Ann Arbor-based Michigan Commerce Bank slows declines after FDIC consent order

“We do not anticipate any issues with our plans as we move forward,” said President and CEO John Smythe.

The order was issued March 31 and released in May by the Federal Deposit Insurance Corp. in Washington and Michigan’s Office of Financial and Insurance Regulation in Lansing.

Deadlines from the order are approaching at the end of June, when the bank “shall have and retain qualified management,” according to the order. Management cannot have ties to the bank’s holding company, Lansing-based Capitol Bancorp, and the board of directors also cannot have ties to Capitol Bancorp.

The bank completed a management study, said Smythe, and he said no significant staffing changes have taken place.

“The only change really that has been recommended is the addition of additional resources to (the special asset group to) handle the level to problem loans… to improve the balance sheet in the future,” Smythe said.

Michigan Commerce Bank, based locally at the corner of South State and Eisenhower, had $705 million in deposits as of June 30, 2009, according to FDIC filings. Of that amount, about half - $344 million - was from the Ann Arbor office, which ranked seventh in Washtenaw County banking market share as of that date. It held 5.69 percent of local deposits.

Smythe said bank is working through issues related to the economy, which is affecting Michigan investors and property values at a disproportionate rate.

“Once the economy stabilizes a little more in Michigan, and I’m hopeful we’re nearing that point, I suspect then the environment for financial institutions and the financial markets to raise capital …. should open up to a greater degree than they currently are,” Smythe said.

That situation also is affecting the bank's response to the order to prepare itself for sale or merger outside of Capitol Bancorp.

Business continues as usual at the banks, Smythe said, with most customers untouched by the consent order. He stressed that deposits are insured by the FDIC.

“We’re obviously very interested in continuing… relationships,” Smythe said.

A year ago, Michigan Commerce had consolidated assets of $1.2 billion and about 1/3 of Capitol Bancorp’s total nonperforming assets. The bank’s Tier 1 capital ratio, an indication of bank health, was 3.19 percent as of March 31. Regulators want that number above 9 percent.

At the same time, Michigan Commerce Bank’s outstanding commercial real estate loans represent 63.8 percent of its overall loan portfolio, according to FDIC data. The statewide average is 13 percent.

However, Smythe said, “I don’t think (commercial real estate) is dragging us down more than any other sector. … Not only have people lost asset value in real estate but also market value in their marketable securities.”

The bank is selling off its bad loans, he said, joining other banks in responding to that directive from federal regulators.

Meanwhile, state officials said they won’t comment on whether specific terms of consent orders are met.

“We do expect them to meet the terms,” said Jason Moon of the Michigan Office of Financial and Insurance Regulation.

By the next quarterly report from Michigan Commerce Bank, Smythe said, the bank should show a drop in loan totals, along with an elevated loan loss reserve for potential problem loans.

“We continue to expense and provide additional money to loan loss reserves,” he said. “That’s likely to remain high.”

The balance sheet also should show some stabilization, he added.

The consent order, Smythe said, “is a guideposts to get banks under those orders back into a better position. Many of those things in the consent order will serve to make us a stronger bank in the future.”

Other Michigan Commerce Bank offices are located in Auburn Hills, Brighton, Detroit, Grand Haven, Holland, Kentwood, Macomb, Muskegon, Farmington Hills and Portage.

Since the announcement about Michigan Commerce Bank, Capitol Bancorp [NYSE: CBC] has:

• Announced that it plans to sell its interest in the Bank of San Francisco sometime this year. The bank, founded in 2005, had 18 employees and $86 million in deposits as of March 31.

• Announced a stock exchange offer for securities in an effort to reduce expenses and increase Tier 1 capital ratio. Up to 2.9 million shares could be issued by the June 25 deadline.

Capitol Bancorp stock traded at $1.74 per share Wednesday, compared to a 52-week range of $1.29-$6.06. Its market capitalization is $38.35 million.

According to TheStreet.com, Capitol Bancorp has multiple undercapitalized bank subsidiaries on the FDIC’s Watch List. Besides Michigan Commerce Bank, they include Pisgah Community Bank of Ashville, N.C., Sunrise Bank of Arizona, Phoenix, Central Arizona Bank of Casa Grande and Bank of Las Vegas.

The company also announced agreements with private investors to raise $7.5 million in common equity on April 26.