In thisQ & A series, I compare the economy at March 31st, 2011 to what it was one year. I also discuss
the role community banks have in the community. To conclude, I share how Heritage Oaks Bank has
led the way to be the Central Coast’s community bank since 1983 and fostered trust in its way of
doing business.
Question: Now that we are through the first quarter of the New Year, how would you compare
the economy at March 31, 2011 to what it was one year ago?

Almost every economist you talk with suggests that the technical end of the recession took
place six quarters ago and that the economy has been expanding or recovering since then. Keep in
mind that when an economist reports these figures, they are referencing the entire national
economy and not just the state of California or the Central Coast.
Unemployment data is a strong indicator of how a state or region is recovering and using this
information, California is still mired in a fairly deep recession. The unemployment figures for our
state are still in the 12.5% range. Only Nevada is reporting a higher rate of unemployment. Add to
this the fact that almost 50% of homes sold last year in California were foreclosures or short sales
and you will understand the challenges we as Californians face. Not all is doom and gloom however.
The Central Coast is enjoying much better unemployment figures and Santa Barbara County is
reporting the lowest unemployment of all the counties in the state.
Housing is still a challenge for California as we are still seeing uneven reports from month to month
on home prices and sales volumes. I do not see this changing much during 2011, but am hopeful that
2012 will paint a different picture. Overall, home prices have dropped by about 35% in our market so
we have several years ahead of us before we come close to values we saw in 2006.
We are starting to see some regional signs that the economy is growing. Most particularly, the
volume of imports and exports is increasing and has been doing so for the past eight months. Data
from the major ports in the state is showing increased volume which is a signal that international
trade is once again picking up. This is a positive sign for the manufacturing companies in our state
and should help to heal our unemployment woes.
Another key factor to look at is the state of our state’s economy and the huge budget deficit we
must deal with over the next few months. $24 billion dollars is a huge deficit and it will be very
difficult to fix with only spending cuts. At the end of the day, additional sources of revenue must be
raised if we are to see a balanced budget. The fact that the state is cutting spending by a minimum
of $12 billion is going to impact the economy and may lead to higher unemployment in the short
Your local community banks have mirrored the economy over these past few years. We have felt the
pain that many of our clients have experienced as we are not immune to effects of the national
economic recession. We at Heritage Oaks Bank are better positioned than most for the simple fact
that we were successful in bolstering our capital position early last year. This recession has been
classified as the worst since the Great Depression and it takes a very robust capital position for any
company, including a bank to survive. We not only have survived, but we have been able to position
our company to be in a much stronger position as the economic expansion takes hold.

Question: Why will there always be a place for community banks?

: This is a very good question and one that must be asked as we see a tidal wave of new
regulations role out of Washington as a result of the passage of Dodd/Frank. This legislation
contained over 2,300 pages of new law which, over the next two years, will result in over 10,000
pages of new regulations with which banks must comply. This legislation also created the Consumer
Financial Protection Agency. This agency has been given free reign by Congress to create new
consumer-oriented regulations without regard to cost, or for that matter, the underlying safety and
soundness of the banks required to comply. No one yet has any concept as to how much it will cost
the banking industry to comply with these new regulations, but it is safe to say, we will all be
impacted to some degree.
The question we are asking in the community banking arena is; how big will a bank have to be in
order to absorb the costs as we must comply with a mountain of new regulation? I don’t know the
answer to this question, but I suspect there will be consolidation as the smallest community banks
find they just do not have the resources to absorb these added costs. Rest assured, community
banking will survive and prosper in the new economy. We are a resilient group of people and I can
assure you we will be around for many years to come.
Question: Heritage Oaks Bank prides itself on being the Central Coast’s community bank since
1983. How have we led by example?

Answer: As a community bank and a community banker, I am proud to say we are a part of this
community. Our organization is made up of almost 300 people working to make this a better place
to live. We not only work as bankers all week long, but many of us are very involved in service
organizations or volunteer organizations after hours or on weekends. We pride ourselves in giving
back to the community that has for the past 28 years supported our company.
This tone is set from the top. Our board of directors is made up of community leaders from both
Santa Barbara and San Luis Obispo Counties. We have created a culture within our company that
promotes involvement and giving back to our community. This is a quality of leadership I am very
proud of.
Question: How has Heritage Oaks Bank fostered trust in its way of doing business?
Answer: As a community bank, our reputation is based on trust. We say what we mean and we mean
what we say. We empower our people to be leaders and we expect them to set very high standards
for everyone to follow.