AUSTIN — Capitol Bancorp Ltd. of Lansing, Mich., has big hopes for Texas.
The community bank development company, which owns 54 banks in 14 states, is set to open its first banks in the state, in Houston and Dallas, in the next few months — and it is not likely to stop there.
Capitol's strategy is to establish banks in cities where it can find bankers to run them. Its regional president, Clinton Dunn, said he is recruiting bankers in such markets as Austin, San Antonio, and Corpus Christi.
The $4.4 billion-asset Capitol is targeting Texas for expansion because it sees opportunity there, Mr. Dunn said. He called its economy "robust" and said consolidation in the state has thinned the ranks of community banks and made more bankers available.
Starting banks in Texas, where it already has a loan production office, would provide Capitol with more "geographic diversification," as Mr. Dunn put it, at a time when several of its Great Lakes region banks are wrestling with shrinking margins and rising levels of bad loans.
"As you have probably read, Michigan is pretty low right now," Mr. Dunn said in an interview last week.
When starting a bank, Capitol puts up 51% of the capital and raises the rest from a local investment group. It typically buys out the minority interest after three or four years.
In April of last year Capitol announced it planned to have 100 individual community banks by 2011. Last week it opened its 54th bank, in Geneva, N.Y., and, besides the two in Texas, it has eight more in its pipeline, said Michael M. Moran, its chief of capital markets.
Capitol had to adjust its strategy to get into Texas, however.
Typically it applies for a state commercial charter when it wants to open a bank, but in Texas and a handful of other states, out-of-state commercial banks cannot move in unless they acquire a charter first. Capitol usually builds, not buys, so its only way into Texas was to seek thrift charters. (It has also done this recently in Oregon and Missouri.)
Capitol's banks primarily target small businesses. However, Stephen Geyen, an analyst with Stifel, Nicolaus & Co. Inc., said the charter should not matter much, because thrifts have business-lending powers.
Establishing a thrift charter was a better option than buying a commercial bank, Mr. Geyen said. "Certainly trying to acquire the charter of a bank in Texas is quite high, especially based on prices of acquisitions in Texas over the last few years."
Capitol is counting on its banks in Texas and other growth markets to help offset a general sluggishness at its home state's banks.
Capitol's second-quarter earnings fell 39%, to $6.3 million, from a year earlier, largely as a result of credit quality troubles in Michigan.
Ninety percent of Capitol's nonperforming loans are in Michigan, Mr. Moran said. "You might say that reinforces our existing efforts to focus on the geographic diversification opportunities that we have," he said.
Finding experienced bankers to run its banks in Texas could prove difficult for Capitol.
Many bankers displaced by consolidation are available and are not ready retire, but in Texas they have lots of options, said Lee Bradley, a managing director with Samco Capital Markets' bank development unit in Atlanta.
Start-up capital is so readily available in Texas that bankers who want to start their own banks instead of linking up with an out-of-state holding company can do so fairly easily, Mr. Bradley said.
"Bankers have been able to raise capital, so they don't need to hitch their wagon to another group," he said.
But Mr. Dunn said Capitol Bancorp would be a good fit for entrepreneurial bankers who do not want to go it entirely alone. He pointed out that the holding company can handle much of the back-office support, such as accounting and data processing, so that the bankers can go out and do what they do best — make loans and gather deposits.
The Dallas bank is to be headed by Gerald Hooker, the former president of Brookhollow National Bank in Dallas, which was sold to Regions Financial Corp. of Birmingham, Ala., five years ago.
Mr. Hooker has been with Regions since, but he and a team of lenders left this year to launch Capitol's Dallas bank, which is to be called Brookhollow Bank. The group has already started booking loans — about $8 million worth — through Capitol's Scottsdale, Ariz., subsidiary, Valley First Community Bank.
The Houston bank is to be called Bank of Fort Bend. Its president would be Bruce Mercer, a group leader in middle-market lending in Houston for Compass Bancshares Inc. of Birmingham.
Mr. Dunn said Capitol has struggled a bit to put a team in place in Houston, but he said that is because the company is not well known in Texas yet.
"As far as I'm concerned, the more banks we have in Texas, the more bankers we'll be able to find," he said. "As word gets out about what we are doing, the more people we will be able to attract."
