1st Commerce Bank, Nevada, Closed By Regulators – Fourth Bank Collapse In A Month for Capitol Bancorp

Nevada had its first bank failure in over two years as regulators swooped in to close tiny 1st Commerce Bank, North Las Vegas, Nevada.  After closing the bank, the FDIC exercised its powers as receiver and sold the failed bank to Plaza Bank, Irvine, CA.

All customer of 1st Commerce will automatically become customers of Plaza Bank on Friday when the bank reopens.  In addition, tomorrow and over the weekend, customers of 1st Commerce can access their money through the use of checking accounts, debit cards and ATM machines.

1st Commerce was a very small one branch bank with total assets of only $20.2 million and total deposits of $19.6 million at March 31, 2013.

In addition to assuming all deposits of 1st Commerce Bank, Plaza Bank also agreed to purchase the assets of the failed bank subject to a loss-share agreement with the FDIC covering $12.2 million of the asset portfolio acquired.  Under loss-share agreements, the FDIC is responsible for most of the future losses than may be incurred on the asset pool purchased by Plaza Bank.  The FDIC maintains that the use of loss-share agreements keeps the failed bank in the private sector which ultimately minimizes overall losses.

The loss to the FDIC Deposit Insurance Fund for the failure of 1st Commerce Bank is $9.4 million or a very hefty 46.5% of total assets .  1st Commerce Bank becomes the 15th banking failure of the year and the first in Nevada since April 2011.

The closing of small 1st Commerce Bank is basically a nonevent from a financial standpoint.  What is noteworthy about the failure of 1st Commerce Bank is that regulators allowed a bank to remain open long after it became insolvent.  At the time of closing, almost half of the assets on the failed bank’s balance sheet were worthless as indicated by the size of the loss to the FDIC.

Also noteworthy is the fact that 1st Commerce bank is the fourth banking failure in the past month of  banks owned by giant bank holding company Capitol Bancorp Ltd.  At December 31, 2012, Capitol Bancorp operated nine state chartered banks, one federal savings bank and one national bank that have combined total assets of $1.6 billion.  All of the 11 banks controlled by Capitol Bancorp are on the unofficial Problem Bank List and eight are operating under Prompt Corrective Action notices.

Since May 10, 2013, three other banks owned by Capitol Bancorp have collapsed – Pisgah Community Bank, Sunrise Bank and Central Arizona Bank.

As previously discussed, the prospects for Capital Bancorp to continue as an ongoing banking enterprise appear to be quite low.

Capitol Bancorp is a uniquely structured affiliation of community banks. Local banks controlled by Capitol Bancorp have local authority to make loans.  The parent company provides administrative and operational support services which, in the view of the parent company, allows each banking unit to perform more efficiently.

Unfortunately, Capitol’s theories on running banks did not work in the really world and many of its banks faced huge losses as loan defaults soared during the financial collapse and ensuing recession.

Capitol Bancorp has been attempting to either recapitalize or sell the various banks it controls without success.  Given the seriously undercapitalized condition of the banks owned by Capitol Bancorp, buyers are hard to find.  Serious buyers are more likely to wait until the banks are closed by regulators when FDIC assisted financing on favorable terms would be available.  On August 9, 2012, Capitol Bancorp filed for reorganization under Chapter 11.  Investors seem to be taking a dim view on a potential recovery by Capitol Bancorp and the stock has fallen from the $50 range in 2008 to a mere three cents per share.

The FDIC seems to have given Capitol Bancorp an extreme amount of latitude considering the dire financial condition that the company is in and the lack of success in disposing of its banking units.  Unless Capitol Bancorp can pull off a miracle, it seems likely that regulators will eventually be forced to close the other banks owned by Capitol Bancorp.

The banks controlled by Capitol Bancorp at 2012 year end are listed below.