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BBCN > SEC Filings for BBCN > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for BBCN BANCORP INC


9-Aug-2013

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, 2012 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 June 30,       At or for the Six Months Ended June 30,
                                              2013                       2012                     2013                  2012
                                                                    (Dollars in thousands, except
                                                                      share and per share data)
Income Statement Data:
Interest income                      $             69,379       $             66,943     $           136,122       $    135,498
Interest expense                                    7,276                      7,441                  14,303             15,137
Net interest income                                62,103                     59,502                 121,819            120,361
Provision for loan losses                             800                      7,182                   8,306              9,782
Net interest income after provision
for loan losses                                    61,303                     52,320                 113,513            110,579
Non-interest income                                10,618                     10,222                  20,558             21,867
Non-interest expense                               34,429                     31,077                  67,704             61,512
Income before income tax provision                 37,492                     31,465                  66,367             70,934
Income tax provision                               14,821                     12,101                  26,235             27,636
Net income                           $             22,671       $             19,364     $            40,132       $     43,298
Dividends and discount accretion on
preferred stock                                         -                     (3,771 )                     -             (5,640 )
Net income available to common
stockholders                         $             22,671       $             15,593     $            40,132       $     37,658
Per Share Data:
Earnings per common share - basic    $               0.29       $               0.20     $              0.51       $       0.48
Earnings per common share - diluted  $               0.29       $               0.20     $              0.51       $       0.48
Book value per common share (period
end, excluding preferred stock and
warrants)                            $               9.86       $               9.14     $              9.86       $       9.14
Cash dividends declared per common
share                                $                .05       $                  -     $               .10       $          -
Tangible book value per common share
(period end, excluding preferred
stock and warrants) (11)             $               8.65       $               7.94     $              8.65       $       7.94
Number of common shares outstanding
(period end)                                   79,205,840                 78,014,107              79,205,840         78,014,107
Weighted average shares - basic                79,062,233                 78,007,270              78,746,444         77,997,305
Weighted average shares - diluted              79,236,732                 78,141,527              79,000,811         78,121,259
Tangible common equity ratio (9)                    11.88 %                    12.49 %                 11.88 %            12.49 %
Statement of Financial Condition
Data - at Period End:
Assets                               $          5,863,014       $          5,049,405     $         5,863,014       $  5,049,405
Securities available for sale                     725,239                    666,852                 725,239            666,852
Gross loans, net of deferred loan
fees and costs (excludes loans held
for sale)                                       4,518,122                  3,874,538               4,518,122          3,874,538
Deposits                                        4,576,799                  3,882,680               4,576,799          3,882,680
FHLB advances                                     421,539                    371,143                 421,539            371,143
Subordinated debentures                            41,920                     41,772                  41,920             41,772
Stockholders' equity                              781,025                    715,461                 781,025            715,461


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                                         At or for the Three Months Ended         At or for the Six Months Ended
                                                     June 30,                                June 30,
                                            2013                   2012               2013               2012
                                                                (Dollars in thousands)
Average Balance Sheet Data:
Assets                               $      5,878,377       $      5,102,769     $  5,802,413       $  5,121,082
Securities available for sale                 705,479                692,399          698,769            709,063
Gross loans, including loans held
for sale                                    4,546,461              3,847,921        4,495,673          3,812,708
Deposits                                    4,592,036              3,854,756        4,520,401          3,879,207
Stockholders' equity                          783,181                823,839          774,257            815,111
Selected Performance Ratios:
Return on average assets (1) (8)                 1.54 %                 1.52 %           1.38 %             1.69 %
Return on average stockholders'
equity (1) (8)                                  11.58 %                 9.40 %          10.37 %            10.62 %
Average stockholders' equity to
average assets                                  13.32 %                16.14 %          13.34 %            15.92 %
Return on average tangible equity
(1) (8) (10)                                    13.21 %                10.61 %          11.83 %            12.01 %
Dividend payout ratio (dividends per
share / earnings per share)                     17.24 %                  0.0 %          19.61 %              0.0 %
Pre-Tax Pre-Provision income to
average assets (1)                               2.60 %                 3.03 %           2.57 %             3.15 %
Efficiency ratio (2)                            47.34 %                44.57 %          47.55 %            47.69 %
Net interest spread                              4.25 %                 4.72 %           4.25 %             4.77 %
Net interest margin (3)                          4.49 %                 5.02 %           4.49 %             5.07 %
Regulatory Capital Ratios (4)
Leverage capital ratio (5)                      12.61 %                12.97 %          12.61 %            12.97 %
Tier 1 risk-based capital ratio                 14.89 %                15.54 %          14.89 %            15.54 %
Total risk-based capital ratio                  16.14 %                16.80 %          16.14 %            16.80 %
Tier 1 common risk-based capital
ratio (12)                                      14.05 %                14.58 %          14.05 %            14.58 %
Asset Quality Ratios:
Allowance for loan losses to gross
loans, excluding loans held for sale             1.59 %                 1.69 %           1.59 %             1.69 %
Allowance for loan losses to
nonaccrual loans                               159.32 %               164.88 %         159.32 %           164.88 %
Allowance for loan losses to
nonperforming loans (6)                         71.67 %                78.44 %          71.67 %            78.44 %
Allowance for loan losses to
nonperforming assets (7)                        65.40 %                72.60 %          65.40 %            72.60 %
Nonaccrual loans to gross loans,
excluding loans held for sale                    1.00 %                 1.03 %           1.00 %             1.03 %
Nonperforming loans to gross loans,
excluding loans held for sale (6)                2.21 %                 2.16 %           2.21 %             2.16 %
Nonperforming assets to gross loans
and OREO (7)                                     2.42 %                 2.32 %           2.42 %             2.32 %
Nonperforming assets to total
assets (7)                                       1.87 %                 1.70 %           1.87 %             1.70 %

(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) Nonperforming loans include nonaccrual 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) Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing interest, OREO, and accruing restructured loans.

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


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(9) Excludes TARP preferred stock, net of discount, of $0 and $119.7 million and stock warrants of $378 thousand and $2.8 million at June 30, 2013 and 2012, respectively.

(10) 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 June 30,          Six Months Ended June 30,
                                            2013               2012               2013              2012
                                                              (Dollars in thousands)
Net income                            $      22,671       $      19,364     $      40,132       $   43,298

Average stockholders' equity          $     783,181       $     823,839     $     774,257       $  815,111
Less: Average goodwill and other
intangible assets, net                      (96,660 )           (93,713 )         (95,824 )        (93,955 )
Average tangible equity               $     686,521       $     730,126     $     678,433       $  721,156

Net income (annualized) to average
tangible equity                               13.21 %             10.61 %           11.83 %          12.01 %

(11) 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.

                                             June 30, 2013      June 30, 2012
                                                      (In thousands)
Total stockholders' equity                  $      781,025     $      715,461
Less: Preferred stock, net of discount                   -                  -
Common stock warrant                                  (378 )           (2,760 )
Goodwill and other intangible assets, net          (95,413 )          (93,518 )
Tangible common equity                      $      685,234     $      619,183

Common shares outstanding                       79,205,840         78,014,107

Tangible common equity per share            $         8.65     $         7.94

(12) Tier 1 common risk-based capital 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.

                                                        June 30, 2013       June 30, 2012
                                                                  (In thousands)
Tier 1 capital                                         $      728,773      $      649,293
Less: Preferred stock, net of discount                              -                   -
Trust preferred securities less unamortized
acquisition discount                                          (40,495 )           (40,347 )
Tier 1 common risk-based capital                       $      688,278      $      608,946

Total risk weighted assets less disallowed allowance
for loan losses                                             4,900,260           4,177,728

Tier 1 common risk-based capital ratio                          14.05 %             14.58 %


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Results of Operations
Overview
Total assets increased $222.4 million from $5.64 billion at December 31, 2012 to $5.86 billion at June 30, 2013. The increase in total assets was primarily due to a $217.1 million increase in loans receivable, net of allowance for loan losses, from $4.23 billion at December 31, 2012 to $4.45 billion at June 30, 2013 and a $20.8 million increase in securities available for sale from $704.4 million at December 31, 2012 to $725.2 million at June 30, 2013 These increases were partially offset by a $16.6 million decrease in cash and cash equivalents from $312.9 million at December 31, 2012 to $296.3 million at June 30, 2013. The increase in total assets was funded by a $192.8 million increase in deposits from $4.38 billion at December 31, 2012 to $4.58 billion at June 30, 2013, a $817 thousand increase in FHLB advances from $420.7 million at December 31, 2012 to $421.5 million at June 30, 2013 and net income available to common stockholders of $40.1 million.
The net income available to common stockholders for the second quarter of 2013 was $22.7 million, or $0.29 per diluted common share, compared to the net income available to common stockholders of $15.6 million, or $0.20 per diluted common share, for the same period of 2012, an increase of $7.1 million, or 45.4%. The net income available to common stockholders for the six months ended June 30, 2012 was $40.1 million, or $0.51 per diluted common share, compared to the net income available to common stockholders of $37.7 million, or $0.48 per diluted common share, for the same period of 2012, an increase of $2.5 million, or 6.6%. The acquisitions impact the comparability of the operating results for the second quarter and the six months period ending June 30 of 2013 and 2012 because the acquisitions resulted in increases in interest earning assets, interest bearing liabilities, employees and branch locations. In addition, the acquired assets and liabilities 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 June 30, 2013 and 2012 and the six months ended June 30, 2013 and 2012 include the following major pre-tax acquisition accounting adjustments and expenses related to acquisitions.

                                                 Three Months Ended June 30,          Six Months Ended June 30,
                                                   2013               2012             2013               2012
                                                                     (Dollars in thousands)
Accretion of discounts on acquired
performing loans                              $      6,637       $      6,010     $     10,713       $     12,093
Accretion of discounts on acquired credit
impaired loans                                       1,032              1,686            2,554              5,247
Amortization of premiums on assumed FHLB
advances                                                92                904              183              2,135
Accretion of discounts on assumed
subordinated debt                                      (48 )              (36 )            (91 )              (71 )
Amortization of premiums on assumed time
deposits                                               247                787              685              2,062
Increase to pre-tax income                    $      7,960       $      9,351     $     14,044       $     21,466

The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.54% for the second quarter of 2013, compared to 1.52% for the same period of 2012. The annualized return on average stockholders' equity, before the effect of dividends and discount accretion on preferred stock, was 11.58% for the second quarter of 2013, compared to 9.40% for the same period of 2012. The efficiency ratio was 47.34% for the second quarter of 2013 compared to 44.57% for the same period of 2012.
The annualized return on average assets, before the effect of dividends and discount accretion on preferred stock on average assets, was 1.38% for the for the six months ended June 30, 2013, compared to 1.69% for the same period of 2012. The annualized return on average stockholders' equity, before the effect of dividends and discount accretion on preferred stock, was 10.37% for the six months ended June 30, 2013, compared to 10.62% for the same period of 2012. The efficiency ratio was 47.55% for the six months ended 2013 compared to 47.69% for the same period of 2012.

Net Interest Income and Net Interest Margin Net Interest Income
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


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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 June 30, 2013 with the Same Period of 2012 Net interest income before provision for loan losses was $62.1 million for the second quarter of 2013, an increase of $2.6 million, or 4.37%, compared to $59.5 million for the same period of 2012. The increase was principally attributable to the increase in interest earnings assets, which was partially offset by the decline in the net interest margin.
Interest income for the second quarter of 2013 was $69.4 million, a increase of $2.4 million, or 3.64%, compared to $66.9 million for the same period of 2012. The increase resulted from a a $10.8 million increase in interest income due to an increase in average interest-earning assets and partially offset by a $8.4 million decrease in interest income due to a decrease in the yield on average interest-earnings assets.
Comparison of Six Months Ended June 30, 2013 with the Same Period of 2012 Net interest income before provision for loan losses was $121.8 million for the six months ended June 30, 2013, an increase of $1.4 million, or 1.21%, compared to $120.4 million for the same period of 2012. The increase was principally attributable to the increase in average interest earning assets, which was partially offset by the decline in the net interest margin.
Interest income for the six months ended June 30, 2013 was $136.1 million, an increase of $0.6 million, or 0.05%, compared to $135.5 million for the same period of 2012. The increase resulted from a $20.4 million increase in interest income due to an increase in average interest-earning assets and partially offset by a $19.7 million decrease in interest income due to a decrease in the yield on average interest-earnings assets.

Net Interest Margin

The net interest margin for the second quarter of 2013 was 4.49%, a decrease of
53 basis points from 5.02% for the same period of 2012. The decrease in the net
interest margin was principally due to the effect of acquisition accounting
adjustments, as summarized in the following table.
                                                Three Months Ended June 30,       Six Months Ended June 30,
                                                    2013             2012           2013             2012
Net interest margin, excluding the effect of
acquisition accounting adjustments                 3.86 %            4.15 %        3.91 %              4.10 %
Acquisition accounting adjustments(1)              0.63              0.87          0.58                0.97
Reported net interest margin                       4.49 %            5.02 %        4.49 %              5.07 %


(1) Acquisition accounting adjustments is calculated by subtracting net interest margin, excluding effect of acquisition accounting adjustments, from reported net interest margin.

Excluding the effect of acquisition accounting adjustments, the net interest margin for the second quarter of 2013 decreased 29 basis points to 3.86% compared to 4.15% for the same period of 2012. The net interest margin excluding the effect of acquisition accounting adjustments for the six months ended June 30, 2013, decreased 19 basis points to 3.91%, compared with the net interest margin for the same period of 2012. The decrease was largely attributable to the decrease in the weighted average yield on loans.

The weighted average yield on loans decreased to 5.78% for the second quarter of 2013 from 6.53% for the second quarter of 2012 and decreased to 5.76% for the six months period ended June 30, 2013 from 6.64% for the same period in 2012. The change in the yield was due to continued pricing pressure on loan interest rates and the decline in the effects of acquisition accounting adjustments, as summarized in the following table.


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                                                Three Months Ended June 30,       Six Months Ended June 30,
                                                    2013             2012           2013             2012
The weighted average yield on loans,
excluding the effect of acquisition
accounting adjustments                            5.02 %             5.59 %       5.08 %               5.60 %
Acquisition accounting adjustments(1)             0.76               0.94         0.68                 1.04
Reported weighted average yield on loans          5.78 %             6.53 %       5.76 %               6.64 %


(1) Acquisition accounting adjustments is calculated by subtracting the weighted average yield on loans, excluding the effect of acquisition accounting adjustments, from the reported weighted average yield on loans.

Excluding the effects of acquisition accounting adjustments, the weighted average yield on loans for the second quarter of 2013 decreased 57 basis points to 5.02% compared to 5.59% for the same period of 2012. This decrease was primarily due to the lower yields on acquired loan portfolios and the reduction in market rates compared to a year ago due to continued pricing pressures. At June 30, 2013, fixed rate loans accounted for 40% of the loan portfolio, compared to 38% at June 30, 2012, reflecting the Company's focus on variable rate business loans. The weighted average yield on the variable rate and fixed rate loan portfolios (excluding loan discount accretion) at June 30, 2013 was 4.50% and 5.31%, respectively, compared with 4.60% and 6.25% at June 30, 2012.

The weighted average yield on securities available for sale for the second quarter of 2013 was 2.0%, compared to 2.45% for the same period of 2012. The weighted average yield on securities available for sale for the six months ended June 30, 2013 was 1.99%, compared to 2.58% for the same period of 2012. The decrease was primarily attributable to the replacement of maturing securities with lower yielding investments as market interest rates declined.

The weighted average cost of deposits for the second quarter of 2013 was 0.49%, a decrease of 6 basis points from 0.55% for the same period of 2012. The amortization of the premium on time deposits assumed in the acquisition positively affected the weighted average cost of deposits, as summarized in the following table.

                                                 Three Months Ended June 30,         Six Months Ended June 30,
                                                   2013               2012              2013             2012
The weighted average cost of deposits,
excluding effect of acquisition accounting
adjustments                                      0.51  %            0.63  %           0.52  %            0.66  %
Acquisition accounting adjustments(1)           (0.02 )            (0.08 )           (0.03 )            (0.11 )
Reported weighted average cost of deposits       0.49  %            0.55  %           0.49  %            0.55  %


(1) Acquisition accounting adjustments is calculated by subtracting the weighted average cost of deposits, excluding the effect of acquisition accounting adjustments, from the reported weighted average cost of deposits.

Excluding the amortization of premiums on time deposits assumed in acquisitions, the weighted average cost of deposits was 0.51% for the second quarter of 2013, compared to 0.63% for the same period of 2012 and 0.52% for the six months ended June 30, 2013, compared to 0.66 for the same period of 2012. The decrease was due to reductions in the cost of interest-bearing demand deposits and an increase in the proportion of non-interest bearing demand deposits to total deposits. Non-interest bearing demand deposits accounted for 26.0% of total deposits at June 30, 2013, compared with 25.8% at June 30, 2012.

The weighted average cost of FHLB advances for the second quarter of 2013 was 1.16%, a decrease of 79 basis points from 1.95% for the same period of 2012. The decrease was attributable to decreases in FHLB advance rates, which was partially offset by the decline in the amortization of premiums on FHLB advances assumed in acquisitions, as summarized in the following table.


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