Regulators Seize Two Banks Owned by Capitol Bancorp

Time is starting to catch up with Capitol Bancorp (CBCRQ).

Regulators on Friday seized two banks owned by the $1.6 billion-asset company. The failures could tangle the Lansing, Mich., company in what the Federal Deposit Insurance Corp. calls the cross-guarantee liability, meaning that the agency has the ability to charge Capitol's nine surviving banks with the cost of the failures.

The FDIC expects the failures to cost a combined $26.2 million; that kind of hit could be detrimental to Capitol. The company is in a negative equity position and its surviving banks are all in various stages of duress.

The company and the FDIC declined to comment. For now, though, observers say the FDIC is likely weighing its options.

"The FDIC has a lot of discretion as it relates to imposing the cross-guarantee liability and I think they will look at whether they will lose more by imposing it now or not," says Ralph "Chip" MacDonald, a partner at Jones Day. "They also have a long time to assert it. My guess is that it will hold off until they evaluated the situation more closely."

In regulatory filings, Capitol has acknowledged what the possible impact a failure could mean to the overall organization. "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," the company said in its annual report filed with the Securities and Exchange Commission.

The North Carolina Office of the Commissioner of Banks closed the $21.9 million-asset Pisgah Community Bank in Asheville. The FDIC entered into an agreement with Capital Bank, allowing the in Rockville, Md., bank to buy $19.8 million of Pisgah Community's assets and assume all of its $21.2 million in deposits. The FDIC said in a press release it would retain the remaining assets for later disposition.

The FDIC expects the failure to cost the Deposit Insurance Fund $8.9 million. 

An hour later, the Georgia Department of Banking and Finance closed the $60.8 million-asset Sunrise Bank in Valdosta. The FDIC sold $13.2 million of the bank's assets to Synovus Bank. Synovus (SNV) also agreed to assume all of the bank's $57.8 million in deposits. The FDIC said it would hold the remaining assets for later disposition.

Sunrise's failure is expected to cost the Deposit Insurance Fund $17.3 million.

Capitol hired Keefe, Bruyette & Woods in April 2009 to help it explore recapitalization options. In lieu of new equity, the company sold several of its banks, using the proceeds to keep the weaker banks afloat.

Last year, Capitol filed for bankruptcy with the hopes of restructuring all of its stakeholders into a 53% equity stake in the company. The restructuring was expected to be paired with a new investor who planned to invest $70 million to $115 million in exchange for a 47% stake. One investor emerged, but later backed out. The company has pushed back the confirmation of its bankruptcy plan several times.

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