VRB_Geruad Smith

Geraud Smith is president and CEO of Bakersfield-based Valley Republic Bank.

In a preemptive move against uncertain conditions ahead, the parent company of Bakersfield's Valley Republic Bank recently borrowed $20 million as a way of making sure it has enough capital to weather what it worries could be a developing economic downturn.

Announcement of the loan came less than four months after the parent company of Bakersfield's only other locally based bank, Mission Bank, similarly raised $10 million.

The loans reflect nervousness about where the local economy may be headed in the aftermath of massive layoffs during the COVID-19 crisis. They also speak to the banks' determination to protect themselves, and the interests of their customers, in case things get worse.

In both cases, investors were informed the money will support the banks' growth. Another way to view it is that if the money is not needed to cover growing deposits then it can also act as a financial reserve in case Mission's and Valley Republic's borrowers are unable to keep up with their loan payments.

Geraud Smith, president and CEO of Valley Republic Bancorp, said Wednesday the bank and its borrowers are performing well but that now seemed like a good time to ensure there's enough capital to make it through what many would agree are uncertain times.

"This is just a little bit of cushion," he said. "We want to make sure we have sufficient capital to make it through whatever's coming our way."

Mission executives could not be reached for comment Wednesday. But the bank's parent company, Mission Bancorp, said in a news release May 19 it had raised $10 million simply as part of its "ongoing growth strategy."

Both capital raises took the form of what are known as fixed-to-floating rate subordinated notes. To the parent companies the unsecured loans are classified as second-level, "tier 2" capital, but to the banks they are considered top-level, tier 1 capital.

For Valley Republic the loan provided a roughly 20 percent increase in the bank's tangible capital, or equity. Net proceeds to the company come to $19.6 million.

Valley Republic's loan was a "private placement," meaning the lenders were individual and institutional investors who expect to receive interest-only payments starting at 5 percent every three months for 15 years, after which time the principal will be due.

Mission's loan carries a shorter term of 10 years but a higher interest rate — 5½ percent — payable every six months.

In both banks' cases the applicable interest rate is subject to change after five years.

Follow John Cox on Twitter: @TheThirdGraf

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