Legal Developments: Third Quarter, 2007
Order Issued under Bank Merger Act
East West Bank
Pasadena, California
Order Approving the Merger of Banks and Establishment of Branches
East West Bank1 has requested the Board's approval under section 18(c) of the Federal Deposit Insurance Act2 ("Bank Merger Act") to merge with Desert Community Bank ("Desert Bank"), Victorville, California, both state member banks, with East West Bank as the surviving entity. East West Bank also has applied under section 9 of the Federal Reserve Act ("FRA") to establish and operate branches at Desert Bank's main office and branch locations.3
Notice of the proposal, affording interested persons an opportunity to submit comments, has been published in local publications in accordance with the Bank Merger Act and the Board's Rules of Procedure.4 As required by the Bank Merger Act, a report on the competitive effects of the merger was requested from the United States Attorney General and a copy of the request was provided to the Federal Deposit Insurance Corporation. The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in the Bank Merger Act and the FRA.
East West Bank, with total assets of approximately $10.7 billion, operates in California and Texas.5 In California, East West Bank is the 15th largest insured depository institution, controlling deposits of approximately $7.1 billion, which represent 1 percent of the total amount of deposits of insured depository institutions in the state ("state deposits").
Desert Bank operates only in California and is the 85th largest insured depository institution in the state, controlling deposits of approximately $494.4 million. On consummation of the proposal, East West Bank would remain the 15th largest insured depository institution in California, controlling deposits of approximately $7.6 billion, which represents 1.1 percent of state deposits.
Competitive Considerations
The Bank Merger Act prohibits the Board from approving a proposal that would result in a monopoly or would be in furtherance of any attempt to monopolize the business of banking in any relevant banking market. The Bank Merger Act also prohibits the Board from approving a proposal that would substantially lessen competition in any relevant banking market, unless the anticompetitive effects of the proposal are clearly outweighed in the public interest by its probable effect in meeting the convenience and needs of the community to be served.6 East West Bank and Desert Bank do not compete directly in any relevant banking market. Based on all the facts of record, the Board has concluded that consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any relevant banking market and that competitive considerations are consistent with approval.
Financial and Managerial Resources and Future Prospects
The Bank Merger Act requires the Board to consider the financial and managerial resources and future prospects of the companies and depository institutions involved in the proposal and certain other supervisory factors. The Board has considered these factors in light of all the facts of record, including confidential reports of examination, other supervisory information from the primary federal and state supervisors of the organizations involved in the proposal, publicly reported and other financial information, information provided by East West Bank, and public comment on the proposal.
In evaluating financial factors in expansion proposals by banking organizations, the Board considers a variety of measures in this evaluation, including capital adequacy, asset quality, and earnings performance. In assessing financial factors, the Board consistently has considered capital adequacy to be especially important. The Board also evaluates the financial condition of the combined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of the transaction.
East West Bank and Desert Bank are well capitalized, and the resulting bank would remain so on consummation of the proposal. East West Bancorp will also remain well capitalized on consummation of the proposal. Based on its review of the record in this case, the Board finds that East West Bank has sufficient financial resources to effect the proposal. The proposed transaction is structured as a combination share exchange and cash purchase. East West Bank will use existing resources to fund the cash portion of the transaction.
The Board also has considered the managerial resources of the organizations involved and the proposed combined organization. The Board has reviewed the examination records of East West Bank and Desert Bank, including assessments of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory experiences with the relevant organizations and the organizations' records of compliance with applicable banking law, including anti-money-laundering laws. East West Bank and Desert Bank are considered to be well managed. The Board also has considered East West Bank's plans for implementing the proposal, including the proposed management after consummation.
Based on all the facts of record, the Board concludes that considerations relating to the financial and managerial resources and future prospects of the organizations involved in the proposal are consistent with approval under the Bank Merger Act.
Convenience and Needs Considerations
In acting on a proposal under the Bank Merger Act, the Board also must consider its effects on the convenience and needs of the communities to be served and take into account the records of the relevant insured depository institutions under the Community Reinvestment Act ("CRA").7 The CRA requires the federal financial supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and sound operation, and requires the appropriate federal financial supervisory agency to take into account an institution's record of meeting the credit needs of its entire community, including low- and moderate-income ("LMI") neighborhoods, in evaluating bank expansionary proposals.8
The Board has considered carefully all the facts of record, including evaluations of the CRA performance records of East West Bank and Desert Bank, data reported by East West Bank and Desert Bank under the Home Mortgage Disclosure Act ("HMDA"),9 other information provided by the banks, confidential supervisory information, and public comment received on the proposal. Twenty-eight commenters supported the proposal and commended East West Bank's efforts to meet the banking needs of its diverse communities. Three commenters opposed or expressed concerns about the proposal. One commenter asserted that East West Bank had not adequately served the credit and investment needs of LMI communities in its assessment areas. In addition, two commenters alleged that East West Bank and Desert Bank failed to provide adequate banking services to all groups of individuals who historically have had insufficient access to banking services.10
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the convenience and needs factor in light of the evaluations by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the applications process because it represents a detailed, on-site evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor.11
East West Bank received a "satisfactory" rating at its most recent CRA performance evaluation by the Federal Reserve Bank of San Francisco, as of May 15, 2006 ("2006 Evaluation"). Desert Bank also received a "satisfactory" rating at its most recent CRA performance evaluation by the Federal Reserve Bank of San Francisco, as of May 31, 2005 ("2005 Evaluation"). East West Bank's current CRA program will be implemented at the resulting bank after consummation of the proposed merger with Desert Bank.
CRA Performance of East West Bank. In the 2006 evaluation, East West Bank received an "outstanding" rating on its lending test, a "needs to improve" rating on its investment test, and a "low satisfactory" rating on its service test.12 Examiners reported that, throughout the California assessment areas, the bank's overall geographic and borrower distribution of loans reflected excellent participation in LMI census tracts.13 Although the examiners found that East West Bank's community development investments were low compared to the opportunity in its area, the examiners determined that the bank's level of community development lending in California demonstrated excellent responsiveness to the need for affordable housing in its assessment areas in the state. In addition to direct loans for community development projects, the bank also offered $70 million in credit enhancements, such as letters of credit, to support the construction or rehabilitation of more than 1,500 housing units.
Examiners reported that the bank's excellent responsiveness to credit needs within LMI areas was a strength in its overall performance. They found that the percentage of the bank's total mortgage loans in LMI areas was substantially higher than the percentage reported by the aggregate of all lenders ("aggregate lenders")14 to LMI areas in Southern California.15 In most of East West Bank's Northern California assessment area, the examiners commended the bank's distribution of home purchase and refinance loans.16 Furthermore, examiners determined that East West Bank's small business lending in LMI areas of its Southern California assessment area was strong and generally exceeded the performance of the aggregate lenders in those areas. More than one-third of the bank's small business loans were made in LMI areas, and a majority of its small business loans was extended to businesses with revenues of $1 million or less in the cities of Los Angeles and Santa Ana and the surrounding areas.17
Examiners concluded that East West Bank's performance under the service test throughout California assessment areas was adequate. In general, retail banking services were reasonably accessible to all portions of the assessment areas.
CRA Performance of Desert Bank. As noted, Desert Bank received an overall "satisfactory" rating in its May 2005 examination. Although Desert Bank focuses on commercial lending, it offers a full range of banking products and services. Examiners concluded that the bank's overall lending levels reflected good responsiveness to community credit needs. In particular, they noted that the bank's distribution of small business loans was excellent and that such lending was strongest in LMI census tracts. In addition, more than half of the bank's small business loans were extended to businesses with revenues of $1 million or less. Business loans in small-dollar amounts made by the bank helped meet an important credit need of its communities. Examiners found community development lending and investments to be adequate, and they rated Desert Bank as "high satisfactory" for its services.
B. HMDA and Fair Lending Record and Other Issues
The Board has carefully considered the fair lending records and HMDA data reported by East West Bank and Desert Bank in 2005 in light of public comments received on the proposal. Two commenters expressed concern that East West Bank focused its services too narrowly on the Chinese American population in its assessment areas and did not effectively serve other populations of historically underserved minority communities. In addition, one commenter questioned the bank's lending record and asserted that East West Bank made a disproportionately small number of home mortgage loans to Latinos, African Americans, and Southeast Asian Americans.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and denials among members of different racial or ethnic groups in certain local areas, they provide an insufficient basis by themselves on which to conclude whether or not East West Bank is excluding or imposing higher costs on any group on a prohibited basis. The Board recognizes that HMDA data alone, even with the recent addition of pricing information, provide only limited information about the covered loans.18 HMDA data, therefore, have limitations that make them an inadequate basis, absent other information, for concluding that an institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data for an institution indicate disparities in lending and believes that all lending institutions are obligated to ensure that their lending practices are based on criteria that ensure not only safe and sound lending but also equal access to credit by creditworthy applicants regardless of their race or ethnicity. Because of the limitations of HMDA data, the Board has considered these data carefully and taken into account other information, including examination reports that provide on-site evaluations of compliance with fair lending laws by East West Bank.
The record, including confidential supervisory information, indicates that East West Bank has taken steps and developed programs to ensure compliance with all fair lending and other consumer protection laws and regulations. These efforts include bankwide fair lending training for all employees. The bank also has a second review process for all loans recommended for denial to ensure that all applicants are evaluated properly, and it performs fair lending audits and examinations. Examiners found no evidence of discriminatory lending practices at East West Bank.
The Board also has considered the HMDA data in light of other information, including the overall performance record of East West Bank under the CRA. The institution's record of performance demonstrates that it is active in helping to meet the credit needs of all the communities it serves.
C. Conclusion on Convenience and Needs Considerations
The Board has considered carefully the CRA performance, fair lending records, and HMDA data of East West Bank and Desert Bank in light of public comments received on the proposal. The Board also has considered carefully all of the facts of record, including reports of examination of the CRA records of the institutions involved, information provided by East West Bank, comments received on the proposal, and confidential supervisory information. The Board notes that the proposal would provide customers of Desert Bank with a broader array of products and services, including expanded options for affordable mortgage loans and ATM networks. Based on a review of the entire record, and for the reasons discussed above, the Board concludes that considerations relating to the convenience and needs factor and the CRA performance records of the relevant depository institutions are consistent with approval.
Other Considerations
East West Bank also has applied under section 9 of the FRA to establish and operate branches at Desert Bank's locations listed in the appendix. The Board has assessed the factors it is required to consider when reviewing an application under section 9 of the FRA and finds those factors to be consistent with approval.19
Conclusion
Based on the foregoing and all facts of record, the Board has determined that the applications should be, and hereby are, approved.20 In reaching its conclusion, the Board has considered all the facts of record in light of the factors that it is required to consider under the Bank Merger Act and the FRA. The Board's approval is specifically conditioned on compliance by East West Bank with the conditions imposed in this order, the commitments made to the Board in connection with the applications, and receipt of all other regulatory approvals. For purposes of this action, the conditions and commitments are deemed to be conditions imposed in writing by the Board in connection with its findings and decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transactions may not be consummated before the 15th calendar day after the effective date of this order, or later than three months after the effective date of this order, unless such period is extended for good cause by the Board or the Federal Reserve Bank of San Francisco, acting pursuant to delegated authority.
By order of the Board of Governors, effective July 16, 2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Kroszner, and Mishkin.
Robert deV. Frierson
Deputy Secretary of the Board
Appendix
Branches in California to be Established by East West Bank
Adelanto 10474 Rancho Road
Apple Valley 16003 Quantico Road
Barstow 945 E. Armory Road
Hesperia 15479 Main Street
Victorville 12022 Dunia Road 12470 Hesperia Road 12530 Hesperia Road 14800 La Paz Drive
Wrightwood 1261 Highway 2
Phelan 48895 Phelan Road
1. East West Bank is a subsidiary of East West Bancorp, Inc.,
Pasadena, California, a financial holding company. Return to text
2. 12 U.S.C. § 1828(c). Return to text
3. 12 U.S.C. § 321. These branches are listed in the
appendix. Return to text
4. 12 CFR 262.3(b). Return to text
5. Asset data are as of March 31, 2007. Deposit data and
state rankings are as of June 30, 2006. In this context, the term
``insured depository institutions'' includes insured commercial
banks, savings banks, and savings associations. Return to text
6. 12 U.S.C. § 1828(c)(5). Return to text
7. 12 U.S.C. § 2901 et seq. Return to text
8. 12 U.S.C. § 2903. Return to text
9. 12 U.S.C. § 2801 et seq. Return to text
10. Two commenters criticized East West Bank and Desert Bank for
not providing effective banking services in languages other than
English and Chinese. East West Bank stated that its ATMs and telephone
services are available in English, Chinese, and Spanish and that it
provides retail banking and mortgage lending services in multiple
languages other than English. In addition, East West Bank has conducted
first-time home-buyer seminars in Spanish and has expanded its home
mortgage programs, which were originally created for Chinese Americans,
to serve other borrowers. Return to text
11. See Interagency Questions and Answers Regarding
Community Reinvestment, 66 Federal Register 36,620 and 36,639 (2001). Return to text
12. One commenter expressed concern about these latter two
ratings for East West Bank's assessment areas in California. Examiners
concluded that the bank's overall record of CRA performance during the
review period merited a rating of ``satisfactory.'' Notably, the
lending test is weighted more heavily than either the investment or
service test in determining the institutional rating. Return to text
13. The Southern California assessment area is defined as Los
Angeles County and portions of Orange County. The Northern California
assessment area is defined as San Francisco County and portions of
Alameda, San Mateo, and Santa Clara counties. Return to text
14. The lending data of the aggregate lenders represent the
cumulative lending for all financial institutions that have reported
mortgage lending as part of their CRA data in a particular area. Return to text
15. East West Bank noted that it offers a home loan program with
affordable interest rates for persons who would not qualify for
traditionally underwritten loans. Return to text
16. More than half of the 1-4 and multifamily loans extended by
East West Bank in its California assessment areas were made in LMI
areas in 2006, while LMI areas comprised 35.8 percent of those
assessment areas. Return to text
17. For purposes of the evaluation, "small business loans"
are loans that have original amounts of $1 million or less and
are either secured by nonfarm or nonresidential real estate or are
classified as commercial and industrial loans. One commenter criticized
East West Bank for not making a sufficient number of loans under
$100,000. The Board has previously noted that the CRA does not require
an institution to provide any specific type of products or services in
its assessment area. Return to text
18. The data, for example, do not account for the possibility
that an institution's outreach efforts may attract a larger proportion
of marginally qualified applicants than other institutions attract and
do not provide a basis for an independent assessment of whether an
applicant who was denied credit was, in fact, creditworthy. In
addition, credit history problems, excessive debt levels relative to
income, and high loan amounts relative to the value of the real estate
collateral (reasons most frequently cited for a credit denial or higher
credit cost) are not available from HMDA data. Return to text
19. 12 U.S.C. § 322; 12 CFR 208.6(b). Return to text
20. Three commenters requested that the Board hold a public
meeting or hearing on the proposal. Neither the Bank Merger Act nor the
FRA requires the Board to hold a public meeting or hearing. Under its
rules, the Board may, in its discretion, hold a public meeting or
hearing on an application to acquire a bank if a meeting or hearing is
necessary or appropriate to clarify factual issues related to the
application and to provide an opportunity for testimony (12 CFR
262.3(e) and 262.25(d)). The Board has considered carefully the
commenters' requests in light of all the facts of record. In the
Board's view, the commenters have had ample opportunity to submit their
views and, in fact, submitted written comments that the Board has
considered carefully in acting on the proposal. The requests by the
commenters fail to demonstrate why the written comments do not present
their views adequately or why a meeting or hearing otherwise would be
necessary or appropriate. For these reasons, and based on all the facts
of record, the Board has determined that a public meeting or hearing is
not required or warranted in this case. Accordingly, the requests for a
public meeting or hearing on the proposal are denied. Return to text
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