Capital Corp's survival in doubt

The parent company of Merced-based County Bank was battered by the real- estate downturn and lost more than $54 million in the third quarter of 2008 -- threatening the bank's very survival.

"It is uncertain if we will be able to continue," Capital Corp of the West CEO Richard Cupp wrote in the earnings statement filed this week with the U.S. Securities and Exchange Commission.

Cupp acknowledged that the bank needs to raise millions of dollars, from investors or the federal bank bailout fund, if it is to survive.

County Bank, with seven branches in Stanislaus County and 39 total in the valley, Tuolumne County and Bay Area, was founded in 1977. It has been hammered by a number of bad loans made to home builders before land values plummeted.

The company's earnings statement showed losses far higher than officials had estimated less than a week ago when the bank asked the Securities and Exchange Commission for more time to finalize its quarterly figures. Just last week, bank officials said they expected to report a net loss of $2.7 million for the quarter.

Capital Corp's operating losses for the quarter came in at about $5.8 million, Cupp said. But the red ink, which totaled $54.6 million, was exacerbated by noncash charges for losses in 2007.

Cupp explained that the bank suffered a loss of "goodwill," or company value after the acquisition of another bank in late 2007, which amounted to $23.5 million, mostly because of stock-price declines. He said the bank lost out on $25.3 million in potential tax benefits from operating losses this year and last.

Compounding its problems is the valley's declining real-estate market.

Capital Corp has about $1.26 billion in loans, and $813 million is for real estate, including construction and development loans.

But its nonperforming loans, loans on which the borrower has stopped paying, amounted to more than $138 million, or nearly 11 percent of the loan portfolio.

Deposits in County Bank totaled $1.43 billion as of Sept. 30, down from the $1.67 billion reported at the end of 2007.

Kent Steinwert, president and chief executive officer at Farmers & Merchants Bank of Central California, said Tuesday that he wasn't surprised by the announcement, because of some of the real estate loans made by County Bank.

Steinwert said most community banks didn't get heavily involved in such loans. Still, he said, banks are dealing with the fallout from nonperforming loans caused by the economic crisis.

When loans go bad during unprecedented financial upheaval, he said, "it's tough for it not to have a negative impact on a bank's portfolio."

While its quarterly loss isn't good news for the bank, what has regulators' attention is the bank's assets.

For the quarter ended Sept. 30, County Bank reported it was "adequately capitalized" with $122.7 million, or a capital ratio of about 8 percent of total assets. That figure, however, falls short of the 10 percent required by regulators -- $153.4 million, according to its earnings statement.

Took time to grasp problem

K.C. Chen, a professor of business and finance in the Craig School of Business at California State University, Fresno, said the capital ratio deals shows how much money the bank has as a percentage of its total assets.

A cushion of capital is needed, Chen said, to enable a bank to absorb unexpected losses from the risky assets, something particularly acute now with real estate serving as collateral for many loans.

"If the firm loses money, that equity is even less," Chen said. "Whenever there are losses suffered (beyond the available capital), the firm becomes insolvent."

Although surprised that County Bank didn't get a handle on the situation sooner, Steinwert said that it probably took a while to understand the extent of the problem. He said there's a good management team and a strong board of directors in place to turn things around.

"County Bank has a great brand, stable deposit base and strong presence in the Central Valley," said Steinwert, ticking off its strengths.

While those qualities could made it a takeover target, he said they also could help management turn things around. "I know management wants to remain independent and is working hard to stay that way," he said.

For County Bank, however, building up needed capital is proving difficult.

"This is one of the most challenging environments in the capital markets in a very long time," Cupp said Monday. "We're doing our very best to be aggressive to find capital sources on a private basis."

Cupp said the bank is exploring a range of options, including seeking more investors, a possible sale and ap- plying to participate in the bank bailout approved by Congress last month. Capital Corp is seeking to sell $46 million in preferred stock to the U.S. Treasury Department, but officials don't know when -- or if -- the application will be approved.

Bee Business Editor David W. Hill contributed to this report.