Part 14
Dear Clients, Friends and Neighbors,
In this Q & A series, I would like to spend some time discussing what specifically determines the level of capital a bank should maintain and talk about our recently completed capital raise including what went into this effort.
Question: What determines the level of capital a bank should maintain?
Answer: Many things go into the determination of what is the appropriate level of capital for a bank to hold. The economy is a key indicator as the economy usually determines the level of problem loans a bank may be carrying on its balance sheet. Today, a bank cannot have too much capital. As we know, we are navigating through what is arguably one of the worst recessions in over 50 years. Banks are dealing with historical levels of problem loans which directly impacts the banks’ ability to generate positive earnings. Without a continuous stream of net income to add into the capital account, banks may be saddled with a dilemma of having to reduce or shrink the balance sheet in order to maintain adequate levels of capital or having to go out and raise new capital. In today's regulatory environment, banks are being required to maintain higher levels of capital for the very reasons stated above. Regulators view capital as an insulator against problem loan issues as well as providing the bank with protection against having to report negative earnings. Prior to our raising $60 million in new capital, we were classified as a "Well" capitalized bank by regulatory standards. However, the Regulators, as part of their oversight, requested that the bank increase capital over and above what were classified as minimum standards based on the level of increased problem loans. We were able to not only raise enough to satisfy their new requirements, but now far exceed their requirements which will allow us to focus on operating the bank and growing our deposit base.
Question: The bank recently announced it raised $60 million in capital. Why this level of funding?
Answer: When we looked at raising capital, we wanted to raise enough to satisfy the new higher regulatory standards as well as providing sufficient levels of capital to deal with reducing the level of problem loans on our books as quickly as we can. In addition, we experienced outstanding levels of deposit growth last year and wanted to remain in a position to take advantage of any future growth opportunities. As I stated above, in today's economy, a bank can't be over capitalized. We will be able to utilize this capital out over an extended period of time and will not feel any pressure or need to go back out to the capital markets any time soon.
Question: Why did investors choose to invest in Heritage Oaks Bank?
Answer: Several reasons. First is the bank’s 15 year history of compounded growth in assets, deposits and earnings. Investors want to know that the company they are investing in has the ability to generate a return on their investment within a reasonable time frame. Our core deposit growth and our core deposits as a percentage of total deposits are and always have been a strength of our company and investors see a lot of value in banks with strong core deposits. Our ability to generate revenue on a pre-tax, pre-loan loss provision basis is also a strength of the bank. Our deposit base carries with it a low overall cost which allows us to maintain a very good net interest margin. This in turn allows us to generate strong core earnings. Most importantly, investors are investing in a management team they believe is capable of moving the bank forward, generating a return for their money invested. I am happy that we were able to demonstrate all of these positive traits to the investment community and that they believe in the future of our company.
Question: How will this new capital be used both short and long-term to benefit our organization, clients and the community?
Answer: In the short-term, the capital will be used to boost our capital ratios well above the minimum levels required by bank regulators. We will then begin to address problem loans still on the bank’s books. Over time, our strategy will be to utilize the capital to support reasonable growth. We see significant opportunity for growth along the Central Coast and it was for this purpose we made the decision to raise as much capital as we did. We would like to increase our share of the market both in San Luis Obispo as well as Santa Barbara Counties, so that we can fully serve the credit needs of more local residents and businesses.
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