Capitol Bancorp Ltd. of Lansing, Mich., plans to extend its unconventional network of community banks to all of the "lower 48" states.
"We want to look at developing a powerhouse community bank system," Joseph D. Reid, the company's chairman and chief executive officer, told investors last week at a conference in Chicago.
He joked that the bank development and holding company plans to open enough new banks "to have regulators with us 365 days a year."
The $2 billion-asset Capitol owns 29 community banks in Michigan, Indiana, Arizona, California, Nevada, and New Mexico. Its growth has come quickly: At the end of last year 10 subsidiaries had been in business for less than three years, and nine others had been in business for less than five. This year Capitol has opened two banks, including Napa Community Bank in California on Friday.
Capitol's modus operandi is to help launch banks by providing 51% of their start-up capital and remaining the majority stockholder for about three years. If the bank is then profitable, the company trades Capitol shares for the 49% minority stake and assumes full ownership.
The formula works because Capitol's stock price keeps rising - a $10,000 investment made in March 1992 would be worth about $64,500 today.
Not even industry giants such as Bank of America Corp. or Citigroup Inc. have established a 48-state presence, but Mr. Reid says he is undaunted.
"We think you can be a national bank without having $500 billion in assets," he said in an interview after the conference, which was sponsored by Margolin & Associates Inc. of Beachwood, Ohio.
The next phase of Capitol's expansion would involve Texas, then the Southeast - particularly Virginia, the Carolinas, and Florida, Mr. Reid said. He refused to give a detailed timetable, except to say that "we're looking at Texas as a great possibility for developing in the next six months."
He also said that Capitol could reach its goal without abandoning its decentralized business plan, which lets each subsidiary bank maintain a separate charter and local management team.
As complicated as that can be with 29 subsidiaries and plans to establish dozens more, Mr. Reid said the decentralized structure is critical to helping the company implement its strategy. Consolidating those charters "would sound the death knell of Capitol Bancorp," he said.
Capitol's unusual business model has its critics, but Joseph A. Stieven, the director of financial institution research at Stifel, Nicolaus & Co. of St. Louis, said the company has done a better job of building its franchise than many traditional banks.
"A lot of banking companies have built franchises that are like a ball and chain," Mr. Stieven said. Capitol "was a long way" from hitting its growth ceiling, he said.
According to Mr. Reid, the chief impediment to growth is not capital but finding enough bankers willing to match Capitol's investment and start community banks.
The company's net income last year rose 33.4%, to $10.7 million, and it reported a return on equity of 13.3%.
However, Michael M. Moran, the executive vice president for business development, predicted that its key performance measures would get a boost this year from Sun Community Bancorp Ltd., a $733 million-asset company controlling 16 banks in Arizona.
Capitol had only a 51% stake in Sun for most of last year and had to include all of the Phoenix company's costs on its consolidated balance sheet while only claiming 51% of the profits, according to Mr. Moran. The company bought out Sun's minority investors in November, so it will be able to claim all of its profits this year, he said.
After the minority investors are bought out, the subsidiary banks continue to operate autonomously, Mr. Moran said. The company keeps its supervision to a minimum and helps out only with back-office support and Internet capabilities, he said.
Capitol manages the mortgage banking and trust services offered by each subsidiary bank, but that is a small part of operations, Mr. Moran said. At their hearts, each subsidiary is a bread-and-butter commercial bank, and lending policies are set locally, he said. "That charter reinforces the individuality of each of the affiliates."
Stephen P. Kent, the Chicago-based managing director of corporate finance for Keefe, Bruyette & Woods Inc., also says he is upbeat about Capitol's future.
As long as it maintains a disciplined approach to new markets and picks those with a high density of households and small and midsize businesses, the company will continue to do well, he said. "It's a model that needs to be selectively employed in distinct geographical areas."
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