PUBLIC DISCLOSURE January 20, 2009 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Heritage Bank of Commerce RSSD #2209553 150 Almaden Boulevard San Jose, California 95113 Federal Reserve Bank of San Francisco 101 Market Street San Francisco, California 94105 NOTE: This document is an evaluation of this institution s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of the institution. This evaluation is not, nor should it be construed as, an assessment of the financial condition of this institution. The rating assigned to this institution does not represent an analysis, conclusion or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution.
TABLE OF CONTENTS INSTITUTION RATING... 1 Institution s CRA Rating... 1 INSTITUTION... 2 Description of Institution... 2 Scope of Examination... 3 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS... 4 Lending Test... 4 LENDING ACTIVITY... 4 ASSESSMENT AREA CONCENTRATION... 5 GEOGRAPHIC AND BUSINESS REVENUE DISTRIBUTION... 5 COMMUNITY DEVELOPMENT LENDING... 5 Investment Test... 6 Service Test... 6 RETAIL BANKING SERVICES... 7 COMMUNITY DEVELOPMENT SERVICES... 7 Fair Lending or Other Illegal Practices Review... 7 FULL-SCOPE ASSESSMENT AREA CONCLUSIONS... 8 Santa Clara Assessment Area... 8 DESCRIPTION OF OPERATIONS IN SANTA CLARA... 8 Alameda-Contra Costa Assessment Area... 15 DESCRIPTION OF OPERATIONS IN ALAMEDA-CONTRA COSTA... 15 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN ALAMEDA-CONTRA COSTA... 18 APPENDICES Appendix A: Glossary of Terms Appendix B: CRA Core Tables
INSTITUTION RATING Institution s CRA Rating Heritage Bank of Commerce is rated "SATISFACTORY" The following table shows the performance level of Heritage Bank of Commerce with respect to the lending, investment, and service tests. PERFORMANCE LEVELS LENDING TEST* PERFORMANCE TESTS INVESTMENT TEST SERVICE TEST OUTSTANDING HIGH SATISFACTORY X X X LOW SATISFACTORY 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: Good small business lending record; o Lending levels are good and a high percentage of all loans are within designated assessment areas. o Distribution of small business loans in geographies of different income levels is good. Significant levels of community development loans and investments that were responsive to the needs of the assessment area. A relatively high level of community development services that supported low- and moderate-income residents and small businesses; and Retail banking services are reasonably accessible within the bank s assessment areas. - 1 -
INSTITUTION Description of Institution Heritage Bank of Commerce (Heritage), with total assets of $1.5 billion as of September 30, 2008, is headquartered in San Jose, California. The bank operates ten full-service branches and seven loan production offices (LPO), primarily in the San Francisco Bay Area. Six of the ten branches are in Santa Clara County (Gilroy, Los Altos, Los Gatos, Morgan Hill, Mountain View, San Jose). The remaining four branches are in Alameda County (Fremont, Pleasanton) and Contra Costa County (Danville, Walnut Creek). In addition, the bank has seven Small Business Administration (SBA) loan production offices. Three of these are located in branch offices (Fremont, Morgan Hill, San Jose) while the other four are stand-alone LPOs located in the cities of Clovis (Fresno County), Oakland (Alameda County), Elk Grove (Sacramento County) and Santa Rosa (Sonoma County). Of these latter four, only the Oakland office is located within the bank s assessment areas. Effective June 20, 2007, Heritage acquired Diablo Valley Bank, a de novo bank with assets of $260 million. This acquisition increased the bank s presence in both Alameda and Contra Costa Counties. Heritage continues to serve principally as a business lender, focusing on small- and middlemarket businesses. The bank offers a wide range of commercial, real estate and SBA loan products. With regard to the latter, Heritage is a preferred SBA lender in Northern California, and is ranked as the fourth and twenty-fifth largest, respectively, in Northern California and the United States. Additionally, Heritage continues to provide consumer lending on an accommodation basis to business customers. The bank s business orientation is evidenced by its commercial and construction lending levels that constitute a substantial 87.9 percent of Heritage s loan portfolio based upon data extracted from the September 30, 2008 Consolidated Reports of Condition and Income and set forth in Exhibit 1 below. EXHIBIT 1 LOAN TYPE DOLLAR AMOUNT PERCENT ( 000S) OF VALUE Commercial/Industrial & Non-Farm Non-Residential Real Estate $844,973 67.6% Construction & Land Development $253,134 20.3% Secured by 1-4 Family Residential Real Estate $84,296 6.7% All Other $49,161 3.9% Consumer Loans & Credit Cards $7,616 0.6% Real Estate secured by Farm Land $5,837 0.5% Multi-family Residential Real Estate $5,323 0.4% TOTAL (Gross) $1,250,340 100.0% - 2 -
Heritage has made revisions to its assessment area by number and composition since the previous CRA examination in 2007. Specifically, the bank s former assessment area, which consisted of the four counties of Alameda, Contra Costa, Santa Clara and Santa Cruz, has been modified to exclude Santa Cruz County. The three remaining counties have been divided into the following two separate assessment areas: Alameda-Contra Costa includes both counties in their entirety and is also the Oakland- Fremont-Hayward Metropolitan Division (MD); and Santa Clara consists of Santa Clara County in its entirety, which also constitutes the larger of two counties in the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA). The foregoing counties are all part of the San Jose-San Francisco-Oakland Combined Statistical Area. Heritage faces no legal or financial impediments that would prevent it from helping to meet the credit needs of its assessment areas consistent with its business strategy, size, financial capacity, and local economic conditions. The bank received a satisfactory rating at its previous CRA examination conducted as of January 22, 2007. Scope of Examination Heritage s CRA performance was assessed utilizing the Interagency Large Institution CRA Examination Procedures. As such, performance was assessed under the lending, investment, and service tests. The evaluation period for all three tests was January 1, 2007, through December 31, 2008. The bank s two assessment areas both received full-scope reviews. The Santa Clara assessment area carried greater weight due to its larger loan volumes, higher share of deposits and more extensive branch presence. The lending test is weighted more heavily than either the investment or the service tests. Given that Heritage is primarily a commercial lender with few consumer purpose loans; the lending test included a review of small business loans only. The bank s limited lending volumes for other loan types did not allow for a meaningful analysis. The scope of the evaluation is consistent throughout the evaluation. - 3 -
CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS Lending Test Heritage s performance under the lending test is high satisfactory. Lending levels are good overall, and a significant percentage of loans were made within the bank s combined assessment areas. Overall, the geographic distribution of loans is good, with strong penetration in low- and moderate-income census tracts. Also, the distribution of loans to businesses of different sizes is adequate. Community development lending is strong, demonstrating notable responsiveness to the need for affordable housing and services to low- and moderate-income individuals. LENDING ACTIVITY Lending levels are good considering the opportunities and competition in the bank s markets. The bank faces intense competition from other small business lenders, yet both transaction and dollar volumes reflect active lending. Exhibit 2 below and Table 1 in Appendix B show the bank s lending activity by product. 1 Overall, loan volumes in the bank s assessment areas compare reasonably with the bank s share of deposits in the respective markets. As noted above, only small business loans are considered in the scope of this examination as the other loan types are of insufficient volume to allow for a meaningful analysis. EXHIBIT 2 SUMMARY OF LENDING ACTIVITY JANUARY 1, 2007 TO DECEMBER 31, 2008 LOAN TYPE # % $ ('000s) % Small Business 1,094 99.1 344,770 97.4 Small Farm 2 0.2 375 0.1 Total Business-Related 1,096 99.3 345,145 97.5 HMDA Home Purchase 2 0.2 909 0.3 HMDA Refinance 1 0.1 550 0.2 HMDA Home Improvement 5 0.5 7,537 2.1 Total HMDA-Related 8 0.7 8,996 2.5 TOTAL LOANS 1,104 100.0 354,141 100.0 1 All CRA tables referenced in this section of the evaluation are located in Appendix B. - 4 -
ASSESSMENT AREA CONCENTRATION A substantial majority of loans, both by number of transactions as well as dollar volume, were made within the assessment areas. The following exhibit shows the number and dollar volume of loans extended within the designated assessment areas during the review period. The tables in Appendix B contain additional information regarding assessment area specific lending. LOAN TYPE EXHIBIT 3 LENDING INSIDE AND OUTSIDE THE ASSESSMENT AREAS JANUARY 1, 2007 TO DECEMBER 31, 2008 Inside Outside # % $ ( 000s) % # % $ ( 000s) Small Business 947 86.6 292,254 84.8 147 13.4 52,516 15.2 Small Farm 1 50.0 125 33.3 1 50.0 250 66.7 Total Business-Related 948 86.5 292,379 84.7 148 13.5 52,766 15.3 HMDA Home Purchase 2 100.0 909 100.0 0 0.0 0 0.0 HMDA Refinance 1 100.0 550 100.0 0 0.0 0 0.0 HMDA Home Improvement 3 60.0 4,937 65.5 2 40.0 2,600 34.5 Total HMDA-Related 6 75.0 6,396 71.1 2 25.0 2,600 28.9 TOTAL LOANS 954 86.4 298,775 84.4 150 13.6 55,366 15.6 % GEOGRAPHIC AND BUSINESS REVENUE DISTRIBUTION Overall, Heritage demonstrated a good record of lending to small businesses in different geographic areas. Loans were generally distributed throughout the assessment areas with no conspicuous gaps in the lending patterns. The bank s responsiveness to credit needs within lowincome geographies was a strength in its overall performance. Heritage demonstrates an adequate level of lending to small businesses. As seen on Table 7, the bank s lending to small businesses was below the performance of the aggregate market, but reasonable overall considering the competition in the bank s assessment areas. In addition, Heritage is a preferred SBA lender allowing it to make SBA guaranteed loans under the SBA 7(a) and SBA 504 programs. These overall conclusions are based on a variety of performance context issues. Individual conclusions for the different assessment areas vary, and the facts and data supporting those assessments are presented within the separate assessment area analyses. COMMUNITY DEVELOPMENT LENDING The bank demonstrated a good level of responsiveness to community credit needs through its origination of a relatively high level of community development loans. Specifically, as shown in - 5 -
Table 1, the bank extended 30 loans totaling $69.2 million. These loans served a multitude of community development purposes but mainly addressed affordable housing and stabilization or revitalization of low- or moderate-income areas. Included in the totals above are four loans totaling approximately $1.0 million that served a broader statewide or regional area that includes the bank s assessment areas. Of these credits, three were focused on providing services to low- and moderate-income individuals and one was designed to create affordable housing units. Investment Test Heritage s performance under the investment test is high satisfactory. The bank made a significant level of investments and donations, primarily aimed at addressing the need for affordable housing. As depicted in Table 12, the bank has provided or committed to provide development investments or grants of $11.5 million. These consist of $6.8 million in prior period investments, $4.6 million in investments and grants made during the review period and $95,000 in unfunded commitments. With the exception of donations, all the bank s investments benefited a broader regional or statewide area that includes the bank s assessment areas. Some of these investments include: Loan Pools participation in four loan pools with a Community Development Financial Institution two affordable housing pools and two small business loan pools that provide interest-free loans to small businesses. The bank s total commitment to this organization is approximately $473,000. This includes approximately $270,000 in prior period funding and two current investments totaling $203,000. Low-Income Housing Tax Credits a commitment of $6.4 million in low income housing tax credit investments that benefit a broader regional area that includes the bank s assessment areas. This commitment includes prior period investments totaling $6.3 million, and an unfunded portion totaling $95,000. The funds have helped to develop six affordable housing projects creating over 1,000 affordable housing units, including units in Santa Cruz, Livermore (Alameda County), San Pablo (Contra Costa County) and Morgan Hill (Santa Clara County). Mortgage-backed Securities investments in mortgage-backed securities totaling $4.1 million; many of these securities are backed by loans extended in a broader regional area that includes the bank s assessment areas. Service Test Overall performance under the service test is high satisfactory. Retail banking services are accessible to essentially all portions of the bank s assessment area, and bank representatives provide a relatively high level of community development services. - 6 -
RETAIL BANKING SERVICES Delivery systems provide sufficient access to the bank s products and services. Heritage operates ten full service branches, two of which are located in low- and moderate-income geographies. Detailed information on the location of the branches can be found on Table 13. Branch hours of operation provide sufficient access to banking services and do not vary in a way that inconveniences low- and moderate-income persons or areas within the assessment areas. A full range of products and services are offered at all branches. Heritage also offers on-line banking and other alternative delivery systems such as telephone banking, ATMs, and courier services which further enhance accessibility. Additionally, the bank operates four stand alone loan production offices, one of which is located in the bank s Alameda-Contra Costa assessment area. COMMUNITY DEVELOPMENT SERVICES Overall, Heritage provided a relatively high level of community development services that had a significant impact on the bank s assessment areas. During the review period, employees performed 50 different qualifying community development services totaling over 2,000 hours. Service hours addressed a variety of community development needs including affordable housing and economic development. Activities benefiting specific assessment areas are addressed under their respective portions of the evaluation. Fair Lending or Other Illegal Practices Review The bank is in compliance with the substantive provisions of the anti-discrimination laws and regulations. The fair lending review conducted concurrently with this examination did not reveal evidence of discriminatory lending practices and there were no other regulatory violations that would negatively affect the bank s CRA performance assessment. - 7 -
FULL-SCOPE ASSESSMENT AREA CONCLUSIONS For each assessment area where a full-scope review was performed using the examination procedures. Santa Clara Assessment Area DESCRIPTION OF OPERATIONS IN SANTA CLARA The Santa Clara assessment area consists of Santa Clara County in its entirety, and represents a portion of the San Jose-Sunnyvale-Santa Clara MSA. Located south of San Francisco Bay, Santa Clara County is part of one of the state s busiest urban areas the San Francisco Bay Area. Santa Clara shares borders with Santa Cruz and San Mateo counties to the west, Stanislaus and Merced counties to the east, San Benito County to the south, and Alameda County, its neighbor to the north. As the largest county in the San Francisco Bay Area, Santa Clara County is home to more than 1.8 million residents. 2 While Heritage maintains its most significant branch presence in this market with six branch offices here, the bank s market share is limited. As of June 30, 2008, Heritage held $816.0 million in deposits, representing 1.6 percent of the market share and ranking the bank 11 th out of 55 Federal Deposit Insurance Corporation (FDIC) insured financial institutions operating 352 offices in the county. 3 The bank s market share of CRA-reportable small business loans was lower at 0.2 percent, ranking the bank 21 st out of 112 lenders reporting a total of 114,877 loans in 2007. Given the large number of institutions that operate in this market, competition for loan and deposit products as well as community development opportunities is significant. The following exhibit presents key demographic and business information, based on the 2000 U.S. Census and 2007 Dun & Bradstreet data, used to help develop a performance context for the assessment area. 2 State of California Employment Development Department, Labor Market Information Division, Santa Clara County Snapshot, available at www.labormarketinfo.edd.ca.gov (accessed December 23, 2008). 3 Federal Deposit Insurance Corporation, Institution Directory, Summary of Deposits, June 30, 2008; available from http://www3.fdic.gov/sod/(accessed December 23, 2008). - 8 -
Income Categories EXHIBIT 4 ASSESSMENT AREA DEMOGRAPHICS Tract Distribution SANTA CLARA Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income 14 4.1 12,598 3.2 2,285 18.1 78,717 19.7 Moderate-income 73 21.4 77,751 19.4 7,241 9.3 70,519 17.6 Middle-income 161 47.2 193,734 48.5 7,675 4.0 85,479 21.4 Upper-income 93 27.3 115,682 28.9 2,423 2.1 165,050 41.3 Total AA 341 100.0 399,765 100.0 19,624 4.9 399,765 100.0 Housing Housing Types by Tract Income Categories Units by Owner-occupied Rental Vacant Tract # % % # % # % Low-income 19,754 3,953 1.2 20.0 15,397 77.9 404 2.0 Moderate-income 113,083 50,136 14.8 44.3 60,204 53.2 2,743 2.4 Middle-income 288,488 163,886 48.4 56.8 118,290 41.0 6,312 2.2 Upper-income 158,004 120,661 35.6 76.4 33,336 21.1 4,007 2.5 Total AA 579,329 338,636 100.0 58.5 227,227 39.2 13,466 2.3 Businesses by Tract & Revenue Size Income Categories Total Businesses by Tract Less Than or Equal to $1 Million Greater than $1 Million Revenue Not Reported # % # % # % # % Low-income 2,289 3.3 1,981 3.4 257 3.3 51 3.2 Moderate-income 16,054 23.5 13,291 22.5 2,166 27.6 597 37.2 Middle-income 30,507 44.6 26,735 45.3 3,207 40.9 565 35.2 Upper-income 19,607 28.6 16,998 28.8 2,216 28.2 393 24.5 Total AA 68,457 100.0 59,005 100.0 7,846 100.0 1,606 100.0 Percentage of Total Businesses: 86.2 11.5 2.3 2004 MSA Median Family Income San Jose-Sunnyvale-Santa Clara MSA $81,717 September 2008 Median Housing Value 4 Santa Clara County $505,000 2008 HUD-Adjusted Median Family Income San Jose-Sunnyvale-Santa Clara MSA $97,800 Third quarter 2008 Unemployment Rate 5 San Jose-Sunnyvale-Santa Clara MSA 6.5% Situated in the heart of Silicon Valley, Santa Clara County is dominated by the technology sector. 6 Despite the development of other high-tech economic centers throughout the United States, Silicon Valley continues to be the leading high-tech hub because of its large number of engineers and venture capitalists. As of December 2008, high-tech employment accounted for 4 California Association of Realtors, Trends in California Real Estate, Volume XX, Number X, October 2008. 5 Bureau of Labor Statistics (Haver Analytics), December 8, 2008. 6 Local Industries, SCC Public Portal, available at www.sccgov.org/portal/site/scc (accessed January 9, 2009). - 9 -
23.9 percent of all employment in the area. 7 Professional and business services and manufacturing are the largest employment sectors, accounting for 20 percent and 18 percent respectively of total employment in the area. Education and health services and government are the third and fourth sectors, each comprising 11 percent of total employment in the area. These sectors combined employed approximately sixty percent of the area s workforce. 8 Small businesses (i.e., those with gross annual revenues of $1.0 million or less), including start up ventures, comprise a substantial majority of all businesses in the assessment area and are an important source of employment. According to Dun & Bradstreet data, as shown in Exhibit 4 above, approximately 86.2 percent of all businesses have gross annual revenues of less than or equal to $1.0 million. Santa Clara County remains the only major California metro area not officially in recession as of the end of 2008; however, its economy weakened during the review period. Employment declined slightly in the second and third quarters of 2008 and in October 2008, the unemployment rate rose above 7 percent for the first time since 2004. The deepening U.S. and global recessions threaten to dampen demand further for the area s technology-producing industries. The housing market continues to weaken and household credit conditions are deteriorating, although at an admittedly moderate pace. 9 As noted above, employment growth in the Santa Clara area economy slowed significantly in 2007 and began to further decline in 2008. 10 Unemployment in the county increased from 4.7 percent in January 2007 to a level of 7.7 percent as of December 2008. 11 In 2007, a handful of sectors experienced contracting employment. These sectors were led by construction, finance and insurance, all of which were most heavily influenced by the housing decline. Additionally, the county experienced a loss of leisure and hospitality jobs. Employment declines were experienced much more broadly in 2008 as information services, professional and business services, and education and health were the only major sectors to see growth during this period. 12 The declining economic conditions during the review period resulted in financial institutions tightening their lending standards and terms on all major loan products. The move toward more stringent lending policies was a trend throughout 2008. For example, according to the October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the 7 Moody s Economy.com, Inc., Précis Metro, San Jose, December 2008. 8 Ibid. 9 Ibid. 10 Beacon Economics, 2008 South Bay Economic Forecast Conference, Employment and Income,Volume 2, Number 3, October 2008, (accessed 1/8/2009), available at www.beaconecon.com/events/sanjose08/sb_forecastbook_08.pdf. 11 State of California Employment Development Department, Labor Market Information Division, Historical Data for Unemployment Rate and Labor Force (Not Seasonally Adjusted) in Santa Clara County, available at www.labormarketinfo.edd.ca.gov (accessed February 19, 2009). 12 Beacon Economics, 2008 South Bay Economic Forecast Conference, Employment and Income,Volume 2, Number 3, October 2008, (accessed 1/8/2009), available at www.beaconecon.com/events/sanjose08/sb_forecastbook_08.pdf. - 10 -
Federal Reserve Board of Governors, the net percentages of respondents that reported tightening standards increased relative to the July survey for both commercial and industrial loans (C&I) and commercial real estate loans. Previous surveys follow the same pattern. Also, survey results indicate that the demand for loans from both businesses and households weakened in the review period. Even though there has been some decline in demand, community representatives indicated that tightened lending has resulted in a need for micro loans to small businesses. Given current economic conditions, the lack of funding for start-up and working capital will continue to be a challenge for small businesses. Community representatives also stated that many small business owners would benefit from additional financial education and technical assistance. Home prices decreased significantly during the review period. The median home price of a home peaked in the Santa Clara area in the third quarter of 2007, and by the third quarter of 2008 prices had fallen by 27.9 percent. 13 This decline in housing prices has been accompanied by a dramatic increase of 518 percent in home foreclosures, from 301 at the end of 2006 to 1,863 as of October, 2008. 14 Falling prices and increasing sales are setting in motion a rebalancing of the housing market. Price declines have helped to improve affordability back to its 2004 level and price indicators such as price-to-income and price-to-rental ratios have moved closer to historical ranges. 15 Although improving, housing affordability remains a significant issue in the area. The median sales price of a home in the Santa Clara area was $505,000 in September 2008 and continues to decline; however, this figure is still well beyond a low-income individual s means. A lowincome individual earning 50 percent of the 2008 HUD adjusted median family income for Santa Clara County, or $48,900 would only qualify for a 30 year fixed mortgage of approximately $140,000. 16 The gap between incomes and home prices, coupled with tighter credit help support assertions that there is a continuing need for the support and development of affordable housing programs in the area, particularly for low- and moderate-income individuals. Additionally, there is an increased need to assist homeowners experiencing mortgage delinquency and foreclosure by providing them with access to counseling services and other resources such as foreclosure prevention programs. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN SANTA CLARA Lending Test 13 California Association of Realtors, Trends in California Real Estate, Volume 29, Number 10, October 2008. 14 Beacon Economics, 2008 South Bay Economic Forecast Conference, Employment and Income, Volume 2, Number 3, October 2008, (accessed 1/8/2009), available at www.beaconecon.com/events/sanjose08/sb_forecastbook_08.pdf. 15 Moody s Economy.com, Inc., Précis Metro, San Jose, December 2008. 16 CNN Money, How Much House Can You Afford?, (accessed 2/3/2009), available at http://cgi.money.cnn.com/tools/houseafford.html. - 11 -
Lending test performance in the Santa Clara assessment area is good. The bank s geographic distribution of loans reflected a strong penetration throughout low- and moderate-income geographies. Also, community development lending demonstrated good responsiveness to affordable housing needs and services for low- and moderate-income individuals. The distribution of lending to businesses of different sizes was adequate. Lending Activity Lending activity is good. As indicated in Table 1, the bank made a significant number of small business loans during the review period given the presence of varied and large banks along with non-bank lenders and declining economic conditions. Lending Distribution by Geography The distribution of small business loans reflected excellent penetration among geographies of various income levels. As seen in Table 2, the bank s small business lending in low- and moderate-income geographies was generally strong, exceeding both the percentage of businesses and aggregate lending. Moreover, the bank s market share in low- and moderate-income geographies exceeded the bank s overall market share of small business lending in the assessment area. Lending Distribution by Business Revenue The distribution of loans to small businesses was adequate. As shown in Table 7, approximately one-third of small business loans made in the assessment area were extended to businesses with gross annual revenues of $1.0 million or less. While this level of lending is less than aggregate lenders, it still evidenced a reasonable number of loans to small businesses. In addition, 30 percent of the small business loans were in small dollar amounts which met a stated credit need in the assessment area. Community Development Lending Heritage made a relatively high level of community development loans in the Santa Clara assessment area. During this review period, the bank made 18 community development loans totaling $55.0 million. A majority of these community development loans (50 percent by number) were directed to revitalize and stabilize low-and moderate-income communities. Highlights of community development loans in this assessment area include: Two loans for the purchase of a commercial property located in a low-income census tract and an enterprise zone. Approximately 60 new jobs will be created as a result of extending these loans. Several lines of credit provided to businesses operating in the San Jose Enterprise Zone. These loans helped promote the efforts of the enterprise zone by attracting, retaining and creating jobs for local residents, especially for individuals with employment barriers. - 12 -
Working capital lines totaling $5.5 million to organizations assisting low- and moderateincome disabled individuals and at-risk youth in low-income communities in San Jose. Investment Test The bank s performance under the investment test is good in the Santa Clara assessment area. As seen in Table 12, the bank made donations totaling $228,000. As previously mentioned, part of the broader state-wide or regional investments also benefited this assessment area. Specifically, the bank committed $6.4 million in LIHTC and $4.1 million in mortgage-backed securities which supported projects in Santa Clara County, among other locations. Also, the bank participated in four loan pools with a CDFI for affordable housing and small business lending. Examples of donations to local community development service providers serving low- and moderate-income people are listed below: A $25,000 donation to an organization that provides a wide variety of programs and services that help low-income individuals and families rise out of poverty and become self-sufficient. A $12,500 donation to an organization providing healthcare to low-income individuals and families. A $15,000 donation to a school dedicated to providing education for students of lowincome families. Service Test Heritage s level of community development services coupled with delivery systems that are accessible to essentially all portions of the assessment area demonstrated good responsiveness to identified area needs. Retail Banking Services The bank s delivery systems are readily accessible to essentially all portions of the assessment area. The bank has six branches in the Santa Clara assessment area, two of which are located in low- and moderate-income geographies. Since the previous examination, two Los Altos branches were consolidated and relocated within one mile of the original location. Considering the proximity of the two offices to one another, the consolidation has a limited impact on the bank s accessibility. A full range of products and services are offered at all branches. The bank also uses alternative delivery systems, such as telephone banking, ATMs, internet banking, and courier services, to meet customer needs and to provide access to banking services after normal branch business hours. Community Development Services - 13 -
Heritage employees provided a relatively high level of community development services. Bank employees provided 47 community development services totaling 2,059 hours. These qualified services met various community development needs by promoting affordable housing and serving the targeted needs of low- and moderate-income families and individuals as well as small businesses. Highlights of the bank s community development services in this assessment area include: Providing 278 hours assisting with loan documentation preparation for a Community Development Financial Institution which provides loans for affordable housing and small businesses. Assisting with loan servicing for an organization dedicated to increasing the strength, safety, and self-sufficiency of low- and moderate-income children, adults, and families. Donating 122 hours for a local hospital whose goal is to provide services to low- and moderate-income people. An employee served on the board of directors, was a member of the governance council and participated on a search committee for the hospital. Providing 144 hours to the small business loan committee for a Community Development Financial Institution. - 14 -
Alameda-Contra Costa Assessment Area DESCRIPTION OF OPERATIONS IN ALAMEDA-CONTRA COSTA The Alameda-Contra Costa assessment area includes Alameda and Contra Costa Counties in their entirety. Both counties comprise the Oakland-Fremont-Hayward metropolitan division and encompass approximately 1,623 square miles on the eastern side of the San Francisco Bay. 17 Alameda and Contra Costa Counties are part of one of the state s busiest urban centers, the San Francisco Bay Area. Based upon January 1, 2007 estimates from the California Department of Finance, Alameda and Contra Costa Counties were ranked the seventh and eleventh most populous California counties, respectively, with more than 1.5 million and 1 million residents. 18 Heritage operates 40 percent (i.e., 4 branches) of its branch network in this assessment area, which accounted for $344.7 million in deposits as of June 30, 2008 and represented 0.6 percent of the market share. The bank ranked 17 th out of 56 Federal Deposit Insurance Corporationinsured financial institutions operating 530 offices. 19 Given the sizeable number of institutions that operated in this market, competition for loan and deposit products as well as community development opportunities was notable. The exhibit below reflects key demographic and business information, based upon the 2000 U.S. Census and 2007 Dun & Bradstreet data, used to help develop a performance context for this assessment area. 17 State of California Employment Development Department, Labor Market Information Division, Alameda County and Contra Costa County Snapshots, available at www.labormarketinfo.edd.ca.gov (accessed December 23, 2008). 18 Ibid. 19 Federal Deposit Insurance Corporation Institution Directory, Summary of Deposits, June 30, 2008; available from http://www3fdic.gov/sod/ (accessed December 23, 2008). - 15 -
Income Categories EXHIBIT 5 ASSESSMENT AREA DEMOGRAPHICS Tract Distribution ALAMEDA-CONTRA COSTA Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income 52 10.6 41,579 7.1 10,879 26.2 121,546 20.7 Moderate-income 103 21.1 106,625 18.2 13,851 13.0 101,521 17.3 Middle-income 191 39.1 242,151 41.3 10,745 4.4 123,824 21.1 Upper-income 142 29.0 195,664 33.4 3,939 2.0 239,128 40.8 Tract not reported 1 0.2 0 0.0 0 0.0 0 0.0 Total AA 489 100.0 586,019 100.0 39,414 6.7 586,019 100.0 Housing Housing Types by Tract Income Categories Units by Owner-occupied Rental Vacant Tract # % % # % # % Low-income 71,037 18,298 3.5 25.8 48,515 68.3 4,224 5.9 Moderate-income 177,627 68,560 13.1 38.6 102,340 57.6 6,727 3.8 Middle-income 380,814 228,679 43.6 60.1 142,111 37.3 10,024 2.6 Upper-income 265,248 209,165 39.9 78.9 49,793 18.8 6,290 2.4 Tract not reported 34 17 0.0 50.0 17 50.0 0 0.0 Total AA 894,760 524,719 100.0 58.6 342,776 38.3 27,265 3.0 Businesses by Tract & Revenue Size Income Categories Total Businesses by Tract Less Than or Equal to $1 Million Greater than $1 Million Revenue Not Reported # % # % # % # % Low-income 10,261 10.6 8,744 10.2 1,202 12.8 315 15.3 Moderate-income 16,414 17.0 14,780 17.3 1,239 13.2 395 19.2 Middle-income 37,635 38.9 33,208 38.9 3,589 38.4 838 40.7 Upper-income 32,371 33.5 28,546 33.5 3,316 35.4 509 24.7 Tract not reported 67 0.1 52 0.1 11 0.1 4 0.2 Total AA 96,748 100.0 85,330 100.0 9,357 100.0 2,061 100.0 Percentage of Total Businesses: 88.2 9.7 2.1 2004 MSA Median Family Income Oakland-Fremont-Hayward MD $68,346 2008 HUD-Adjusted Median Family Income Oakland-Fremont-Hayward MD $86,100 September 2008 Median Housing Value 20 Alameda County Contra Costa County $385,000 $300,000 Third quarter 2008 Unemployment Rate 21 Oakland-Fremont-Hayward MD 6.70% 20 California Association of Realtors, Trends in California Real Estate, Volume 29, Number 10, October 2008. 21 Bureau of Labor Statistics (Haver Analytics), December 8, 2008. - 16 -
The years 2007 and 2008 have been difficult years for the economies of Alameda and Contra Costa. Employment has fallen, with the downturn spread broadly across most industries. House prices are falling at an accelerated pace and household credit conditions are deteriorating more rapidly than elsewhere in the Bay Area. 22 As the East Bay more fully benefited from the run up in mortgage activity than did other parts of the Bay Area, it is now on the leading edge of the recession due to the decline in the housing market. The unemployment rate in Alameda and Contra Costa was 7.3 and 7.1 percent respectively in November 2008, up from 4.9 percent for both counties in November 2007. 23 The declines in employment began in the financial activities sector. This is one of a small number of sectors in the region s economy, along with information services and manufacturing, to have experienced a decline through the first eight months of 2007. However, through early 2008, the declines in unemployment have become increasingly broad-based. The only major sector to have experienced positive employment growth through August of 2008 is education and health services. The construction sector, especially residential activities, has been leading the charge downhill through much of 2008. 24 More than other counties around the Bay Area, Alameda and Contra Costa Counties have experienced significant declines in construction and financial sector employment. Construction employment is down more than 10 percent from its peak in the East Bay. The financial sector has suffered because part of this sector is devoted to real estate services, and these services are in lower demand as fewer houses change hands. However, playing an even larger role is the finance and insurance sector, reflecting significant reductions in the demand for mortgage loan services. Both of these sectors have been falling significantly faster than elsewhere in the Bay Area. 25 Small businesses comprise a substantial majority of all businesses in Alameda and Contra Costa Counties. As shown in Exhibit 5 above, approximately 88.2 percent of all businesses have gross annual revenues of less than or equal to $1,000,000. Given the preponderance of small businesses, credit for these entities is an apparent need. Also, as discussed in the Santa Clara assessment area, the recent economic conditions have resulted in financial institutions tightening their lending standards and terms on all major loan products. Consequently, discussions with community representatives indicated that these more stringent lending criteria have resulted in a need for micro loans to small businesses. Given current employment conditions, the lack of funding for start-up and working capital will continue to be a challenge for small businesses. Community representatives further noted that many small business owners would also benefit from financial education and technical assistance. As previously noted, the economic downturn is closely linked to the decline in housing values in the East Bay. Between 2000 and 2006, the average price of a home in the East Bay Metropolitan Division increased by 114 percent. Having peaked in the first quarter of 2006, prices had fallen 22 Moody s Economy.com, Inc., Precis Metro, Oakland, August 2008. 23 State of California, Employment Development Department, Labor Market Information Division. 24 Beacon Economics, 2008 East Bay Economic Forecast Conference, Summary, Volume 2, Number 2, October 2008, (accessed 1/8/2009), available at www.beaconecon.com/events/san Jose08/SB_ForecastBook_08.pdf. 25 Ibid. - 17 -
by 39 percent by the end of the first quarter of 2008. This decline in housing prices has been accompanied by a dramatic increase in foreclosures. From the second quarter of 2007 to the second quarter of 2008, foreclosures have risen by 215 percent in Alameda and 266 percent in Contra Costa. 26 Despite favorable trends in housing costs, the overall affordability landscape did not materially improve during the review period. In September 2008, the median sales price of a home in Alameda County was $385,000 and in Contra Costa County was $300,000. 27 A low-income individual earning 50 percent of the 2008 HUD adjusted median family income for the Alameda- Contra Costa area, or $43,000, with no existing debt, was able to qualify for a 30-year fixed-rate mortgage of approximately $117,000. 28 However, there are few homes available in this price range in the Alameda-Contra Costa assessment area. Based on the aforementioned information, affordable housing as well as financial counseling services and foreclosure resources are a pertinent need in the assessment area. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS IN ALAMEDA-CONTRA COSTA Lending Test Heritage demonstrated an adequate level of performance under the lending test in the Alameda- Contra Costa assessment area. The bank s geographic distribution of loans reflected an adequate penetration. Also, the overall distribution of lending to businesses of different sizes was adequate. Last, the bank s level of community development lending demonstrated good responsiveness to the need for affordable housing and services for low-and moderate-income individuals. Lending Activity Lending levels are good. A high number of small business loans were extended and the percentage of loans made in relation to the percentage of deposits garnered within the assessment area is favorable as seen in Table 1. Lending Distribution by Geography The overall distribution of small business loans reflected adequate penetration among various geographies. As seen in Table 2, small business lending in low-income geographies was good exceeding the percentage of aggregate lending; however, performance in moderate-income geographies was weaker than both aggregate lending and the percentage of businesses in those geographies. 26 Beacon Economics, 2008 East Bay Economic Forecast Conference, Summary, Volume 2, Number 2, October 2008, (accessed 1/8/2009), available at www.beaconecon.com/events/san Jose08/SB_ForecastBook_08.pdf. 27 California Association of Realtors, Trends in California Real Estate, Volume 29, Number 10, October 2008. 28 CNN Money, How Much House Can You Afford?, (accessed 2/3/2009), available at http://cgi.money.cnn.com/tools/houseafford/houseafford.html. - 18 -
Lending Distribution by Business Revenue The distribution of loans to small businesses was adequate. As shown in Table 7, over one-third of small business loans made in the assessment area were extended to businesses with gross annual revenues of $1.0 million or less. While the bank s performance was less than aggregate lenders, it still evidenced a reasonable penetration to small businesses. Also, almost 28 percent of the small business loans were in small dollar amounts, which met a stated credit need. Community Development Lending Heritage made a relatively high level of community development loans in the Alameda-Contra Costa assessment area. The bank made eight community development loans totaling $13.0 million during the period. A majority of these community development loans (69 percent by dollar amount) was directed to creating affordable housing. For example, the proceeds of one loan was used to rehabilitate a large apartment complex in a moderate-income area of Richmond where the majority of the units will be available to low-income individuals earning less than 50 percent of the area median income. The bank also made a loan to a nonprofit organization to purchase a building to house a day treatment program and residential services to low-and moderate income adults with developmental disabilities in Contra Costa County. Investment Test Heritage s performance under the investment test is adequate in the assessment area. As seen in Table 12, the bank made 10 donations totaling $6,000 to local community development service providers serving low- and moderate-income people. As previously mentioned, part of the broader state-wide or regional investments also benefited this assessment area. Specifically, the bank committed $6.4 million in LIHTC and $4.1 million in mortgage-backed securities which supported projects in Alameda and Contra Costa Counties, among other locations. Examples of donations are listed below: A $1500 donation to an organization providing meals to low income seniors. A $1000 donation to an organization dedicated to providing services for the poor and needy. A $1000 donation to a small business financial development corporation. Service Test Heritage s performance under the service test in the Alameda-Contra Costa assessment area is characterized by reasonably accessible retail banking services and the provision of an adequate level of community development services that addressed a variety of community development needs including affordable housing and economic development. - 19 -
Retail Banking Services Heritage s delivery systems are reasonably accessible to essentially all portions of the assessment area. As noted in Table 13, the bank has four branches in the assessment area, resulting in a net increase of two branches during the review period. A total of three branches were added and one branch was closed. Of these additional branches, two were acquired in connection with the Diablo Valley Bank acquisition and one was opened in Walnut Creek. The branch closure was a consolidation into an existing nearby branch in Danville. These additional offices increase the bank s overall accessibility. In addition, a full range of products and services are offered at all branches. The bank also uses alternative delivery systems, such as telephone banking, ATMs, internet banking, and courier services, to meet customer needs and to provide access to banking services after normal branch business hours. Community Development Services Heritage provided an adequate level of community development services in the Alameda-Contra Costa assessment area. Employees provided three community development services totaling 169 hours. These qualified services supported organizations serving the needs of low- and moderate-income families and individuals. Highlights of the bank s community development services include: Providing service as treasurer of an organization that assists low- and moderate-income people who are victims of domestic violence. Providing service as board member of an organization that delivers subsidized child care services to low- and moderate-income families. - 20 -