PUBLIC DISCLOSURE October 9, 2012 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION United Security Bank RSSD # 1162017 2126 Inyo Street Fresno, California 93721 Federal Reserve Bank of San Francisco 101 Market Street San Francisco, California 94105 NOTE: This document is an evaluation of this institution s record of meeting the credit needs of its entire community, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. This evaluation is not, nor should it be construed as, an assessment of the financial condition of this institution. The rating assigned to this institution does not represent an analysis, conclusion or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution.
TABLE OF CONTENTS INSTITUTION RATING... 1 Institution s CRA Rating... 1 INSTITUTION... 2 Description of Institution... 2 Scope of Examination... 3 LENDING TEST... 3 COMMUNITY DEVELOPMENT TEST... 4 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS... 5 Lending Test... 5 LOAN TO DEPOSIT RATIO... 5 LENDING IN ASSESSMENT AREA... 5 GEOGRAPHIC AND BORROWER DISTRIBUTION... 6 RESPONSE TO COMPLAINTS... 6 Community Development Test... 6 Fair Lending or Other Illegal Practices Review... 7 FULL SCOPE ASSESSMENT AREA CONCLUSIONS... 8 Fresno Assessment Area... 8 DESCRIPTION OF OPERATIONS IN FRESNO... 8 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN FRESNO... 12 Kern Assessment Area... 16 DESCRIPTION OF OPERATIONS IN KERN... 16 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN KERN... 20 Santa Clara Assessment Area... 22 DESCRIPTION OF OPERATIONS IN SANTA CLARA... 22 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN SANTA CLARA... 26 LIMITED SCOPE ASSESSMENT AREA CONCLUSIONS... 29 APPENDICES Appendix A: Glossary of Terms Appendix B: Limited Scope Assessment Area Market Profiles i
INSTITUTION RATING Institution s CRA Rating United Security Bank (USB) is rated "SATISFACTORY The following table shows the performance ratings for the lending and community development tests. OUTSTANDING SATISFACTORY PERFORMANCE LEVELS PERFORMANCE TESTS COMMUNITY LENDING DEVELOPMENT TEST TEST X X NEEDS TO IMPROVE SUBSTANTIAL NONCOMPLIANCE The major factors supporting the institution s rating include: A reasonable loan to deposit ratio; A substantial majority of small business loans originated within the bank's assessment area; A reasonable geographic distribution of small business loans and small farm loans; A reasonable distribution of loans to businesses and farms of different sizes, with a significant portion of loans made in amounts under $250 thousand, thereby addressing an identified credit need for small dollar business loans; A significant volume of community development lending activities primarily directed to stabilize and revitalize low and moderate income census tracts to address the need for economic development and job creation and retention, particularly in the assessment areas economic incentive zones; and Delivery systems that are readily accessible throughout the bank s assessment areas, including branches in rural underbanked communities. 1
INSTITUTION Description of Institution USB, with total assets of $563 million as of December 31, 2011, and headquartered in Fresno, California, is a wholly owned subsidiary of United Security Bancshares. USB began operations on December 21, 1987 and operates a network of 11 full service branches and two stand alone ATMs. Ten of the branches are in California s San Joaquin Valley (Fresno, Kern, and Madera counties) and one is in the San Francisco Bay Area s Santa Clara County. USB s primary business focus is to provide commercial banking products and services to small and medium size businesses and farms. Commercial loan products include working capital, equipment financing, agricultural loans, and U.S. Small Business Administration (SBA) loans, among others. The bank also offers consumer loans to existing commercial customers typically on an accommodation basis. Below is USB s loan portfolio as stated in the December 31, 2011 Consolidated Reports of Condition and Income, which shows the bank s commercial lending focus. EXHIBIT 1 LOANS AND LEASES AS OF DECEMBER 31, 2011 Loan Type $ ( 000s) % Commercial/Industrial & Non Farm Non Residential Real Estate 215,984 50.8 Construction & Land Development 57,402 13.5 Farm Land & Agriculture 47,785 11.2 Secured by 1 4 Family Residential Real Estate 47,477 11.2 Multi Family Residential Real Estate 31,441 7.4 Consumer Loans & Credit Cards 25,172 5.9 Other Loans and Leases 206 0.0 Total (Gross) 425,467 100.0 USB assessment areas remain unchanged since the previous examination and are comprised of the following: Fresno consists of Fresno County, excluding two remote census tracts that extend into the Sierra Nevada Mountains in the northeast corner of the county. Fresno also comprises the Fresno Metropolitan Statistical Area (MSA). Madera consists of Madera County in its entirety, which is also the Madera Chowchilla MSA. Fresno County and Madera County together comprise the Fresno Madera Combined Statistical Area (CSA). Kern is comprised of a portion (excludes 44 census tracts) of Kern County that consists of the city of Bakersfield and west to the boarder of San Luis Obispo County. Kern County also comprises the Bakersfield MSA. Santa Clara consists of Santa Clara in its entirety, which is also part of the San Jose Sunnyvale Santa Clara MSA. 2
The bank s primary market remains the Fresno assessment area, where seven of the eleven branches are located. The Kern assessment area contains two branches and the Madera and Santa Clara assessment areas each contain one branch. The CRA examination considered the bank s financial capacity, local economic conditions, and demographics, including the competitive environment in which it operates. During the period of review, USB was subject to a Written Agreement that required strengthening of lending and credit administration, earnings, and liquidity and funds management. As such, USB was operating under financial constraints that impacted its ability to engage in CRA related activities, particularly community development investments. Accordingly, besides accounting for the external economic environment in which the bank operates, the bank s capacity and constraints in light of the Written Agreement were also taken into account in assessment the bank s performance under the CRA. The bank received an overall satisfactory rating at its previous CRA examination conducted as of September 27, 2010. Scope of Examination The CRA performance of USB was evaluated using the Interagency Intermediate Small Institution Examination Procedures. Performance for intermediate small banks is evaluated under two tests that consider the bank s lending and community development activities. The Fresno, Kern, and Santa Clara assessment areas received full scope reviews based on USB s larger presence and level of lending and deposit activity within those markets. Given the predominance of USB s branches and concentration of lending and deposit activity, performance within the Fresno assessment area received the greatest weight, followed by Kern and Santa Clara, which were weighted equally. The Madera assessment area was evaluated using a limited scope review due to the bank s smaller presence and limited activity in that market. Limited Scope reviews are conducted to determine whether or not performance in these areas is consistent with the bank s overall performance. LENDING TEST The lending test portion of the evaluation was based on the following performance criteria: Loan volume compared to deposits (Loan to Deposit Ratio); Lending inside versus outside of the assessment area (Lending in the Assessment Area); Dispersion of lending throughout the assessment area (Lending Distribution by Geography); and Lending to businesses of different sizes (Lending Distribution by Business Revenue). Responsiveness to consumer complaints was not evaluated since the bank did not receive any CRA related complaints during this review period. The lending test evaluation was based on small business and small farm loans originated between July 1, 2010 and December 31, 2011. Products were weighted according to volume, credit needs, and available opportunities in each assessment area. Consistent with USB s focus on commercial lending, the evaluation placed the greatest weight on small business lending and then small farm lending. The Fresno assessment area evaluation was based on small business and small farm loans, while all other assessment areas were based only on small business loans given there were insufficient volumes of small farm loans within those assessment areas for a meaningful analysis. Furthermore, home 3
purchase, home improvement, and home refinance loans were considered in the evaluation but did not influence the overall assessment due to their limited volume. A total of 257 small business and 25 small farm loans were considered in the evaluation of Lending in the Assessment Area. A sample of 229 small business loans and all 25 small farm loans extended within the assessment areas were used in the evaluation of Lending Distribution by Geography and Lending Distribution by Business Revenue. COMMUNITY DEVELOPMENT TEST The community development test portion of the examination included an evaluation of USB s level of community development activities in relation to local needs and opportunities, as well as the bank s capacity to participate in such activities. The evaluation was based on qualified community development loans, investments, and services from July 1, 2010 to December 31, 2011. 4
CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS The overall assessments for the lending and community development tests are discussed below. These conclusions are based on performance context information for each area and the factors discussed in the preceding scope section. Additional facts and data in support of these conclusions are contained in the separate assessment area sections. Lending Test Overall performance under the lending test is satisfactory. The loan to deposit ratio and level of lending within the assessment area indicate that USB is effectively engaging in lending activities within its defined markets. The overall lending distributions are reasonable by geography and by business and farm revenue. LOAN TO DEPOSIT RATIO The loan to deposit ratio is reasonable. Since the last CRA examination conducted on September 27, 2010, the average loan to deposit ratio is 74.3 percent. This number reasonably compares to the state average of 79.9 percent and the national peer average of 77.1 percent. LENDING IN ASSESSMENT AREA A substantial majority of small business and small farm loans were extended within the bank s assessment areas as shown in Exhibit 2 below. These lending levels support that lending activities are focused within the bank s assessment areas. EXHIBIT 2 LENDING INSIDE AND OUTSIDE THE ASSESSMENT AREAS JULY 1, 2010 DECEMBER 31, 2011 Inside Outside Loan Type $ $ # % % # % ( 000s) ( 000s) % Small Business 229 89.1 58,840 88.2 28 10.9 7,862 11.8 Small Farm 25 100.0 6,607 100.0 0 0.0 0 0.0 Total Business Related 254 90.1 65,447 89.3 28 9.9 7,862 10.7 Home Purchase 6 60.0 1,789 56.5 4 40.0 1,376 43.5 Home Refinance 1 100.0 15 100.0 0 0.0 0 0.0 Home Improvement 4 100.0 645 100.0 0 0.0 0 0.0 Multifamily 2 100.0 2,820 100.0 0 0.0 0 0.0 Total Home Related 13 76.5 5,269 79.3 4 23.5 1,376 20.7 Total Loans 267 89.3 70,716 88.5 32 10.7 9,238 11.6 5
GEOGRAPHIC AND BORROWER DISTRIBUTION Overall, small business loans are reasonably distributed throughout the assessment area geographies and to businesses and farms of different revenue sizes. Lending levels to small businesses and small farms reasonably compared to the level of small businesses and the aggregate lending levels in the assessment area. Further, a majority of small business loans were in smaller dollar amounts (i.e., less than $250,000), thereby addressing an identified credit need for small dollar business loans. The facts and data supporting this overall conclusion are presented within the respective assessment area analysis. RESPONSE TO COMPLAINTS USB did not receive any complaints related to CRA during the review period. Consequently, the bank s performance in responding to complaints was not considered in evaluating CRA performance. Community Development Test Overall performance under the community development test is outstanding. USB is a leader in making community development loans that exhibit an excellent record of meeting community credit needs, particularly for job creation and retention. During the review period, the bank responded to high employment rates by making community development loans that helped to create or retain over 2,800 local jobs. These loans played a significant role in helping to stabilize and revitalize low and moderateincome geographies and promote economic development within the bank s assessment areas. Other community development activities were also responsive to local assessment area needs and helped ensure the provision of essential services for low and moderate income individuals and address the need for affordable housing for low and moderate income individuals. Although financial constraints limited USB s ability to engage in community investments during this review period, USB maintained prior period investments on its books that helped to maintain over 1,200 housing units targeted to lowand moderate income individuals within the bank s assessment area and a broader state wide area that includes the assessment area. 6
Exhibit 3 below illustrates USB s total community development activities for the review period. Assessment Areas # EXHIBIT 3 COMMUNITY DEVELOPMENT ACTIVITIES Loans $ ( 000s) Prior Period # Investments $ ( 000s) Current Period # $ ( 000s) Services # Hours Fresno 63 31,427 1 475 9 6 8 126 Kern 8 1,789 0 0 0 0 0 0 Santa Clara 8 2,325 0 0 0 0 0 0 Madera 1 500 0 0 0 0 0 0 Broader Statewide or Regional Area 0 0 4 796 1 419 6 641 Total 80 36,041 5 1,271 10 425 14 767 USB also engaged in additional community development service activities that benefited a broader statewide or regional area that also included the bank s Fresno, Kern, and Madera assessment areas. The following examples highlight these community development activities: The bank s chief executive officer/president provided over 600 hours of financial assistance to a local state funded university attended primarily by low and moderate income students from the San Joaquin counties. Bank personnel provided 30 hours of financial service to a small business development corporation that provides technical assistance and financing to small businesses and small farmers who are unable to secure traditional sources of funding. Bank personnel provided 11 hours of financial service to assist the Federal Home Loan Bank of San Francisco and local affordable housing developers by helping to monitor housing projects. USB s retail banking services provide another avenue to meet the community s needs and contribute to the bank s performance under this test. The bank s branch network extends throughout a large and primarily rural assessment area and provides services in remote areas with extremely limited banking facilities. USB operates in areas where it is either one of a very limited number or the only bank, providing critical banking services to these communities through its retail branch and ATM networks. Fair Lending or Other Illegal Practices Review Concurrent with this CRA evaluation, a review of USB s compliance with consumer banking laws and regulations was conducted. That review found no evidence of violations of the substantive provisions of anti discrimination, fair lending, or credit practices rules, laws, or regulations. 7
FULL-SCOPE ASSESSMENT AREA CONCLUSIONS For each assessment area where a full scope review was performed using the examination procedures. Fresno Assessment Area DESCRIPTION OF OPERATIONS IN FRESNO The Fresno assessment area consists of Fresno County in its entirety. Fresno County is the sixth largest county in the state, covering more than 6,000 square miles. 1 The assessment area is located near the center of the San Joaquin Valley region of Central California, where its fertile soils and long growing seasons help make it a major agricultural region. According to the 2010 United States (U.S.) Census, Fresno County had a population of approximately 930,450 residents. 2 USB has a relatively small presence within this highly competitive market, despite its concentration of branches in Fresno. As of June 30, 2011, USB operated seven of its 11 branches in Fresno, which had total deposits of $402.1 million, representing 3.9 percent of the deposit market share for the assessment area. 3 Large national banks have a significant presence in this area, with the top two banks, ranked by deposit share, comprising 43.2 percent of the market. 4 Additionally, in 2011, there were 60 lenders reporting small business loans and 20 lenders reporting small farm loans, pursuant to the reporting requirements of the CRA. These lenders, which represent only a portion of the overall commercial and agricultural lending market, extended 11,536 small business loans and 454 small farm loans. Exhibit 4 on the next page presents key demographic and business information, based on the 2000 U.S. Census and 2010 Dun and Bradstreet data, used to help develop a performance context for the assessment area. 1 County of Fresno, About the County; available from http://www.co.fresno.ca.us/countypage.aspx?id=19947, (accessed September 1, 2012). 2 U.S. Census Bureau, 2010 Census, 2010 Demographic Profile Data, Fresno County DP 1; available from http://factfinder2.census.gov, (accessed September 5, 2012). 3 FDIC, Deposit Market Share, Summary of Deposits Fresno County, June 30, 2011; available from http://www2.fdic.gov/sod/, (accessed August 28, 2012). 4 Ibid. 8
Income Categories Tract Distribution EXHIBIT 4 ASSESSMENT AREA DEMOGRAPHICS FRESNO Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low income 9 5.8 6,809 3.7 3,453 50.7 42,699 22.9 Moderate income 47 30.1 54,617 29.3 16,596 30.4 31,834 17.1 Middle income 52 33.3 66,982 36.0 10,460 15.6 34,483 18.5 Upper income 47 30.1 57,764 31.0 2,506 4.3 77,156 41.4 Tract not reported 1 0.6 0 0 0 0 0 0 Total AA 156 100.0 186,172 100.0 33,015 17.7 186,172 100.0 Housing Housing Types by Tract Income Categories Units by Owner Occupied Rental Vacant Tract # % % # % # % Low income 10,480 2,285 1.6 21.8 7,060 67.4 1,135 10.8 Moderate income 79,480 31,015 22.1 39.0 43,123 54.3 5,342 6.7 Middle income 96,269 49,645 35.4 51.6 41,212 42.8 5,412 5.6 Upper income 78,172 57,438 40.9 73.5 18,062 23.1 2,672 3.4 Total AA 264,401 140,383 100.0 53.1 109,457 41.4 14,561 5.5 Businesses by Tract & Revenue Size Total Businesses Income Categories by Tract Less Than or Equal Greater than $1 Revenue Not to $1 Million Million Reported # % # % # % # % Low income 1,889 6.4 1,629 6.2 153 8.0 107 7.7 Moderate income 7,805 26.5 6,742 25.8 608 31.6 455 32.9 Middle income 9,434 32.0 8,345 31.9 635 33.0 454 32.8 Upper income 10,298 35.0 9,409 36.0 524 27.2 365 26.4 Tract not reported 30 0.1 25 0.1 3 0.2 2 0.1 Total AA 29,456 100.0 26,150 100.0 1,923 100.0 1,383 100.0 Percentage of Total Businesses 88.8 6.5 4.7 Farms by Tract & Revenue Size Total Farms by Income Categories Tract Less Than or Equal Greater than $1 Revenue Not to $1 Million Million Reported # % # % # % # % Low income 9 0.4 9 0.4 0 0 0 0 Moderate income 575 24.9 475 23.2 85 40.1 15 29.4 Middle income 1,096 47.4 983 48.0 93 43.9 20 39.2 Upper income 631 27.3 581 28.4 34 16.0 16 31.4 Total AA 2,311 100.0 2,048 100.0 212 100.0 51 100.0 Percentage of Total Businesses 88.6 9.2 2.2 2004 Median Family Income $38,493 December 2011 Median Housing Value $145,000 2011 HUD Adjusted Median Family Income $54,700 December 2011 Unemployment Rate 16.2% 9
Economic Conditions Agricultural is the backbone of Fresno County and is an important source of jobs and gross income. Gross agricultural production in Fresno was $5.9 billion in 2010, making Fresno the leading county in agricultural production for the state. 5 Fresno s top commodities include grapes, almonds, and tomatoes. 6 In line with this agricultural industry concentration, a large food processing industry has developed in the area and includes canning, curing and freezing processing plants throughout the assessment area. 7 Other major industries include public sector employers, such as federal, state and local government; health care and small businesses (i.e. those with gross annual revenues of $1 million or less) were also important contributors to the local economy. As shown in Exhibit 4, small businesses account for 88.8 percent of all businesses and small farms account for 88.6 percent of all farms in Fresno. Like much of California s San Joaquin Valley, Fresno continued to experience the effects of the recession and financial crisis during the review period. Annual unemployment rates were above statewide averages. In 2011, Fresno had the 12 th highest unemployment rate in California, with 16.5 8 percent of workers unable to find a job, almost double the national average. 9 In an average month in 2011, approximately 73 thousand workers were looking for jobs. 10 Fresno is among the California counties most affected by the housing market downturn. Despite a small amount of leveling out, home prices continued to decline throughout 2010 and 2011. 11 By the end of 2011, average home prices in Fresno had declined by roughly 47 percent of their 2006 peak values and declined 11 percent from 2010 to 2011. 12 The housing market was also adversely impacted by high foreclosure rates. In December 2010, Fresno s foreclosure rate of 3.4 percent was slightly above the state average of 3.3 percent. 13 One year later, foreclosure rates in Fresno fell to 3.0 percent but still remained above the state average of 2.8 percent for December 2011. 14 In addition, an estimated 3.7 percent of borrowers in Fresno were 90+ days delinquent in December 2011, slightly higher than the California average of 3.6 percent. 15 This translates into approximately 3,800 additional properties that 5 California Agricultural Statistics Review 2011 2012, County Statistical Data, page 19; available at http://www.cdfa.ca.gov/statistics/pdfs/costatdata2011 12.pdf, (accessed August 28, 2012). 6 Fresno County, 2010 Annual Crop and Livestock Report; available at http://www.co.fresno.ca.us/departments.aspx?id=114, (accessed August 28, 2012). 7 Moody s Analytics, Précis U.S. Metro West, Fresno, December 2011. 8 U.S. Bureau of Labor Statistics, February 2012, Local Area Unemployment Statistics. Tables: Labor force data by county 2010 and 2011 annual averages and Labor Force data by county, not seasonally adjusted, latest 14 months; available from http://www.bls.gov/lau/#tables, (accessed march 5, 2012). 9 U.S. Bureau of Labor Statistics, March 2012. U.S. Annual Unemployment Statistics; available from http://www.bls.gov/cps/pre yrs.htm, (accessed March 5, 2012). 10 U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics. Tables: Labor force data by county, 2010, and 2011 annual averages and Labor force data by county, not seasonally adjusted; available from http://www.bls.gov/lau/#tables, (accessed March 5, 2012). 11 Federal Reserve Bank of San Francisco calculations of the Federal Housing Finance Agency House Price Index; available from Haver Analytics at http://haver.com/databaseprofiles.html, (accessed August 29, 2012). 12 Ibid. 13 FRBSF Calculations of data provided by Lender Processing Services Analytics, Inc. 14 Ibid. 15 Ibid. 10
remained at imminent risk of default. 16 In the third quarter of 2011, an approximated 45 percent of Fresno homeowners with mortgages owed more than their property was worth. 17 Credit and Community Development Needs Demand for small business loans fluctuated, but started to improve during the latter part of the review period. According to the October 2011 Federal Reserve Board s Senior Loan Officer Opinion Survey on Bank Lending Practices, loan officers reported easing lending standards for small businesses. Nonetheless, banks reported that demand for small business loans declined. 18 These reports accord with national data reported under the CRA, as the number and dollar amount of small business loans reported in 2010 declined about nine percent from 2009. 19 In 2011, however, nationwide demand for credit appeared to be on the rise, as noted by the Federal Reserve System s January 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices. In that survey, approximately 15 percent of domestic banks reported stronger demand for commercial and industrial loans from small firms; this was the highest level since 2005. 20 Local aggregate lending data indicate that trends within the assessment area were similar to the national trends noted above with a rise in the number of small business loans extended from 2010 to 2011. Discussions with community representatives further revealed that many of the area s small businesses, including small farmers, typically need small dollar loans, emphasizing the need for loans of less than $250,000. In October 2010, the Federal Reserve Bank of San Francisco held a Business Leadership Summit, in partnership with the Turlock Chamber of Commerce that focused on small business financing needs in California s San Joaquin Valley. 21 At this meeting, a wide variety of academic and community development presenters identified access to credit and technical assistance for small businesses and small farms as critical needs in the community. The recession, coupled with the continuing housing and foreclosure crisis, have had a significant impact on the community development needs in Fresno County, particularly for affordable housing and affordable housing programs. Although home values declined during the review period, access to credit tightened making home loans more difficult to obtain. As such, many families had no alternative, but to rent. Rents, however, increased making the rental housing option unaffordable for many. The median 16 Ibid. 17 Slight decline in underwater home rate seen in Q3. November 29, 2011. Central Valley Business Times. 18 Board of Governors of the Federal Reserve System, The October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices, October 2011, page 1, available from http://www.federalreserve.gov/boarddocs/snloansurvey/, accessed January 26, 2012. 19 FFIEC (2011), Findings from Analysis of Nationwide Summary Statistics for 2010 Community Reinvestment Act Data Fact Sheet (August 2011), available online at http://www.ffiec.gov/hmcrpr/cra_fs11.htm. Accessed January 26, 2012. 20 Board of Governors of the Federal Reserve System, The January 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, January 2012, Full Report Version, page 2; available from http://federalreserve.gov/boarddocs/snloansurvey, (accessed September 5, 2012). Note that the 15 percent figure is net of those banks that did not respond to the question. 21 Federal Reserve Board of Governors (2010), Addressing the Financing Needs of Small Businesses: Summary of Key Themes from the Federal Reserve Systems Small Business Meeting Series, p. 19; available from http://www.federalreserve.gov/newsevents/conferences/sbc small business summary.pdf, (accessed January 27, 2012). 11
rent in 2011 for Fresno was $857 per month. 22 While this appears low compared to higher cost areas in the state, 48.5 percent 23 of renter households in Fresno paid 35 percent or more of their income for rent in 2011 (paying more than 30 percent of income for housing is considered cost burdened). 24 Finally, the economic crisis revealed the need to build the capacity of local organizations in Fresno to undertake a wide range of community development activities, including small business lending, affordable housing development, financial education and counseling, and community development finance. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN FRESNO Lending Test Overall lending test performance in Fresno is reasonable. Performance was generally consistent with the bank s market presence, financial constraints, and capacity. Loans were reasonably distributed among geographies of different incomes, and the distribution of loans among businesses and farms of different sizes is also reasonable. In addition, high percentages of loans were made in in amounts less than $250,000, thereby addressing an identified credit need for small dollar loans. Lending Distribution by Geography Small Business Lending As shown in Exhibit 5 on the next page, the geographic distribution of small business loans demonstrates that a reasonable level of lending was dispersed throughout the assessment area. Overall, the bank s lending levels reasonably compare to the percentage of business entities and aggregate lending levels. Lending levels in 2010 were impacted by the depressed loan demand discussed previously. Small business lending levels improved in 2011 and reasonably compare to lending opportunities and aggregate lending levels. 22 U.S. Census Bureau, American Community Survey, 1 Year Estimates Selected Housing Characteristics DP04, 2011 Fresno County; available from http://www.factfinder.census.gov, (accessed September 20, 2012). 23 U.S. Census Bureau, American Community Survey, Selected Housing Characteristics DP04, 2011 Fresno County; available from http://www.factfinder.census.gov, (accessed September 10, 2012). 24 U.S. Department of Housing and Urban Development. Affordable Housing; available from http://www.hud.gov/offices/cpd/affordablehousing/, (accessed September 21, 2012). 12
Census Tract EXHIBIT 5 GEOGRAPHIC DISTRIBUTION OF SMALL BUSINESS LOANS Low Moderate Middle Upper # % # % # % # % Fresno 2010 Bank Lending 0 0.0 4 16.0 7 28.0 14 56.0 Aggregate Lending 448 4.6 2,084 21.4 2,937 30.1 4,274 43.9 Business Concentration 1,889 6.4 7,805 26.5 9,434 32.1 10,298 35.0 Fresno 2011 Bank Lending 2 3.9 10 19.6 14 27.5 25 49.0 Aggregate Lending 479 4.2 2,521 21.9 3,455 30.0 5,078 44.0 Business Concentration 1,889 6.4 7,805 26.5 9,434 32.1 10,298 35.0 Small Farm Lending As shown in Exhibit 6 below, the geographic distribution of small farm loans demonstrates a reasonable level of lending in the assessment area. Overall, the bank s lending levels reasonably compare to the percentage of farm entities and to the aggregate lending levels. Similar to small business loans, the level of small farm loans in 2010 was impacted by the depressed loan demand discussed previously. Small farm lending levels improved somewhat in 2011 and compared favorably to lending opportunities and aggregate lending levels in low and moderate income geographies. Census Tract EXHIBIT 6 GEOGRAPHIC DISTRIBUTION OF SMALL FARM LOANS Low Moderate Middle Upper # % # % # % # % Fresno 2010 Bank Lending 0 0.0 0 0.0 6 85.7 1 14.3 Aggregate Lending 3 0.6 114 24.1 230 48.5 127 26.8 Farm Concentration 9 0.4 575 24.9 1,096 47.4 631 27.3 Fresno 2011 Bank Lending 1 5.9 6 35.3 6 35.3 4 23.5 Aggregate Lending 2 0.4 128 28.2 199 43.8 125 27.5 Farm Concentration 9 0.4 575 24.9 1,096 47.4 631 27.3 Lending Distribution by Business Revenue Small Business Lending The level of lending to small businesses is reasonable. Although the level of lending to small businesses was below the concentration of businesses, as seen in Exhibit 7, it exceeded the aggregate lending levels in 2010 and 2011. Moreover, the majority of small business loans were in dollar amounts of $250 thousand or less, thereby addressing an identified credit need for small dollar business loans. 13
Year Bank Lending # EXHIBIT 7 BUSINESS REVENUE DISTRIBUTION OF SMALL BUSINESS LOANS Fresno Lending to Businesses with Revenue Originations Regardless of Revenue Size <=$1 Million by Loan Amount Businesses Bank Aggregate <=$100K > $100K & >250K & <=$1M in Lending (%) Lending (%) (%) <=$250K (%) <=$1M (%) Revenue (%) 2010 25 64.0 88.8 35.7 44.0 12.0 44.0 2011 51 56.9 88.8 42.3 35.3 19.6 45.1 Small Farm Lending The level of lending to small farmers is excellent. The level of lending reasonably compares to the concentration of small farms and exceeded the aggregate lending level for both 2010 and 2011. Moreover, over forty seven percent of all small farm loans were in small dollar amounts of $250 thousand or less, thereby addressing an identified credit need for small dollar farm loans. Year Bank Lending # EXHIBIT 8 BUSINESS REVENUE DISTRIBUTION OF SMALL FARM LOANS Fresno Lending to Businesses with Revenue Originations Regardless of Revenue Size <=$1 Million by Loan Amount Businesses Bank Aggregate <=$100K > $100K & >250K & <=$1M in Lending (%) Lending (%) (%) <=$250K (%) <=$1M (%) Revenue (%) 2010 7 71.4 88.6 59.1 28.6 42.9 28.6 2011 17 76.5 88.6 57.9 17.7 29.4 52.9 Community Development Test USB s performance under the community development test is excellent. The bank is a leader in making community development loans that were highly responsive to the assessment area s most pressing community development needs. During the review period the bank extended 63 community development loans totaling $31.4 million that helped to create or retain over 2,000 jobs in Fresno. Given the area s high unemployment rates, these loans played a significant role in helping to stabilize and revitalize low and moderate income areas and promote economic development within the assessment area. In addition, bank personnel provided 126 financial service hours to organizations involved in housing related activities targeted to low and moderate income individuals, low cost financial services for low and moderate income individuals, higher education for low income communities, and financing for small and very small businesses. Lastly, despite financial constraints, USB provided community development investments totaling over $481 thousand that helped support organizations involved in serving the needs of low and moderate income individuals, including affordable housing and technical assistance for start up businesses, which were responsive to the needs of the community. 14
USB s retail banking services provide another avenue to meet the community s needs and contribute to the bank s excellent level of community development activities. The bank s branch network extends throughout a large, primarily rural assessment area and provides services in remote communities with extremely limited banking facilities. USB operates in the communities of Caruthers, Firebaugh, and San Joaquin where it is either one of a very limited number or the only bank, providing critical banking services to these communities through its retail branch and ATM networks. The following examples highlight community development activities within the Fresno assessment area: Twenty nine loans totaling $19.6 million that helped stabilize low and moderate income census tracts that are designated enterprise and empowerment zones. These loans helped to create or retain over 1,200 jobs. Thirty loans totaling $10.4 million that helped foster economic development by financing small businesses that met the size requirements of the SBA. These loans helped to create or retain over 800 jobs. A total of $800 thousand in loans was provided to a non profit organization involved in rehabilitating deteriorating homes to provide affordable housing to low and moderate income individuals. During the review period, 22 homes were made available for purchase by low and moderate income individuals. A total of $700 thousand in loans was provided to a medical group that serves primarily lowand moderate income clients through 11 clinics located in rural areas within the assessment area. This credit facility was crucial for the continued operation of the clinics due to the budget challenges faced by the state of California. Bank personnel provided 48 hours of fundraising support for a local 2 year community college district attended by local students, the majority of which are from low and moderate income families. Bank personnel provided 34 hours of lending expertise to the loan committee of an organization that makes micro and other loan programs available to small businesses and to refugees who have come to the Fresno area. A prior period low income housing tax credit investment with a book balance of $475 thousand that provided a total of 55 affordable housing units targeted to low and moderate income individuals in the cities of Fresno and Clovis. 15
Kern Assessment Area DESCRIPTION OF OPERATIONS IN KERN The Kern assessment area is located in the southern end of California s San Joaquin Valley. According to the 2010 U.S. Census, Kern County had a population of approximately 839,631 residents. 25 USB has a relatively small presence within the overall market in Kern. As of June 30, 2011, USB operated two of its 11 branches in Kern, which had total deposits of $79.5 million, representing 1.2 percent of the deposit market share for the assessment area. 26 Large national banks have a significant presence in this area, with the top two banks, ranked by deposit share, comprising 44.5 percent of the market. 27 Additionally, in 2011, there were 50 lenders reporting small business loans, pursuant to the reporting requirements of the CRA. These lenders represent only a portion of the commercial lending market, extended 7,404 small business loans. Exhibit 9 on the next page presents key demographic and business information, based on the 2000 U.S. Census and 2010 Dun & Bradstreet data, used to help develop a performance context for the assessment area. 25 U.S. Census Bureau, 2010 Census, 2010 Demographic Profile Data, Kern County DP 1; available from http://factfinder2.census.gov, (accessed September 5, 2012). 26 FDIC, Deposit Market Share, Summary of Deposits Kern County, June 30, 2011; available from: http://www2.fdic.gov/sod/, (accessed September 5, 2012). 27 Ibid 16
Income Categories Tract Distribution EXHIBIT 9 ASSESSMENT AREA DEMOGRAPHICS KERN Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low income 5 5.2 6,178 6.0 2,744 44.4 23,566 22.8 Moderate income 23 24.0 24,219 23.5 7,141 29.5 16,042 15.5 Middle income 32 33.3 35,585 34.5 4,946 13.9 18,972 18.4 Upper income 36 37.5 37,229 36.1 2,047 5.5 44,631 43.2 Total AA 96 100.0 103,211 100.0 16,878 16.4 103,211 100.0 Housing Housing Types by Tract Income Categories Units by Owner Occupied Rental Vacant Tract # % % # % # % Low income 9,724 2,723 3.2 28.0 5,690 58.5 1,311 13.5 Moderate income 36,675 15,379 18.3 41.9 17,813 48.6 3,483 9.5 Middle income 50,379 29,364 34.9 58.3 18,063 35.9 2,952 5.9 Upper income 50,638 36,776 43.7 72.6 11,824 23.4 2,038 4.0 Total AA 147,416 84,242 100.0 57.1 53,390 36.2 9,784 6.6 Income Categories Total Businesses by Tract Less Than or Equal to $1 Million Businesses by Tract & Revenue Size Greater than $1 Million Revenue Not Reported # % # % # % # % Low income 705 3.8 633 3.8 38 3.3 34 4.5 Moderate income 4,456 23.8 3,948 23.5 290 24.9 218 28.9 Middle income 5,278 28.2 4,752 28.3 310 26.7 216 28.6 Upper income 8,271 44.2 7,460 44.4 525 45.1 286 37.9 Total AA 18,710 100.0 16,793 100.0 1,163 100.0 754 100.0 Percentage of Total Businesses 89.8 6.2 4.0 2004 Median Family Income $39,425 December 2011 Median Housing Value $125,000 2011 HUD Adjusted Median Family Income $53,300 December 2011 Unemployment Rate 14.3% Economic Conditions Similar to Fresno, agriculture is an important source of jobs and gross income in Kern. Gross agricultural production in Kern was $4.8 billion in 2010, making it the third highest ranking county in agricultural production for the state. 28 Kern s top commodities include grapes, almonds, pistachios, and milk. 29 28 California Agricultural Statistics Review 2011 2012, County Statistical Data, page 19; available from http://www.cdfa.ca.gov/statistics/pdfs/costatdata2011 12.pdf, (accessed August 28, 2012). 29 Kern County, 2010 Annual Agricultural Crop Report; available from http://www.kernag.com/caap/cropreports/crop10_19/crop2010.pdf, (accessed September 5, 2012). 17
Other major industries include public sector employers, such as federal, state and local government; natural resources (oil, gas, and wind), transportation 30,31, and small businesses are also important contributors to the economy. As shown in Exhibit 10, small businesses (i.e. those with gross annual revenues of $1 million or less) account for 89.8 percent of businesses in Kern. Kern continued to experience the effects of the recession and financial crisis throughout 2010 and 2011 as evidenced by unemployment figures. Like Fresno, the unemployment rate in Kern is relatively high, but showed some improvement from 2010 to 2011. For both years, unemployment rates in Kern were above statewide averages. In 2011, Kern s unemployment rate was the 20 th highest in the state and reached 14.9 percent, which is higher than the state annual average unemployment rate of 11.7 percent. 32,33 In addition, fiscal challenges within the local government contribute to unemployment concerns. Kern County recommended reducing the number of permanent full time staff by 576 positions during the fiscal year 2010 2011. 34 Kern is among the California counties most affected by the housing market downturn. Despite some levelling of price declines, home prices in Bakersfield continued to decline throughout 2010 and 2011. 35 By the end of 2011, average home prices in the Bakersfield MSA were 51 percent lower than their 2006 peaks and had declined by about 12 percent from the beginning of 2010. 36 Similar to Fresno, Kern also suffers from high foreclosure rates. In December 2010, Kern s foreclosure rate of 4.4 percent was above the state average of 3.3 percent. 37 One year later, foreclosure rates in Kern fell to 3.4 percent but still remained above the state average of 2.8 percent for December 2011. 38 In addition, an estimated 4.2 percent of borrowers in Kern were 90+ days delinquent in December 2011, slightly higher than the California average of 3.6 percent. 39 This translates into approximately 4,000 additional properties that remained at imminent risk of default. 40 In the third quarter of 2011, an approximated 48 percent of Kern homeowners with mortgages owed more than their property was worth. 41 30 Greater Bakersfield Chamber of Commerce, Oil & Energy Industries; available from http://www.bakersfieldchamber.org, (accessed September 5, 2012). 31 Moody s Analytics, Précis U.S. Metro West, Bakersfield, December 2011. 32 U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics, Kern County 2010 2011, not seasonally adjusted, available from http://www.bls.gov/lau/#tables, (accessed September 5, 2012). 33 U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics, California statewide labor force data, not seasonally adjusted, available from http://www.bls.gov/lau/#tables, (accessed September 5, 2012). 34 Kern County, Proposed Budget 2010 2011; available from http://www.co.kern.ca.us/cao/budget/fy1011/rec/sumbudrec.asp, (accessed September 17, 2012). 35 Federal Reserve Bank of San Francisco calculations of the Federal Housing Finance Agency House Price Index, Haver Analytics; available from http://haver.com/databaseprofiles.html, (accessed August 29, 2012). 36 Ibid 37 FRBSF Calculations of data provided by Lender Processing Services Analytics, Inc. 38 Ibid 39 Ibid 40 Ibid 41 Edelhart, Courtenay. (February 9, 2012). Settlement could help Kern's beleaguered housing market. The Bakersfield Californian; available from http://www.bakersfieldcalifornian.com, (accessed September 10, 2012). 18
Credit and Community Development Needs As previously discussed under the Fresno Assessment Area, demand for small business loans fluctuated during the review period, dipping in 2010 and rising in 2011. According to the October 2011 Federal Reserve Board s Senior Loan Officer Opinion Survey on Bank Lending Practices, loan officers reported easing lending standards for small businesses. Nonetheless, banks reported that demand for small business loans declined in 2010. 1 These reports accord with national data reported under the CRA, as both the number and dollar amount of small business loans reported in 2010 declined about nine percent from their respective amounts in 2009. 1 In 2011, however, nationwide demand for credit appeared to be on the rise, as reflected in the results of the Federal Reserve System s January 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices. In that survey, approximately 15 percent of domestic banks reported stronger demand for commercial and industrial loans from small firms; this was the highest level since 2005. 42 Local aggregate data indicate that local trends were similar to the national trends noted above with a rise in the number of small business loans extended from 2010 to 2011. Discussions with community representatives revealed that many of the area s small businesses typically need small dollar loans, emphasizing the need for loans of less than $250,000. The Federal Reserve Bank of San Francisco held a Business Leadership Summit in partnership with the Turlock Chamber of Commerce that focused on small business financing needs in California s San Joaquin Valley. 1 At this meeting, a wide variety of academic and community development presenters also identified access to credit and technical assistance for small businesses and small farms as critical needs in the community. Similar to Fresno, the recession, coupled with a depressed housing market and the foreclosure crisis, have had a significant impact on the needs of low and moderate income communities in Kern, particularly the need for affordable housing and affordable housing programs. While home values have declined, access to credit had tightened making home loans more difficult to obtain. As such, many families turned to rental housing; however, rents had increased and for some were unaffordable. For example, the median rent in 2011 for Kern was $839 per month. 43 While this appears low compared to higher cost areas in the state, 44.6 percent of renter households in Kern paid 35 percent or more of their income for rent in 2011 (families who pay more than 30 percent of their income for housing are considered cost burdened). 44,45 Housing availability was also a concern as rental vacancies in the Bakersfield area decreased from an annual rate of 5.6 percent in 2010 to 3.8 percent in 2011, 46 indicating an increase in demand and a significant need for additional affordable rental units. 42 Board of Governors of the Federal Reserve System, The January 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, January 2012, Full Report Version, page 2; available from http://federalreserve.gov/boarddocs/snloansurvey, (accessed September 5, 2012). Note that the 15 percent figure is net of those banks that did not respond to the question. 43 U.S. Census Bureau, American Community Survey, 1 Year Estimates Selected Housing Characteristics DP04, 2011; available from http://www.factfinder.census.gov, (accessed September 20, 2012). 44 Ibid 45 U.S. Department of Housing and Urban Development. Affordable Housing; available from http://www.hud.gov/offices/cpd/affordablehousing/, (accessed August 30, 2012). 46 Reis, Inc. Performance Monitor, Apartment 4 th Quarter 2011, Metro: Bakersfield; available from www.reis.com, (accessed September 6, 2012). 19
In addition, one of the key community development activities in Kern included local efforts to prevent foreclosures. In 2009, a group of nonprofit organizations, government agencies, professionals and financial institutions organized the San Joaquin Valley Foreclosure Task Force. The Task Force has coordinated a number of activities in response to the crisis, including borrower outreach and loan modification fairs, foreclosure recovery workshops (which provide information about local programs such as job training and employment assistance and credit repair), and legal referrals. In addition, there are ongoing efforts to provide financial education and connect low and moderate income families to financial services. In 2010, the Task Force held a Foreclosure Prevention meeting in Bakersfield to discuss the loss mitigation process, and the event organizer indicated that there is a lack of housing counselors in the Kern area and that the housing counseling agencies lack capacity to serve the needs of the area. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN KERN Lending Test Overall lending test performance in Kern is reasonable. Performance was generally consistent with the bank s market presence, constraints, and capacity. Loans were reasonably distributed among geographies of different incomes, though the distribution of loans among businesses of different sizes is poor. Lending Distribution by Geography The geographic distribution of small business loans in Kern is reasonable. Loans were reasonably distributed near the bank s two branches in the assessment area. Low income census tracts offered limited lending opportunities given the small number of business entities and were further away from the bank s two branches. Moderate income census tracts had higher concentrations of businesses offering more opportunity for lending, but were also distant from the bank s branches and closer to competing financial institutions. EXHIBIT 10 GEOGRAPHIC DISTRIBUTION OF SMALL BUSINESS LOANS Census Tract Low Moderate Middle Upper # % # % # % # % Kern 2010 Bank Lending 0 0.0 0 0.0 3 20.0 12 80.0 Aggregate Lending 161 2.5 1,184 18.7 1,590 25.1 3,408 53.7 Business Concentration 705 3.8 4,456 23.8 5,278 28.2 8,271 44.2 Kern 2011 Bank Lending 0 0.0 1 4.0 9 36.0 15 60.0 Aggregate Lending 172 2.32 1,488 20.1 1,770 23.9 3,974 53.7 Business Concentration 705 3.8 4,456 23.8 5,278 28.2 8,271 44.2 20