Eroding financials prompted FDIC to increase oversight of Michigan Commerce Bank

Among the requirements issued by federal and state banking regulators: The bank must plan to sell itself or merge into an institution that is not controlled by Capital Bancorp, its Lansing-based holding company.

At the same time, borrowers who have outstanding loans more than 90 days delinquent will be affected: The bank has been ordered to stop extending additional credit - including interest-only payments - without board approval. Each delinquent borrower faces a review of their cash flow and collateral value.

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

Bank officials did not return calls seeking comment.

While officials have been taking steps since late March to correct the issues at the bank, unclear is the timeline for resolution.

“In general, these orders serve as a roadmap for banks to improve their condition,” said Jason Moon, spokesperson for the state’s OFIR. “… Banks typically do meet the terms of the orders.”

Michigan Commerce Bank, based locally at the corner of South State and Eisenhower in Ann Arbor, 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.

Ann Arbor Commerce Bank was the second-largest community bank in Washtenaw County when the merger was announced. Its market share even grew from June 2008 to June 2009.

Yet after the merger, as 8 other Michigan banks moved to operate under its charter, and two more joined them since, several key measures of bank health showed significant enough erosion that regulators first stepped into the picture in 2009.

At the same time, the bank’s holding company - Capital Bancorp., based in Lansing - announced in federal filings that it planned to spinoff Michigan Commerce into a separate entity but had not yet received regulatory approval. At that time, Michigan Commerce had consolidated assets of $1.2 billion and about 1/3 of the holding company's total nonperforming assets.

One sign of concern: 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.

“That’s a very high concentration of loans to finance commercial real estate,” said Stephen Lange Ranzini, president of University Bank in Ann Arbor.

Those commercial loans also represent about 9 times the bank’s overall capital, which is a trigger for regulators - particularly as falling values for commercial buildings and development land continue to hammer balance sheets of banks that once aggressively pursued the sector.

“The FDIC recently sent out …. guidance reminding banks of what they need to do if they have more than three times their capital in commercial real estate loans, because they consider that a risk,” Ranzini said. “A high concentration in commercial real estate in the current environment is going to cause problems.”

Meanwhile, the bank’s tier-one capital ratio - defined as both the core measure of a bank’s strength and its ability to sustain future losses - has steadily dropped every quarter since early 2009.

Federal regulators expect a bank holding company to have a ratio of 4 percent or higher. A bank with a ratio under 2 percent would be cause for immediate action.

And at Michigan Commerce Bank, that number dropped to 3.19 percent by March 31, one third of where it stood a year earlier.

According to the consent order, the bank has to raise it to 9 percent. In comparison, the Michigan banking average at year-end was 10.92 percent.

Meanwhile, the bank’s return on equity - a measure of how it’s performing for shareholders - was -234.5 percent at the end of March, compared to -11.81 percent a year earlier.

The consent order also calls for management consultants to assess the bank’s executive staff.

By the end of June, the bank “shall have and retain qualified management,” according to the order. Management cannot have ties to Capital Bancorp. The board of directors also cannot have ties to Capital Bancorp.

The new management, according to the order, must be capable of restoring “all aspects of the bank to a safe and sound condition” in areas including earnings, liquidity and management effectiveness.

As regulators force changes at Michigan Commerce Bank, customers of the bank who are not behind on their loans should see no changes.

“These types of orders are designed to help the bank take a look at what it has to do to make sure it is as safe, as sound and as profitable as it can be,” said Gail Madziar, vice president of membership and communications for the Michigan Banker Association.

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

The FDIC has closed three banks in Michigan this year, with about 200 projected to close in the U.S. in 2010. The closest was New Liberty Bank in Plymouth, which was acquired this month by the Bank of Ann Arbor.

Paula Gardner is Business News Director at AnnArbor.com. Contact her at 734-623-2586 or by email.