Capitol Bancorp Keeps Hanging On, But for How Much Longer?
Part 1 of 2
Capitol Bancorp could soon hit the wall after a long run that has cheated the odds.
It once operated dozens of banks across the country under its signature strategy of partnerships with local investors. But the financial crisis dealt Capitol a severe blow because it was heavy into states such as Arizona, Michigan and Nevada that suffered the most. It has been busy slimming down since then.
"I tip my hat to them," says Eliot Stark, a managing director at Headwaters MB, a Denver investment bank. "They've gone through this liquidation process without going into conservatorship. It is really pretty amazing; no one would have thought in 2008 that they would still be alive in 2012."
The company, however, might be running out of options.
Capitol made an abrupt about-face in April 2009, abandoning aspirations of chartering 100 banks. It hired KBW to help unload healthy banks and used the proceeds to prop up the strugglers. Three years later the company has whittled its franchise to 14 banks, from a peak of 64, through sales and consolidations. So far, Capitol has managed to keep all of its banks out of the hands of the Federal Deposit Insurance Corp.
Most of its remaining banks are deeply troubled despite periodic capital injections. The holding company has $108 million of negative equity and is saddled with debt from trust-preferred securities.
Capitol has four pending bank sales that would reduce its assets by $235 million and raise about $6 million. If it completes the sales, the company would have 10 banks. Seven of those banks are dangerously close to becoming critically undercapitalized, a level at which regulators are typically compelled to step in and shutter an institution.
"It really comes down to those remaining troubled banks and what is left in those portfolios," says Terry Keating, a managing director at Amherst Partners in Chicago. "Have they been repaired to a point of breakeven? They wouldn't be able to sustain substantial losses again without a source of capital."
Late last month the company reported consolidated nonperforming assets of $324.6 million, down nearly a quarter from a year earlier. Though the amount remains high for the $2.2 billion-asset company, the decrease was positive.
Based on past quarters I would guess around May 15th. The other thing that bothers me about an article like that is that there was no mention at all that CBCR had done a small trust pref exchange previously and was likely to at least try another one. To discuss CBCR options and not at least mention that possibility shows either a negative bias or ignorance on the part of the author.
Also, to write an article about CBCR prospand not get into the Michigan Commerce situation seems odd. MI is the 800 pound gorilla in the room when it comes to CBCR. No mention really of that situation. No mention of the possibility that CBCR might return to profitability sometime in 2012 which would eliminate the need to keep selling banks to raise capital.
Then again, do we really expect smart financial people with a good understanding of complex financial issues to be working as low paid journalists?
Your analysis is more precise than mine. I won't argue with you and I hope the folks running the company are headed in the direction you propose. I think they can pull it off, so I am staying long.
Raising about 50 million of outside capital and converting about 2/3 of the trust pref to equity simultaneously would save the bank and put the equity at the holding co at about 60 mil while improving the capital levels at the banks. It's a tricky deal to pull off, but possible IMO.
The trust pref would be likely to take equity IF this also brings in outside capital. Outside capital could be attractive if the trust pref debt can be simultaneously cut to cleanup the balance sheet. I continue to think that this scenario and most others likley scenarios favor the trust pref holders over the common.
Here's what I think, for what it's worth.... Putting money into this thing is a long shot. As the article says, which I have been saying, it is highly unlikely that there will be a buyout. $108 million in the hole and lose out of the deferred tax asset. I don't believe that the "franchise" is worth much at all, and certainly not $108 million. It's not that many banks and if someone wanted such a franchise, they could get it much cheaper in other ways. I'd love to be wrong about that, but I think there will be no buyout. HOWEVER, there are two major factors the company can capitalize on. That's converting the preferred and getting into a position to take advantage of the deferred tax asset. If they can convert enough preferred to wipe out the negative equity, or close to it, then how attractive would it be to a new investor to put money in, expand the overall business, and collect tax free income until that sizable tax asset is gone? A couple hundred million of tax savings is nothing to sneeze at. JMO
Capitol Bancorp Keeps Hanging On, But for How Much Longer?
Part 2 of 2
None of Capitol's banks have failed, but the FDIC has asserted that the company controlled Commerce Bank of Southwest Florida, which failed in late 2009. Capitol has maintained that it did not own an interest in the bank, which cost the Deposit Insurance Fund $23.6 million.
Calls to Capitol were not returned. Investment bankers say there still might be a few other levers left to pull but they are either longshots or too incremental.
There are still a few banks that could fetch a premium, Stark says, particularly the $154 million-asset Capitol National Bank. Based in Lansing, Mich., it is the franchise's patriarch and the only one of its banks with a national charter. Capitol National is among the healthier of the remaining banks; it was adequately capitalized at Dec. 31, with a total risk-based capital ratio of 9.03%.
"It is still a small gem that could be sold," Stark says. "Maybe it brings in $15 million and keeps them going for awhile."
The benefit of hanging on this long is that others' appetite for troubled banks has improved, Keating says, such that even significantly undercapitalized banks could attract some prospective buyers. Capitol can attest to that: it has deals to sell two significantly undercapitalized banks in North Carolina.
Investors are trying to focus on the upside potential, while putting money that was initially raised to buy failed banks to work, Keating says. "On the whole, investors are expecting the market to improve and are trying to get their money in," Keating says.
In its annual filing with the Securities and Exchange Commission, Capitol says it is seeking new capital. Given the company's insolvency and debt, that is the least likely outcome, industry observers say. Investors are likely unwilling to invest enough money to pull the company out of its capital hole and then refill its coffers.
"I don't see anyone stepping in to recapitalize the company," Stark says. "It would take $100 million just to get it to zero."
Chip MacDonald, a partner at the law firm Jones Day, says the company could potentially look to recapitalize its struggling banks by filing for bankruptcy, though that would be extremely difficult.
"You have to have a really solid plan with somebody coming in with capital," MacDonald says. "It is hard to recap banks and holding companies that do not have a core strategy."
Regulators have been gracious in working with Capitol, MacDonald adds. Its most-troubled banks are its biggest ones, and the failure of any of those particular banks could jeopardize the whole company by piling the cost of the failure onto the remaining banks.
Also, Capitol owned 51% stakes in many of its younger banks, with local investors owning the rest. Many of the local investors have managed to buy their banks outright, and the FDIC has given them waivers for any liability for Commerce Bank of Southwest Florida. Should any of the remaining banks fail, Capitol would face a much easier resolution process compared with a two years ago.
"Kudos to the company for being able to keep it going," MacDonald says. "But the FDIC deserves a lot of credit for hanging in there and allowing them to get it resolved on their own."