By David Hayes and Lindsey White and Tahir Ali
Capitol Bancorp Ltd. has repeatedly warned that the failure of one unit could bring down the entire franchise. As of June 6, regulators had seized four of the company's subsidiaries in the space of a month.
The North Carolina Office of the Commissioner of Banks closed Asheville-based Pisgah Community Bank on May 10, and shortly thereafter the Georgia Department of Banking and Finance shut down Valdosta-based Sunrise Bank.
Pisgah Community Bank, Ashville, North Carolina May 10, 2013
Sunrise Bank, Valdosta, Georgia May 10, 2013
In a rare Tuesday failure, the Arizona Banking Superintendent seized Scottsdale-based Central Arizona Bank on May 14. FDIC spokesman Greg Hernandez told SNL that the bank was scheduled to be closed by the state regulator May 10, but the closing was delayed through a legal challenge.
Central Arizona Bank, Scottsdale, Arizona May 14, 2013
State regulators also attempted to close North Las Vegas, Nev.-based 1st Commerce Bank on May 10, but the bank fended them off with a temporary restraining order. The FDIC stepped in and closed 1st Commerce on June 6.
1st Commerce Bank North Las Vegas, Nevada June 6, 2013
All four failed banks were small - as of March 31, Pisgah had $21.9 million in assets and $21.2 million in deposits; Sunrise Bank had about $60.8 million in total assets and $57.8 million in total deposits; Central Arizona had roughly $31.6 million in assets and $30.8 million in deposits; and 1st Commerce had about $20.2 million in assets and $19.6 million in deposits. All four had significant concentrations of commercial real estate loans.
North Carolina's Interim Commissioner of Banks seized Pisgah after the bank failed to come up with a recapitalization plan that did not rely on injections from its holding company. In an Order Taking Possession, the commissioner called the bank's problems "permanent and irremediable."
"Since May 2010, the officers and directors of the Bank have been aware of the problems and deficiencies and have not made appropriate corrections," the order stated.
Pisgah had a 2.48% leverage ratio March 31. At 2.44%, 1st Commerce Bank's was even lower. Among Capitol's remaining subsidiaries, Sunrise Bank of Arizona had a leverage ratio of 2.27% March 31. Bank of Las Vegas, the unit Capitol was seeking to merge with 1st Commerce, had a leverage ratio of 2.21% at the end of the first quarter.
After state regulators appointed the FDIC receiver, Rockville, Md.-based Capital Bank NA, a unit of Capital Bancorp Inc., assumed all of Pisgah's deposits and approximately $19.8 million of its assets.
Columbus, Ga.-based Synovus Bank, a unit of Synovus Financial Corp., assumed about $54 million in deposits from Sunrise Bank and purchased about $13.2 million of the failed bank's assets.
On May 14, Devils Lake, N.D.-based Western State Bank, a unit of Western State Agency Inc., assumed all of the deposits and purchased essentially all of the assets of Central Arizona Bank.
The FDIC signed a purchase and assumption agreement with Irvine, Calif.-based Plaza Bank to acquire all the deposits and essentially all the assets of 1st Commerce Bank on June 6. Plaza Bank is a unit of PB Holdings Inc., whose ownership is shared by funds affiliated with Carpenter Bank Partners Inc.
When the first Capitol Bancorp subsidiary went down, the FDIC declined to comment on whether a failure would trigger cross-liability claims against other Capitol units. "We wouldn't comment on the other institutions, as they are open and operating. And we also wouldn't comment on potential enforcement action," FDIC spokeswoman LaJuan Williams-Young told SNL on May 10.
Capitol Bancorp has warned that the failure of any of its subsidiary banks would have "disastrous consequences."
"If even a single subsidiary bank were to be seized by the FDIC, it is likely that the FDIC would assert cross guarantee claims against the Company's solvent subsidiary banks, thereby crippling these subsidiary banks as well," Capitol Bancorp said in a June 2012 filing.
of Capitol Bancorp units continue to operate. Greg Dingens, executive vice president and head of investment banking at Monroe Securities, said regulators continue to knock off the worst of Capitol Bancorp's subsidiaries but still have not decided to exercise their cross-guaranty rights. He called this a wise strategy, given the situation and the company's unique ownership structure.
"My guess is [regulators] keep doing something like this until they feel like moving on the entire organization makes sense, but they haven't gotten to that point yet," Dingens told SNL.
Cross-guaranty claims have toppled entire franchises in the past. Andrew Christians, vice president at Donnelly Penman & Partners, gave the example of Oak Park, Ill.-based FBOP Corp., which saw nine of its banking units shuttered in one day in 2009. U.S. Bancorp assumed all deposits and most assets of the failed banks.
Of course, there are differences between the two situations. "When FBOP failed, granted, it was [several] years ago, it was much larger, the economy was in a different place, and its geographies were quite a bit different at the subsidiary banks," Christians said.
Capitol Bancorp's ownership structure is also different, and some observers say it may be preventing the FDIC from taking more sweeping action. The company has partial ownership in several banking units spread across the U.S.
Dingens said the FDIC is "breaking their own rules a little bit" to give local investors in Capitol Bancorp's subsidiaries a chance to recapitalize and get out from underneath the holding company ownership. "They're not penalizing the local investors for the sins of the parent as quickly as they might otherwise," he said.
Christians suggested that the FDIC may be in the process of looking for interested buyers for Capitol Bancorp's remaining banking units. "A lot of folks like certain parts of the franchise but don't like the entire franchise. It's a very convoluted structure," he said, adding that the FDIC may be "dragging their feet" on the cross-guaranty liability because of a lack of buyers.
Lansing, Mich.-based Capitol Bancorp has struggled to raise capital for years, restructuring and selling off a number of parts in the process. In August 2012, the company filed for a prepackaged Chapter 11 bankruptcy reorganization in the U.S. Bankruptcy Court for the Eastern District of Michigan, but various challenges forced it to scrap that plan.
In February, the court granted approval for an interim emergency motion by Capitol Bancorp to pursue a $1 million loan to prevent the possible imminent seizure of its Sunrise Bank of Albuquerque unit. Bankruptcy counsel for the company warned that Capitol Bancorp's other banking units "probably would go under" if Sunrise Bank of Albuquerque failed and the FDIC asserted cross-guaranty liabilities.
In a Form 10-Q filed May 15, Capitol Bancorp said it sold its remaining stake in Capitol National Bank in April. Capitol Bancorp said that proceeds from the sale are in escrow pending the issuance by the FDIC of a waiver of cross-guaranty liability. However, the company, in a Chapter 11 liquidation plan it proposed May 16, said the sales of its interests in Maumee, Ohio-based Bank of Maumee and Capitol National Bank remain "pending" and "are subject to regulatory approval and other significant contingencies."
"My understanding is that it's the FDIC's right, but not obligation, to seize other subsidiaries of the same holding company in order to try to recover their funds," Dingens said. "[The FDIC has] been exercising a judgment call and saying, 'I'd rather not take them all down, I'd rather give some of them a chance to be recapitalized independently.'"
Christians said the fact that the failure of four subsidiary banks has not toppled Capitol Bancorp suggests that the FDIC will continue closing one bank at a time, instead of taking down the entire franchise. "If they failed the holding company, I don't know if there would be one buyer for all those assets," Christians said. "So it might be in the best interest of everyone involved for them to allow the banks to continue to operate as community banks, until the time comes where they cannot or there's a capital solution in place."
In the wake of the four failures, Capitol Bancorp Corporate President Cristin Reid told SNL that the company will stay focused on finding positive solutions for its remaining affiliate banks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.