PUBLIC DISCLOSURE. March 5, 2012 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION. Bay Commercial Bank RSSD #

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1 PUBLIC DISCLOSURE March 5, 2012 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Bay Commercial Bank RSSD # Civic Drive, Suite 100 Walnut Creek, California Federal Reserve Bank 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 TABLE OF CONTENTS INSTITUTION RATING... 1 Institution s CRA Rating... 1 INSTITUTION... 2 Description of Institution... 2 Description of Assessment Area... 3 Scope of Examination... 7 CONCLUSIONS WITH RESPECT TO PERFORMANCE CRITERIA... 8 Loan to Deposit Ratio... 8 Lending in Assessment Area... 8 Lending Distribution by Geography... 8 Lending Distribution by Business Revenue... 9 Response to Complaints... 9 Fair Lending or Other Illegal Practices Review GLOSSARY OF TERMS i

3 INSTITUTION RATING Institution s CRA Rating Bay Commercial Bank is rated "SATISFACTORY The major factors supporting the institution s rating include: A reasonable loan to deposit ratio; A substantial majority of loans made within the assessment area; and, A reasonable geographic distribution of small business loans. 1

4 INSTITUTION Description of Institution Bay Commercial Bank (BCB), with total assets of $269.6 million, as of December 31, 2011, commenced operations on July 20, 2004, and is headquartered in Walnut Creek, California. BCB has a network of four full service branch offices located in the San Francisco Bay Area cities of Castro Valley, Mountain View, Oakland, and Walnut Creek. In 2009, BCB acquired the Castro Valley branch and certain other assets and liabilities though the purchase and assumption agreement with Community Banks of Northern California and Community Bancshares, Incorporated. In 2011, BCB acquired the full service branch in Mountain View through a merger with Global Trust Bank in BCB is a full service bank specializing in lending to small and middle market businesses. The commercial loan portfolio includes business lines of credit, equipment loans, term loans, working capital, commercial real estate secured and construction and land development loans. BCB originates a small number of consumer loans as accommodations to its business clients. These consumer loans include products such as consumer construction loans, home equity lines of credit and home equity loans, and overdraft protection lines of credit. The bank also offers business and consumer credit cards through a third party provider. A variety of deposit products are available and include checking, savings, money market, and certificates of deposit. Below is the bank 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 176, Construction & Land Development 14, Secured by 1 4 Family Residential Real Estate 13, Multi Family Residential Real Estate 3, Other Loans 2, Consumer Loans & Credit Cards 1, Total (Gross) 212, BCB did not face any legal or financial impediments during the review period that would have prevented 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 prior Community Reinvestment Act (CRA) examination, conducted as of June 5, 2006, resulted in a satisfactory rating and was conducted by the Federal Deposit Insurance Corporation (FDIC) using the Interagency Small Institution CRA Examination Procedures. 2

5 Description of Assessment Area BCB s assessment area is the Greater San Francisco Bay Area (Bay Area) that is also the San Jose San Francisco Oakland Combined Statistical Area and is defined as follows: Alameda and Contra Costa Counties in their entirety. This area is part of the Oakland Fremont Hayward Metropolitan Division (MD). Marin, San Francisco, and San Mateo Counties in their entirety. This area is part of the San Francisco San Mateo Redwood City MD. Napa County in its entirety. This area is part of the Napa Metropolitan Statistical Area (MSA). Santa Clara County in its entirety. This area is part of the San Jose Sunnyvale Santa Clara MSA. Solano County in its entirety. This area is part of the Vallejo Fairfield MSA. Sonoma County in its entirety. This area is part of the Santa Rosa Petaluma MSA. With only four branches, BCB has a limited presence in a highly competitive market for deposit and loan products. In particular, as of June 30, 2011, BCB accounted for less than 1 percent of the share of deposits in this market, where 106 FDIC insured institutions operated 1,653 offices with deposits of over $331 billion. 1 To illustrate the competitiveness of the small business lending market, in 2010, there were 160 lenders reporting small business loans pursuant to the reporting requirements of the CRA; most of these were large regional and national institutions. These lenders, which represent only a portion of the commercial lending market, extended 158,802 small business loans totaling $5.3 billion. 2 In 2010, BCB extended 85 small business loans totaling $28.6 million. The following exhibit 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. Income Categories Tract Distribution EXHIBIT 2 ASSESSMENT AREA DEMOGRAPHICS BAY AREA 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 1, ,609, , ,609, Federal Deposit Insurance Corporation, Deposit Market Share, Summary of Deposits, June 30, 2011 (accessed March 12, 2012); available from 2 Information based on 2010 aggregate data consisting of institutions required to file annual CRA data. 3

6 Housing Housing Types by Tract Income Categories Units by Owner Occupied Rental Vacant Tract # % % # % # % Low income 152,219 27, , , Moderate income 489, , , , Middle income 1,186, , , , Upper income 724, , , , Tract not reported Total AA 2,552,402 1,424, ,041, , Businesses by Tract & Revenue Size Total Businesses by Income Categories Tract Less Than or Equal Greater than $1 Revenue Not to $1 Million Million Reported # % # % # % # % Low income 36, , , , Moderate income 80, , , , Middle income 193, , , , Upper income 142, , , , Tract not reported Total AA 453, , , , Percentage of Total Businesses Median Family Income Napa MSA Oakland Fremont Hayward MD SF San Mateo Redwood City MD Santa Clara County Santa Rosa Petaluma MSA Vallejo Fairfield MSA $61,203 $68,346 $75,188 $80,198 $61,922 $60,600 December 2011 Median Housing Value HUD Adjusted Median Family Income Napa MSA Oakland Fremont Hayward MD SF San Mateo Redwood City MD Santa Clara County Santa Rosa Petaluma MSA Vallejo Fairfield MSA $85,000 $92,300 $101,600 $103,600 $81,500 $81,500 Alameda County Contra Costa County Marin County Napa County San Francisco County San Mateo County Santa Clara County Solano County Sonoma County December 2011 Unemployment Rate 4 Alameda County Contra Costa County Marin County Napa County San Francisco County San Mateo County Santa Clara County Solano County Sonoma County $325,000 $259,000 $517,818 $317,500 $590,500 $490,000 $440,000 $182,250 $279, % 9.6% 6.9% 8.6% 7.8% 7.5% 9.1% 10.6% 9.1% 3 California Association of Realtors, Trends in California Real Estate, Volume 33, Number 1, U.S. Bureau of Labor Statistics (Haver Analytics). 4

7 Economic Conditions The Bay Area has major economic centers, suburban neighborhoods, and productive agricultural regions. Alameda, Contra Costa, Santa Clara, and San Francisco Counties have some of the fastest growing companies in the nation and, as a result, this part of the assessment area is considered one of the top ten regions globally as a host to Fortune 500 companies. 5 Meanwhile, the other areas of the Bay Area serve various other functions in the specific industries which include tourism, agriculture, and winemaking. 6 Like much of the rest of California, the Bay Area continued to experience the effects of the recession and financial crisis in 2010, but the labor market showed some signs of improvement in The Bay Area s annual unemployment rates remained below the statewide averages throughout 2010 and 2011, at 12.3 percent and 11.8 percent, respectively, but, as shown in Exhibit 2 on the previous page, variation across the counties show that certain communities are struggling more than others. 7 Solano County had the highest 2011 annual unemployment rate in the Bay Area at 11.5 percent, followed by Contra Costa County at 10.5 percent, while Marin and San Francisco Counties had the lowest rates of unemployment in the area for 2011, at 7.7 percent and 8.6 percent, respectively. 8 The Bay Area has a highly diverse economy, with sectors including government, higher education, health care, finance, manufacturing, technology, utilities, agriculture, and food processing. The area has a number of large private and public employers, including Kaiser Permanente, University of California, Berkeley, Wells Fargo & Company, Genentech, Inc., Oracle Corporation, and Chevron. 9 Although these large employers exert a significant influence on the overall economy, small businesses (i.e., those with gross annual revenues of $1 million or less) remain a substantial majority of all businesses in the assessment area. As shown in Exhibit 2, small businesses comprised 90 percent of businesses in the assessment area. Some sectors are stronger than others. Growing output and employment in 2011 in industries such as technological manufacturing and services, healthcare, and tourism, all point to positive signs of an economic recovery in the assessment area. 10 Whereas, in response to reduced revenue and budgetary constraints, county governments have reduced the number of employees in recent years. Bay Area Counties cumulatively eliminated or laid off almost 1,500 positions in their budgets for the fiscal year Bay Area Council Economic Institute, Innovation and Investment: Building Tomorrow s Economy in the Bay Area, March 2012 Press Release (accessed on March 12, 2012); available from list/. 6 Moody s Economy.com Inc, Precis U.S. Metro/West/August U.S. Bureau of Labor Statistics, February Local Area Unemployment Statistics. Tables: Labor force data by county, 2009, 2010, and 2011 annual averages and Labor force data by county, not seasonally adjusted, latest 14 months, available online at 8 U.S. Bureau of Labor Statistics, February Local Area Unemployment Statistics. Tables: Labor force data by county, 2009, 2010, and 2011 annual averages and Labor force data by county, not seasonally adjusted, latest 14 months, available online at 9 Moody s Economy.com Inc, Precis U.S. Metro/West/August U.S. Bureau of Labor Statistics, December Local Area Unemployment Statistics. Tables: Labor force data by county, 2009, 2010, and 2011, 2012 annual averages and Labor force data by county, not seasonally adjusted, latest 4 months, available online at 11 Alameda County Budget available online at 11final_budget.pdf. Contra Costa County Budget available online at costa.ca.us/documentview.aspx? DID=4429. Marin County Budget available online at Napa County Budget available online at San Francisco County Budget available online at Solano County Budget available online at 5

8 In 2010 and 2011, housing prices continued to decline, though the decline was less steep than during the worst of the financial crisis. Like the unemployment trends in the nine county assessment area, the severity of the housing downturn varied by county. Solano County had the sharpest decline whereby by the end of 2011, home prices were approaching 2000 levels. In contrast, San Francisco, San Mateo, and Marin Counties home prices were 39 percent higher than in Rates of foreclosure in the assessment area also differ across counties. Solano and Contra Costa had the highest foreclosure rates in the assessment area at 3.67 percent and 3.02 percent, respectively, in November 2011, both higher than the state average of 2.88 percent. 13 Although foreclosure rates in the Bay Area decreased throughout 2011 (except in Marin and San Francisco counties, which both experienced a slight increase), an estimated 8.32 percent of borrowers in Solano County, and 6.64 percent in Contra Costa County, were still either 90+ days delinquent or in foreclosure in November Credit Context and Needs 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, while leaving standards for residential real estate loans basically unchanged. 15 Nonetheless, banks reported that demand for small business loans declined, while demand for residential mortgage loans strengthened. These reports accord with national data reported under the CRA, citing that both the number and dollar amount of small business loans reported in 2010 declined about 9 percent from their respective amounts in Credit needs are similar within the assessment area. Discussions with community representatives revealed that many of the area s small businesses typically need small business loans, emphasizing the need for loans of less than $250,000. In March 2011, the Federal Reserve Bank of San Francisco Community Development Department and the Office of the Comptroller of the Currency held a Small Business forum in San Francisco that focused on business ownership and access to credit to small businesses. At this forum, a wide variety of academic and community development presenters identified that access to credit and technical assistance for small businesses remains a critical credit need in the community. Finally, housing affordability is another critical need in the high cost Bay Area. While home prices continued to decline in 2010 and 2011, access to credit was more difficult to obtain. 17 Sonoma County Budget available online at county.org/auditor/pdf/fy_10 11_adopted_budget.pdf. All budgets accessed on March 1, Federal Reserve Bank of San Francisco Calculations of data provided by Federal Housing Finance Agency. Available from Haver Analytics at Accessed March 1, Federal Reserve Bank of San Francisco Calculations of data provided by Lender Processing Services Analytics, Inc. 14 Federal Reserve Bank of San Francisco Calculations of data provided by Lender Processing Services Analytics, Inc. 15 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 accessed January 26, FFIEC (2011), Findings from Analysis of Nationwide Summary Statistics for 2010 Community Reinvestment Act Data Fact Sheet (August 2011), available online at Accessed January 26, U.S. Census Bureau, American Community Survey, Selected Housing Characteristics, 2010, Alameda, Contra Costa, Marin, Napa, San Francisco, Solano, and Sonoma Counties. Accessed 1/27/2012 at 6

9 Scope of Examination The bank s CRA performance was evaluated using the Interagency Small Institution CRA Examination Procedures. The evaluation was based upon the following performance criteria: Loan volume in comparison to deposits (Loan to Deposit Ratio); Lending inside and outside the assessment area (Lending in Assessment Area); Dispersion of lending throughout the assessment area (Lending Distribution by Geography); and, Distribution of lending to businesses with different revenue sizes (Lending by Business Revenue). Responsiveness to consumer complaints was not evaluated since the bank did not receive any complaints related to its CRA performance during the review period. The evaluation was based on 226 small business loans originated from January 1, 2010 through December 31, All 226 loans were used in the evaluation of Lending in Assessment Area; a sample of 136 small business loans extended within the assessment area were used in the evaluation of Lending Distribution by Geography and Lending Distribution by Business Revenue. Loans extended between January 1, 2010 and June 30, 2010 and acquired through the merger with Global Trust Bank were omitted from this review as they were considered during the FDIC s previous CRA evaluation. Furthermore, home mortgage loans were considered during the review but did not influence the overall assessment due to their limited volume. 7

10 CONCLUSIONS WITH RESPECT TO PERFORMANCE CRITERIA Loan-to-Deposit Ratio The loan to deposit ratio is reasonable. Since the previous CRA examination conducted on June 5, 2006, the average loan to deposit ratio is percent. This number exceeded the state average of 87.0 percent and the national peer average of 85.6 percent, respectively. Lending in Assessment Area A substantial majority of loans were originated inside the bank s assessment area. As shown in Exhibit 3, the bank extended 89.6 percent of loans by number and 90.4 percent of loans by dollar volume within the assessment area. Given the large geographic size of the assessment area in relation to the bank s size, this high level of lending within the assessment area is expected. EXHIBIT 3 LENDING INSIDE AND OUTSIDE THE ASSESSMENT AREA JANUARY 1, 2010 TO DECEMBER 31, 2011 Inside Outside Loan Type $ $ # % % # % ( 000s) ( 000s) % HMDA Home Purchase HMDA Refinance HMDA Multifamily Total HMDA Related , Small Business , , Total Business Related , , Total Loans , , Lending Distribution by Geography Overall, the geographic distribution of small business loans during the review period is reasonable. Small business loans were concentrated near its branches in the counties of Alameda (Castro Valley and Oakland), Contra Costa (Walnut Creek), and Santa Clara (Mountain View). As such, the bank s lending patterns reflect an adequate distribution of loans through the assessment area, with adequate penetration in all income geographies. As shown in Exhibit 4 on the following page, the level of lending also reasonably compared with the percentage of business entities and level of aggregate lending. 8

11 Census Tract EXHIBIT 4 GEOGRAPHIC DISTRIBUTION OF SMALL BUSINESS LOANS Low Moderate Middle Upper # % # % # % # % 2010 Bank Lending Aggregate Lending 10, , , , Business Concentration 18 29, , , , Bank Lending Aggregate Lending 19 Business Concentration 20 36, , , , Lending Distribution by Business Revenue The distribution of loans among businesses of different sizes is poor. As shown in Exhibit 5, the level of lending is significantly below the concentration of businesses and below the 2010 aggregate levels. Further, in 2011, despite the increase in lending volumes, the level of lending to small businesses and in dollar amounts of $250 thousand or less both decreased and, as such, provided less help in meeting the identified credit needs in the assessment area. This distribution of loans is less than what would typically be observed at a community bank with a small business lending focus and capacity to lend. Year Bank Lending # EXHIBIT 5 BUSINESS REVENUE DISTRIBUTION OF SMALL BUSINESS LOANS Lending to Businesses with Revenue <=$1 Million Businesses <=$1M in Revenue (%) Bank Lending (%) Aggregate Lending (%) Originations Regardless of Revenue Size by Loan Amount <=$100K (%) > $100K & <=$250K (%) >250K & <=$1M (%) Response to Complaints BCB did not receive any CRA related complaints during the review period. Consequently, the bank s performance in responding to complaints was not considered in evaluating CRA performance Dun and Bradstreet Data Aggregate Data not available at this time Dun and Bradstreet Data. 9

12 Fair Lending or Other Illegal Practices Review Concurrent with this CRA evaluation, a review of the bank's compliance with consumer protection laws and regulations was conducted, and no violations of the substantive provisions of anti discrimination, fair lending, or other illegal credit practice rules, laws or regulations were identified. 10

13 GLOSSARY OF TERMS Aggregate lending: The number of loans originated and purchased by all reporting lenders in specified income categories as a percentage of the aggregate number of loans originated and purchased by all reporting lenders in the metropolitan area/assessment area. Census tract: A small subdivision of metropolitan and other densely populated counties. Census tract boundaries do not cross county lines; however, they may cross the boundaries of metropolitan statistical areas. Census tracts usually have between 2,500 and 8,000 persons, and their physical size varies widely depending upon population density. Census tracts are designed to be homogeneous with respect to population characteristics, economic status, and living conditions to allow for statistical comparisons. Community development: All Agencies have adopted the following language. Affordable housing (including multifamily rental housing) for low or moderate income individuals; community services targeted to low or moderate income individuals; activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration s Development Company or Small Business Investment Company programs (13 CFR ) or have gross annual revenues of $1 million or less; or, activities that revitalize or stabilize lowor moderate income geographies. Effective September 1, 2005, the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have adopted the following additional language as part of the revitalize or stabilize definition of community development. Activities that revitalize or stabilize: (i) Low or moderate income geographies; (ii) Designated disaster areas; or (iii) Distressed or underserved nonmetropolitan middle income geographies designated by the Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, based on: a. Rates of poverty, unemployment, and population loss; or b. Population size, density, and dispersion. Activities that revitalize and stabilize geographies designated based on population size, density, and dispersion if they help to meet essential community needs, including needs of low and moderate income individuals. Consumer loan(s): A loan(s) to one or more individuals for household, family, or other personal expenditures. A consumer loan does not include a home mortgage, small business, or small farm loan. This definition includes the following categories: motor vehicle loans, credit card loans, home equity loans, other secured consumer loans, and other unsecured consumer loans. Family: Includes a householder and one or more other persons living in the same household who are related to the householder by birth, marriage, or adoption. The number of family households always equals the number of families; however, a family household may also include non relatives living with the family. Families are classified by type as either a married couple family or other family, which is further classified into male householder (a family with a male householder and no wife present) or female householder (a family with a female householder and no husband present). 11

14 Full scope review: Performance under the lending and community development tests is analyzed considering performance context, quantitative factors (for example, geographic distribution, borrower distribution, and total number and dollar amount of investments), and qualitative factors (for example, responsiveness). Geography: A census tract delineated by the United States Bureau of the Census in the most recent decennial census. Home Mortgage Disclosure Act (HMDA): The statute that requires certain mortgage lenders that do business or have banking offices in a metropolitan statistical area to file annual summary reports of their mortgage lending activity. The reports include such data as the race, gender, and the income of applications, the amount of loan requested, and the disposition of the application (for example, approved, denied, and withdrawn). Home mortgage loans: Includes home purchase and home improvement loans as defined in the HMDA regulation. This definition also includes multifamily (five or more families) dwelling loans, loans for the purchase of manufactured homes and refinancings of home improvement and home purchase loans. Household: Includes all persons occupying a housing unit. Persons not living in households are classified as living in group quarters. In 100 percent tabulations, the count of households always equals the count of occupied housing units. Limited scope review: Performance under the lending and community development tests is analyzed using only quantitative factors (for example, geographic distribution, borrower distribution, total number and dollar amount of investments, and branch distribution). Low income: Individual income that is less than 50 percent of the area median income, or a median family income that is less than 50 percent, in the case of a geography. Market share: The number of loans originated and purchased by the institution as a percentage of the aggregate number of loans originated and purchased by all reporting lenders in the metropolitan area/assessment area. Metropolitan area (MA): A metropolitan statistical area (MSA) or a metropolitan division (MD) as defined by the Office of Management and Budget. A MSA is a core area containing at least one urbanized area of 50,000 or more inhabitants, together with adjacent communities having a high degree of economic and social integration with that core. A MD is a division of a MSA based on specific criteria including commuting patterns. Only a MSA that has a population of at least 2.5 million may be divided into MDs. Middle income: Individual income that is at least 80 percent and less than 120 percent of the area median income, or a median family income that is at least 80 percent and less than 120 percent, in the case of a geography. Moderate income: Individual income that is at least 50 percent and less than 80 percent of the area median income, or a median family income that is at least 50 percent and less than 80 percent, in the case of a geography. 12

15 Multifamily: Refers to a residential structure that contains five or more units. Other products: Includes any unreported optional category of loans for which the institution collects and maintains data for consideration during a CRA examination. Examples of such activity include consumer loans and other loan data an institution may provide concerning its lending performance. Owner occupied units: Includes units occupied by the owner or co owner, even if the unit has not been fully paid for or is mortgaged. Qualified investment: A qualified investment is defined as any lawful investment, deposit, membership share, or grant that has as its primary purpose community development. Rated area: A rated area is a state or multistate metropolitan area. For an institution with domestic branches in only one state, the institution s CRA rating would be the state rating. If an institution maintains domestic branches in more than one state, the institution will receive a rating for each state in which those branches are located. If an institution maintains domestic branches in two or more states within a multistate metropolitan area, the institution will receive a rating for the multistate metropolitan area. Small loan(s) to business(es): A loan included in 'loans to small businesses' as defined in the Consolidated Report of Condition and Income (Call Report) and the Thrift Financial Reporting (TFR) instructions. These loans have original amounts of $1 million or less and typically are either secured by nonfarm or nonresidential real estate or are classified as commercial and industrial loans. However, thrift institutions may also exercise the option to report loans secured by nonfarm residential real estate as "small business loans" if the loans are reported on the TFR as nonmortgage, commercial loans. Small loan(s) to farm(s): A loan included in loans to small farms as defined in the instructions for preparation of the Consolidated Report of Condition and Income (Call Report). These loans have original amounts of $500,000 or less and are either secured by farmland, or are classified as loans to finance agricultural production and other loans to farmers. Upper income: Individual income that is more than 120 percent of the area median income, or a median family income that is more than 120 percent, in the case of a geography. 13