Verus Thrives After Cutting Ties with Capitol Bancorp

A breakup perhaps has never ended so well as when the local investors bought out Capitol Bancorp's majority stake in three Colorado banks more than two years ago.

The banks — Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce — were merged a few months later to create Verus Bank of Commerce in 2011. The combined bank, based in Fort Collins, has gone on to post double-digit loan growth and healthy loan-to-deposit and efficiency ratios. 

The buyouts were a necessity for the minority investors, who raised about $14.5 million in 2010 to make the deals with the $1.8 billion-asset Capitol happen, says Gerard Nalezny, Verus' chairman and chief executive.

Capitol, which once owned more than 60 banks, has divested dozens of banks since 2009, using the proceeds to keep capital levels at its struggling banks above a critically undercapitalized threshold where they could be seized by regulators. Last year the Lansing, Mich., company filed for Chapter 11 bankruptcy protection.

"In banking, if you have a sick partner, their problems end up being your problems," Nalezny says. "It can spill over in a variety of ways. We didn't really have an alternative."

One concern involved cross-guaranty liability, which gives the Federal Deposit Insurance Corp. the ability to pin the cost of a failure to any related banks. The FDIC has said Capitol controlled a bank that failed in Florida in 2009, but the agency granted liability waivers for banks it was able to sell.

Severing ties with Capitol lifted "a cloud of uncertainty" and led to "less regulatory scrutiny," says Wesley Brown, co-founder and managing director of St. Charles Capital, a Denver investment bank.

Verus now expects a higher return on assets and return on equity in 2013. With an average 105% loan-to-deposit ratio, the $257 million-asset bank is considering acquisitions, Nalezny says.

There are several reasons for the bank's high loan-to-deposit  ratio, which means it has more loans than deposits at a time when most banks are drowning in liquidity. Northern Colorado has a relatively healthy economy. The September unemployment rate in the Fort Collins/Loveland area was 5.8%, according to St. Charles Capital. Colorado's unemployment rate stood at 7.4% in September, while the national rate was 7.8%, the firm says.

Verus' markets are "economically viable," Brown says. "It's not crazy or anything, but it's a pretty healthy economy. The area is gaining right now and Verus is pretty well positioned."

Northern Colorado has a well-educated population — Fort Collins is home to Colorado State University — and a well-paid population. The market also has a smattering of manufacturing and technology companies. The Fort Collins area, just east of the Rocky Mountains, is "a very beautiful place to live, so it tends to attract higher-paying businesses," Brown says.

These factors also make the area extremely competitive for banks, Brown says. Verus has distinguished itself by focusing on "the basics" of customer relationships, says Nalezny, who shares leadership responsibilities with Mark Kross. 

The bank, a unit of Verus Acquisition Group, sticks to consistent underwriting and provides quick turnarounds for borrowers. With just two branches, the bank's lenders also visit customers when needed, which helps them develop long-term relationships with borrowers. The bank counsels business owners about long-term growth plans to find out how it can help along the way.

"We don't ever advertise," Nalezny says. "There's no magic to it. It's just a matter of taking some time with customers."

Verus was also able to "push the gas pedal" on lending at a time when many competitors had to pull back, Brown says. A large portion of the loan book involves commercial real estate, an area that got many other banks in trouble, but Verus' underwriting helped it avoid problems, Nalezny says.

CRE loans cover a wide range of loans, Nalezny says. Verus mostly avoided speculative land deals and other higher-risk areas, he says. Instead, it largely required borrowers to have equity in its deals, which also included loans from the Small Business Administration.

"We were lending when other people weren't," Nalezny says. "That goes a long way with customers."

Acquisitions could help Verus bring greater equilibrium to its loan-to-deposit ratio. Last year, Pacific Premier Bancorp in Costa Mesa, Calif., which has an almost even amount of loans and deposits, agreed to buy First Associations Bank in Dallas to gain more deposits to back its loan growth.

Shareholders have urged Verus to consider expanding, and the bank is open to a variety of possibilities, Nalezny says. It would consider acquisitions of whole banks or branches. But sellers' pricing expectations remain high, making it difficult to find the right opportunity, he says.

"Having gone through an acquisition from Capitol, I think we have the core competency to do a deal," Nalezny says. At the right price, "I think we can generate the financial returns to do a deal."