PUBLIC DISCLOSURE April 5, 2010 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION Liberty Bank RSSD #478766 500 Linden Avenue South San Francisco, California 94080 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 Description of Assessment Area... 3 Scope of Examination... 9 CONCLUSIONS WITH RESPECT TO PERFORMANCE CRITERIA... 9 Loan-to-Deposit Ratio... 10 Lending in Assessment Area... 10 Lending Distribution by Geography... 10 Lending Distribution by Business Revenue... 12 Response to Complaints... 12 Fair Lending or Other Illegal Credit Practices Review... 12 GLOSSARY OF TERMS... 13 i
INSTITUTION RATING Institution s CRA Rating Liberty Bank is rated "SATISFACTORY" The major factors supporting the institution s rating include: A reasonable loan-to-deposit ratio; A majority of loans made within the assessment area; A reasonable geographic distribution of small business loans; and A reasonable level of lending to small businesses. 1
INSTITUTION Description of Institution Headquartered in South San Francisco, California, Liberty Bank (Liberty) is a wholly-owned subsidiary of Liberty Bancorp, with reported total assets of $231 million as of December 31, 2009. Liberty commenced operations on April 7, 1982, and has a network of four full-service branch offices located in the cities of Boulder Creek, Felton, Palo Alto, and South San Francisco. Since the previous CRA examination, Liberty closed a full-service branch in the city of Ben Lomond and opened a full-service branch in the city of Felton in January 2008. The Boulder Creek and Felton branches are located in the rural San Lorenzo Valley in the Santa Cruz Mountains. In contrast, the bank s Palo Alto branch is located in a highly commercialized section of downtown Palo Alto, in Santa Clara County. Similarly, the South San Francisco branch is located approximately ten miles south of downtown San Francisco in San Mateo County. Liberty is a full-service bank specializing in commercial lending. The bank provides commercial banking products and services to small- and middle-market businesses. The commercial loan portfolio is primarily comprised of commercial real estate (CRE) loans and commercial and industrial loans. Liberty currently offers consumer loans primarily to existing business customers on an accommodation basis. Products include home purchase, home refinance, home equity, consumer construction, automobile, and overdraft protection. Below is the December 31, 2009, loan portfolio composition, as stated in the Consolidated Reports of Condition and Income, which shows the bank s commercial lending focus. EXHIBIT 1 LOANS AND LEASES AS OF DECEMBER 31, 2009 Loan Type $ ( 000s) % Commercial/Industrial & Non-Farm Non-Residential Real Estate 143,594 74.8 Multifamily Residential Real Estate 21,046 11.0 Construction & Land Development 13,198 6.9 Secured by 1-4 Family Residential Real Estate 11,647 6.0 Consumer Loans & Credit Cards 1,873 1.0 All Other 508 0.3 Total (Gross) 191,866 100.0 Liberty faced no 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 CRA examination, conducted as of January 17, 2006, resulted in a satisfactory rating and was conducted using the Interagency Small Institution Examination Procedures. 2
Description of Assessment Area Liberty s one assessment area is part of the Greater San Francisco Bay Area extending from San Francisco County in the north and continuing south to Santa Cruz County. The assessment area is part of the San Jose-San Francisco-Oakland Combined Statistical Area and includes the following: San Francisco and San Mateo Counties in their entirety. This area is also part of the San Francisco-San Mateo-Redwood City Metropolitan Division (MD). Major portions of Santa Cruz County, extending along the Pacific Ocean coastline from the San Mateo County line in the north to the city of Aptos in the south. This area is also part of the Santa Cruz-Watsonville Metropolitan Statistical Area (MSA). The city of Palo Alto, which south and southwest of Santa Cruz County and part of the San Jose-Sunnyvale-Santa Clara MSA. The San Francisco/San Mateo portion of the assessment area has the largest population, followed by Santa Cruz and then Palo Alto. In 2008, the California Department of Finance estimated that the populations of San Francisco and San Mateo Counties exceeded 824 thousand and 739 thousand, respectively. 1, 2 In the same year, the population of Santa Cruz exceeded 260 thousand, with the population surrounding the two Santa Cruz branches in Boulder Creek and Felton much smaller at approximately five thousand. 3, 4 Estimates placed the 2008 population of Palo Alto at almost 60 thousand. 5 With only four branches, Liberty has a limited presence in a highly competitive assessment area. As of June 30, 2009, there were 91 Federal Deposit Insurance Corporation (FDIC) insured institutions within this market operating 1,079 offices with deposits over $214 billion; Liberty accounts for less than one percent of the deposit market share. The majority of these institutions were located in San Francisco/San Mateo with over 60 institutions competing for loan and deposit products. Palo Alto has 18 institutions, while 14 institutions operated in Santa Cruz. A majority of these institutions are located in the city of Santa Cruz, not in the rural San Lorenzo Valley. Unlike the other two areas, Liberty does have a significant presence in the Santa Cruz portion of the assessment area. During the review period, it was the only institution located in Boulder Creek and one of two institutions located in Felton. 6 In 2008, there were a total of 123 lenders that reported 119,743 small business loans totaling $2.7 billion, pursuant to the reporting requirements of the CRA, most of which were large regional and national institutions. For instance, the top three large national institutions make up 68 percent of this market share and 1 California Employment Development Department, San Francisco County Profile, (accessed March 16, 2010), available from http://www.labormarketinfo.edd.ca.gov. 2 Ibid at San Mateo County Profile. 3 City-Data.com, Boulder Creek, CA, (accessed March 17, 2010), available from http://www.citydata.com/city/boulder-creek-california.html 4 Ibid at Felton, CA. 5 California Employment Development Department, Palo Alto Profile, (accessed March 16, 2010), available from http://www.labormarketinfo.edd.ca.gov. 6 Federal Deposit Insurance Corporation, Institution Directory, Deposit Market Share Report, Summary of Deposits, June 30, 2009, (accessed on April 2, 2010), available from http://www2.fdic.gov 3
these CRA reporters represent only a portion of the small business lending market. Given the number of institutions that operate within the assessment area, competition for loan and deposit products was significant. Exhibit 2, on the following page, presents key demographic and business information, based on the 2000 U.S. Census and 2008 Dun & Bradstreet Data, used to help develop a performance context for the assessment area. 4
Income Categories Tract Distribution EXHIBIT 2 ASSESSMENT AREA DEMOGRAPHICS ASSESSMENT AREA Families by Tract Income Families < Poverty Level as % of Families by Tract Families by Family Income # % # % # % # % Low-income 28 7.4 19,892 5.4 4,243 21.3 79,358 21.4 Moderate-income 86 22.6 73,598 19.8 7,010 9.5 65,417 17.6 Middle-income 150 39.5 161,782 43.6 6,071 3.8 75,319 20.3 Upper-income 114 30.0 115,967 31.2 2,524 2.2 151,145 40.7 Tract not reported 2 0.5 0 0.0 0 0.0 0 0.0 Total AA 380 100.0 371,239 100.0 19,848 5.3 371,239 100.0 Income Categories Housing Units by Tract Housing Types by Tract Owner-occupied Rental Vacant # % % # % # % Low-income 56,280 4,133 1.3 7.3 48,696 86.5 3,451 6.1 Moderate-income 141,716 45,495 14.1 32.1 90,218 63.7 6,003 4.2 Middle-income 291,273 146,734 45.5 50.4 132,965 45.6 11,574 4.0 Upper-income 213,211 125,965 39.1 59.1 79,130 37.1 8,116 3.8 Tract not reported 11 11 0.0 100.0 0 0.0 0 0.0 Total AA 702,491 322,338 100.0 45.9 351,009 50.0 29,144 4.1 Businesses by Tract & Revenue Size Total Businesses by Less Than or Equal Greater than Revenue Not Income Categories Tract to $1 Million $1 Million Reported # % # % # % # % Low-income 14,449 14.6 12,206 13.9 1,807 20.5 436 19.7 Moderate-income 19,561 19.7 17,011 19.3 2,026 22.9 524 23.7 Middle-income 36,671 37.0 33,223 37.7 2,662 30.1 786 35.5 Upper-income 28,431 28.7 25,642 29.1 2,324 26.3 465 21.0 Tract not reported 46 0.0 33 0.0 12 0.1 1 0.0 Total AA 99,158 100.0 88,115 100.0 8,831 100.0 2,212 100.0 Percentage of Total Businesses 88.9 8.9 2.2 2004 Median Family Income: San Francisco County San Mateo County Santa Cruz County Santa Clara County $75,188 $75,188 $62,332 $80,198 December 2009 Median Housing Value: 7 San Francisco County San Mateo County 8 Santa Cruz County Palo Alto $650,000 $719,000 $441,250 $1,066,000 2009 HUD Adjusted Median Family Income: San Francisco County San Mateo County Santa Cruz County Santa Clara County $96,800 $96,800 $83,800 $102,500 December 2009 Unemployment Rate: San Francisco County 9 San Mateo County 10 Santa Cruz County 11 Palo Alto 12 8.8% 8.9% 11.5% 6.5% 7 California Association of Realtors, Trends in California Real Estate, Volume 31, Number 1, 2010. 8 San Mateo County Housing Indicators, County of San Mateo Department of Housing HCD, (accessed March 16, 2010), available from http://www.co.sanmateo.ca.us/attachments/housingdepartment/ PDFS/Statistics/stats_december_2009_indicators.pdf 9 Moody s Economy.com Inc., Precis METRO:, San Francisco, August 2009. 10 San Mateo County Comprehensive Annual Financial Report, page iii, June 30, 2009, (accessed March 16, 2010), available from http://www.co.sanmateo.ca.us/attachments/controller/files/cafr/2009cafr.pdf 11 Moody s Economy.com Inc., Precis METRO:, Santa Cruz, August 2009. 12 CityData.com, Palo Alto, CA, (accessed March 17, 2010), available from http://www.city-data.com/city/palo- Alto-California.html 5
The bank s assessment area represents three different areas of the Greater San Francisco Bay Area which have different business and economic bases. San Francisco/San Mateo is the center of the Bay Area and is a center for commerce. San Francisco/San Mateo is home to several Fortune 500 firms and over 60 thousand small businesses. 13, 14 Palo Alto is located in the heart of the Silicon Valley, an area defined by its large concentration of high technology businesses. Finally, Santa Cruz is largely characterized by its public sector and tourism industries. San Francisco/San Mateo share the leading industries of computer technology, biotechnology, healthcare, education, and tourism. 15, 16 Approximately one third of the world s biotechnology workforce is employed in the San Francisco/San Mateo area within the fields of biomedical engineering, network systems, and data communications representing the fastest growing industries. 17, 18 Additionally, the area s tourism industry generates $6.7 billion in tourist spending annually and is the largest industry in the region. 19 San Francisco International Airport, located in San Mateo County, also contributes to the area creating tens of thousands of jobs related to the airport s businesses. 20 San Francisco and San Mateo s top employers are the University of California at San Francisco, Kaiser Permanente, United Airlines, Wells Fargo & Company, Oracle, and Genentech, Inc. 21 22 With its proximity to San Francisco/San Mateo, Palo Alto shares many of the same economic attributes. Known as the Birthplace of the Silicon Valley, Palo Alto is regarded as a leader in product innovation and one of the top cities for patents, with 798 patents registered in 2008. 23, 24 Palo Alto is also home to Stanford University, Stanford Research Park, and Stanford Medical Center, which are key aspects of Palo Alto s research, development, and technology focal points. Additionally, employment sectors include retail and commercial, neighborhood retail and local centers, startup and service industries, and medical facilities. 25 Palo Alto is home to more than seven thousand businesses employing over 98 thousand individuals. 26 Located 35 miles southwest of Silicon Valley is Santa Cruz. Although Santa Cruz extends up to the western edge of San Mateo County, this area is rural with the majority of its population 13 CityData.com, San Francisco Economy, (accessed March 16, 2010), available at http://www.city-data.com/uscities/the-west/san-francisco-economy.html 14 SFGOV, Business, accessed February 8, 2010, available at http://www6.sfgov.org/index.aspx?page=3 15 San Mateo County Comprehensive Annual Financial Report page iii. 16 CityData.com, San Francisco Economy, (accessed March 16, 2010), available at http://www.city-data.com/uscities/the-west/san-francisco-economy.html 17 Ibid 18 California Employment Development Department, Compare Areas San Francisco County and San Mateo County; (accessed March 16, 2010), available from http://www.labormarketinfo.edd.ca.gov. 19 CityData.com, San Francisco Economy, (accessed March 16, 2010), available at http://www.city-data.com/uscities/the-west/san-francisco-economy.html. 20 Ibid. 21 Moody s Economy.com Inc., Precis METRO:, San Francisco, August. 22 San Mateo County Comprehensive Annual Financial Report page iii. 23 City of Palo Alto, About Palo Alto, (accessed March 18, 2010), available from http://www.cityofpaloalto.org 24 Joint Venture: Silicon Valley Network, Silicon Valley 2010 Index, page 25, (accessed April 1, 2010), available from http://www.jointventure.org 25 City of Palo Alto, Business Districts, (accessed March 18, 2010), available from http://www.cityofpaloalto.org 26 Ibid. 6
residing along its southern part and its largest population in the city of Santa Cruz. State, local, and federal government, along with tourism and technology, represent major employment sectors in Santa Cruz. 27 The University of California at Santa Cruz is the largest employer followed by Monterey Mushrooms, Seagate Technology, and Securitas Security. 28 In addition, the area s tourism industry is attributed to its 29 miles of beaches, 14 state parks, and mild weather. 29 During the review period, the San Francisco/San Mateo economy softened as a result of the national financial crisis. By December 2008, San Francisco was driven into recession largely due to increasing unemployment and declining consumer and business spending. 30 Retail, architecture, engineering and construction were the largest contributors to job losses. 31 By December 2009, the unemployment rate reached 8.8 percent, almost doubling since the beginning of 2008. 32 Similarly, by the spring of 2008, San Mateo s financial services, trade, transportation and utilities industries were facing economic declines. As the months progressed, San Mateo s economy continued to decline as evidenced by the softening housing market, rising office occupancy rate, and overall decreased consumer spending. 33 By December 2009, San Mateo s unemployment rate nearly doubled, reaching 8.9 percent compared to 4.7 percent in December 2008. 34 Palo Alto s economy also displayed signs of weakness during the review period, though, milder than other parts of the assessment area. Beginning in 2008, venture capital investment across the entire Silicon Valley began to decline for the area s core software industry. However, offsetting this decline was a shift of investments into green energy, with a focus on green transportation and energy efficiency. 35 A year later, other new areas of production were also emerging in the fields of industrial, media and entertainment, biotechnology, and medical devices. 36 Although these new start-up companies mitigated the decline of the financial crisis, Palo Alto was not completely insulated from the rising unemployment levels plaguing the state and nation. Palo Alto s unemployment rate doubled in a year s time and reached 6.5 percent in December 2009. 37 Within the assessment area, Santa Cruz s economy was hit hardest by the financial crisis. In 2008, the area displayed signs of economic weakness due to declining consumer spending, but was being somewhat mitigated with the still strong hiring levels in the government sector. 38 However, in 2009, the government sector began to experience large state and local budget 27 Moody s Economy Inc. Precis METRO: Santa Cruz, August 2009. 28 Ibid. 29 Santa Cruz County CA, About Santa Cruz County, (accessed March 17, 2010), available from http://www.santacruzca.org/misc/about-santa-cruz-county.php 30 Moody s Economy Inc. Precis METRO:, San Francisco, August 2008. 31 Ibid. 32 Moody s Economy Inc. Precis METRO:, San Francisco, August 2009. 33 San Mateo County Comprehensive Annual Financial Report, page iii, June 30, 2009, (accessed March 16, 2010), available from http://www.co.sanmateo.ca.us/attachments/controller/files/cafr/2009cafr.pdf 34 Ibid. 35 Joint Venture: Silicon Valley Network, Silicon Valley 2010 Index, page 22, (accessed April 1, 2010), available from http://www.jointventure.org 36 Ibid. 37 San Mateo County Overview, Municipal Unemployment Rate California, page 6, December 2009. 38 Moody s Economy Inc. Precis METRO, Santa Cruz, August 2009. 7
shortfalls and could no longer help offset the impact of the national financial crisis. Santa Cruz s largest employer, the University of California at Santa Cruz, faced funding issues and underwent a furlough and salary reduction program, preventing it from adding to local growth. At the same time, Santa Cruz s tourism industry weakened with tourism-related jobs disappearing and discretionary consumer spending remaining low. By December 2009, Santa Cruz s unemployment rate was the highest in the assessment area reaching 11.5 percent compared to 7.3 percent in December 2008. 39 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, but eased measurably by 2009. According to the January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve Board of Governors, commercial banks continued to ease tightening standards into the fourth quarter of 2009, but have yet to unwind the considerable tightening that had occurred leading up to this period, with peaks reached in late 2008. However, despite this easing trend, banks indicated that they had tightened terms on CRE loans substantially over 2009, with further tightening during the fourth quarter of 2009. This national trend was confirmed locally through community contacts who also indicated access to credit, particularly for working capital lines in amounts of $50 thousand to $250 thousand, was a critical need for small businesses. Furthermore, stemming from the financial crisis, the assessment area s housing market experienced varying declines in value, with the sharpest decline occurring in Santa Cruz and the least in Palo Alto. Despite these differences, signs of recovery were beginning to surface in the latter half of 2009 in all three areas. For instance, Santa Cruz s housing market declined 36.1 percent from $625 thousand in December 2007 to $399 thousand in December 2008, with a slight increase to $411 thousand by December 2009. 40, 41 For the same period, San Mateo home values declined 30.3 percent from $940 thousand in December 2007 to $655 thousand in December 2008 and then recovered to $719 thousand by December 2009. 42 San Francisco and Palo Alto experienced less of a decline with the median home price both falling 14.7 percent between 2007 and 2008 and both slightly increasing in 2009. 43, 44 Despite the decline in housing values in the assessment area, housing affordability is still out of reach for many of the area s residents, especially low- and moderate-income individuals and families. According to the Housing Affordability Index (HAI), a ratio which calculates the percentage of households in a given area that can afford to purchase a median priced home, in December 2009, the first-time buyer HAI for San Francisco, San Mateo, and Santa Cruz was 39 Ibid. 40 California Association of Realtors, Trends in California Real Estate, Volume 30, Number 1, 2008. 41 Ibid at Volume 31, Number 1, 2010. 42 San Mateo County Housing Indicators, County of San Mateo Department of Housing HCD, (accessed March 23, 2010), available from http://www.co.sanmateo.ca.us/portal/site/housingdepartment 43 California Association of Realtors, Trends in California Real Estate, Volume 28, Number 9, 2007. 44 California Association of Realtors, Trends in California Real Estate,Volume 31, Number 1, 2010. 8
35 percent, 40 percent, and 43 percent, respectively. In comparison, the first-time buyer HAI for California was 64 percent and the United States was 76 percent in December 2009. 45 In addition, a 2009 Home Price Comparison Index released by Coldwell Banker lists the cities of Palo Alto, San Francisco and San Mateo in the top 10 most expensive U.S. surveyed markets, with Palo Alto, San Francisco, and San Mateo ranked fourth, sixth, and tenth, respectively. 46 Scope of Examination The bank s CRA performance was evaluated using the Interagency Small Institution CRA Examination Procedures. The San Francisco/San Mateo portion of the assessment area was given the most weight as the bank has it s more significant presence in this portion of the market. 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 small business loans originated from January 1, 2008 through December 31, 2009. During this period, the bank originated 128 small business loans. The universe of loans was used to evaluate the level of lending in the assessment area. A sample of 49 loans extended within the assessment area was used to evaluate the bank s lending distribution by geography and lending by business revenue. Given this sample included only one loan in Palo Alto, a further review of the entire universe was conducted to identify any others in the Palo Alto area. A total of three small business loans were identified and were added to the evaluation of the bank s lending distribution by geography. CONCLUSIONS WITH RESPECT TO PERFORMANCE CRITERIA 45 Ibid. 46 Coldwell Banker, 2009 Home Price Comparison Index Released, (accessed March 17, 2010), available from http://www.coldwellibertyanker.com/servlet/news?action=viewnewsitem&contentid=14527705&print=true&custo mertype=news 9
Loan-to-Deposit Ratio The loan-to-deposit ratio is reasonable. Since the previous CRA examination in January 2006, the average loan-to deposit ratio was 89.6 percent. This number mirrors the state average of 89.7 percent and exceeded the national peer average of 83.9 percent for the same time period. Lending in Assessment Area A majority of loans were originated inside the bank s assessment area. As shown in Exhibit 3, the bank extended 82.8 percent of small business loans by number and 78.5 percent by dollar volume within its assessment area. Considering the large geographic size of the bank s assessment area relative to the bank s size, this level of lending within the assessment area is reasonable. EXHIBIT 3 LENDING INSIDE AND OUTSIDE THE ASSESSMENT AREA JANUARY 1, 2008 TO DECEMBER 31, 2009 Inside Outside Loan Type $ $ # % % # % ( 000s) ( 000s) Small Business 106 82.81 25,741 78.51 22 17.19 7,046 21.49 Lending Distribution by Geography Overall, the geographic distribution of small business loans demonstrated a reasonable level of lending dispersed throughout the bank s assessment area. Small business loans were primarily made in close proximity to the areas surrounding the bank s four branches. While there was absence of lending in some census tracts, much of this can be explained by a variety of performance context issues. Otherwise there were no unexplained gaps in the bank s lending patterns. Exhibit 4 on the following page details the bank s geographic lending patterns for the entire assessment area, broken out by the individual sub-areas. Individual conclusions for the different areas and the data supporting these conclusions follow. % 10
EXHIBIT 4 GEOGRAPHIC DISTRIBUTION OF SMALL BUSINESS LOANS Census Tract Business Concentration Bank Lending (%) Income Category (%) Aggregate Lending (%) San Francisco/ San Mateo Low-Income 4.88 15.62 11.42 Moderate-Income 24.39 20.20 19.85 Middle-Income 51.22 35.30 38.36 Upper-Income 19.51 28.89 30.38 Palo Alto Low-Income 0.0 0.45 1.89 Moderate-Income 0.0 0.96 0.96 Middle-Income 33.3 22.93 20.22 Upper-Income 66.7 75.66 76.94 Santa Cruz Moderate-Income 0.0 13.84 13.35 Middle-Income 57.14 57.09 53.54 Upper-Income 42.86 29.08 33.11 San Francisco/San Mateo Small business lending in San Francisco/San Mateo was particularly notable in moderate-income census tracts, which exceeded both the percentage of business entities and the level of aggregate lending in those census tracts. In contrast, lending in low-income census tracts was below the percentage of businesses and aggregate lending levels. However, this is primarily the result of the fact that these census tracts are mostly located in downtown San Francisco, a distance away from the bank s closest branch in South San Francisco. Palo Alto Small business lending compared favorably to both the concentration of businesses and aggregate lending across Palo Alto. Further, considerable competition for financial services existed in the area surrounding the Palo Alto branch with 12 other financial institutions located in the census tract. Santa Cruz Performance in middle- and upper-income geographies compared favorably to both the number of businesses and aggregate lending across Santa Cruz. In comparison, a conspicuous gap exists in lending within moderate-income census tracts, with no lending in these areas. However, these moderate-income census tracts are located a distance from the bank s rural branches, in the city of Santa Cruz, and are also separated by a mountainous region. Further, the moderate-income census tracts are surrounded by a significant number of financial institutions and aggregate lending levels of CRA reportable small business loans to the number of business entities in these census tracts indicates possible market saturation. For instance, in the bank s six moderate- 11
income census tracts, 1,385 business entities were extended 1,370 CRA reportable small business loans in 2008. Lending Distribution by Business Revenue The distribution of loans among businesses of different sizes is reasonable. Although the level of lending to small businesses was generally below the concentration of businesses, it exceeded the aggregate lending level in each county of the bank s assessment area and demonstrated a reasonable level of lending to small businesses. In addition, 68.3 percent of loans in San Francisco/San Mateo were under $250 thousand and 71.4 percent of loans in Santa Cruz were in dollar amounts less than $100 thousand, which helped meet an identified credit need for smaller dollar business loans in those areas. Assessment Areas San Francisco/ San Mateo EXHIBIT 5 BUSINESS REVENUE DISTRIBUTION OF SMALL BUSINESS LOANS Businesses with Revenue <= $1 Million Bank All Lending Businesses (%) (%) Originations Regardless of Revenue Size by Loan Amount <=$100K (%) > $100K and <=$250K (%) > $250K and <=$1M (%) Aggregate Lending All Loans Revenue <= $1 Million (%) 41.46 89.13 36.59 31.71 31.71 104,351 33.72 Palo Alto 100.00 90.62 0.00 0.00 100.00 5,129 32.64 Santa Cruz 57.14 92.39 71.43 28.57 0.00 10,263 32.33 Response to Complaints Liberty 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. Fair Lending or Other Illegal Credit Practices Review Liberty 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 violations of credit practice laws that would impact the bank s CRA performance assessment. 12
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 121.301) or have gross annual revenues of $1 million or less; or, activities that revitalize or stabilize low- or 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 13
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). 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. 14
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. 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. 15