Capitol Bancorp Ltd. is taking radical measures to combat a drastic capital crunch.

The $4.2 billion-asset company plans to ask its shareholders, who have seen their stock drop 78% in value in the past year, to increase the number of authorized shares to 1.5 billion from 50 million at a meeting in late January. Capitol, with headquarters in Lansing, Mich., and Phoenix, had 21.6 million shares of common stock outstanding at Oct. 31.

The massive dilution, Capitol said, would allow it to pursue a multipronged capital strategy announced last week that includes exchanging $170.8 million of trust-preferred securities for common equity and a $25 million rights offering to existing shareholders. The plan also calls for a possible reverse stock split, which would later decrease the number of shares.

Although the deal would significantly improve the company's capital structure and reduce expenses, it doesn't cure all ills. In fact, Capitol's pro forma numbers, based on a best-case scenario, move the total risk-based capital ratio to 7.8% from 1.89% at Sept. 30, leaving it still below the threshold of being adequately capitalized. Additionally, the moves likely would fall short of supporting its largest and most sickly banks, industry observers said.

"This is going to help, but it is not a slam dunk," said Eliot Stark, the managing director of the financial institutions group at Headwaters MB, a Denver investment bank. "They need fresh money. They would get some from the rights offering, but it is hard to judge if it will be enough to recapitalize all the banks that are struggling."

Capitol's three biggest banks were significantly undercapitalized at Sept. 30.

Karen Dorway, the president of BauerFinancial, a bank rating firm in Coral Gables, Fla., said that Michigan Commerce Bank in Ann Arbor, which accounts for about a quarter of Capitol's assets, needs $29.6 million to be adequately capitalized. Its second-largest bank, the $460 million-asset Bank of Las Vegas in Nevada, and its third-largest bank, the $400 million-asset Sunrise Bank of Arizona in Phoenix, both need roughly $12 million, she said.

Dorway said that given the high level of nonperforming assets, the banks would need significantly more capital to return to good health. At Sept. 30, Capitol had a consolidated nonperforming asset ratio of 10.59%.

Stark said that it might be a tough sell convincing existing shareholders to double down. "They are going to want to know that they are not throwing good money after bad," he said.

Capitol might have an easier time with its trust-preferred holders. This is the second time Capitol has solicited such investors.

In October, it called off an exchange offer to the holders of its most expensive tranche after failing to gain consent from senior debtholders. Now, Capitol is asking all trust-preferred holders to take common equity.

If completed, the plan would dramatically alter Capitol's ownership. In effect, trust-preferred holders would own the company, Stark said. Existing shareholders could end up with as little as a 2% stake in Capitol, he said.

"If this happens, the existing shareholders are going to be diluted down to marginal ownership," Stark said. "This might be their only chance to get some value. If they say no, they might just be speeding up their money's pace to zero."

The most recent capital-boosting efforts follow Capitol's divestiture strategy of the past few years. It has sold 13 banks since 2009 and consolidated nearly two dozen others. Those moves have reduced assets and brought in some capital, and more is expected.

Since Sept. 30, it has completed four divestitures, which will reduce assets by $340 million and bring in about $25 million of proceeds that will show up in the fourth quarter.

It has an additional five sales pending that, if completed, would reduce assets by another $500 million and bring in $33 million more.

Capitol did not return calls for comment, but in a press release issued Dec. 23, Joseph D. Reid, the company's chairman and chief executive, said the new capital plan furthers a goal to deleverage the balance sheet and could provide a road map for building more capital.

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