9 of 59

 
CAPITOL BANCORP LIMITED
(DEBTOR-IN-POSSESSION)
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2013 and 2012
(in $1,000s)
 
 
   
 
 
 
2013
   
2012
 
 
 
   
As Adjusted
 
 
 
   
(Note C)
 
 
 
   
 
OPERATING ACTIVITIES
 
   
 
Net loss
 
$
(2,507
)
 
$
(8,231
)
Adjustments to reconcile net loss to net cash provided by
operating activities (including discontinued operations):
 
Provision for loan losses
   
(571
)
   
1,326
 
Depreciation of premises and equipment
   
839
     
1,050
 
Reorganization items
   
1,080
     
-
 
Net amortization of investment security premiums
   
23
     
45
 
Loss on sale of premises and equipment
   
63
     
21
 
Gain on sale of government-guaranteed loans
   
-
     
(219
)
Loss (gain) on sale of bank subsidiaries
   
523
     
(126
)
Gain on sale of other real estate owned
   
(631
)
   
(333
)
Write-down of other real estate owned
   
1,282
     
4,789
 
Amortization of issuance costs of subordinated debentures
   
-
     
25
 
Share-based compensation expense
   
2
     
45
 
Deferred income tax expense (credit)
   
2
     
(243
)
Originations and purchases of loans held for sale
   
(571
)
   
(8,461
)
Proceeds from sales of loans held for sale
   
321
     
10,583
 
Decrease in accrued interest income and other assets
   
3,379
     
2,697
 
Decrease in accrued interest expense on deposits and other liabilities
   
(1,907
)
   
(1,896
)
 
               
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
1,327
     
1,072
 
 
               
INVESTING ACTIVITIES
               
Proceeds from calls, prepayments and maturities of investment securities
   
3,001
     
4,437
 
Purchases of investment securities
   
(3,497
)
   
(2,500
)
Redemption of Federal Home Loan Bank stock by issuer
   
203
     
144
 
Purchases of Federal Home Loan Bank stock
   
-
     
(31
)
Net decrease in portfolio loans
   
49,020
     
64,597
 
Proceeds from sales of government-guaranteed loans
   
-
     
2,377
 
Proceeds from sales of premises and equipment
   
32
     
28
 
Purchases of premises and equipment
   
(94
)
   
(1,038
)
Proceeds from sale of bank subsidiaries
   
1,000
     
4,060
 
Payments received on other real estate owned
   
16
     
15
 
Proceeds from sales of other real estate owned
   
14,917
     
8,627
 
 
               
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
64,598
     
80,716
 
 
               
FINANCING ACTIVITIES
               
Net increase (decrease) in demand deposits, NOW accounts and savings accounts
   
(18,826
)
   
51,933
 
Net decrease in certificates of deposit
   
(54,686
)
   
(130,154
)
Net payments on debt obligations
   
-
     
(111
)
Proceeds from Federal Home Loan Bank borrowings
   
10
     
4,500
 
Payments on Federal Home Loan Bank borrowings
   
(1,510
)
   
(14,500
)
Tax effect of share-based payments
   
-
     
(17
)
 
               
NET CASH USED IN FINANCING ACTIVITIES
   
(75,012
)
   
(88,349
)
 
               
DECREASE IN CASH AND CASH EQUIVALENTS
   
(9,087
)
   
(6,561
)
 
               
Change in cash and cash equivalents of discontinued operations
   
-
     
(2,633
)
 
               
Change in cash and cash equivalents of deconsolidated subsidiary
   
(44,753
)
   
-
 
 
               
Cash and cash equivalents at beginning of period
   
326,847
     
352,367
 
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
273,007
   
$
343,173
 
 
               
Supplemental disclosures:
               
Cash paid during the period for interest on deposits and debt obligations
 
$
2,553
   
$
7,721
 
Transfers of loans to other real estate owned
   
6,134
     
18,601
 
 
               
See notes to condensed consolidated financial statements.
               
 
Page 10 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESION)
Note A – Background and Basis of Presentation

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

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

For comparative purposes, original balances as previously reported in periods prior to March 31, 2013 have been adjusted to exclude amounts related to discontinued operations.

The results of operations for the period ended March 31, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.

The consolidated balance sheet as of December 31, 2012 was derived from audited consolidated financial statements as of that date.  Certain 2012 amounts have been reclassified to conform to the 2013 presentation.  Refer to Note C for the effects of a change in accounting principle on amounts previously reported in the 2012 consolidated financial statements.

Capitol's ability to continue to operate as a going concern is contingent upon a number of factors which are discussed below, in Note O, and on page 48 of this document, as well as upon a variety of risk factors discussed elsewhere in this document and in Capitol's other filings with the SEC.  Capitol's auditors included a going concern qualification in the most recent report on the Corporation's audited consolidated financial statements as of and for the year ended December 31, 2012.

Bankruptcy Filings

On August 9, 2012, Capitol and its affiliate FCC (collectively the "Debtors") filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Eastern District of Michigan (the "Court").  The Debtors' Chapter 11 Cases (the "Chapter 11 Cases") are being jointly administered under Case Number 12-58409.  Capitol and FCC continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Court.  Capitol's banking subsidiaries are not part of the filing and continue to conduct business on an uninterrupted basis.

Accounting Standards Codification ("ASC") Topic 852, Reorganizations, which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared.  However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Amounts that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the condensed consolidated statements of operations beginning in the quarter ended September 30, 2012.  The condensed consolidated balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise (none as of March 31, 2013) and from post-petition liabilities.  Liabilities that may be affected by a Chapter 11 plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  Capitol applied ASC Topic 852 effective August 9, 2012 and will segregate those items as outlined above for all reporting periods subsequent to such date until emergence from Chapter 11.

Refer to Note O for recent information regarding regulatory closures of certain of Capitol's subsidiary banks.


Page 11 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESION)
Note B – Debtor-in-Possession Financial Information

Liabilities Subject to Compromise

As required by ASC Topic 852, the amount of liabilities subject to compromise represents management's estimate of known or potential prepetition and post-petition claims to be addressed in connection with the bankruptcy filing.  Such claims are subject to future adjustments.  The liabilities subject to compromise consist of the following (in $1,000s):

 
 
March 31,
2013
   
December 31,
2012
 
 
 
   
 
Trust-preferred securities
 
$
151,296
   
$
151,296
 
Senior notes
   
6,820
     
6,820
 
Accrued interest payable
   
33,318
     
33,318
 
Accrued estimated taxes payable
   
5,561
     
7,108
 
Accounts payable and other accrued liabilities
   
1,751
     
1,751
 
 
               
Total liabilities subject to compromise
 
$
198,746
   
$
200,293
 

In accordance with ASC Topic 852, interest was no longer accrued on the trust-preferred securities and senior notes included in liabilities subject to compromise after Capitol filed for bankruptcy protection.  If Capitol had continued to accrue interest on these debt obligations, additional contractual interest expense of $2.7 million for the three months ended March 31, 2013 would have been reported.

Reorganization Items

Professional advisory fees and other costs directly associated with the reorganization are reported separately as reorganization items pursuant to ASC Topic 852.  The reorganization items for the three months ended March 31, 2013 consisted only of professional fees in the amount of $1,080,000.

Note C – Change in Accounting Principle

Effective January 1, 2013, the Corporation elected to change its method of accounting related to the reserve for, and payment of, delinquent real and personal property taxes on properties serving as collateral for impaired loans.  The Corporation pays delinquent property taxes on these properties to avoid lien attachment by the taxing authorities.  Previously, the Corporation recorded an accrued liability for delinquent property taxes in accordance with ASC 450-20, "Loss Contingencies," with a corresponding charge to "Costs associated with foreclosed properties and other real estate owned."  Recent regulatory guidance suggests a more preferable method of accounting for these estimated delinquent property taxes is to consider the amount of such taxes when performing impairment analyses on collateral-dependent impaired loans.  Based on its analysis, the Corporation has determined this method of accounting is preferable.  Under the newly adopted method of accounting, when a loan is deemed to be collateral-dependent and a specific impairment analysis is performed, the delinquent property taxes will be reflected in the impairment calculation similar to estimated selling costs.  The decision on whether to reserve for, or charge-off, the amount of delinquent property taxes will depend upon whether the net value of the collateral (property appraised amount, less estimated costs to sell and the amount of the delinquent property taxes) is greater or less than the loan balance.  When the delinquent property taxes are paid, the amount will be added to the loan basis and considered in current and future impairment analyses.

In accordance with ASC 250-10-45, "Accounting Changes – Change in Accounting Principle," the Corporation is reporting the change in accounting principle through retrospective application as of the beginning of 2012, the first period presented in the accompanying condensed consolidated financial statements.  This is also the period through which the Corporation has determined it is practicable to determine the most appropriate amount of the beginning adjustment.  For periods prior to 2012, management believes determining the appropriate amount is impracticable due to the availability of records, subsequent changes in loan balances and relationships and the assumptions about

Page 12 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESION)
 
Note C – Change in Accounting Principle – Continued
management's intent at the time that is now difficult to independently substantiate.  Also, management believes retrospective application of the new accounting principle to periods prior to 2012 would not produce a materially different result.

Upon retrospective application of the new accounting method, it was determined that either (1) the adjusted impaired loan analyses resulted in no additional reserves or charge-offs, or (2) an adequate amount of unallocated allowance for loan losses existed to absorb the impact of any collateral shortfall on a by-loan basis.  As a result, the net effect of adopting the new accounting method was a decrease of the retained-earnings deficit and a reduction of accrued liabilities of $4.1 million as of January 1, 2012.  As indicated in the following table, the cumulative increase to portfolio loans, decrease to the accrued liability and decrease to the retained-earnings deficit were $3.1 million, $3.5 million and $6.6 million, respectively, as of December 31, 2012.

All 2012 periods have been retrospectively adjusted to reflect the change in accounting principle.  The following tables summarize the adjustments to the Corporation's unaudited condensed consolidated financial statements for each affected line item (in $1,000s, except per-share data):

Condensed Consolidated Balance Sheet (Unaudited)

 
 
As of December 31, 2012
 
 
 
 
 
As Previously
Reported
   
Effect of
Change in
Accounting
Principle
   
 
 
 
As Adjusted
 
 
 
   
   
 
Portfolio loans, less allowance for loan
losses
 
 
$
 
1,143,212
   
 
$
 
3,050
   
 
$
 
1,146,262
 
Total assets
   
1,618,252
     
3,050
     
1,621,302
 
Accrued interest on deposits and other
liabilities
   
 
9,779
     
 
(3,518
 
)
   
 
6,261
 
Total liabilities
   
1,762,368
     
(3,518
)
   
1,758,850
 
Retained-earnings deficit
   
(430,590
)
   
6,568
     
(424,022
)
Total Capitol Bancorp Limited
stockholders' equity deficit
   
 
(133,869
 
)
   
 
6,568
     
 
(127,301
 
)
Total equity deficit
   
(144,116
)
   
6,568
     
(137,548
)


Condensed Consolidated Statement of Operations (Unaudited)

 
 
For the Three Months Ended March 31, 2012
 
 
 
 
 
As Previously
Reported
   
 
Reclassification
of Discontinued
Operations(1)
   
Effect of
Change in
Accounting
Principle
   
 
 
 
As Adjusted
 
 
 
   
   
   
 
Costs associated with foreclosed
properties and other real estate owned
 
 
$
 
5,148
   
 
$
 
(389
 
)
 
 
$
 
(700
 
)
 
 
$
 
4,059
 
Total noninterest expense
   
27,097
     
(1,919
)
   
(700
)
   
24,478
 
Loss before income tax benefit
   
(9,197
)
   
350
     
700
     
(8,147
)
Loss from continuing operations
   
(9,080
)
   
278
     
700
     
(8,102
)
Net loss
   
(8,931
)
           
700
     
(8,231
)
Net loss attributable to Capitol Bancorp
Limited
   
 
(7,912
 
)
           
 
700
     
 
(7,212
 
)
Net loss per common share attributable
to Capitol Bancorp Limited
 
 
$
 
(0.19
 
)
                 
 
$
 
(0.18
 
)

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

Page 13 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESION)
Note D – Accounting Standards Updates

In February 2013, an accounting standards update was issued to amend and improve the reporting of reclassifications out of accumulated other comprehensive income.  The amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements.  However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts.  This new guidance became effective prospectively for all annual and interim periods beginning January 1, 2013 and it did not have a material effect on the Corporation's condensed consolidated financial statements upon implementation.

Note E – Investment Securities

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

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

 
 
March 31, 2013
   
December 31, 2012
 
 
 
 
Amortized
Cost
   
Estimated
Fair
Value
   
 
Amortized
Cost
   
Estimated
Fair
Value
 
 
 
   
   
   
 
United States treasury
 
$
3,497
   
$
3,497
   
$
3,499
   
$
3,500
 
United States government agency
   
5,000
     
4,971
     
4,000
     
3,987
 
Mortgage-backed
   
7,573
     
7,707
     
8,098
     
8,219
 
 
                               
 
 
$
16,070
   
$
16,175
   
$
15,597
   
$
15,706
 

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

 
 
March 31, 2013
   
December 31, 2012
 
 
 
Gains
   
Losses
   
Gains
   
Losses
 
 
 
   
   
   
 
United States treasury
 
   
   
$
1
   
 
United States government agency
 
   
$
29
           
$
13
 
Mortgage-backed
 
$
134
             
121
         
 
                               
 
 
$
134
   
$
29
   
$
122
   
$
13
 


Page 14 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

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

 
 
March 31, 2013
   
December 31, 2012
 
 
 
Unrealized
Loss
   
Carrying
Value
   
Unrealized
Loss
   
Carrying
Value
 
One year or less:
 
   
   
   
 
United States government agencies
 
$
29
   
$
4,971
   
$
13
   
$
3,987
 

 
 
 
 
 
 
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 March 31, 2013 were as follows (in $1,000s):

 
 
Amortized
Cost
   
Estimated
Fair Value
 
 
 
   
 
Due in one year or less
 
$
3,498
   
$
3,498
 
After one year, through five years
   
1,000
     
999
 
After five years, through ten years
   
4,558
     
4,583
 
After ten years
   
7,014
     
7,095
 
 
               
 
 
$
16,070
   
$
16,175
 





 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
[The remainder of this page intentionally left blank]

Page 15 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESION)
Note F – Loans

The following tables present the allowance for loan losses and the carrying amount of loans based on management's overall assessment of probable incurred losses (in $1,000s), and should not be interpreted as an indication of future charge-offs:

 
 
March 31, 2013
 
 
 
Secured by Real Estate
   
   
   
   
   
 
 
 
 
 
 
 
Commercial
   
 
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
 
 
 
 
Consumer
   
 
 
 
 
Other
   
 
 
 
 
Unallocated
   
 
 
 
 
Total
 
 
 
   
   
   
   
   
   
   
 
Allowance for loan
losses:
 
   
   
   
   
   
   
   
 
Individually
evaluated for
impairment
 
$
8,238
   
$
3,365
   
$
1,238
   
$
1,576
   
$
50
   
   
   
$
14,467
 
Collectively
evaluated for
probable incurred
losses
   
13,119
     
6,434
     
1,452
     
3,676
     
302
   
$
141
   
$
19,091
     
44,215
 
 
                                                               
Total allowance
for loan losses
 
$
21,357
   
$
9,799
   
$
2,690
   
$
5,252
   
$
352
   
$
141
   
$
19,091
   
$
58,682
 
 
                                                               
Portfolio loans:
                                                               
Individually
evaluated for
impairment
 
$
115,241
   
$
32,604
   
$
12,239
   
$
12,566
   
$
99
                   
$
172,749
 
Collectively
evaluated for
probable incurred
losses
   
561,646
     
185,422
     
36,238
     
86,623
     
8,786
   
$
2,238
             
880,953
 
 
                                                               
Total portfolio
loans
 
 
$
 
676,887
   
 
$
 
218,026
   
 
$
 
48,477
   
 
$
 
99,189
   
 
$
 
8,885
   
 
$
 
2,238
           
 
$
 
1,053,702
 


 
 
December 31, 2012 (As Adjusted – Note C)
 
 
Secured by Real Estate
   
   
   
   
   
 
 
 
 
 
 
 
Commercial
   
 
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
 
 
 
 
Consumer
   
 
 
 
 
Other
   
 
 
 
 
Unallocated
   
 
 
 
 
Total
 
 
 
   
   
   
   
   
   
   
 
Allowance for loan
losses:
 
   
   
   
   
   
   
   
 
Individually
evaluated for
impairment
 
$
8,246
   
$
2,803
   
$
1,058
   
$
1,405
   
$
57
   
   
   
$
13,569
 
Collectively
evaluated for
probable incurred
losses
   
13,380
     
8,596
     
1,810
     
4,102
     
1,098
   
$
5
   
$
20,895
     
49,886
 
 
                                                               
Total allowance
for loan losses
 
$
21,626
   
$
11,399
   
$
2,868
   
$
5,507
   
$
1,155
   
$
5
   
$
20,895
   
$
63,455
 
 
                                                               
Portfolio loans:
                                                               
Individually
evaluated for
impairment
 
$
124,795
   
$
38,722
   
$
14,037
   
$
14,028
   
$
94
                   
$
191,676
 
Collectively
evaluated for
probable incurred
losses
   
635,225
     
214,971
     
42,388
     
114,068
     
9,230
   
$
2,159
             
1,018,041
 
 
                                                               
Total portfolio
loans
 
 
$
 
760,020
   
 
$
 
253,693
   
 
$
 
56,425
   
 
$
 
128,096
   
 
$
 
9,324
   
 
$
 
2,159
           
 
$
 
1,209,717
 

Page 16 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

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

The tables below summarize activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012 (in $1,000s) by loan type:

 
 
Three Months Ended March 31, 2013
 
 
Secured by Real Estate
   
   
   
   
   
 
 
 
 
 
 
 
Commercial
   
 
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
 
 
 
 
Consumer
   
 
 
 
 
Other
   
 
 
 
 
Unallocated
   
 
 
 
 
Total
 
 
 
   
   
   
   
   
   
   
 
Beginning balance
 
$
21,626
   
$
11,399
   
$
2,868
   
$
5,507
   
$
1,155
   
$
5
   
$
20,895
   
$
63,455
 
 
                                                               
Less allowance for
deconsolidated
subsidiary – Note H
   
(765
)
   
(869
)
   
(53
)
   
(422
)
   
(48
)
                   
(2,157
)
 
                                                               
Charge-offs
   
(2,393
)
   
(1,320
)
   
(2,393
)
   
(854
)
   
(142
)
   
(7
)
           
(7,109
)
Recoveries
   
1,570
     
1,092
     
1,783
     
562
     
56
     
1
             
5,064
 
Net charge-offs
   
(823
)
   
(228
)
   
(610
)
   
(292
)
   
(86
)
   
(6
)
           
(2,045
)
 
                                                               
Provision for loan losses
   
159
     
(875
)
   
402
     
289
     
(684
)
   
138
             
(571
)
 
                                                               
Net change in
unallocated
allowance
   
1,160
     
372
     
83
     
170
     
15
     
4
     
(1,804
)
       
 
                                                               
Ending balance
 
$
21,357
   
$
9,799
   
$
2,690
   
$
5,252
   
$
352
   
$
141
   
$
19,091
   
$
58,682
 


 
 
Three Months Ended March 31, 2012
 
 
 
Secured by Real Estate
   
   
   
   
   
 
 
 
 
 
 
 
Commercial
   
 
Residential
(including
multi-
family)
   
Construction,
Land
Development
and Other
Land
   
Commercial
and Other
Business-
Purpose
Loans
   
 
 
 
 
Consumer
   
 
 
 
 
Other
   
 
 
 
 
Unallocated
   
 
 
 
 
Total
 
 
 
   
   
   
   
   
   
   
 
Beginning balance
 
$
37,007
   
$
19,328
   
$
10,372
   
$
13,928
   
$
689
   
$
17
   
$
4,447
   
$
85,788
 
 
                                                               
Charge-offs
   
(5,852
)
   
(4,375
)
   
(2,150
)
   
(1,778
)
   
(295
)
                   
(14,450
)
Recoveries
   
2,393
     
3,202
     
773
     
1,355
     
63
     
7
             
7,793
 
Net charge-offs
   
(3,459
)
   
(1,173
)
   
(1,377
)
   
(423
)
   
(232
)
   
7
             
(6,657
)
 
                                                               
Provision for loan losses
   
983
     
(114
)
   
680
     
(784
)
   
99
     
2
             
866
 
 
                                                               
Net change in
unallocated
allowance
   
(4,254
)
   
(1,547
)
   
(466
)
   
(800
)
   
(59
)
   
(13
)
   
7,139
         
 
                                                               
Ending balance
 
$
30,277
   
$
16,494
   
$
9,209
   
$
11,921
   
$
497
   
$
13
   
$
11,586
   
$
79,997
 


Page 17 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued
The average total portfolio loans for the three months ended March 31, 2013 and 2012 were $1.1 billion and $1.5 billion, respectively.  The ratio of net charge-offs (annualized) to average portfolio loans outstanding was 0.72% and 1.79% for the three months ended March 31, 2013 and 2012, respectively.

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

 
 
March 31,
2013
   
December 31,
2012
 
 
 
   
As Adjusted
(Note C)
 
Nonaccrual loans:
 
   
 
Loans secured by real estate:
 
   
 
Commercial
 
$
77,341
   
$
83,499
 
Residential (including multi-family)
   
26,830
     
29,719
 
Construction, land development and other land
   
8,961
     
8,440
 
Total loans secured by real estate
   
113,132
     
121,658
 
Commercial and other business-purpose loans
   
9,609
     
11,678
 
Consumer
   
458
     
292
 
Total nonaccrual loans
   
123,199
     
133,628
 
 
               
Past due (>90 days) loans and accruing interest:
               
Loans secured by real estate:
               
Commercial
   
1,459
     
660
 
Residential (including multi-family)
   
--
     
85
 
Total loans secured by real estate
   
1,459
     
745
 
Commercial and other business-purpose loans
   
--
     
70
 
Total past due loans
   
1,459
     
815
 
 
               
Total nonperforming loans
 
$
124,658
   
$
134,443
 
 
               
Real estate owned and other
repossessed assets
   
 
68,874
     
 
81,031
 
 
               
Total nonperforming assets
 
$
193,532
   
$
215,474
 

Impaired loans which do not have an allowance requirement include collateral-dependent loans for which direct write-downs have been made to the carrying amount of such loans and, accordingly, no additional allowance requirement or allocation is currently necessary.





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Page 18 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued
Impaired loans are summarized in the following table (in $1,000s), based on loans which either have an allowance for loan losses recorded or no such allowance as of March 31, 2013:

 
 
 
 
Carrying
Value
   
 
Unpaid
Principal
Balance
   
Related
Allowance
for Loan
Losses
 
 
 
   
   
 
With an allowance recorded:
 
   
   
 
Loans secured by real estate:
 
   
   
 
Commercial
 
$
73,297
   
$
83,568
   
$
10,028
 
Residential (including multi-family)
   
18,889
     
32,057
     
4,287
 
Construction, land development and other land
   
7,133
     
13,621
     
1,249
 
Total loans secured by real estate
   
99,319
     
129,246
     
15,564
 
Commercial and other business-purpose loans
   
9,899
     
17,022
     
2,023
 
Consumer
   
526
     
706
     
133
 
 
   
109,744
     
146,974
     
17,720
 
With no related allowance recorded:
                       
Loans secured by real estate:
                       
Commercial
   
74,764
     
103,585
         
Residential (including multi-family)
   
22,625
     
26,636
         
Construction, land development and other land
   
7,907
     
9,919
         
Total loans secured by real estate
   
105,296
     
140,140
         
Commercial and other business-purpose loans
   
6,225
     
8,688
         
Consumer
   
23
     
31
         
 
   
111,544
     
148,859
         
 
                       
Total
 
$
221,288
   
$
295,833
   
$
17,720
 

Included in total impaired loans as of March 31, 2013 is $165.0 million of loans modified and reported as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note), along with $6.9 million of loans modified as troubled debt restructurings which are no longer reported as troubled debt restructurings due to the loans being in compliance with their modified terms and having an interest rate consistent with market rates.





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Page 19 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued
Interest income is recorded on impaired loans if not on nonaccrual status, or may be recorded on a cash basis in some circumstances, if such payments are not credited to principal.  For the three months ended March 31, 2013 and 2012, the average recorded investment in impaired loans and interest income recorded on impaired loans were as follows (in $1,000s):

 
 
Three Months Ended
 
 
 
March 31, 2013
   
March 31, 2012
 
 
 
Average
   
Interest
   
Average
   
Interest
 
 
 
Recorded
   
Income
   
Recorded
   
Income
 
 
 
Investment
   
Recorded
   
Investment
   
Recorded
 
 
 
   
   
   
 
Commercial
 
$
157,119
   
$
1,953
   
$
172,193
   
$
1,661
 
Residential (including multi-family)
   
49,660
     
509
     
61,433
     
613
 
Construction, land development and other land
   
22,727
     
126
     
35,475
     
286
 
Total loans secured by real estate
   
229,506
     
2,588
     
269,101
     
2,560
 
Commercial and other business-purpose loans
   
20,122
     
223
     
26,274
     
302
 
Consumer
   
416
     
1
     
239
     
4
 
 
                               
Total
 
$
250,044
   
$
2,812
   
$
295,614
   
$
2,866
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans are summarized in the following table (in $1,000s), based on loans which either have an allowance for loan losses recorded or no such allowance as of December 31, 2012:

 
 
 
 
Carrying
Value
   
 
Unpaid
Principal
Balance
   
Related
Allowance
for Loan
Losses
 
 
 
As Adjusted
(Note C)
   
As Adjusted
(Note C)
   
 
With an allowance recorded:
 
   
   
 
Loans secured by real estate:
 
   
   
 
Commercial
 
$
76,961
   
$
90,983
   
$
9,638
 
Residential (including multi-family)
   
20,672
     
34,886
     
3,564
 
Construction, land development and other land
   
7,406
     
13,213
     
1,153
 
Total loans secured by real estate
   
105,039
     
139,082
     
14,355
 
Commercial and other business-purpose loans
   
11,598
     
20,550
     
2,001
 
Consumer
   
373
     
1,517
     
139
 
 
   
117,010
     
161,149
     
16,495
 
With no related allowance recorded:
                       
Loans secured by real estate:
                       
Commercial
   
76,706
     
110,852
         
Residential (including multi-family)
   
26,100
     
33,126
         
Construction, land development and other land
   
9,625
     
13,922
         
Total loans secured by real estate
   
112,431
     
157,900
         
Commercial and other business-purpose loans
   
7,574
     
11,379
         
Consumer
   
22
     
22
         
 
   
120,027
     
169,301
         
 
                       
Total
 
$
237,037
   
$
330,450
   
$
16,495
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in impaired loans as of December 31, 2012 is $185.0 million of loans modified as troubled debt restructurings (see further discussion under the Troubled Debt Restructurings section of this Note).
 

Page 20 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued
The following tables summarize the aging and amounts of past due loans (in $1,000s):

 
 
March 31, 2013
 
 
 
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
 
$
17,861
   
$
1,459
   
$
77,341
   
$
96,661
   
$
580,226
   
$
676,887
 
Residential (including multi-
family)
   
4,595
             
26,830
     
31,425
     
186,601
     
218,026
 
Construction, land development
and other land
   
851
             
8,961
     
9,812
     
38,665
     
48,477
 
Total loans secured by real
estate
   
 
23,307
     
 
1,459
     
 
113,132
     
 
137,898
     
 
805,492
     
 
943,390
 
Commercial and other business-
purpose loans
   
2,028
             
9,609
     
11,637
     
87,552
     
99,189
 
Consumer
   
170
             
458
     
628
     
8,257
     
8,885
 
Other
                                   
2,238
     
2,238
 
 
                                               
Total
 
$
25,505
   
$
1,459
   
$
123,199
   
$
150,163
   
$
903,539
   
$
1,053,702
 


 
 
December 31, 2012 (As Adjusted – Note C)
 
 
 
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
 
$
17,580
   
$
660
   
$
83,499
   
$
101,739
   
$
658,281
   
$
760,020
 
Residential (including multi-
family)
   
6,750
     
85
     
29,719
     
36,554
     
217,139
     
253,693
 
Construction, land development
and other land
   
4,242
             
8,440
     
12,682
     
43,743
     
56,425
 
Total loans secured by real
estate
   
 
28,572
     
 
745
     
 
121,658
     
 
150,975
     
 
919,163
     
 
1,070,138
 
Commercial and other business-
purpose loans
   
3,269
     
 
70
     
11,678
     
15,017
     
113,079
     
128,096
 
Consumer
   
362
             
292
     
654
     
8,670
     
9,324
 
Other
                                   
2,159
     
2,159
 
 
                                               
Total
 
$
32,203
   
$
815
   
$
133,628
   
$
166,646
   
$
1,043,071
   
$
1,209,717
 

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

Pass.  Loans classified with a pass rating have been deemed to have acceptable credit quality by bank management.
Page 21 of 59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITOL BANCORP LIMITED (DEBTOR-IN-POSSESSION)

Note F – Loans – Continued

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

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

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

 
 
March 31, 2013
 
 
 
Pass
   
   
Total
Portfolio
Loans
 
 
 
 
Watch
   
 
Substandard
 
 
 
   
   
   
 
Loans secured by real estate:
 
   
   
   
 
Commercial
 
$
457,318
   
$
78,092
   
$
141,477
   
$
676,887
 
Residential (including multi-family)
   
156,103
     
20,617
     
41,306
     
218,026
 
Construction, land development and
other land
   
28,883
     
6,495