Capitol Bancorp Says Its N.M. Bank Faces Seizure

Capitol Bancorp (CBCRQ) has been fighting for survival for a few years now, but the next month might prove to be its toughest battle.

The multibank holding company in Lansing, Mich., disclosed on Wednesday that the New Mexico Regulation and Licensing Department has given it until Dec. 20 to address the capital woes at its Sunrise Bank of Albuquerque or face seizure. Sunrise is significantly undercapitalized and its state regulator says the bank is operating in an unsound condition and lacks a quorum of outside directors.

"The bank is actively addressing this notice and working toward correcting its capital position as part of Capitol's restructuring and recapitalization efforts," the company said in its regulatory filing.

The failing of one bank could be detrimental to the overall company, given the Federal Deposit Insurance Corp.'s ability to levy the cost of a failure on related banks. At Sept. 30, all of the $1.7 billion-asset company's remaining dozen banks were in fragile states. None of the banks is considered well capitalized.

Capitol filed for Chapter 11 bankruptcy reorganization in the U.S. Bankruptcy Court for the Eastern District of Michigan in August and a confirmation hearing is set for Dec. 4. The plan calls for all of Capitol's existing debt and equity be converted into a 53% equity stake and for new investors to invest $70 million to $115 million in exchange for a 47% stake.

In October, Capitol entered into agreements with ValStone Partners, a private-equity firm in Michigan, to invest $50 million in the company and buy $207 million of its nonperforming assets. The agreements, however, are contingent on the approval of the bankruptcy. Otherwise, ValStone can walk away without a penalty.

Bankruptcy lawyers say the company doesn't need to have definitive agreements for all of the capital by the confirmation hearing, but would likely need to show substantial proof that it was close to getting such agreements quickly. The hearing has been rescheduled twice — it was initially set for mid-September, then moved to mid-October. That could be a sign that Capitol is struggling to line up the additional investors, lawyers say, though they added that rescheduling is not entirely unusual.

Capitol also reported that its Central Bank of Arizona, Sunrise Bank of Arizona and Pisgah Community Bank were critically undercapitalized, with leverage ratios at or below 2% at Sept. 30. Such a capital classification gives regulators the legal authority to close banks, but Capitol said it plans to push the banks' ratios above the threshold by the end of November.

The company said it would do so with the proceeds it is expecting to receive from the sale of High Desert Bank, which is expected to close this quarter. A strategy of selling banks to prop up others has been Capitol's key to survival since April 2009. At the onset of the downturn, the company had 64 banks. Through consolidations and sales, it had a dozen at Sept. 30.

The company's financial condition improved modestly in the third quarter, with nonperforming assets falling 10% from the second quarter, to $231.8 million. Capitol reported a third-quarter loss of $5.67 million, narrowing its loss by 75% from a year earlier.