Banks large and small are feeling the pinch from the real estate downturn, and regulatory agencies have started asking banks to step up and amass more capital. While that may be relatively easy for some of the area’s big institutions, smaller community banks are handling the process differently.

In Oxnard, Ventura County Business Bank President Gerald Lukiewski is doing everything he can to raise capital. In the past few months, the bank has cut jobs and consolidated operations to save on spending, and Lukiewski said the bank even adopted a private placement memorandum.

“We believe that capital is king right now, so we’ve got to get more capital in just to stay ahead of the curve because it’s hard to know how deep this downturn is going to be,” Lukiewski told the Business Times. “The private placement memorandum allows us to solicit investors without going through a full public offering, which is pretty extensive. So we had the private placement approved by our regulator, the state of California.”

The private placement permit was suspended pending the bank’s first quarter numbers, but Lukiewski said he’s “getting ready to put it back out on the street.”

The bank’s first quarter results showed a quarter loss of $2.7 million resulting from an increase in the bank’s allowance for loan loss reserves and a write down of other foreclosed assets. The allowance for loan loss reserves increased to $1.6 million, representing 2.1 percent of outstanding loans.

The bank also reported that compared to last year, its total assets decreased by 1.3 percent at March 31 to $106 million and that it experienced a 12.1 percent decline in net loans to $78.8 million.

With margins down, Lukiewski predicts that it’s going to be a rough road for the bank – at least until things start picking up for area businesses. He said there aren’t a lot of opportunities to lend to profitable businesses right now.

The bank’s wagons are hitched to those of the companies it does business with, so its growth – or lack thereof – is linked with that of its clients.

“We focus exclusively on business,” he said. “We don’t do any consumer products – we don’t do home mortgages or equity lines or car loans, so our whole client base is the business community – and until they can start expanding, we’re down too,” Lukiewski said.

“It’s rough, but that’s exactly what we’re supposed to be doing,” he said. “We’re supposed to be out there lending and protecting as many of our business customers as we can to ride through this cycle.”
Lukiewski said that can be challenging sometimes, as he’s under fierce pressure from regulatory agencies to raise capital.

“Sometimes you can only work with people so long,” he said. “The regulators have asked us to do what we’re seeing across the board right now: put in capital, raise your ratios, raise your reserves. We try to stay ahead of that curve. The private placement was our way of telling regulators that we understand the environment and we know what we have to do, but when you’re a small player, sometimes it takes a little more time.”

Lukiewski said Ventura County Business Bank also purchased some participation loans with other banks “that are difficult to manage out of because we’re not the lead bank in charge of those, so we have to go along with the bank that originated them.”

The commercial real estate market has not shown many signs of improvement in a while, which is troubling for Lukiewski and his bankers.

“It keeps me up at night,” he said. “Because of that, we’re going to have to keep our reserves higher than normal until it does, because we don’t want to sell assets at the bottom of the cycle.”

Like most people, Lukiewski would prefer to hold assets until the market improves, but said he doesn’t always have the luxury of time.

“Sometimes you just have to write assets off,” he said. “Unfortunately, we’ve had to do that. We’ve had to take some borrowers’ properties back, which we don’t like to do because it definitely affects the relationship and if they can’t sell in this market, I can’t either.”

As assets decline, banks are putting up more reserves, and Lukiewski said his bank has to “keep reappraising our properties and our loans to make sure we have adequate protection in there.”

If the protection isn’t there, the bank has to put up more reserves, and the bank needs more capital to do so. The bank has eliminated much of its wholesale funding, but Lukiewski said “there are still a lot of people hurting, and it’s not pleasant to be dealing with them right now. Misery does not love company. We’re trying to protect as many people as we can, but it’s very challenging.”

The bank recently consolidated its note department from an offsite facility back into the regular branch. Lukiewski said he just couldn’t justify the rented office space anymore.

Without a big network of branches, there isn’t a lot of opportunity for cost savings from rent, so Lukiewski has been on the lookout for new ways to save money. Salary is often the first area to receive cuts, and two positions were eliminated.

“We also look at ways of keeping our deposit costs as reasonable as possible because margins right now are squeezed to an all-time low. So any chance we have for savings on either interest rates or non-interest expense, that’s what we try to tackle first.”

Lukiewski said California’s recently issued state IOUs just add another layer of uncertainty to the mix. But one of the recent benefits “that we’ve all felt – all of the banks – is the FDIC putting in place the temporary liquidity program, because that insures our deposits of up to $250,000.”

Unfortunately for Lukiewski, that insurance expires at the end of this year, but legislation that would extend the program’s deadline to 2013 is in the works.

“That would be a major shot in the arm for us, and it’s even more important for business owners because if they keep non-interest-bearing deposits in their checking account, we can offer them unlimited insurance.”

Lukiewski said the unlimited insurance is a great way for the bank to compete with some of the larger, well-capitalized banks.

“That’s huge for us because it puts us on a level playing field with everyone else. Having that insurance for a while is big,” Lukiewski said. “While I disagree with a lot of the things they’re doing with stimulus money, I do agree with that. There’s not a lot of interesting pay on some of the money market accounts right now, and we’re seeing real nice growth in our regular business checking accounts.”

The bank was up more than 20 percent in regular checking accounts from year-end 2008 to the first quarter of 2009.

“The increase wasn’t from anything we did; it was just a result of that insurance,” Lukiewski said. “But come December, if it’s not extended we’re going to be fighting to hang on to that money. The bottom line: I want the recovery to happen fast.”

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