Two Tucson-based community banks are raising money to shore up their balance sheets as they continue to work out commercial-loan problems in the lingering aftermath of the recession.
Commerce Bank of Arizona and Canyon Community Bank are working under consent orders from federal regulators to boost their capital. After carrying top ratings just a few years ago, both banks were rated two stars, or βproblematic,β in the third-quarter bank ratings recently issued by Bauer Financial.
Officials of both banks say theyβre in no danger of failure, but they must boost their capital after continuing to suffer losses in their small-business loan portfolios.
Commerce Bank, a state-chartered bank with assets of $224 million, signed a consent order in January with the Federal Deposit Insurance Corp. and the state Department of Financial Institutions.
Under the order, the bank must raise its leverage-capital ratio β a key measure of a bankβs ability to weather loan losses β to 9 percent, and a key risk-weighted capital ratio to 13 percent.
Commerceβs leverage ratio was 8.4 percent in the third quarter, down from 8.9 percent in the second quarter, according to regulatory filings used by Bauer to rate banks. The bankβs risk-based ratio was just over 14 percent in the third quarter.
Commerce plans to raise $4.5 million to $5 million in a private stock placement next year, said John P. Lewis, founder and head of the former Southern Arizona Community Bank who is now heading Commerce Bankβs Southern Arizona operations.
Canyon Community Bank, a federally chartered bank with assets of $80 million, signed a consent agreement with the Office of the Comptroller of the Currency in July, President Chuck Luhtala said.
Under the agreement, Canyon Community must increase its leverage-capital ratio to 9 percent, said Luhtala. Canyonβs leverage-capital ratio was just over 8 percent in the third quarter, according to Bauer.
Canyon Community Bank plans to raise between $3.5 million and $12 million in a private stock placement planned for the first quarter of 2014, Luhtala said.
Commerce boasted Bauerβs top, five-star rating as recently as mid-2011, and it acquired the assets of a failed Scottsdale bank in 2010.
Though in acquiring the assets of Towne Bank Commerce was subject to some loan losses under a loss-sharing agreement with the FDIC, the main issue has been the lingering effects of the recession on local small-business borrowers, Lewis said.
βThe problem loans have not been very kind to this bank, and itβs pretty much recession-driven β theyβre all real estate loans,β he said.
Commerce has posted net losses totaling $1.8 million through the first three quarters of 2013, after losing $2.9 million in all of 2012. The bank has seven branches, four in Tucson and one each in Scottsdale, Green Valley and Tubac.
Commerce has been rehabilitating loans, but some business customers never fully recovered from the recession, Lewis said.
βWeβre rehabilitating a lot of the loans, because thatβs what community banks do. Itβs got to make sense not only for the bank, but for the borrower and the regulators,β he said. βThese customers are very, very stressed and a lot of them have used up their personal liquidity to keep their businesses alive β¦ . When they come in the front door and hand you the keys to their business, thereβs not much you can do as a bank.β
In late October, Commerce abandoned plans to merge with First Scottsdale Bank, after the banks couldnβt agree to an extension for final approval of the deal amid months of regulatory delays, Lewis said. The banks had to return $11 million raised from investors to swing the deal, he said, but added that regulators did not reject the proposed merger.
Commerce Bankβs board last week approved a new strategic plan including the stock offering, which is expected to occur in late first quarter or early second quarter, said Lewis, who said the bankβs goal is to get out from under the FDIC consent order within a year.
βThe bank is very liquid, the board is solid,β Lewis said.
Commerce Bank Chairman Dr. J. Wendell Tyson said the board has confidence in its executive team, which includes bank President and CEO John S. Lewis (no relation to John P. Lewis), and Michael Trueba, who replaced Randy Yenerich as chief credit officer.
Trueba and John P. Lewis were co-founders of Southern Arizona Community Bank, which merged with the Bank of Tucson in 2011.
The bank also has shored up its board, Tyson said, noting that Bill Assenmacher, president of the industrial metal fabrication firm Caid Industries, recently agreed to join the board.
Tyson, a co-founder of Commerce Bank in 2001, said the bank was caught in a βperfect stormβ when small businesses had trouble paying their loans and the underlying value of commercial properties plummeted.
While the bank continues to work out some loans, careful lending practices will help Commerce solidify its balance sheet, Tyson said.
βYouβve got to be very, very careful in your underwriting process,β he said.
Canyon Community Bankβs Luhtala said the bank has hired an investment banking firm to handle its stock sale and is hopeful it can raise the necessary capital.
βBusinesses were able to survive the early parts of the recession, and they learned how to be more efficient,β Luhtala said. βBut as the recession lingered, itβs taken its toll on small businesses.β
He said Canyon Community Bank is very liquid and is aggressively trying to make commercial loans. The bank was rated four stars, or βexcellent,β by Bauer until late 2011.
βWeβre encouraged by what weβve done here in the near term and we think the economics going forward are good,β Luhtala said.
Unlike national and larger regional banks, which can spread their risk across wide geographic areas, community banks are inexorably tied to their local economies, Luhtala said.
βItβs been a tough economy here in Tucson, and for locally owned banks, we have all of our eggs in one basket here.β
