CALIFORNIA REINVESTMENT COALITION

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1 Board of Directors PAUL AINGER Chair Rural Community Assistance Corporation STEPHANIE CARROLL Vice Chair, Public Counsel Law Center ROBERTO BARRAGAN Secretary VEDC LUIS GRANADOS Treasurer Mission Economic Development Agency CHANCELA AL-MANSOUR Housing Rights Center MAEVE ELISE BROWN Housing and Economic Rights Advocates ANTIONETTE DOZIER Western Center on Law and Poverty ISELA GRACIAN East LA Community Corporation SHARON KINLAW Fair Housing Council of the San Fernando Valley APPASWAMY VINO PAJANOR Housing Opportunities Collaborative WILLIAM PAVÃO JOSEPH RIDOUT Consumer Action NAMOCH SOKHOM Pacific Asian Consortium in Employment STEPHON TAYLOR California Resources and Training ROBERT VILLARREAL CDC Small Business Finance CLARENCE WILLIAMS California Capital PAULINA GONZALEZ Executive Director March 12, 2016 Audi Del Mundo Senior Compliance Examiner Division of Depositor and Consumer Protection Federal Deposit Insurance Corporation 25 Jessie Street at Ecker Square San Francisco, CA By to Dear Mr. Del Mundo, Thank you for the opportunity to submit this letter regarding the CRA activities of Mechanics Bank. We ask that you consider our input as you develop the CRA performance evaluation for Mechanics. It is also our understanding that the bank will be providing a copy of this letter to federal regulators accompanying its application to acquirer California Republic Bank (CRB). Though CRA performance evaluations look into to past activity, regulators must consider the likely public benefits of a proposed application to merge institutions as through an acquisition, such as future CRA activity. Therefore, this letter will include both an analysis of the bank s past activities as well as what we currently understand to be the benefits to the communities affected that likely will be created by the acquisition and merger of CRB by and into Mechanics Bank. I. Past Activity: CRC and Mechanics Bank CRA Agreement The California Reinvestment Coalition is a statewide coalition of about 300 organizations and agencies that provide services to tens of thousands of low income residents across the state. Our mission is to build an inclusive and fair economy that meets the needs of communities of color and low-income communities by ensuring that banks and other corporations invest and conduct business in our communities in a just and equitable manner. CRC was founded in 1986 to advocate application of the federal Community Reinvestment Act (CRA) to increase the flow of credit, services and investments in low income communities and communities of color. Since then we have worked with many banks across California to forge public CRA agreements that have clear benchmarks for lending, investment and services. These benchmarks make it possible for all CRA stakeholders community residents, nonprofit organizations, regulators and other banks to understand the bank s goals and evaluate how well they have met them.

2 In January of 2015, Mechanics signed a public CRA agreement with CRC, attached as Appendix A. In it, the bank agreed to annually provide CRA-qualifying loans, investments and services in its footprint totaling at least 9.8% of California deposits, exclusive of time deposits, with the goal of increasing this goal to 15% of same by In April 2016, Mechanics provided information indicating that the bank had met or exceeded many of their goals and were developing plans to meet others. Public CRA agreements like Mechanics provide a great service to the community. They telegraph throughout their assessment area the bank s goals for lending, investment and services, with clear benchmarks, providing community organizations the information they need to develop partnerships with the bank and help accomplish their goals. The agreement was developed in negotiation with leaders of the communities that are directly affected by changes in the bank s ownership and growth strategy. It reflects the expertise of all parties about the most important community credit, capital and financial service needs and the most effective ways to meet them, ensures that all stakeholders are invested in the success of the agreement, and requires transparency and accountability on all sides. Both the development of the public agreement and the continuing communication about the same deserve CRA credit under the services test to reflect the value of bank leadership engaging with community partners to identify and develop responses to CRA needs in its assessment areas. a. Mechanics 2015 CRA activity was 13% of deposits, exceeding the agreement goal of 9.8%. Mechanics has exceeded their public agreement goals in the first year of performance. The bank has reported to us that its total deposits in California in 2015, excluding time deposits, was $2.45 billion and that they originated or made CRA qualified loans, investments and services in 2015 worth $326.4 million, or 13% of measured deposits. CRC conducts an annual survey of bank CRA activity across California. The most recent survey about 2014 received detailed responses from 20 banks across the state of varying sizes of under $10 billion in deposits to over $200 billion in deposits. Mechanics Bank s total CRA activity for 2015 would place it third from the top among banks who provided information about their CRA activity in For 2015, we expect other banks who are also in their first or second year of activity under a public CRA agreement to also rank among top performers. b lending distribution by income compared to the 2014 market was uneven: adequate or better than the market in small business lending and poor in HMDA lending. In San Francisco, Mechanics HMDA lending may actually be hurting low income residents. Mechanics CRA assessment areas include very diverse communities by both race and income, including very low income people and people of color, including immigrants, who face enormous pressure of a rapidly and sharply rising cost of living due to unprecedented rates of gentrification. The diversity of the area is threatened as the cost of both housing and commercial space rises dramatically causing lower income families and small businesses in lower income communities, particularly those owned by people of color, to be displaced into outlying areas. African American residency in the San Francisco Bay area is at a historical low, a fraction of what it had been in both San Francisco and Alameda counties.

3 For this reason, the Mechanics CRA agreement includes a provision that the bank s lending should reflect the diversity of the area. We cannot provide an opinion about how the bank s lending distribution compares to the proportional size of low income communities and communities of color throughout its footprint because the bank has not yet made this data available to us. We hope that the CRA exam conducts this analysis. The bank has provided a self-assessment comparing its lending to 2014 market performance for HMDA and small business lending in LMI tracts and to LMI borrowers, an imperfect but still enlightening analysis. For the Sacramento area, we are concerned that the bank appears to have no HMDA reportable originations in LMI tracts, compared to the market rate of 19.7% of loans in We expect this to change as the bank grows its mortgage business. The bank s performance for small business lending in LMI tracts and LMI and very small business borrowers is comparable though less than market performance. In the Oakland area, the bank has a significantly lower share of HMDA loans in LMI tracts and slightly lower share to LMI borrowers. The bank s performance for small business lending in Oakland LMI tracts and to LMI or very small business borrowers, however, is equals or stronger than its peers. The bank s HMDA and small business lending in Napa is comparable to their peers with regard to both lending in low income areas and to low income and very small business borrowers. While Mechanics lending to small businesses in San Francisco low income areas is comparable with their peers, and they seem to do a better job than others of lending to low income and very small businesses, we are alarmed 100% of the bank s HMDA loans in San Francisco were in LMI areas but none were to LMI borrowers. This trend of HMDA lending is what fueling the gentrification that is displacing low income residents in San Francisco, where investors are scooping up properties, often evicting tenants, and selling the individual units to higher income borrowers. We are seeing banks finance both investor purchases and, later, the owner-occupant mortgages. We do not think that banks should get CRA credit when their lending hurts existing low income residents. Though there may be an argument to support income diversity in an area that has been historically blighted and where there is a strong need to bring families into the community, the situation in San Francisco is the opposite: it is a city where lower income residents are fighting to stay against a tsunami of higher income newcomers and dwindling affordable housing. In sum, the bank appears to compare adequately or better than its peers in small business lending in LMI tracts and to very small businesses but struggles to make HMDA reportable loans to low and moderate income borrowers, especially in San Francisco and Oakland where the need for loans to LMI borrowers is strongest and the flow of loans for non-lmi borrowers buying in LMI tracts is a destabilizing force. c. Mechanics is providing needed lending and other support for small businesses. The same gentrification pressures at work in the housing market are also impacting small businesses in the bank s footprint. Northern California small businesses face rapidly rising costs of commercial

4 property and struggle to access small business lending which has not sufficiently picked up since the economic crisis. Many businesses are in dire need of loans beyond the SBA model, particularly when many banks are quick to offer large, collateral based loans but offer limited other options. So-called fintech or marketplace lenders have aggressively targeted small businesses borrowers, offering easy to get loans with high rates and often predatory terms. Our members have reported horror stories of businesses being driven out of business by stacked loans, some demanding revenue based payments that leave owners unable to purchase inventory or pay employees. Older family-owned small businesses in gentrifying communities are particularly vulnerable, in need of transition planning as well as credit. Additionally, many people are turning to entrepreneurship as area wages continue to lag behind housing costs, creating additional need for credit and capital that can create jobs and increase income. These new businesses have additional challenges securing loans since they often lack the ability to make performance based projections. Mechanics reported to us that they made 901 CRA qualifying small business loans in 2015, of which, 608 were loans of under $150,000 and made to businesses with gross annual revenues of under $1 million. These are the most needed and hardest to get loans. We ask that they receive CRA credit for helping to meet this critical need. In addition, the bank has begun referring denied applicants for help from nonprofit lenders. From March 2015 to February 2016, the bank denied 133 small business requests under their Credit Scored program and referred 10% of these to Opportunity Fund. Other banks with small business referral programs refer more than twice that rate, however, we are confident that Mechanics will reach that performance given the strong start. The bank has also begun the process of participating in the California Small Business Loan Guarantee Program. The bank has met with two participating nonprofit lenders and, after a strategic review, has committed both resources and personnel to utilize the SBLGP guarantee, with the goal to offer loans to some businesses that the bank previously would have declined, due to factors that may include time in business and capitalization. We also expect this activity to increase and look forward to future progress reports. d. Mechanics has made important investments including meeting a critical need to support affordable housing through the purchase of social impact bonds. Mechanics informed us that they have made $13.4 million in investments to support housing, economic and community development investments including the purchase of all $3 million in Social Impact Bonds (SIBs) issued by the City of Richmond and the Richmond Community Foundation (RCF), the proceeds of which will go to acquire, rehabilitate and sell blighted homes throughout the City of Richmond, with a preference to lower income homebuyers participating in the United Way SparkPoint First-Time Homebuyer counseling program. It is the first time SIBs have been used for this purpose. This innovative and complex investment leverages both private investments and philanthropic giving, tackles blight and the need for first-time homebuyer support. Homes are expected to sell for under $300,000. Mechanics is foregoing interest payments and capping their potential profit as part of its purchase. We encourage the FDIC to calculate any lost revenue resulting from this cap and add this to the value of the $3 million investment when scoring the value of this investment.

5 Mechanics is also maintaining $550,000 in maturing Certificates of Deposits with three CDFIs and one minority owned bank that was extended for one year. This includes Bank of the Orient, Northeast FCU, Community trust FCU and Community Bank of the Bay. These investments should be counted in the years they were originally made. Finally, the bank has met its agreement goal of providing CRA qualified grants totaling at least 0.02% of California deposits, of which 47% went to support the most urgent needs including affordable housing, economic development, and financial education, far surpassing its initial goal of 35%. Compared to other banks that have provided us with information about their CRA activity, this places the bank square among its peers for philanthropic support for CRA and for the most urgent CRA qualifying needs. e. Mechanics has taken strong steps to develop a corporate supplier and procurement program that supports economic development by contracting with women and minority owned businesses. CRC strongly supports corporate supplier and procurement programs and urges CRA examiners to examine this activity as community development service. Banks, like other corporations, are increasingly recognizing the value of contracting with women and minority owned businesses as well as the impact of such programs to promote economic growth, job creation and income generation. About half of the banks that respond to our annual survey report having these programs with the strongest spending about 14 to 15% of their corporate procurement budget on such contracts. Strong programs require significant outreach to qualifying businesses, often through networks of nonprofits that provide technical assistance to such companies to strengthen their contracting capacity. Not having had a program in place, the bank took strong steps to establish a Supplier Diversity Policy across numerous departments after committing to do so in the public CRA agreement. The bank informs us that they reviewed best practices, incorporated a method for vendor identification/certification, corresponding certification forms, determining departmental responsibility for tracking and reporting, and compiling base-line supplier diversity numbers. For 2015, the analysis reflected that the Bank s diversity spend was $2.8 million out of a $40.4 million budget, which yields a 7% supplier diversity spend, excluding contracts with major utilities for which there is little competition. Now that the bank has established the baseline, we are supporting and looking forward to the bank s efforts to increase its diversity procurement spend over time. f. Mechanics continues to waive ATM surcharges for public benefits recipients and supports Individual Development Accounts to help lower income households save. One of the most basic and critically needed services banks can provide is access to cash through ATMs. California public benefits recipients in particular need this access without fees: currently, these households, the average of which receives about $500 a month to support two children, pay $19.4 million a year in ATM surcharges unnecessarily imposed by banks. Mechanics is among the relatively few banks that waive out-of-network surcharges for public benefit recipients using state issued electronic benefits transfer cards at their ATMs. A recent letter (attached as Appendix B) from the FDIC, Federal Reserve and OCC confirms that banks that waive these fees should get CRA credit under the services test

6 for this activity. The value of the waiver far exceeds foregone fee revenue; providing surcharge-free ATM access increases the ability of public benefits recipients to withdraw cash as needed rather than all at once in as few transactions as possible, making money management more stable and safe. Lower income households also critically need support saving to head off financial emergencies and secure economic security. Mechanics supports this by offering Individual Development Accounts. Typically, participants in financial education use these accounts to save for a specified goal, such as a down payment or to launch a small business. Mechanics opened 11 IDA accounts in 2015 as compared to 5 in We encourage this growth and hope to see it continue. Finally, Mechanics has developed but not yet originated personal loans of $500 or less payable in installments at no more than 30% APR. We applaud the creation of the product as a strong first step but stop short of recommending CRA credit since the product has not yet been used. We are currently reviewing the terms of the Unsecured Personal Term Loan" to understand what features should be adjusted to attract borrowers who would otherwise turn to triple digit interest rate loans at payday lenders or auto-title lenders. II. Future Performance: After acquiring California Republic Bank, Mechanics annual CRA activity will grow by $124.5 million. Mechanics Bank s commitment to its public CRA agreement, backed up by their strong 2015 performance, gives us a strong indication of the CRA activity that reasonably can be expected as a result of its acquisition of California Republic Bank (CRB). The CRA agreement accounts for growth in deposits and assets including through acquisition. Adherence to the agreement means that Mechanics CRA annual goals will grow as the bank grows. For 2017, the calendar year following the acquisition, Mechanics has committed to an annual CRA activity of 12.4% of total deposits excluding time deposits, including CRB s estimated $1.16 billion in deposits excluding time deposits (calculated using the most recent data available via the FDIC summary of deposit and call reports). For 2015, the bank has already reached a level of activity equaling 13% totaling $326.4 million. The stated goal of 12.4% for 2017 including CRB s non-time deposits is expected to total $450.9 million, an increase of $124.5 million from the 2015 activity. This includes increased annual investments by 0.02% of the $1.8 billion in CRB s assets that the bank will acquire, totaling $36 million, and an increase of CRA targeted philanthropic giving to over $727,000 annually. We have not had an opportunity to loosely analyze CRB s annual CRA performance or identify important programs that we will hope Mechanics Bank will continue to offer post-acquisition. We firmly believe that merging banks should leverage their respective strengths to yield CRA activity that is better than what is being provided by the banks separately. We expect the Mechanics to perform as agreed through its pubic CRA plan even as it faces some challenges, including integrating CRB s operations and relationships in the Southern California. Regarding the former, the bank has already demonstrated the capacity for strong CRA performance even as it has had internal leadership shifts over the past year. Regarding the latter, CRC stands ready to

7 help as we have done already by facilitating conversations with subject matter experts at local nonprofits who can help the bank identify needs and opportunities. For example, Mechanics recently spoke with experts from Opportunity Fund, Chinatown CDC, Main Street Launch and Safe BidCo, all CDFIs successfully serving diverse lower income communities in the bank s current CRA footprint, to identify opportunities to target lending and investment to meet critical small business needs. Out of that conversation, the bank has indicated that they will explore purchasing small business loans from CDFIs to enable to use the capital for additional lending as well as investing in the same through grants and equity, increasing loan referrals, and using the California Loan Guarantee program. Mechanics has also expressed interest in participating in Bank On, a local and national initiative to enroll unbanked consumers with safe and affordable bank accounts. Mechanics plans to participate in a call on March 18 with Emerson Hall, Regional Manager of Community Affairs at the FDIC, and local Bank On coordinators to discuss the features of accounts that meet current Bank On national standards for safety and affordability. The bank has already agreed to waive fees for accounts that use direct deposit. We are encouraged by these exploratory activities and will work with the bank to ensure that they yield measurable impact, including in the current CRB territory. III. Conclusion: Mechanics Bank has strong CRA performance and a public plan with benchmarks that will guide future performance. CRC advocates for strong public CRA agreements like Mechanics because they allow community members to provide critical insight about community needs, help develop the bank s goals, understand annual performance, and forecast upcoming opportunities as the bank grows. We believe that Mechanics commitment to CRA and to transparent communication with community partners are evident and strong. The proof is in the performance and our analysis indicates that Mechanics has met or exceeded most of their goals and taken strong steps to meet others. There are a few areas that need attention, including stopping financing of gentrification by lending to non-lmi borrowers buying in LMI areas from which LMI residents are being displaced. We hope that an analysis of lending distribution by race and income relative to the size of the communities of color and low income communities in the bank s footprint will also yield insight about opportunities to target the most credit starved for lending. We ask the FDIC to provide CRA credit areas to areas that where the bank has demonstrated impact, including making small business loans in the amounts most needed by local businesses; significant investments including purchasing Social Impact Bonds that will help address blight and the need for affordable homeownership opportunities; grants to support affordable housing, economic development and financial education; waiving cash access fees for public benefits recipients struggling to make ends meet with extremely low income; opening IDA accounts to help families save for a business, education or home; and providing contracting opportunities to minority and women owned businesses who can create jobs and income as a result of the bank s partnership.

8 The public agreement, and the bank s demonstrated performance, indicate that communities affected by the acquisition of California Republic Bank will likely benefit from increased CRA activity. We are looking forward to continuing to work with Mechanics as they grow into other parts of California and to help them develop appropriate responses to meet the most urgent credit, capital and financial service needs. Sincerely, Andrea Luquetta-Kern Director of Policy and Research