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foreclosed assets at the end of 2014, relative to only $689,000, or 0.08% of total loans and foreclosed assets at the
end of 2006, prior to the recession. California’s San Joaquin Valley, where the Company is headquartered and has
most of its branch locations, was particularly hard hit by the recession. Unemployment levels have always been
relatively high in the San Joaquin Valley, including Tulare County which is our geographic center, but recessionary
conditions pushed unemployment rates to exceptionally high levels. The unemployment rate for Tulare County
reached a high of 19.3% during the most recent economic cycle, in March 2010. It reflects a steady downward trend
since 2010 and had declined to 12.7% by December 2014, but is still well above the 6.7% aggregate unemployment
rate reported for California in December 2014.
In addition, as discussed below in connection with challenges to the
agricultural industry, if the current drought in California continues it could have a significant negative impact on
unemployment rates in our market areas. Furthermore, the recent precipitous drop in oil prices could also negatively
impact unemployment rates, particularly in Kern County.
There are indications of improving economic conditions, and the real estate sector appears to have stabilized in many
of our local markets. However unemployment remains relatively high, as noted above, and many local governments
and businesses are still experiencing difficulties due to reduced consumer spending and a drop in tax revenues.
Additional adverse market developments could further depress consumer confidence levels and payment patterns,
which could cause real estate values to resume their unfavorable trends and lead to additional loan delinquencies and
increased default rates.
If business and economic conditions deteriorate, the ensuing economic weakness could have one or more of the
following undesirable effects on our business:
•
a lack of demand for loans, or other products and services offered by us;
•
a decline in the value of our loans or other assets secured by residential or commercial real estate;
•
a decrease in deposit balances due to increased pressure on the liquidity of our customers;
•
an impairment of our investment securities; or
•
an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or
default on their loans or other obligations to us, which in turn could result in a higher level of nonperforming
assets, net charge-offs and provision for credit losses.
Challenges in the agricultural industry could have an adverse effect on our customers and their ability to
make payments to us, particularly in view of the current drought in California.
While the Company’s
nonperforming assets are currently comprised mainly of loans secured by non-agricultural real estate and other real
estate owned (“OREO”), the drivers behind high levels of nonperforming assets in previous economic cycles include
difficulties experienced by the agricultural industry. This is due to the fact that a considerable portion of our
borrowers are involved in, or are impacted to some extent by, the agricultural industry. While a great number of our
borrowers are not directly involved in agriculture, they would likely be impacted by difficulties in the agricultural
industry since many jobs in our market areas are ancillary to the regular production, processing, marketing and sale
of agricultural commodities.
The markets for agricultural products can be adversely impacted by increased supply from overseas competition, a
drop in consumer demand, and numerous other factors. The ripple effect of any resulting drop in commodity prices
could lower borrower income and depress collateral values. Weather patterns are also of critical importance to row
crop, tree fruit, and citrus production. A degenerative cycle of weather has the potential to adversely affect
agricultural industries as well as consumer purchasing power, and could lead to further unemployment throughout the
San Joaquin Valley. The state of California is currently experiencing the worst drought in recorded history, and it is
not possible to predict at present how long the drought may last. Another looming issue that could have a major
impact on the agricultural industry involves water availability and distribution rights. If the amount of water
available to agriculture becomes increasingly scarce due to drought and/or diversion to other uses, farmers may not
be able to continue to produce agricultural products at a reasonable profit, which has the potential to force many out
of business. Such conditions have affected and may continue to adversely affect our borrowers and, by extension,
our business, and if general agricultural conditions decline our level of nonperforming assets could increase.
The recent drop in oil prices could have an adverse impact on our customers and their ability to make
payments to us, particularly in areas such as Kern County where oil production is a significant economic
driver.
Kern County, which is home to about three quarters of California’s oil production, declared a fiscal
