Tuesday, Aug. 12, 2008

County Bank's parent company posts $12 million second-quarter loss

Unpaid loans from declining real estate woes major cause of loss

By JEFF ST. JOHN
The Fresno Bee

Merced-based County Bank's parent company reported Monday that it lost $12 million in the second quarter of 2008 as it increased its provisions for bad loans tied to the region's declining real estate market.

Capital Corp of the West's second quarter loss was a sharp turnaround from first-quarter profits of $2.3 million, and followed the company's fiscal year 2007 loss of $3.6 million, the first annual loss for the bank.

The second quarter loss was due primarily to an increase in loan-loss provisions to $13.9 million, about $11 million of which was tied to nine loans, the company reported.

Key to the 41-branch bank's increasing loan-loss reserves is its "exposure to real estate declining rather dramatically in the Central Valley," Richard Cupp, the newly appointed chief executive and president of the company, said in a Monday conference call with reporters.

The bank held $122 million in nonaccrual loans, or loans that weren't being paid, at the end of the second quarter. That was about 9 percent of the bank's total portfolio of loans, Cupp said, and an increase from $77.2 million at the end of the first quarter.

"I've seen and dealt with much worse numbers in the past," said Cupp, who joined the bank as interim chief executive last month. "At the same time, I think it's important to note that the numbers reflect the realities of the marketplace today."

To explain the economic problems, the bank's press release noted that Merced, San Joaquin and Stanislaus counties had ranked as the top three for foreclosure rates in June.

While the bank has no exposure to subprime residential mortgages, the housing market meltdown and subsequent economic downturn has had an effect on the ability of borrowers to repay residential developer and commercial construction loans.

The bank had reviewed 80 percent of its commercial and real estate loan portfolio at the end of the second quarter, and had charged off $20.3 million and set aside reserves of $15.3 million for the six months ending June 30, the bank reported.

While Cupp wouldn't speculate on how many more nonperforming loans the review of the remaining 20 percent of the bank's loans might reveal, he did say that the loans reviewed so far included most of the larger loans the bank has made.

"At the same time, we have to be ever-watchful as the economy rolls out in the Central Valley and in California," he said.

"The bank is quite well diversified, with a robust agribusiness sector as well," Cupp added.

Despite its increase in nonaccrual loans, the bank increased net interest income by $2.4 million or 14.4 percent in the second quarter compared with the same quarter last year, he added.

"We opened up a whole slew of new accounts, and that's great," he said. The bank increased net deposit accounts by 3,549 in the second quarter.

The bank's professional fees, however, grew 132 percent to $1.1 million in the second quarter, mainly because of costs associated with a 2007 year-end audit and hiring of specialists to help evaluate loan-loss reserves.

The bank announced in March that it had "material weaknesses" in its lending and accounting functions in 2007, and has taken steps to correct those weaknesses.

"We'll be making some moves in the next couple to three months to improve our efficiency," Cupp said, though he would not elaborate.

When asked whether County Bank was a potential target of being bought by another bank, Cupp declined to comment, adding that "We are totally focused on our market, our customers and assessing our situation here at the bank."