Local banks fare well while shareholder struggles

Editor’s note: Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce are independently state chartered banks and not part of the Capitol Bancorp holding company. While Capitol Bancorp is a shareholder in the banks, it is only one among several hundred shareholders, and the terms of its agreement with the Federal Reserve have no direct impact on the operations of the local banks.

In another example of how the Northern Colorado market is different from the rest of the country, a national bank holding company has spent the past months attempting to restructure at the behest of a federal regulator, while its local affiliates appear to be bucking the downward trend.

Lansing, Mich.-based Capitol Bancorp is the holding company affiliated with Fort Collins Commerce Bank, Larimer Bank of Commerce and Loveland Bank of Commerce and more than 50 community banks nationally. Capitol Bancorp generally operates as a service provider to and shareholder of its community banking subsidiaries. The subsidiaries operate fairly autonomously, each with its own, independent board of directors.

In February, publicly traded Capitol announced its 66th consecutive quarterly dividend. At the end of September, the company entered into an agreement with the Federal Reserve following the announcement of several divestures and an attempted exchange offer that would consolidate its operations. The agreement limits the holding company’s ability to award dividends or divert any capital – in the form of dividends or other payments – from the banking subsidiaries operating under its umbrella.

The agreement explicitly forbids Capitol and its non-bank subsidiaries from increasing any fees charged to its subsidiary banks or levy any new fees without approval from the regulator.

The agreement also requires:

n a plan to maintain sufficient capital;

n a revised method for calculating its allowance for loan losses;

n a risk management plan;

n a strategic plan to improve its consolidated earnings and overall condition;

n compliance with banking regulations related to changes in executive level positions.

The agreement also requires Fed approval for any stock redemption between Capitol Bancorp and its secondary bank holding companies. In July, the company filed an exchange offer proposal with the U.S. Securities and Exchange Commission that would have enveloped related holding companies in exchange for preferred stock and trust-preferred securities. After filing two extensions to the offering, Capitol filed to terminate the exchange offer due to the inability to satisfy all of the conditions of the offering, including one that dealt with approvals from the SEC and authorization under state securities law.

“It’s discouraging, but (the Fed agreement) does serve to confirm that at the end of the day, we share a common objective with the regulator,´ said Mike Moran, chief of capital markets for Capitol. “It runs hand-in-hand with our efforts to harvest equity and build reserves.”

Toward that end, the holding company announced it would divest five affiliate banks, spin off its Michigan Commerce Bancorp and consolidate charters for banks in several regions. It has reduced its total loan portfolio by 11 percent since the start of the year.

For the third quarter, the holding company reported a net loss of $30.9 million – not far from the $32.5 million loss it reported for the third quarter of 2008.

“In certain markets, it’s a bit more challenging than in others,” Moran said.

Strong leadership in Northern Colorado

Capitol has subsidiaries in 17 states, including several that have been hard hit by the recession such as Michigan, Arizona and Nevada. Three of its subsidiaries are currently operating under Federal Deposit Insurance Corp. cease-and-desist enforcement actions – Mesa Bank in Mesa, Ariz., Goshen Community Bank in Goshen, Ind., and Bank of Tacoma in Tacoma, Wash. The other banks under the Capitol umbrella are not impacted by these actions or the holding company agreement.

The Northern Colorado banks are faring relatively well in this market. Gerard Nalezny, president of Fort Collins Commerce Bank, said that the issues for the bank holding company do not impact the local banks’ ability to continue normal operations. He explained that the situation is no different than if any other shareholder of the bank were going through it.

“We’ve been blessed to have strong leadership at each of the (Northern Colorado) banks and a strong supportive board of directors,” Moran said. “We are very enthusiastic and optimistic about continued strong prospects for those operations.”

Both Fort Collins Commerce and Larimer Bank of Commerce were operating in the black through the first half of the year at $166,000 and $183,000 respectively. Loveland Bank of Commerce reported a $177,000 loss. The results were similar to the same period last year. Additionally, the banks have all added to their loan portfolios since the start of the year and reported no “other real estate owned” – properties collected after default.

Except for the late-summer departure of Loveland Bank of Commerce President John Busby, it’s been largely business as usual for the Northern Colorado affiliates. At the same time, the holding company continues to make adjustments to its operations.

“It’s really to ensure we get through this and hopefully come out the other end a much stronger organization,” Moran said. “As a collective corporation, we have to make every effort to get through these difficult times.”

Kristen Tatti covers the banking industry for the Northern Colorado Business Report. She can be reached at 970-221-5400, ext. 219 or ktatti@ncbr.com.

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