Capitol Bancorp Ltd. of Lansing, Mich., is putting its cross-country expansion on hold while it sorts through credit problems at some of its Midwest banks.
The $5.4 billion-asset holding company, which has chartered 31 banks since the start of 2005, says that it will not open any more of them for the foreseeable future, and that two start-ups that were in the works are being converted into branches of its current banks.
With its stock price off 75% this year, Capitol is also suspending its long-standing practice of buying out investors who help capitalize its start-up banks.
The moves continue a retooling of sorts for Capitol, a company that has built its reputation operating single banks in multiple markets. In October it announced that it is merging seven of its Michigan banks into three and is even eyeing acquisitions.
Capitol has a network of more than 60 banks in 17 states, and Joseph D. Reid, its chairman and chief executive, has said his company hopes someday to have banks in every state in the continental United States.
But with asset quality problems — particularly at the Michigan banks — dominating the management team's time and energy, Capitol executives have determined now is a good time to focus on "harvesting" its current banks rather than building new ones from scratch. The company lost $32.5 million last quarter as nonperformers spiked 93% from a year earlier, to $127 million.
"We are focused inwardly, and that is where our time and energy is being spent," Michael Moran, Capitol's chief of capital markets, said in an interview Friday. "Right now we've got our sleeves rolled up, but we still believe in our model and plan to return to it when things stabilize."
Founded in Michigan, Capitol began moving into faster-growing states, such as Arizona, California, and Nevada, in the 1990s. Under its model, it hires a local banker with deep market knowledge and then typically rounds up local investors to take a 49% ownership stake in the new bank.
Though it is not contractually obligated to do so, Capitol usually buys out the minority investors at about the three-year mark, paying them, in Capitol stock, roughly 1.5 times the bank's book value.
However, with its shares now trading at around $5.75, the company would have to issue significantly more stock to local investors, so any buyout deal would be "materially dilutive," Mr. Moran said. "We've determined that we need to hold off" buying out investors "in the current environment."
About 10 of Capitol's banks are three years old or will soon be hitting their third anniversary, he said.
Dell Duncan, the president and CEO of Ohio Commerce Bank in Beachwood, a Capitol-chartered bank founded in November 2006, said his investors are starting to ask whether they will be able to cash out when the $55 million-asset bank hits its third anniversary next year.
But Mr. Duncan said it might be in the investors' best interest to wait not only for Capitol's stock to rebound, but also for Ohio Commerce to become profitable, so it will be worth more.
"Economists have written off 2009, and we are expecting our profitability to be down," he said, because of slowing growth, a narrowing net interest margin, and higher deposit insurance premiums. "Another year would give us more time to progress, ultimately giving our investors a better yield."
Capitol launched an average of nine banks a year in 2005, 2006, and 2007, and heading into this year its plan had been to open six more. Four of those start-ups made it off the ground, but one in Arizona ended up becoming a branch of another Capitol bank, and the same thing is likely to happen with another planned bank in the Southeast, Mr. Moran said.
Capitol has traditionally kept its banks to a single branch, but Mr. Moran said that given the economic environment, branching makes it easier for the community bankers to "continue to build their business" without the "capital-intensive raising of the straight de novo model."
Brad Milsaps, an analyst at Sandler O'Neill & Partners LP, said the shift away from chartering banks, though dramatic, is necessary. "With that many charters, it is difficult to keep up with what is going on," Mr. Milsaps said. "I think it is important that they don't open up any more banks for now."
Part of the slowdown is strategic. Mr. Moran said that Capitol cycles through times of massive expansion followed by periods where it is focused on growing its banks. Trouble finding interested investors, coupled with persistent loan problems in its home state, accelerated the move to the sidelines, he said.
"The large number of nonperforming loans in the existing banks is keeping them from reinvesting in new charters," Mr. Milsaps said. "It is a good idea to put the business model on hold until they can get their arms around credit issues in Michigan."