Even for a company as expansion-minded as Capitol Bancorp Inc. of Lansing, Mich., 2005 has been an extraordinarily busy year.
The $3.4 billion-asset multibank holding company has opened five banks, bought the majority stake in another, and filed applications to open five more by mid-2006. Capitol, which bills itself as a community bank development company, has entered three new states this year - Colorado, Georgia and Washington - and will move into two more if pending applications are approved.
Joseph D. Reid, Capitol's chairman and chief executive officer, said this week that the company did not start the year with a set number of new banks or new markets in mind. He said its strategy is the same as it always has been: to open independently chartered, one-branch banks wherever it can find good bankers.
"When we select a location, the state really is irrelevant," he said. "Our plan is to develop small banks when, in an almost Darwinian fashion, they are becoming extinct."
Though Capitol will make an occasional acquisition, it has mostly expanded by establishing new banks. Generally, its strategy is to provide 51% of the capital to start a bank and then buy out the minority shareholders after roughly three years. The new banks keep their own presidents and local boards, but the back-office tasks are handled by the holding company, an approach Mr. Reid said combines the benefits of larger bank's economies of scale with a small bank's strength of local decision-making.
The new banks typically are one-branch operations because Capitol wants its local presidents to be trusted business advisers to business owners, Mr. Reid said. Building branch networks would distract the company from that mission, he said.
Capitol opened an average of just over two banks a year from 2000 to 2004. Its five this year would make 2005 its most active year since 1998, when it added seven.
It started 2005 off by opening Bank of Michigan, in Farmington Hills, on Jan. 10.
In April it established itself in Georgia by buying 51% of Peoples State Bank of Jeffersonville. That was significant because Georgia law prohibits out-of-state banks from opening banks there without a Georgia charter; Capitol has since filed applications to open in two faster-growing Georgia markets, Valdosta and Atlanta.
In June, Capitol opened Bank of Bellevue in Washington, its first in that state, then, in a three-week span between July 13 and Aug. 1, it opened another bank in its home state, Bank of Auburn Hills, entered Colorado with the opening of Fort Collins Commerce, and opened Bank of San Francisco, its fifth in California.
Capitol now has 38 banks in 10 states. It also has applications pending for banks in Santa Barbara, Calif., Belleville, Ill., and Lee's Summit, Mo. Missouri and Illinois would both be new markets.
Terry McEvoy, an analyst with Oppenheimer & Co., said he expects Capitol to keep adding banks. The new banks are the foundation of its growth, and the added name recognition makes finding new bankers easier, he said.
"Instead of Capitol going out and trying to find bankers to start up new banks, it is now to the point where the word has spread where bankers are coming to Capitol and saying, 'That is something I might be interested in,' " Mr. McEvoy said. "That has created the opportunities that led to the increased number of start-ups this year."
Mr. Reid said Capitol could add an unlimited number of banks as long as its back-room operations, such as accounting, can keep pace.
"One of the challenges I face day to day with the swelling numbers of financial institutions is to make certain we have the proper infrastructure in place to provide the services that allow our banks to flourish," the CEO said.
Bradley Ness, an analyst with Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., said Capitol's assets have grown about 11% a year. As it gets bigger, it will have to add banks at an even faster clip if it is to maintain that growth, he said.
"They are definitely investing in the future to sustain some kind of above-average balance-sheet growth," Mr. Ness said. But "one of these days it would just increasingly get more difficult to manage that expansion."
