Reeling from loan losses in its beleaguered home state, Capitol Bancorp Ltd. in Lansing, Mich., plans to cut overhead by combining several of its Michigan banks.
It is a drastic measure for the $5.4 billion-asset Capitol, which has made its reputation operating single banks in multiple markets. It currently has 64 banks in 17 states.
But the company says the move would not only improve its efficiency, it would also set up Capitol, never much of an acquirer, to buy banks hobbled by the credit crisis.
"Obviously, we have a lot of work to do in strengthening the underlying organization," said Michael Moran, Capitol's chief of capital markets. But, he said, "this puts us in a position to be acquisitive. … Our strength and resources could be compelling for other banks around the area that might be struggling."
Capitol disclosed the consolidation plan Thursday — five weeks after the collapse of its deal to sell four underperforming banks in western Michigan to Northstar Financial Group Inc. of Bad Axe, Mich.
Mr. Moran said that his company has been approached by other buyers since but that a deal could not be worked out. So instead, it will merge the four banks it planned to sell into two: Grand Haven Bank is merging with Muskegon Commerce Bank, and Kent Commerce Bank is merging with Paragon Bank and Trust.
Capitol also said its Detroit Commerce Bank would be combined with two others in its southeast Michigan market: Oakland Commerce Bank and Macomb Community Bank.
Those seven banks, along with two others in which Capitol has a controlling interest, have lost $11 million so far this year. Its four other Michigan banks have earned $4.5 million on the year.
Brad Milsaps, an analyst at Sandler O'Neill & Partners LP, called Capitol's decision to regionalize its banks a "small positive." But he said its growing credit troubles could be an obstacle in its plan to start buying banks.
"They have to get their own house in order first," Mr. Milsaps said. "Maybe if they can put some of their credit issues to bed it could happen … but unless there is some special circumstances, I think it is unlikely."
Capitol said Thursday that it swung to a loss of $32.5 million in the third quarter, or $1.90 a share, from a profit of $6 million, or 35 cents a share, a year earlier. Nonperforming assets rose 93%, to $127 million.
Capitol's chairman and chief executive, Joseph D. Reid, said that, though combining charters would "not immediately mitigate our exposure to the struggling Michigan economy," it "will serve to better harness our resources and allow us to more efficiently allocate capital."
The consolidation is expected to save Capitol $3.3 million a year. Mr. Moran said he expects it to be completed by yearend.
Up to now, Capitol's story has been one of organic growth; 61 of its 64 of its banks were start-ups, Mr. Moran said, and that is likely to remain the strategy for future growth.
However, Mr. Moran said the company sees the current environment as ripe with opportunity. Specifically, it wants to be able to participate in deals structured by the Federal Deposit Insurance Corp., buy banks looking to sell themselves, or even take over the deposits of failed institutions. "We are not deviating, just augmenting our business plan to be opportunistic if opportunities arise," he said.
Mr. Moran said Capitol started thinking more seriously about acquisitions last week after Monroe Bank and Trust of Monroe, Mich., which is about a quarter of the size of Capitol, acquired the deposits of the failed Main Street Bank in Northville, Mich.
"We took that to heart," he said. Deposits of failed banks "are usually folded into the larger institutions."
