Part 15
Dear Clients, Friends and Neighbors,
In this Q & A series, I would like to discuss how the proposed financial regulation changes may impact how a community bank does business. In addition, I would like to talk about interest rates, inflation, and unemployment. Lastly, I would like to share my insights on how having a strong capital base benefits our local economy.
Question: Will the proposed financial regulation changes being discussed on Capitol Hill stifle or stimulate a community bank’s ability to do business?
Answer: It is too soon to predict how the new tidal wave of regulations will impact community banking. It is safe to say local banks’ compliance costs will go up as we must comply with all new regulations. I do hope that our representatives in Washington put the interests of the nation and the small banks which serve their communities before any political interests. We do not need new regulation based on popular movements, but rather based on what is best for the financial well being of the country. If Congress moves too aggressively with new regulations, its actions could have the negative impact of stifling innovation. This is not good for either the industry or the consumer. My hope is that cooler heads prevail and that the new regulations are directed at the root causes of the recent financial melt down. We need to focus on Wall Street investment firms as well as the mortgage banking industry. Neither have the level of regulation necessary to prevent another disaster. Congress should be focused on what really caused the problems, not follow the popular and easy target of “ the banks.” We, as community banks, are suffering from the lack of regulation on Wall Street and its largely unsupervised relationship with the sub-prime lending industry.
Question: Do you see an interest rate rise in either the 3rd or 4th quarter of this year? Do you see a rise in inflation? Will the unemployment numbers get better?
Answer: The Federal Reserve just concluded its Open Market Committee meetings last week. The Committee stated that interest rates will remain at the current low levels for an extended period of time. With this being said, I think it is safe to assume interest rates will not be going up substantially in 2010. The overall economy is still much too fragile to risk having an interest rate increase slow it down. When you look around the world, many major industrial countries are still locked in a deep recession, and members of the European Union are deeply in debt. Raising interest rates in the US could compound problems around the world. Inflation doesn’t appear to be an issue at this time, but if inflation does set in, you can be sure that the Fed will raise rates to keep it in check. Look for interest rates to rise some time after the first of the year, 2011. Unemployment numbers are still unacceptably high, particularly in California. The current view is that will take some time for the number of jobs to catch up with those who are out of work.
Question: With the bank having a strong capital base, does this give Heritage Oaks Bank greater opportunity to enhance the economic strength of our local economy?
Answer: Capital is the life blood for any company, a bank being no different. With our success in raising capital, we now have sufficient strength to allow us to deal more swiftly with problem loans. This recession has resulted in significant devaluations in real estate. A large percentage of our loans are secured by real estate in some form or another. When our collateral values shrank at the pace and level we saw over these past 18 months, it was very difficult to avoid problems in the loan portfolio. With sufficient capital we have more options available to us in how we address these problem loans.
Capital is also a key indicator in how much a bank can grow. Banks must maintain minimum capital levels based on industry standards as well as the risk profile of the balance sheet. If our capital levels were not increasing, we would be restricted on how much or how fast our company could grow. With the capital levels we now enjoy, we no longer have to be overly concerned when we see potential growth opportunities. We will be able to sustain a nice healthy level of growth over the foreseeable future. Because our employees all live in San Luis Obispo and Santa Barbara counties, we all have a vested interest in the growth of the bank. In addition, growth of the bank will also be good for our community.
Capital is also the key to how much money a bank has available to lend out. A bank’s lending limit is based on a percentage of its capital. Our newly acquired capital will allow our company to remain active in the lending arena, which in turn will help local businesses as they recover from the recession and begin to expand, creating more local jobs and wealth in the process.
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