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assets at the end of 2015, although that is still slightly higher than the recent median ratio of 0.94% for financial
institutions with total assets between $500 million and $3 billion.
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 elevated 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 12.2% by December
2015, but is still well above the 5.8% aggregate unemployment rate reported for California in December 2015.
In
addition, as discussed below in connection with challenges to the agricultural industry, if the California drought
continues it could have a significant negative impact on unemployment rates in our market areas. The drop in oil prices
could also negatively impact unemployment rates, particularly in Kern County.
There are indications of stabilized economic conditions, and the real estate sector appears to have gained momentum
in many of our local markets. However unemployment remains relatively high, as noted above, and some 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 recent drought conditions 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 has recently experienced the worst drought in recorded history, and while precipitation this
season appears to be above average it is difficult to predict if the drought will resume and how long it might 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.