PUBLIC DISCLOSURE. September 3, 2013 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION. Farmers and Merchants Bank RSSD #

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1 PUBLIC DISCLOSURE September 3, 2013 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Farmers and Merchants RSSD # Pine Avenue Long Beach, California Federal Reserve of San Francisco 101 Market Street San Francisco, California 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.

2 Farmers and Merchants TABLE OF CONTENTS INSTITUTION RATING... 1 Institution s Community Reinvestment Act (CRA) Rating... 1 INSTITUTION... 2 Description of Institution... 2 Description of Assessment Area... 2 Scope of Examination CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS Lending Test LENDING ACTIVITY ASSESSMENT AREA CONCENTRATION LENDING DISTRIBUTION BY GEOGRAPHY LENDING DISTRIBUTION BY BORROWER INCOME AND BUSINESS REVENUE COMMUNITY DEVELOPMENT LENDING Investment Test Service Test RETAIL BANKING SERVICES COMMUNITY DEVELOPMENT SERVICES Fair Lending or Other Illegal Practices Review APPENDICES Appendix A: Glossary of Terms Appendix B: CRA Core Tables i

3 Farmers and Merchants INSTITUTION RATING Institution s Community Reinvestment Act (CRA) Rating Farmers and Merchants (FMB) is rated "SATISFACTORY The following table shows the performance level of FMB with respect to the lending, investment, and service tests. PERFORMANCE LEVELS LENDING TEST* PERFORMANCE TESTS INVESTMENT TEST SERVICE TEST OUTSTANDING X HIGH SATISFACTORY LOW SATISFACTORY X X NEEDS TO IMPROVE SUBSTANTIAL NONCOMPLIANCE * The lending test is weighted more heavily than the investment and service tests in determining the overall rating. The major factors supporting the institution s rating include: An excellent dispersion of small business loans in low- and moderate-income census tracts; An adequate dispersion of home refinance and home improvement loans and a poor dispersion of home purchase in low- and moderate-income geographies; An adequate level of small business lending to borrowers with gross annual revenue of $1 million or less; Generally adequate levels of home improvement and home mortgage refinance lending to borrowers of different income levels; A very poor distribution of home purchase loans to borrowers of different income levels; A relatively high level of community development lending activities; An adequate level of investments and donations; A leadership role in providing community development services. 1

4 Farmers and Merchants INSTITUTION Description of Institution FMB, with $5.1 billion in assets as of June 30, 2013, is headquartered in Long Beach, California. The bank currently operates 21 full-service branch offices in the southern California counties of Los Angeles and Orange. FMB is a wholly-owned subsidiary of Palomar Enterprises, LLC. FMB offers a full range of loan and deposit products to businesses and consumers. However, the bank's primary strategic focus is to provide collateral-based commercial and business banking to small- to medium-sized businesses. Commercial loans offered include credit facilities for commercial real estate, working capital, receivables management, operating lines of credit, equipment, and construction. Other commercial products include merchant card services. Consumer purpose products include auto loans, credit cards, personal lines of credit, home equity loans, and Home Mortgage Disclosure Act (HMDA)- reportable mortgage loans for the purpose of home purchase, refinance, and home improvement. The composition of the loan portfolio, as disclosed in the June 30, 2013, Consolidated Reports of Condition and Income and presented in Exhibit 1, shows the bank's commercial lending focus. EXHIBIT 1 LOANS AND LEASES AS OF JUNE 30, 2013 Loan Type $ ( 000s) % Commercial/Industrial & 1,501,219 Non-Farm Non-Residential Real Estate 71.1 Secured by 1-4 Family Residential Real Estate 427, Multi-Family Residential Real Estate 108, State, Political Subdivisions and All Other 31, Construction & Land Development 29, Consumer & Credit Cards 14, Farm Land & Agriculture Total (Gross) 2,112, FMB faces no legal or financial impediments that would prevent it from helping to meet the credit needs of its assessment area consistent with its business strategy, size, financial capacity, and local economic conditions. The bank received a satisfactory rating during the previous CRA examination conducted as of August 1, Description of Assessment Area Since the last CRA examination, FMB has made no changes to its sole assessment area, which consists of the southwestern portion of Los Angeles County and neighboring Orange County in its entirety. The Los Angeles County portion of the assessment area constitutes the southern tip of the Los Angeles-Long Beach-Glendale, California Metropolitan Division (MD) while Orange County, to the south, composes the Santa Ana-Anaheim- Irvine, California MD. Together, the two contiguous MDs form the Los Angeles-Long Beach-Santa Ana, 2

5 Farmers and Merchants California Metropolitan Statistical Area (MSA). The MSA is bordered by Ventura and Kern Counties to the northwest and north, by San Bernardino and Riverside Counties to the northeast and east, by San Diego County to the south, and by the Pacific Ocean to the west. Los Angeles County has a population of just under ten million people, making it the most populous county in the state. Orange County has an estimated population of just over three million, making it the third most populous county in California after Los Angeles and San Diego. 1, 2 Of its 22 office locations in the assessment area, FMB operates its main office and nine branches in Los Angeles County; the remaining 12 offices operate in Orange County. FMB has a relatively limited presence in this competitive assessment area. There were a total of 210 Federal Deposit Insurance Corporation-insured financial institutions operating 2,498 offices in Los Angeles and Orange Counties as of June 30, The bank's deposit market share at that time was just under one percent, ranking 16th among depository institutions. In 2013, FMB ranked 21 out of 137 lenders, with 0.2 percent by number of loans and two percent by dollar volume of all small business loans reported pursuant to the CRA in the area. Among area banks reporting HMDA data, FMB ranked 137 out of the 707 lenders, with 0.1 percent by number and dollar volume of loans. These CRA and HMDA data reporters represent only a portion of the lending market. Accordingly, given the sizable number of institutions operating in the bank's assessment area, competition for loan and deposit products as well as for community development opportunities is significant. Exhibit 2 on page 4 presents key demographic and business information used to help develop a performance context for the assessment area, based on 2000 U.S. Census, 2011 Dun & Bradstreet, and the Bureau of Labor Statistics (BLS) unemployment data, 3 applicable to the bank s lending in Exhibit 3 on page 5 provides information, drawn from the 2010 U.S. Census, 2012 Dun & Bradstreet, and the BLS, applicable to the bank s lending in 2012 and In 2010, the U.S. Census was updated which showed only modest changes in the distribution of census tracts. However, some significant changes were noted including the increase in owner-occupied housing units within low-income census tracts that almost doubled and the number of vacant housing units also increased significantly in census tracts of all income categories. 1 U. S. Census Bureau QuickFacts for California, Los Angeles County, and Orange County accessed September 25, 2013 at and 2 U. S. Census Bureau Annual Estimates of the Resident Population: April 1, 2010 to July 1, Population Estimates accessed September 25, 2013 at 3 U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics by county; available from (accessed January 7, 2013). 3

6 Farmers and Merchants Income Categories Tract Distribution EXHIBIT 2 ASSESSMENT AREA DEMOGRAPHICS 4 LOS ANGELES ORANGE 2000 CENSUS Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income , , , Moderate-income , , , Middle-income , , , Upper-income , , , Tract not reported Total AA ,024, , ,024, Housing Housing Types by Tract Income Categories Units by Owner-Occupied Rental Vacant Tract # % % # % # % Low-income 64,666 12, , , Moderate-income 348, , , , Middle-income 487, , , , Upper-income 594, , , , Tract not reported Total AA 1,494, , , , 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 11, , , Moderate-income 66, , , , Middle-income 96, , , , Upper-income 116, , , , Tract not reported 2, , Total AA 293, , , , Percentage of Total Businesses 89.6% 7.0% 3.4% 2011 Median Family Income Los Angeles County December 2011 Median Housing Value Los Angeles County December 2011 Unemployment Rate Los Angeles County $64,000 $306, % 2011 Median Family Income Orange County December 2011 Median Housing Value Orange County December 2011Unemployment Rate Orange County $84,200 $484, % U.S. Census, 2011 Dun & Bradstreet Data and U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics by county; available from (accessed January 7, 2013). 4

7 Farmers and Merchants Income Categories Tract Distribution EXHIBIT 3 ASSESSMENT AREA DEMOGRAPHICS 5 LOS ANGELES ORANGE 2010 CENSUS Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income , , , Moderate-income , , , Middle-income , , , Upper-income , , , Tract not reported Total AA ,054, , ,054, Income Categories Housing Units by Tract Housing Types by Tract Owner-Occupied Rental Vacant # % % # % # % Low-income 87,492 22, , , Moderate-income 369, , , , Middle-income 472, , , , Upper-income 658, , , , Tract not reported Total AA 1,588, , , , 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 13, , , Moderate-income 64, , , , Middle-income 85, , , , Upper-income 118, , , , Tract not reported 4, , , Total AA 287, , , , Percentage of Total Businesses 89.7% 7.0% 3.3% 2012 Median Family Income Los Angeles County June 2013 Median Housing Value Los Angeles County June 2013 Unemployment Rate Los Angeles County $64,800 $403, % 2012 Median Family Income Orange County June 2013 Median Housing Value Orange County June 2013 Unemployment Rate Orange County $85,300 $661, % U.S. Census, 2012 Dun & Bradstreet Data and U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics by county; available from (accessed January 7, 2013). 5

8 Farmers and Merchants Economic Conditions Los Angeles and Orange Counties are home to large and highly diverse economies and populations. In terms of gross domestic product in 2011, Los Angeles County would have ranked 21 st in the world if it was a sovereign country; together with Orange County and the rest of Southern California, the larger Los Angeles metropolitan area would have ranked 16 th. 6 The area labor market is varied and driven by a number of principle industries. For Los Angeles County, these industries include entertainment and hospitality services; education and health services; manufacturing (particularly in aerospace, computer and electronics, and apparel); and, as home of the nation s largest ports of Los Angeles and Long Beach, transportation, logistics and trade. 7, 8 Orange County, a more affluent economy historically developed out of Los Angeles County, is highly integrated with the Los Angeles economy and operates as a hub for high-tech goods manufacture (including aerospace, computer and biomedical products), tourism 9 and financial (particularly mortgage) services. 10 During the review period, both counties continued to suffer the effects of the Great Recession, although to varied extents. Constrained by the sluggish economy, modest expansion in entertainment, hospitality, and tourism contributed to economic and job growth in Los Angeles and Orange Counties, particularly earlier in the review period. 11 This sector-driven employment tapered, however, in the second half of the review period. Despite state budgetary shortfalls, educational and health services likewise sustained and modestly grew employment in each of the counties throughout the period, tempering labor market volatility. 12 Manufacturing, on the other hand, had a more mixed effect on Southern California labor markets. While both counties are moderately to heavily specialized in durable manufacturing, 13 Los Angeles County suffered persistent high unemployment and declines in manufacturing over the entirety of the review period while Orange County ultimately expanded employment. Although Los Angeles County has diversified away from defense department procurement contracts over the last decade as compared to Orange County in particular, 14 its labor market remains significantly linked via the aerospace industry, which contracted with the end of the space shuttle program, tightening Pentagon budgets and high costs generally. Conversely, Orange County shed manufacturing jobs initially, but the sector drove expanded employment from late 2010 onwards as result of the recovering nondefense technology-related 6 Los Angeles County Economic Development Corporation, Kyser Center for Economic Research, Mid-Year Economic Forecast and Industry Outlook - July 2012, page 20, available at accessed July 1, The Los Angeles metropolitan area as defined in the report includes Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. 7 Moody s Economy.com Inc., Précis U.S. Metro, Los Angeles, December 2011 and April Los Angeles County Economic Development Corporation, Industry Clusters in Los Angeles, available from (accessed January 11, 2013). 9 Los Angeles County Economic Development Corporation, Kyser Center for Economic Research, Mid-Year Economic Forecast and Industry Outlook - July 2012, pp. 34ff., available at (accessed July 1, 2013). 10 Los Angeles County Economic Development Corporation, Kyser Center for Economic Research, Economic Forecast and Industry Outlook - February 2011, page 57, available from (accessed June 19, 2012). 11 Economy.com, Précis Metro, Los Angeles, August 2010 and December Economy.com, Précis Metro, Los Angeles, April Economy.com, Précis Metro, Los Angeles, April 2010 and August Economy.com, Précis Metro, Santa Ana, August

9 Farmers and Merchants research and development and its specialization in high-end semiconductor production. 15 Additionally, mortgage lending, in which Orange County was highly active prior to the Great Recession, resurged moderately at the end of 2010 and began to recover. It tempered, however, as of mid-2011 as bank layoffs and consolidation of recently merged branch networks and back offices offset expansion. 16 Finally, the healthcare and biomedical industries in the region expanded employment most significantly and consistently through the period, with some of the fastest growth occurring in Orange County. These industries remain a sturdy underpinning to the Orange County job market. 17 In terms of unemployment, Los Angeles and Orange Counties recovered gradually though unevenly from the Great Recession. Unemployment rates declined over the period, with Orange County s rate of unemployment falling more quickly and consistently than Los Angeles County s. In Los Angeles County, an initially sluggish labor market gained momentum in the second half of 2012 through the first half of 2013, with the monthly unemployment rate falling from 12.3 percent at year-end 2011 to 10.2 percent in June Still, according to projections, an unemployment rate approaching the 5.8 percent five-year average for the period 2003 through 2007 remains years away. Orange County, boasting the lowest unemployment rate in Southern California at 7.6 percent at year-end 2012, likewise remains above its normal rate of just over 4 percent. 18 Housing Southern California s housing market recovery gained momentum during the review period. In 2012, the declining number of foreclosures contributed to significant gains in median values for the first time since Homes in Los Angeles and Orange Counties saw gains in median values of 31.5 and 36.6 percent, respectively, between 2011 and 2012, as shown in Exhibits 2 and 3 on pages 4 and 5. The housing market was bolstered by low interest rates, rising job security, and investor belief that the upward trend is sustainable. 19 In southern California, home sales rose fastest in mid- to higher-end markets, with sales of homes priced between $300,000 and $800,000 outpacing sales of homes priced under $300, Further spurring the recovery were the rebound in construction permits, up 21 percent and 30 percent in Los Angeles and Orange Counties between 2011 and 2012, 21 as well as tight supply of unsold inventory, at an unprecedented low of 2.6 month supply in California for December Economy.com, Précis Metro, Santa Ana, April Los Angeles County Economic Development Corporation, Kyser Center for Economic Research, Mid-Year Economic Forecast and Industry Outlook - July 2013, p. 75, available at (accessed August 1, 2013). Economy.com, Précis Metro, Santa Ana, December August Los Angeles County Economic Development Corporation, Kyser Center for Economic Research, Economic Forecast and Industry Outlook February 2013, p. 59, available at (accessed August 1, 2013). 18 U.S. Bureau of Labor Statistics, Local Area Unemployment Statistics by County, 2003 through 2012 Annual Averages, June 2013 Monthly Average not seasonally adjusted; available from (accessed August 26, 2013). 19 Los Angeles County Economic Development Corporation The Kyser Center for Economic Research, Economic Forecast & Industry Outlook, February 2013 available at EconomicForecastandIndustryOutlook.pdf. 20 Ibid. 21 U. S. Census Bureau, Annual New Privately-Owned Residential Building Permits, Orange County, California (059) for 2011 and 2012, and Annual New Privately-Owned Residential Building Permits, Los Angeles County, California (037) for 2011 and 2012 available at 7

10 Farmers and Merchants The demand for multi-family housing continued to be strong, resulting in low vacancy rates and rising rents. Reportedly, many young people are choosing to be renters rather than homeowners, at least for the near term, while they try to pay down some of their student debt. Many families who lost their homes to foreclosure will necessarily remain in the rental market while they rebuild their credit and savings. And many seniors are choosing to downsize from the family home and are transitioning to multi-family communities. 22 Credit and Community Development Needs Small Business and Economic Development Access to credit for businesses, particularly for small business owners, was a concern during the Great Recession. 23 As shown in Exhibits 2 and 3 on pages 4 and 5, small businesses represent nearly 90 percent of all businesses within Los Angeles and Orange Counties. According to national data reported under the CRA, the number and dollar amount of small business loans reported in 2010 declined approximately nine percent from their respective amounts in Throughout the review period, however, nationwide demand for credit appeared to be on the rise, as reflected in the results of the Federal Reserve System s Senior Loan Officer Opinion Survey on Lending Practices (Surveys) from January 2011 through July 2013, with demand increasing noticeably. Nonetheless, the Surveys indicate largely unchanged lending criteria. Information obtained from community contacts and other sources that work with a variety of non-profit and economic development organizations suggest that small businesses in the assessment area may have unique needs that are not being fully met. For example, one contact with a certified development company indicated that banks are not providing enough Small Business Administration (SBA) loans, or are placing restrictions on SBA loans. Another contact with a community organization suggested that depressed property values and the general slowdown in economic activity has made it more challenging to access credit. According to a community contact with a small business development corporation, there is limited capacity among small businesses to qualify for loans and access capital needed for their businesses and contacts. To that end, it was suggested that there is a need to support the small business intermediaries, such as community development financial institutions (CDFI) and small business development organizations that provide training and build capacity. In general, contacts noted a need for smaller dollar commercial loans. Affordable Housing A variety of factors suggest that there is a need for products and services that support the development of and access to affordable housing and financing within the bank s assessment area. As previously discussed, home prices declined throughout the area during the recession. Nonetheless, median home prices in Los Angeles and Orange Counties remain well out of reach for most first-time homebuyers and particularly for low- and moderate-income families. For example, using the median housing value of $403,760 in Los Angeles County as of June 2013 with an interest rate of 4.2 percent, 22 Los Angeles County Economic Development Corporation The Kyser Center for Economic Research, Economic Forecast & Industry Outlook, February 2013 available at EconomicForecastandIndustryOutlook.pdf. 23 The American er, February 8, 2010, Agencies Urge to Small Businesses. 24 FFIEC, Findings from Analysis of Nationwide Summary Statistics for 2010 Community Reinvestment Act Data Fact Sheet (August 2011), available from (accessed January 26, 2012). 8

11 Farmers and Merchants and zero down payment terms that would likely be available to only the most highly qualified of borrowers results in a monthly payment of $2,064 based on a 30-year fixed-rate mortgage. 25 Even under the most ideal terms, this monthly payment is almost $800 over what is considered affordable for a family earning a moderate-income in the county. 26 Although the median family income is higher in Orange County, a similar calculation shows that a moderate-income family could afford only $1,706 per month. Given that the median home price in that county is over $650,000, the area is even more unaffordable. Further, as previously discussed, area rents are unaffordable for many households and the availability of rental units is decreasing. A family is considered housing cost burdened if 35 percent or more of their monthly income is dedicated to housing. The percentages of Los Angeles and Orange County families considered housing cost burdened in 2012 were 50.7 and 47.7, respectively, compared to 43.1 percent nationally. The scarcity of rental housing is demonstrated by vacancy percentages of 4.6 and 4.2 in Los Angeles and Orange Counties again contrasted with a national average of 7.4 percent. 27 A community contact pointed out that unemployment and other factors are pushing families out of their homes, meaning more households are seeking rental units. These trends of increased demand, high purchase prices, and rental cost burdens indicate a need for additional affordable rental housing units. Consistent with this conclusion, community contacts with housing agencies indicated that there is a significant need for more housing affordable to low- and moderate-income families, particularly multi-family affordable rental units. Due to high levels of foreclosures, there are neighborhoods with high concentrations of distressed properties in parts of Los Angeles County. This has heightened the importance of community development activities that stabilize and revitalize areas experiencing decline. In late 2008, the federal government launched the Neighborhood Stabilization Program (NSP), which provides funding for local governments to purchase foreclosed properties and redevelop them into affordable housing opportunities. A total of $284.2 million in NSP funding was allocated throughout Los Angeles County, which includes allocations at the city and county level across all three rounds of NSP. 28 Similarly, Orange County was awarded a total of $31.7 million in NSP funding. 29 The NSP program provided the funding to at least partially address the significant demand for community development activities, including financial education, homebuyer counseling, and the rehabilitation and management of distressed properties. Finally, while the need for affordable housing is great, a variety of challenges face affordable housing developers in the area. Notably, all California Redevelopment Agencies (RDAs) were officially dissolved 25 CNN Money Mortgage Estimator; available from (accessed October 31, 2013). The monthly payment includes principal, interest and private mortgage insurance but does not reflect property taxes or other forms of necessary insurance. 26 According to the Department of Housing and Urban Development (HUD), housing cost is considered affordable if it is 30% of a family s monthly income. Taking $64,800 (2012 HUD Adjusted Median Family Income multiplying times.8 and dividing by 64,800 x.8 12 = $4,320 x 30% = $1,296. See HUD - Affordable Housing; available from (accessed July 31, 2012). 27 American Community Survey, 1 year DP04 reports for Los Angeles County and Orange County 2012, available at 28 U.S. Department Housing and Urban Development, Neighborhood Stabilization Program, NSP Grantee Database; available from (accessed January 4, 2013). 29 U.S. Department Housing and Urban Development, Neighborhood Stabilization Program, NSP Grantee Database, available from (accessed January 4, 2013). 9

12 Farmers and Merchants on February 1, 2012; the RDAs were critical for affordable housing development in the state and their absence further increases the need for available funding for affordable housing development. A contact with a non-profit housing development agency suggested that the economic downturn has reduced investor appetite for low-income housing tax credits and that available credits are sold at a discount. Another indicated that while affordable housing developers are able to find short-term construction financing, which is considered less risky, they are having difficulty securing permanent financing with terms of 30 or 40 years. Finally, it was also noted by one contact that transit issues are a major challenge for low- and moderate-income populations in the Southern California assessment area and that there is a need for transit-oriented development, particularly affordable housing situated near public transit. Social Services According to a community indicators survey conducted by the Federal Reserve of San Francisco s Community Development Department, demand for social services such as food stamps, housing for the homeless, and job training has increased dramatically, outstripping the capacity of local nonprofit organizations to provide these services, particularly given government budget cuts at the local and state level. 30 Exhibit 4 below shows the percentage of all people in poverty and the percentage of households receiving food stamps for assessment area counties and the state as a whole. 31 In all three areas presented in the table, poverty increased between 2010 and 2011, but showed some improvement in Nonetheless, all areas saw increases in the percentage of households receiving food stamps throughout this period, including into This general increase in poverty and uptake of social supports suggests that nonprofit organizations serving low-income communities in the assessment area face greater demands for their services. Exhibit 4 Poverty and Food Stamps in Southern California Assessment Area, Area Percent of All People in Poverty Percent of Households Receiving Food Stamps Los Angeles Orange California Scope of Examination The bank s performance under the CRA was assessed under the Interagency Large CRA Examination Procedures for the period July 1, 2011 through June 30, The review for 2011 was based upon data from the census for 2000 and Dun and Bradstreet for The review for 2012 and 2013 was based upon data from the census for 2010 and Dun and Bradstreet for The evaluation included interviews with community members, bank management, and bank staff, as well as various other sources used to develop the performance context for the bank. 30 Federal Reserve of San Francisco (2011), Vantage Point survey conducted September 2010, available at (accessed on March 1, 2012). 31 U.S. Census Bureau, American Community Survey 1-Yr Estimate, Selected Economic Characteristics DP03, 2010, 2011, and 2012; available from (accessed January 7, 2013). 10

13 Farmers and Merchants The examination procedures for large banks call for a review of the bank s performance under three distinct tests: the lending test, the investment test, and the service test. The lending test requires an assessment of small business, small farm, HMDA-reportable mortgage loans (which includes home purchase, home refinance, home improvement and multi-family loans), and community development loans. Among HMDA loans, home refinancings accounted for the majority of the bank s mortgage lending, but there were a limited number of multi-family loans. Similarly, the number of small farm loans was nominal. Accordingly, while multi-family and small farm loans were considered in the assessment, this lending did not have a material impact on the overall evaluation of the bank s CRA performance. They are nonetheless included in the lending tables contained in Appendix B. During this review period, as shown in Exhibit 5 on the following page, the dollar volume of mortgage loans originated actually exceeded the dollar volume of small business loans. However, the number of business loans exceeded the number of mortgage loans and this product remained the bank s business focus. Accordingly, more weight was assigned to small business lending than to mortgage lending. In addition, home mortgage refinance lending received slightly more weight than home purchase and home improvement lending given the higher volume of refinance lending. In accordance with the CRA examination procedures, FMB s lending data was evaluated separately for Los Angeles County and Orange County. However, based on similarities in the number of branches, loan volume, and loan distribution, equal weight was given to the bank s performance in each county. 11

14 Farmers and Merchants CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS Lending Test FMB s performance under the lending test is rated low satisfactory. Overall lending levels were good given the ongoing challenges presented by the recovering economy during the period. Additionally, the majority of the loans were extended within the assessment area. While the geographic distribution of small business lending was excellent, the level of lending to small businesses was adequate. With regard to HMDA lending, geographic and borrower distributions were generally adequate for home improvement and home mortgage refinance loans, but performance under both criteria was poor for home purchase loans. A relatively high level of community development lending, however, contributed to the overall satisfactory assessment. LENDING ACTIVITY The bank s overall lending levels are good and reflect general responsiveness to community credit needs given the competition among the large number of financial institutions operating within the assessment area and the ongoing challenges of the recovering economy. As shown in the exhibit below, FMB focusses on small business lending, but also makes good number of other loan types. Additionally, as shown in Table 1 in Appendix B, FMB also extended a good number of community development loans that, as discussed further in the Community Development Lending section, met a number of key needs within the assessment area. EXHIBIT 5 SUMMARY OF LENDING ACTIVITY JULY 1, 2011 TO JUNE 30, 2013 Loan Type # % $ ( 000s) % Small Business , Small Farm Total Business-Related , HMDA Home Purchase , HMDA Home Improvement , HMDA Refinance , HMDA Multi-family , Total HMDA-Related , Total 1, , Finally, as illustrated in Exhibit 6 on the following page, while loan volumes in the two counties generally compare reasonably with the bank s share of deposits in those markets, they are slightly askew, with a proportionally lower level of loans originated compared to the level of deposits held in Los Angeles County and with the reverse true for Orange County. 12

15 Farmers and Merchants EXHIBIT 6 SUMMARY OF DEPOSITS AND LOANS BY COUNTY County Total Deposits by County Total by County $ ( 000s) % $ ( 000s) % Los Angeles County 1,850, , Orange County 1,633, , Totals 3,484, , ASSESSMENT AREA CONCENTRATION A high percentage of FMB s loans were made within the assessment area, attesting to the bank s focus on its defined market. Exhibit 7, below, shows the number and dollar volume of loans extended inside and outside of the assessment area during the review period. EXHIBIT 7 LENDING INSIDE AND OUTSIDE THE ASSESSMENT AREAS JULY 1, 2011 TO JUNE 30, 2013 Loan Type Inside Outside # % $ ( 000s) % # % $ ( 000s) % Small Farm Small Business , , Total Business-Related , , HMDA Home Purchase , , HMDA Refinance , , HMDA Home Improvement , , HMDA Multi-family , , Total HMDA-Related , , Total , $ LENDING DISTRIBUTION BY GEOGRAPHY Overall lending distribution by geography within the assessment area is adequate. While the distribution for small business loans was outstanding, it was largely adequate for home mortgage loans. Small Business Lending The geographic distribution of small business loans throughout the assessment area was excellent. As illustrated on Table 2 in Appendix B, lending was dispersed throughout census tracts of all income levels. Despite FMB s relatively limited market share, performance exceeded that of aggregate lenders in lowand moderate-income census tracts in all but Los Angeles County in 2013, when the level of lending was comparable to that in moderate-income census tracts. Although aggregate lending data is not available for 2012, FMB s performance was similar to that of previous years. Similarly, compared to the distribution of businesses in low- and moderate-income census tracts, the bank s lending levels exceeded the proportion of business entities in most years. 13

16 Farmers and Merchants Home Mortgage Lending The overall geographic distribution of home mortgage loans is adequate. The geographic and borrower distributions of home refinance and improvement loans are adequate, while the same distributions of home purchase loans are poor. As can be seen in Table 4 in Appendix B, FMB focusses on small business lending and as such generated lower levels of home mortgage lending which contributed to the varied performance by county and year. Nevertheless, FMB extended loans in all geographies and to borrowers of all income levels. Home Refinance The overall geographic distribution of home refinance loans is adequate. While home refinance lending is not a focus for FMB, loan volumes are higher for this product relative to home purchase and refinance lending. As shown in Table 5 in Appendix B, this contributed to more stable performance during the review period and a stronger penetration into low-and moderate-income geographies, particularly when lending is considered in aggregate. Home Improvement The geographic distribution of home improvement loans is adequate. Home improvement lending volumes are limited, which contributed to the varied performance within each county during the threeyear period shown in Table 5 in Appendix B. Nevertheless, considered in aggregate, a reasonable level of loans was extended in census tracts of all income levels. Home Purchase The geographic distribution of home purchase loans is poor. The lower lending volumes are consistent with FMB s focus on small business lending and help explain the variations in lending performance by county and by year. While loans were extended in census tracts of all income levels, in aggregate, lending was largely concentrated in middle- and upper-income tracts with nominal lending in low-and moderate-income geographies. LENDING DISTRIBUTION BY BORROWER INCOME AND BUSINESS REVENUE Lending levels among businesses of different sizes and borrowers of different income is generally adequate. Small Business Lending The lending distribution by business revenue was adequate. As presented in Table 8 in Appendix B, although performance fell below the representation of small businesses in the area, results for Los Angeles approximated aggregate lending in 2011 and That performance, however, lagged in Results in Orange were adequate in 2011, but subsequently declined below that of aggregate lenders to a marginally adequate level. Nevertheless, in most years a majority of loans during the review period were extended in amounts of $250,000 or less, addressing a commonly articulated credit need for small businesses. 14

17 Farmers and Merchants Home Mortgage Lending The overall distribution of home mortgage lending reflects adequate penetration among borrowers of different income levels. Performance is adequate for home improvement loans and home refinance loans, while the distribution of home purchase loan is very poor. FMB s limited lending volumes, the high unemployment, and the general lack of capacity for low- and moderate-income individuals and families to purchase, improve, or refinance a home contributed the uneven performance by year and county, as seen in Tables 10 through 12 in Appendix B. Home Refinance The distribution of home refinance loans is adequate. While home refinance lending is not a focus for FMB, loan volumes are higher for this product relative to home purchase and refinance lending. As shown in Table 12, the higher lending volumes contribute to a more consistent performance across counties and by year, with lending to borrowers of all income levels and a reasonable record of lending to low-and moderate-income borrowers. Home Improvement The distribution of home improvement loans is adequate. The limited lending volume and aforementioned performance context factors contributed to the limited percentage of loans to lowincome borrowers displayed in Table 11. FMB did, however extend loans to borrowers of all income levels, and in general, had a stable record of reaching moderate-income borrowers. Home Purchase The distribution of home mortgage purchases to borrowers of different income levels was very poor, reflecting lending that was skewed to middle- and upper-income borrowers. While recognizing FMB s focus and other performance context factors, only one loan was extended to low-income borrowers and no loans were extended to moderate-income borrowers over the three-year period shown in Table 10. COMMUNITY DEVELOPMENT LENDING FMB makes a relatively high level of community development loans considering its asset size, opportunities within its assessment area, and strong competition from other lenders. As illustrated in Table 1 in Appendix B, FMB extended 43 community development loans totaling over $140.8 million within its assessment area. These loans helped to provide affordable housing and community services to low- and moderate-income individuals and families, helped to stabilize and revitalize low- and moderate-income geographies and special economic zones, helped to create or retain jobs for low- and moderate-income persons, and provided needed lending to small businesses for economic development purposes. The following are examples of FMB s community development lending within its assessment area: A $14.5 million loan secured by a commercial property located in a low-income census tract within the Huntington Beach Redevelopment Project area in Orange County. The loan finances improvements to the property that are consistent with the redevelopment strategies to preserve and enhance the quality of the city s neighborhoods and to help support the local economy. 15

18 Farmers and Merchants A $14 million loan secured by a community shopping center located in a moderate-income census tract in the Santa Ana enterprise zone in Orange County. In addition to bringing needed services to the community, this center offers facilities for 31 small businesses and provides 29 jobs for low-income persons. A $13.7 million loan for the purchase of a commercial property in a moderate-income census tract in Los Angeles County. The property houses a number of small businesses that provide jobs to low- and moderate-income residents of the area. The property also houses a Goodwill store and a technical school. A $5.8 million loan to a private school located in a moderate-income census tract in Orange County. Original loan proceeds were used to construct and equip the school, which helped to revitalize the area by providing jobs and attracting small businesses into the neighborhood. A $4.1 million loan to a community development agency located in Orange County. The agency will use the loan proceeds to fund efforts to improve areas that have suffered economic decline, blighted conditions, or which have been unable to attract and promote new private investment in the area. A $1.7 million loan for the purchase and improvement of a property located in a moderateincome census tract in Los Angeles County. The property now houses a grocery store that provides jobs and an essential service to the area. Investment Test FMB s performance under the investment test is low-satisfactory given community credit needs, the bank s financial capacity and business focus, and competition from other financial institutions. FMB made an adequate level of qualified community development investments and donations during the review period. As noted in Table 13 in Appendix B, FMB has a total of 89 investments aggregating $10.1 million, including 82 current-period investments totaling $1.3 million and seven totaling $8.8 million that remained on the bank s books from a prior period. These include, but are not limited to, capital for low-income school districts and donations to support non-profit organizations that provide community services to low- and moderate-income individuals and families. There were no unfunded commitments. Listed below are examples of the FMB s community development investments: A prior-period investment in New Market Tax Credits benefitting businesses in low-income communities in Orange County, of which $5.3 million remains on the bank s books. A prior-period investment in a school bond benefitting the Los Angeles Unified School District, which has 88,186 students, of which 67% participate in the free or reduced-price meal programs; $2.5 million of the original investment remains on the bank s books. Current period investments aggregating $1 million benefitted a Los Angeles school district. The district has 8,866 students of which 85 percent qualify for the Free and Reduced Price Lunch program. 16

19 Farmers and Merchants An investment security in the amount of $675,000 backed by home mortgage loans to low- and moderate-income families in Orange County. The security was purchased in a prior period. Service Test FMB s performance under the service test is outstanding. The leadership role of bank employees in providing financial community development services was a key driver of the rating. RETAIL BANKING SERVICES The bank s delivery systems are reasonably accessible to all portions of the bank s assessment area, including to low and moderate income areas and individuals. Nine of the bank s 21 branches are located in Los Angeles County, with the remaining 12 branches in Orange County. The main office is located in a moderate-income census tract within the Long Beach redevelopment area. In total, eight of the offices, or 38.1 percent, are located in low- and moderate-income census tracts, which compares favorably to the overall proportion of low- and moderate-income census tracts within the assessment area at 29.7 percent and the percentage of low- and moderate-income population at 28.8 percent. Many of the bank s branches offer Saturday banking, and differences in hours and services between branches do not vary in a way that inconveniences individuals or geographies of any income level. Additional branch details are shown in Table 14 in Appendix B. FMB has a number of alternative delivery systems that enhance its branch network, including ATMs, online, and telephone banking. Further, the bank has recently launched its mobile banking platform. The bank s diverse community continues to benefit from FMB s many multi-lingual staff. Over 250 employees communicate in two or more languages, principally Spanish, Tagalog, Cambodian/Khmer, and Farsi. COMMUNITY DEVELOPMENT SERVICES FMB demonstrated a leadership role in providing community development services that address many needs of the communities served by the bank. While maintaining its strategic focus, the bank provided financial services that supported low- and moderate-income families and individuals and small businesses. employees dedicated over 7,000 hours of service to organizations throughout the assessment area. The following are examples of community development services provided: Nearly 2,000 hours of financial expertise were provided during the review period to unemployed and low-income individuals through a church located in Los Angeles County. Services provided included financial education assistance in the areas of auto purchases, home refinancing, and understanding the terms of mortgage products. Beginning in 2013, the bank designated a full-time employee to design and deliver financial education to students and non-profits throughout Los Angeles and Orange Counties. The program is tailored to the age level, group size, and knowledge level of the audience and is designed to build financial knowledge, security, and confidence with the goal of smart money management. Approximately 1,000 hours have been devoted to this effort. 17