ABA Banking Journal - May 2007 - (Page 34) COVER STORY 51 banks, and banking operations in 14 states … and counting * “We have a couple of banks that have branches, but we’re not good at it.” “Our banks are ‘banks of destination’,” he explains, “not ‘banks of convenience.’ When people come to our banks, they usually get out of their car, even though we have some banks that offer drive-ins.” Take the greater Phoenix market, or the Las Vegas market. In both cases, Capitol has chosen to establish multiple banks. The mix of approaches varies with the submarkets and neighborhoods targeted with each new charter. The Capitol contingent in greater Phoenix, for instance, includes a bank chartered especially to serve the AsianAmerican market and another in development that will target the Hispanic market. CEOs, boards, and customer segments tend to be precisely targeted, and the emphasis is on smaller business loans, typically secured with real estate. Reid says even in the same markets, affiliates rarely bump heads. CEOs say when the rare instance of chasing the same target happens, it gets worked out. Whether the market is Vegas or a community of 6,000 people, Reid’s philosophy is the same: “To me it isn’t about the market, it’s about the leadership.” To Reid, that is critical. And linked to his concept of a banker as a professional. “Our entire strategy is based on staying small. These banks are driven by relation- Key Capitol affiliate or shared-ownership de novo Loan production office Pending opening/application Additional sites also under consideration. * A 52nd bank was on the verge of opening, in Colorado, at press time. 51 banks* and banking operations in 14 states and counting ships,” says Reid. “Now, I know you hear that from lots of community banks. All community banks say that they are ‘relationship driven’ and they all say that they provide better service, take better care of their customers. And they do.” But Reid says that for many such institutions, their success actually undoes them. “The problem is, they grow out of it,” he explains. “The market demands that they grow, and they’ve got to continue to grow. So they open ten branches, 20 branches, and all of a sudden, they’re not what they were before. They’ve become something else.” Unfortunately, says Reid, these bulked-up community banks begin to kid themselves. “They grow large, and they’re something else,” he says. “So then they say, sure, but our people are great. Yes, but BofA’s people, Wells Fargo’s people, they’re all great too.” So Reid prefers to open new banks, hence the clustering that sometimes goes on. “We just can’t get these banks opened fast enough,” he says. He’d rather open a new bank than let an existing charter grow too large—indeed, the company doesn’t pay much heed to relative size in the market nor to market share. Reid considers market share irrelevant to a banking professional. “We want to get our new bank up to $150 million, which is almost a perfect bank for us, in terms of optimal performance,” says Reid. “I never tell a president, ‘You’ve got to keep growing.’ What I say is, ‘Get your bank up to a size where you’ve got your arms around it, you know what’s going on, you’re comfortable with it.’ Can you name me another bank holding company that’s driven by that?” Camelback Community Bank’s Gail Grace puts it in a nutshell, from the CEO’s perspective: Growth, she says, is never a top item of discussion; the focus, instead, is on each bank’s profitability, notably, ROE. Indeed, CEO compensation is based on the ROE of their bank. And Reid also has a strong rule-ofthumb for when a bank, no matter what its asset size, has grown large enough. And that is when the CEO begins thinking about taking his or her office off the “Want a bank? I’ll meet you just past half-way” A A key element of Capitol Bancorp’s de novo strategy is its “incubator” approach. When Capitol starts a new bank, it doesn’t fund it solely from its own coffers. Chairman and CEO Joe Reid’s belief is that if a new bank is going to fly, it must have the interested support of local investors/customers, its own board, and its top management team. Capitol, using special bank development subsidiaries, puts up 51% of the capital, while local interests put up 49%. The other, nonfinancial investment Capitol provides is logistical and administrative support, as well as a deep bench of experienced experts. “We tell the board that they have to get about 150 investors,” says Reid. Capitol doesn’t want any big checks, no investment bankers. It wants local money, and won’t sell the new bank’s stock out of state. And, more specifically, it wants investment by people who will bring their banking business to the new bank. “If they’re not going to open up accounts,” Reid warns the new board and team, “do not give them stock.” This way, “everybody’s incented to get the bank up and running and profitable,” Reid explains. Typically, after three years, when the new bank is going into the black, Capitol offers to exchange the local bank’s shares for its own stock. The usual rate is at about 1.5 times book. Frequently, Reid says, he’ll hear the minority investors point out that a bank down the street sold for, say, two times book. “My question is, how long were those stockholders in the deal? Because a 50% premium after 36 months comes out to three times book over a 12-year period,” says Reid. “It’s the duration that makes the difference in the investment.” Capitol Bancorp stock is a pretty good medium of exchange to get, Reid says, and if the investors choose to take their gains right away, it’s a liquid public stock. “The worst deal we ever had was something around a buck thirty five on a buck,” says Reid. “And that’s a pretty good investment right there.” —Steve Cocheo 34 MAY 2007/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.ababj.com/subscribe.html Table of Contents for the Digital Edition of ABA Banking Journal - May 2007 Contents Editor's Column Got Blogs? A Few Pioneers have Embraced this “New Media” Parting Advice from Fed's Bies Sleight of Mind Snapshot: Efficiency Stays Flat Two Snag Stock Contest Honors This Mid-Size Bank Likes Investment Banking ABA Resources ABA Chairman's Position Taxes: The Forgotten Piece of Bank Profits Pass the Aspirin "I'm Not the Contrarian" Top Performers 2007 - Part 1: Banks Over $3 Billion A Closer Look at Two Standouts Banking on the Wild Side - Not All Bankers Play Golf Picturing Strategy with Numbers Don't Laugh: There's a "Wiki" in Your Future Counting on Vista and "Payments as a Service" to Lure Small Firms Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy ABA Banking Journal - May 2007 http://www.nxtbook.com/naylor/BAKS/BAKS0515 http://www.nxtbook.com/naylor/BAKS/BAKS0415 http://www.nxtbook.com/naylor/BAKS/BAKS0315 http://www.nxtbook.com/naylor/BAKS2/BAKS1014 http://www.nxtbook.com/naylor/BAKS2/BAKS0914 http://www.nxtbook.com/naylor/BAKS2/BAKS0814 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