Unable to raise capital from either the Treasury Department or private investors, Capital Corp. of the West finds its options have dwindled, observers say, to a government-assisted deal for its banking operations.

That was not what Richard S. Cupp had in mind in August when he signed on as the Merced, Calif., company's chief executive. Though Mr. Cupp would not comment when interviewed Thursday about the prospect of a government-assisted deal, the California banker, known for his turnarounds of ailing companies, did talk candidly about how much harder it has been to raise capital now.

"In the past, you could always raise capital at a price — even if a bank was troubled — as long as the basic business was there," Mr. Cupp said. "But in today's market, there is no return that an investor feels finds acceptable, because the risk is simply too high. Even if a bank is reasonably sound, because of the tremendous uncertainty of the markets, investors say they just don't know what's inside of those portfolios."

After Thomas Hawker retired as Capital Corp.'s CEO, Mr. Cupp, 68, came out of semiretirement last year after expressly to help the company deal with its huge losses on residential construction loans made in San Joaquin Valley. Under Mr. Cupp's direction, the $1.8 billion-asset Capital Corp. has been trying to raise $50 million to $75 million in capital, but even investors who gave him money in earlier turnaround situations will not give him money now. They are too afraid of further losses, he said.

Frank Barkocy, director of research at Mendon Capital Advisors Corp., said he is not surprised. Mr. Barkocy said Capital Corp. took advantage of the growth boom in California's central valley by aggressively making residential construction and land development loans, but that strategy has come back to haunt it. It has lost money four out of the past five quarters because of heavy losses on those loans. As of Dec. 31, $109 million worth of its loans, or 9% of its total, still were nonperforming.

"Until we see the company making progress working through these problem assets, and until we see a turnaround in the California economy, investors are going to be somewhat reluctant to get in too soon," Mr. Barkocy said.

Mr. Barkocy would not say outright than a Federal Deposit Insurance Corp.-assisted deal was Capital Corp.'s only option, but Brett Rabatin, an analyst at Sterne, Agee & Leach Inc., called it "the most likely outcome." Capital Corp. "really cannot sustain any additional high credit losses without raising more capital, and chances are slim it can do that," Mr. Rabatin said.

Mr. Cupp began his banking career in the 1960s, holding various positions at United California Bank, which later became 1st Interstate Bank. In the late '70s he was dispatched by the company to be CEO of its Belgian subsidiary, Union du Credit de Bruxelles, which was saddled with bad loans to governments of developing countries. But the Belgian bank could not overcome its problems and failed, Mr. Cupp said.

Mr. Cupp then spent a decade at CalFed Inc., which was folded into Golden State Bancorp and sold in 2002 to Citigroup Inc. His turnaround successes were at two Southern California community banking companies hit by commercial real estate losses: Ventura County National Bancorp in Oxnard and HF Bancorp in Hemet. Ventura was sold in 1997 to City National Corp. of Los Angeles. HF was sold in 1999 to the paper and building products concern Temple-Inland Inc.

At Ventura, Mr. Cupp said he was able to cut staffing and to sell and run off bad commercial real estate loans. He also raised $6.5 million in capital through a rights offering, which satisfied a regulatory order and enabled the company to right itself enough to attract City National.

HF Bancorp was a generally sound but underperforming bank, Mr. Cupp said, and it did not take long to find a buyer in Temple-Inland.

In both turnaround situations, the companies were in very attractive markets that buyers were eager to enter — and if the current environment were not so dicey, Capital Corp. and its service area would also be attractive, Mr. Cupp said. Its County Bank has 39 branches from Sacramento to south of Fresno, and Mr. Cupp said a rebound in development in the central valley is inevitable. "In the '70s, '80s, or '90s, a bank like County Bank could have raised capital, but today, it can't," he said.

In November, Capital Corp. applied to receive $46 million from the Treasury's Capital Purchase Program, but it has yet to hear if it has been approved. The "very existence" of the government's program has made things worse, Mr. Cupp said, because investors do not want to touch a bank that may have been rejected. "It's an artificial cap on the entry into the capital markets," he said.

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