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BBCN > SEC Filings for BBCN > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BBCN BANCORP INC

Form 10-Q for BBCN BANCORP INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 and the unaudited consolidated financial statements and notes set forth elsewhere in this report.

                                    GENERAL
Selected Financial Data
The following table sets forth certain selected financial data concerning the
periods indicated:

                                         At or for the Three Months Ended September 30,      At or for the Nine Months Ended September
                                                                                                                30,
                                                2012                        2011                       2012                   2011
                                                                        (Dollars in thousands, except
                                                                          share and per share data)
Income Statement Data:
Interest income                       $              65,455       $              38,927      $             200,953       $    113,415
Interest expense                                      7,224                       7,874                     22,361             24,148
Net interest income                                  58,231                      31,053                    178,592             89,267
Provision for loan losses                             6,900                       3,483                     16,682             18,792
Net interest income after provision
for loan losses                                      51,331                      27,570                    161,910             70,475
Non-interest income                                   7,664                       4,258                     29,531             16,452
Non-interest expense                                 28,770                      16,817                     90,282             50,398
Income before income tax expense                     30,225                      15,011                    101,159             36,529
Income tax expense                                   11,827                       5,196                     39,463             13,650
Net income                            $              18,398       $               9,815      $              61,696       $     22,879
Dividends and discount accretion on
preferred stock                       $                   0       $              (1,077 )    $              (5,640 )     $     (3,227 )
Gain on repurchase of stock warrant                     193                           0                        193                  0
Net income available to common
stockholders                          $              18,591       $               8,738      $              56,249       $     19,652
Per Share Data:
Earnings per common share - basic     $                0.24       $                0.23      $                0.72       $       0.52
Earnings per common share - diluted   $                0.24       $                0.23      $                0.72       $       0.52
Book value per common share (period
end, excluding preferred stock and
warrants)                             $                9.41       $                8.30      $                9.41       $       8.30
Tangible book value per common share
(period end, excluding preferred
stock and warrants) (12)              $                8.21       $                8.23      $                8.21       $       8.23
Number of common shares outstanding
(period end)                                     78,016,260                  38,095,260                 78,016,260         38,095,260
Weighted average shares - basic                  78,015,960                  38,098,142                 78,004,458         38,044,625
Weighted average shares - diluted                78,103,795                  38,103,683                 78,082,059         38,070,141
Tangible common equity ratio (9)                      12.23 %                     10.40 %                    12.23 %            10.40 %
Statement of Financial Condition Data
- at Period End:
Assets                                $           5,331,979       $           3,016,127      $           5,331,979       $  3,016,127
Securities available for sale                       687,059                     455,789                    687,059            455,789
Gross loans, net of deferred loan
fees and costs (excludes loans held
for sale)                                         4,069,494                   2,257,667                  4,069,494          2,257,667
Deposits                                          4,052,524                   2,267,196                  4,052,524          2,267,196
Federal Home Loan Bank borrowings                   460,815                     300,000                    460,815            300,000
Subordinated debentures                              41,809                      39,268                     41,809             39,268
Stockholders' equity                                734,455                     383,615                    734,455            383,615


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                                         At or for the Three Months Ended         At or for the Nine Months Ended
                                                   September 30,                           September 30,
                                            2012                   2011               2012               2011
                                                                (Dollars in thousands)
Average Balance Sheet Data:
Assets                               $      5,179,186       $      2,987,441     $  5,140,591       $  2,952,371
Securities available for sale                 679,764                486,009          699,225            504,402
Gross loans, including loans held
for sale                                    4,007,402              2,248,544        3,878,080          2,202,535
Deposits                                    3,962,379              2,244,808        3,906,834          2,199,023
Stockholders' equity                          728,038                377,654          785,875            370,155
Selected Performance Ratios:
Return on average assets (1) (8)                 1.42 %                 1.31 %           1.60 %             1.03 %
Return on average stockholders'
equity (1) (8)                                  10.11 %                10.40 %          10.47 %             8.24 %
Return on average tangible equity
(1) (8) (11)                                    11.60 %                10.48 %          11.89 %             8.31 %
Pre Tax- Pre Provision income to
average assets (1)                               2.87 %                 2.48 %           3.06 %             2.50 %
Efficiency ratio (2)                            43.66 %                47.63 %          43.38 %            47.67 %
Net interest margin (3)                          4.79 %                 4.29 %           4.97 %             4.20 %
Regulatory Capital Ratios (4)
Leverage capital ratio (5)                      13.15 %                13.50 %          13.15 %            13.50 %
Tier 1 risk-based capital ratio                 15.22 %                16.71 %          15.22 %            16.71 %
Total risk-based capital ratio                  16.48 %                17.98 %          16.48 %            17.98 %
Tier 1 common -risk based capital
ratio (13)                                      14.26 %                12.42 %          14.26 %            12.42 %
Asset Quality Ratios:
Allowance for loan losses to gross
loans, excluding loans held for sale             1.62 %                 2.66 %           1.62 %             2.66 %
Allowance for loan losses to legacy
loans (10)                                       2.00 %                 2.66 %           2.00 %             2.66 %
Allowance for loan losses to
non-accrual loans                              224.56 %               215.94 %         224.56 %           215.94 %
Allowance for loan losses to
non-performing loans (6)                        89.13 %               116.90 %          89.13 %           116.90 %
Allowance for loan losses to
non-performing assets (7)                       84.41 %               106.83 %          84.41 %           106.83 %
Nonaccrual loans to gross loans,
excluding loans held for sale                    0.72 %                 1.23 %           0.72 %             1.23 %
Nonperforming loans to gross loans,
excluding loans held for sale (6)                1.82 %                 2.26 %           1.82 %             2.26 %
Nonperforming assets to gross loans
and OREO (7)                                     1.92 %                 2.47 %           1.92 %             2.47 %
Total non-performing assets to total
assets (7)                                       1.47 %                 1.86 %           1.47 %             1.86 %

(1) Annualized.

(2) Efficiency ratio is defined as non-interest expense divided by the sum of net interest income before provision for loan losses and non-interest income.

(3) Net interest margin is calculated by dividing annualized net interest income by average total interest-earning assets.

(4) The ratios required to meet the definition of a "well-capitalized" institution under certain banking regulations are 5% leverage capital, 6% tier I risk-based capital and 10% total risk-based capital.

(5) Calculations are based on average quarterly asset balances.

(6) Non-performing loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and accruing restructured loans. Loans 90 days or more past due and still accruing consist of acquired loans that were originally recorded at fair value upon acquisitions. These loans are considered to be accruing as we can reasonably estimate future cash flows on acquired loans and we expect to fully collect the carrying value of these loans.

(7) Non-performing assets include non-accrual loans, loans past due 90 days or more and still accruing interest, other real estate owned, and accruing restructured loans.

(8) Based on net income before effect of dividends and discount accretion on preferred stock.

(9) Excludes TARP preferred stock, net of discount, of $0 and $64.9 million and stock warrants of $378 thousand and $2.4 million at September 30, 2012 and 2011, respectively.

(10) Legacy loans are those loans accounted for under the amortized cost method and do not include loans acquired from Center Financial Corporation on November 30, 2011. This is a non-GAAP measure that we believe provides investors with information


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that is useful in understanding our financial performance and position. Allowance for loan losses to legacy loans is calculated by dividing the gross legacy loan balance by allowance for loan losses.
(11) Average tangible equity is calculated by subtracting average goodwill and average other intangibles from average stockholders' equity. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

                                         Three Months Ended September 30,           Nine Months Ended September 30,
                                             2012                 2011                 2012                 2011
                                                                   (Dollars in thousands)
Net income                            $        18,398       $         9,815     $        61,696       $        22,879

Average stockholders' equity          $       728,038       $       377,654     $       785,875       $       370,155
Less: Average goodwill and other
intangible assets, net                        (93,407 )              (2,861 )           (93,771 )              (2,938 )
Average tangible equity               $       634,631       $       374,793     $       692,104       $       367,217

Net income (annualized) to average
tangible equity                                 11.60 %               10.48 %             11.89 %                8.31 %

(12) Tangible book value per share is calculated by subtracting goodwill and other intangible assets from total stockholders' equity and dividing the difference by the number of shares of common stock outstanding. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

                                             September 30, 2012     September 30, 2011
                                                          (In thousands)
Total stockholders' equity                  $         734,455      $         383,615
Less: Preferred stock, net of discount                      0                (64,918 )
Common stock warrant                                     (378 )               (2,383 )
Goodwill and other intangible assets, net             (93,216 )               (2,811 )
Tangible common equity                      $         640,861      $         313,503

Common shares outstanding                          78,016,260             38,095,260

Tangible common equity per share            $            8.21      $            8.23

(13) Tier 1 common is calculated as Tier 1 capital less non-common elements, including perpetual preferred stock and related surplus, minority interest in subsidiaries, trust preferred securities and mandatory convertible preferred securities.

                                                        September 30, 2012      September 30, 2011
                                                                      (In thousands)
Tier 1 capital                                         $         666,652       $         401,441
Less: Preferred stock, net of discount                                 0                 (64,918 )
Trust preferred securities less unamortized
acquisition discount of $5,616                                   (40,384 )               (38,000 )
Tier 1 common-risk based capital                       $         626,268       $         298,523

Total risk weighted assets less disallowed allowance
for loan losses                                                4,392,505               2,402,920

Tier 1 common-risk based capital ratio                             14.26 %                 12.42 %


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Results of Operations
Overview
Total assets increased $165.4 million from $5.17 billion at December 31, 2011 to $5.33 billion at September 30, 2012. The increase in total assets was primarily due to a $326.7 million increase in loans receivable, net of allowance for loan losses, from $3.7 billion at December 31, 2011 to $4.0 billion at September 30, 2012. This increase was partially offset by a $70.5 million decrease in cash and cash equivalents from $300.1 million at December 31, 2011 to $229.6 million at September 30, 2012, a $40.0 million decrease in term federal funds sold from $40.0 million at December 31, 2011 to none at September 30, 2012 and a $53.9 million decrease in securities available for sale from $740.9 million at December 31, 2011 to 687.1 million at September 30, 2012. The increase in total assets was funded by a $111.6 million increase in deposits from $3.94 billion at December 31, 2011 to $4.05 billion at September 30, 2012, a $116.4 million increase in borrowings from the FHLB from $344.4 million at December 31, 2011 to $460.8 million at September 30, 2012 and net income available to common stockholders of $56.1 million. The increases in deposits and net income available to common shareholders were partially offset by the $122 million redemption of the Series A and Series B Perpetual Preferred Stock issued under the U.S. Treasury's TARP Capital Purchase Program in June 2012. The redemption covered the total combined preferred stock investment by the U.S. Treasury of $67 million in the former Nara Bancorp, Inc. and $55 million in the former Center Financial Corporation ("Center").
The net income available to common stockholders for the third quarter of 2012 was $18.4 million, or $0.24 per diluted common share, compared to the net income available to common stockholders of $8.7 million, or $0.23 per diluted common share, for the same period of 2011, an increase of $9.7 million, or 111%. The net income available to common stockholders for the nine months ended September 30, 2012 was $56.1 million, or $0.72 per diluted common share, compared to the net income available to common stockholders of $19.7 million, or $0.52 per diluted common share, for the same period of 2011, an increase of $36.4 million, or 185%. The merger with Center (the "Merger") impacts the comparability of the operating results for the third quarters of 2012 and 2011 and for the nine month periods ended September 30, 2012 and 2011 because the Merger closed in the fourth quarter of 2011 and resulted in significant increases in interest earning assets, interest bearing liabilities, employees and branch locations. In addition, the assets and liabilities of Center were recorded at fair value and certain acquisition premiums and discounts are being amortized or accreted into income or expense as adjustments to the yield/cost of the related asset or liability. The operating results for the three months ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 and 2011 include the following pre-tax acquisition accounting adjustments and expenses related to the Merger.
                                               Three Months Ended September 30,        Nine Months Ended September 30,
                                                   2012                2011               2012                 2011
                                                                            (In thousands)
Accretion of discount on Center loans (1)     $    6,105         $            0     $       23,445       $            0
Amortization of premiums on Center FHLB
borrowings (2)                                       307                      0              2,442                    0
Accretion of discount on Center
subordinated debt (3)                                (37 )                    0               (108 )                  0
Amortization of premium on Center time
deposits (4)                                         650                      0              2,712                    0
Amortization of core deposit intangibles
from Center (5)                                     (253 )                    0               (796 )                  0
Accretion of discounts on other Center
assets (6)                                           158                      0                272                    0
Amortization of unfavorable lease liability
(7)                                                   53                      0                168                    0
Merger and integration expense (8)                  (183 )                 (574 )           (3,304 )             (1,466 )
Increase (decrease) to pre-tax income         $    6,800         $         (574 )   $       24,831       $       (1,466 )

(1) The fair value of the Center loans was estimated to be $118.0 million below the principal amount of such loans on the Merger date. The accretable portion of the discounts on the loans is being accreted into interest income over the remaining lives of the acquired loans.
(2) The fair value of the outstanding FHLB borrowings assumed from Center was estimated to be above the face amount of such debt. The premiums on FHLB borrowings are being amortized into interest expense over the remaining term of the debt.
(3) The fair value of the outstanding subordinated debt assumed from Center was estimated to be below the face amount of such debt. The discounts on the subordinated debt are being accreted into interest expense over the remaining term of the debt.
(4) The fair value of time deposits assumed from Center was estimated to be above the face amount of such deposits. The premiums on certificates of deposits are being amortized into interest expense over the remaining term of the deposits.


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(5) A core deposit intangible arises in an acquisition of a financial institution or a financial institution branch having a deposit base comprised of stable customer relationships. These customer relationships provide a future benefit to the acquiring institution due to their favorable interest rates in comparison to market rates for alternative funding sources with terms similar to the length of time the customer relationships are expected to be retained. The initial value assigned to a core deposit intangible represents the present value of this future economic benefit. The core deposit intangible asset recognized as part of the Merger is being amortized over its estimated useful life of approximately seven years utilizing an accelerated amortization method.
(6) Discounts on other assets primarily relate to servicing assets, investments in affordable housing partnerships and the fair value of the favorable operating leases.
(7) Unfavorable lease liability relates to the Center facility lease contracts which had rental rates that exceeded market rental rates on the Merger date.
(8) Direct costs related to the Center merger were expensed as incurred. During the three months ended September 30, 2012, we incurred $183 thousand in merger and integration expenses, including $33 thousand in salaries and benefits and $150 thousand in professional fees. During the three months ended September 30, 2011, we incurred $574 thousand in merger and integration expenses. During the nine months ended September 30, 2012, we incurred $3.3 million in merger and integration expenses, including $1.1 million in salaries and benefits and $2.2 million in professional fees. During the nine months ended September 30, 2011, we incurred $1.5 million in merger and integration expenses. The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.42% for the third quarter of 2012 compared to 1.31% for the same period of 2011. The annualized return on average stockholders' equity, before the effect of dividends and discount accretion on preferred stock, was 10.11% for the third quarter of 2012 compared to 10.40% for the same period of 2011. The efficiency ratio was 43.66% for the third quarter of 2012 compared to 47.63% for the same period of 2011. The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.60% for the nine months ended September 30, 2012 compared to 1.03% for the same period of 2011. The annualized return on average stockholders' equity, before the effect of dividends and discount accretion on preferred stock, was 10.47% for the nine months ended September 30, 2012 compared to 8.24% for the same period of 2011. The efficiency ratio was 43.38% for the nine months ended September 30, 2012 compared to 47.67% for the same period of 2011. Net Interest Income and Net Interest Margin Net Interest Income and Expense
A principal component of the Company's earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities. Net interest income is affected by changes in the balances of interest-earning assets and interest-bearing liabilities and changes in the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. Comparison of Three Months Ended September 30, 2012 with the Same Period of 2011 Net interest income before provision for loan losses was $58.2 million for the third quarter of 2012, an increase of $27.1 million, or 88%, compared to $31.1 million for the same period of 2011. The increase was principally attributable to the higher level of interest earning assets and the improvement in the net interest margin following the merger. The net interest margin increased to 4.79% for the third quarter of 2012, compared to 4.29% for the same period of 2011. The increase was principally due to the effect of acquisition accounting adjustments.
Interest income for the third quarter of 2012 was $65.5 million, an increase of $26.5 million, or 68%, compared to $38.9 million for the same period of 2011. The increase resulted from a $28.2 million increase in interest income due to an increase in average interest-earning assets, which was partially offset by a $1.7 million decrease in interest income due to a decrease in the yield on average interest-earnings assets.
Interest expense for the third quarter of 2012 was $7.2 million, a decrease of $0.7 million, or 8%, compared to interest expense of $7.9 million for the same period of 2011. The decrease resulted from a $3.6 million decrease in interest expense due to a decrease in the rates paid on average interest-bearing liabilities, which was partially offset by a $2.9 million increase in interest expense due to an increase in average interest-bearing liabilities. Comparison of Nine Months Ended September 30, 2012 with the Same Period of 2011 Net interest income before provision for loan losses was $178.6 million for the nine months ended September 30, 2012, an increase of $89.3 million, or 100%, compared to $89.3 million for the same period of 2011. The increase was principally due to the higher level of interest earning assets and the improvement in the net interest margin following the merger.
Interest income for the nine months ended September 30, 2012 was $201.0 million, an increase of $87.6 million, or 77%,


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compared to $113.4 million for the same period of 2011. The increase resulted from a $2.6 million increase in interest income due to an increase in the yield on average interest-earnings assets and a $85.0 million increase in interest income due to an increase in average interest-earning assets.
Interest expense for the nine months ended September 30, 2012 was $22.4 million, a decrease of $1.7 million, or 7%, compared to interest expense of $24.1 million for the same period of 2011. The decrease resulted from a $10.1 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities, which was partially offset by an $8.4 million increase in interest expense due to an increase in average interest-bearing liabilities.

Net Interest Margin

The net interest margin for the third quarter of 2012 was 4.79%, an increase of
50 basis points from 4.29% for the same period of 2011. Net interest margin for
the nine months ended September 30, 2012 was 4.97%, an increase of 77 basis
points from 4.20% for the same period of 2011. The improvement in net interest
margin was principally due to the effect of acquisition accounting adjustments,
as summarized in the following table.
                                                 Three Months Ended September         Nine Months Ended
                                                             30,                        September 30,
                                                    2012              2011            2012           2011
. . .
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