Are Capital Corp. of the West's days as an independent company numbered?
Last week, after saying it expects to report a loss of about $15 million for the fourth quarter because of residential construction loan losses, the Merced, Calif., company said it had hired KBW Inc.'s Keefe, Bruyette & Woods Inc. to help it raise capital and evaluate "other strategic alternatives."
Though the $1.9 billion-asset company is not tipping its hand — the head of its new oversight committee said only that it is "exploring all options" — Jeffrey A. Rulis, an analyst at D.A. Davidson & Co. in Portland, Ore., said that given its credit troubles, Capital Corp. may have little choice but to find a buyer.
"Anytime a bank has this amount of credit issues, they are oftentimes sold," Mr. Rulis said. "The management team seems to not have done their job, and maybe someone could do it better."
Investors seem to be betting the parent of County Bank will sell itself. Since the company announced after the market closed March 19 that it had hired an investment banker, the shares have risen 123%, to $8.38 late Tuesday. That was after the shares plunged 64% on news of the $15 million loss and Capital Corp.'s announcement that it would miss a deadline for filing its annual report, because of "material weaknesses" in its lending and accounting functions.
Despite the recent troubles, Mr. Rulis said Capital Corp. would be an attractive target, because of its strong branch network in the state's fast-growing San Joaquin Valley.
As of June 30, County Bank had the No. 1 deposit share in Merced County (41.47%), according to the Federal Deposit Insurance Corp. The bank has also been expanding in Fresno and Modesto, and though residential construction in the state's Central Valley has slowed to a trickle, it is widely expected to pick up next year.
Mr. Rulis named the $4.6 billion-asset Westamerica Bancorp. in San Rafael, Wells Fargo & Co., and Rabobank Group as potential buyers.
A Wells Fargo spokeswoman said Tuesday that its policy is not to comment on "rumors or speculation." Calls to Westamerica and Rabobank were not returned.
Mr. Rulis said any deal for Capital Corp. would likely be a "fire sale," depending on the extent of the credit problems. The company may get only $7 a share, or 75% of its current book value, which he calculates at about $9.40 a share, but if credit losses are not so bad, it could get a little more, he said.
On March 18, Capital Corp. reported that it would take a $26 million loan-loss provision for the fourth quarter, and that it would take several quarters to determine the extent of its credit troubles.
The next day it said that County Bank's chief executive and executive committee would report directly to a newly established regulatory oversight committee made of three outside directors. Capital Corp. also said that Thomas T. Hawker, 65, would retire early as its CEO once the board hires a successor. Mr. Hawker had been slated to leave at yearend.
In an interview Tuesday, Mr. Hawker said that he was not asked to retire early, but that he volunteered to leave as soon as the board found a successor, a process it had begun last year.
"We just wanted to make it clear that in this process, there would be no awkward moments," such as "if they had found somebody to step in and then say, 'What are we going to do with you, Tom?' " Mr. Hawker said. "So I said, let's make it easy."
Mr. Rulis said he applauded the board for establishing its oversight committee and tackling the bank's problems.
However, since more than 2% of County Bank's assets are nonperforming, he said he would not be surprised if it were hit with an enforcement order requiring it to improve its underwriting and accounting processes.
