Capitol Bancorp Ltd., which has bet its success on an innovative model of expanding into high-growth territories, is paring back its exposure to its low-growth home turf of Michigan.
The Lansing company said Monday that it would sell four banks in the state to Northstar Financial Group Inc., a financial holding company based in Bad Axe, for $52 million. The price is roughly 1.5 times the tangible book value of the banks, which have $420 million of assets and have not performed well over the past year.
Capitol began expanding outside Michigan in 1996 and has since spread to 17 states, but its overall performance has remained heavily dependent on its home state's economy.
"Even with the dramatic growth in other parts of the country, we have been a bit top-heavy with Michigan," said Michael M. Moran, Capitol's chief of capital markets. "Given today's economic environment in Michigan, that concentration has been problematic."
After the sale closes, Michigan banks would make up 16% of the company's charters and 28% of its assets, Mr. Moran said. Currently 13 of Capitol's 62 bank charters and 34% of its assets are in Michigan. And with six additional charter applications being processed, Capitol's concentration in its home state is expected to fall further in the coming years.
"Our key objective for the last several years is continued geographic diversification," he said. "It should result in a more balanced operation."
Three of the four banks being sold — Kent Commerce Bank, Muskegon Commerce Bank, and Paragon Bank and Trust — reported a combined loss of $1 million for last year. At the fourth, Grand Haven Bank, 5.7% of all loans are nonperforming.
"This is surprisingly good news, given the quality of those four banks," said Terry McEvoy, an analyst at Oppenheimer & Co. "Michigan is a crummy market right now. To exit these markets without a loss is good news today."
In late trading Monday, Capitol's shares were down slightly, to $20.98.
Capitol began rolling out its banking development model a little more than a decade ago, launching banks in high-growth states like Texas, California, and Arizona to offset the slow growth of Michigan.
And even though credit problems have become a national problem, they have been amplified in Michigan. Almost 20% of Capitol's $72.6 million of nonperforming loans are at the banks being sold to Northstar.
Christopher McGratty, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., said that with many of Capitol's other banks still relatively green — 11 were launched last year — the company has struggled to offset the credit issues in Michigan.
"It takes time for these new franchises to become profitable," Mr. McGratty said. "Shedding some of its lower profitability in Michigan is incrementally positive," because "it allows them to accelerate their geographic diversification."
Mr. Moran described the deal as "opportunistic" and said it does not signal a complete departure from its home state.
"Michigan is still a critical component of our operation," he said. "Our roots are still here, and despite the state's economy, we believe there is embedded value in our franchises."
The deal is set to close this quarter. Northstar, which did not return calls for comment, owns two community banks in Michigan and one in Florida, and according to a Capitol press release, it has over $500 million of assets.
The release said the acquirer has a "strong system of supporting community banks in the areas of back-room operations and is in a position to work with the new banks in a highly successful and efficient manner."
