Capitol Bancorp Ltd. finds itself in a precarious situation — even though it has spent the past 14 months shedding banks to raise capital.

Of the $5 billion-asset company's nearly three dozen bank units, five are undercapitalized. That's worrisome for Capitol, with dual headquarters in Lansing, Mich., and Phoenix, as the undercapitalized list includes its two largest units, Michigan Commerce Bank and Sunrise Bank of Arizona.

The deteriorating health of the banks puts Capitol at risk, analysts said. The failure of one unit, particularly one of the larger ones, could unravel the company.

"Without the capital they need, those banks keep moving up the ladder to be potentially closed," said Daniel Cardenas, an analyst with Howe Barnes Hoefer & Arnett Inc. "Should that happen, who knows what it would take down? It could start a domino effect for the company."

The company's defense against its weakening capital picture has been to sell wherever it can. Capitol has sold four banks and has pending deals to sell 12 more; it recently announced it would unload Bank of Fort Bend in Texas. Earlier this month it announced the sale of its Bank of San Francisco unit.

During its peak growth years, Capitol partnered with local investors to start banks. Its strategy was to own 51% for the first three years and then to buy the bank outright from the investors.

Today, however, local investors are the ones buying out Capitol's ownership stake — and with good reason. If one of Capitol's crippled banks fails, the remaining banks could be responsible for the cost of that failure through the Federal Deposit Insurance Corp.'s cross-guaranty powers. Essentially, that gives the FDIC the ability to seize and sell other banks to recoup losses from sister organizations.

"I would imagine that a lot of them are thinking 'Oh God, we are going to be on the hook.' That is strong motivation to want to do a deal," said Walter G. Moeling 4th, a partner in the law firm Bryan Cave LLP in Atlanta.

Several executives of banks with pending sales said the cross-guaranty liability was at least a factor in their decision to seek autonomy.

The FDIC has employed the cross-guaranty, though rarely, in the past. In July 1994 it seized Meriden Trust and Safe Deposit Co. in Connecticut to retrieve money it lost on the 1991 failure of Central Bank of Meriden. Both banks were owned by Cenvest Inc. The FDIC sold Meriden Trust in October 1994 for $7.8 million.

In a 2009 Securities and Exchange Commission filing Capitol acknowledged the inherent risk of its strategy. "The FDIC gave notice to many of Capitol's banking subsidiaries in December 2009 that, to mitigate the effects of any possible assessment arising from potential cross-guaranty liability, they should be encouraged to arrange a sale, merger or recapitalization such that Capitol no longer controls the bank," the company said.

Though none of Capitol's bank units have failed, the FDIC linked the failure of Commerce Bank of Southwest Florida to Capitol.

In a brief interview, Joseph D. Reid, Capitol's chairman and chief executive, said the entities once shared directors and that Capitol owned a small amount of preferred stock in the Florida bank. He personally owned shares as well, he said, yet both investments were sold before the bank failed. Reid added that though the FDIC has said Capitol asserted control over the bank, the Federal Reserve has made no such determination.

When asked about recapitalizing Capitol's bank units, Reid said the company is aggressively working on it. "We believe at the end of the day we will have achieved our objectives," he said.

Yet analysts said a problem with Capitol's strategy is that divestitures haven't brought in enough capital. "They are moving in the right direction with the sales," Cardenas said, "but in terms of capital, they are not meaningful."

For instance, Cardenas said if all the pending deals as of March 31 had closed then, the company's tangible common equity ratio would have been 1.6%, instead of 1.02%. Generally, that ratio should be above 6% for a bank company to be considered healthy.

Also, analysts said its complex, nationwide structure and stubborn credit problems have made it tougher for the company to raise capital.

Eliot Stark, a managing director at the Chicago investment banking firm Capital Insight Partners Inc., said local investors looking for a way out likely are struggling to find capital, too. "I think a lot of those deals have been done on a 'let me get financing' basis," he said.

Reid said the backlog results from the slow regulatory process.

Still, analysts said there is a sense of urgency for the company.At least seven of its banks, including the $1.2 billion-asset Michigan Commerce Bank, have capital mandates as part of consent orders. Capitol reported a $47.9 million first-quarter loss.

"The June numbers could be catalytic of what is going to happen for Capitol," Stark said. "If they post another big loss the situation is going to get real dire, real quick."

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