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BBCN > SEC Filings for BBCN > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for BBCN BANCORP INC

Form 10-Q for BBCN BANCORP INC


8-Aug-2014

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 Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013 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     At or for the Six Months Ended
                                                 June 30,                            June 30,
                                          2014               2013             2014               2013
                                                         (Dollars in thousands, except
                                                           share and per share data)
Income Statement Data:
Interest income                      $     76,453       $     69,379     $    149,806       $    136,122
Interest expense                            8,963              7,276           17,351             14,303
Net interest income                        67,490             62,103          132,455            121,819
Provision for loan losses                   2,996                800            6,022              8,306
Net interest income after provision
for loan losses                            64,494             61,303          126,433            113,513
Noninterest income                         10,492             10,618           21,587             20,558
Noninterest expense                        37,739             34,429           74,013             67,704
Income before income tax provision         37,247             37,492           74,007             66,367
Income tax provision                       14,935             14,821           29,499             26,235
Net income                           $     22,312       $     22,671     $     44,508       $     40,132
Per Share Data:
Earnings per common share - basic    $       0.28       $       0.29     $       0.56       $       0.51
Earnings per common share - diluted  $       0.28       $       0.29     $       0.56       $       0.51
Book value per common share (period
end, excluding warrants) (8)         $      10.72       $       9.86     $      10.72       $       9.86
Cash dividends declared per common   $       .075       $       0.05
share                                                                    $        .15       $        .10
Tangible book value per common share
(period end, excluding warrants) (8)
(10)                                 $       9.34       $       8.65     $       9.34       $       8.65
Number of common shares outstanding
(period end)                           79,493,732         79,205,840       79,493,732         79,205,840
Weighted average shares - basic        79,490,767         79,062,233       79,481,359         78,746,444
Weighted average shares - diluted      79,614,046         79,236,732       79,618,446         79,000,811
Tangible common equity ratio (8)            10.99 %            11.88 %          10.99 %            11.88 %
Statement of Financial Condition
Data - at Period End:
Assets                               $  6,866,291       $  5,863,014     $  6,866,291       $  5,863,014
Securities available for sale             746,683            725,239          746,683            725,239
Loans receivable                        5,347,057          4,518,122        5,347,057          4,518,122
Deposits                                5,470,388          4,576,799        5,470,388          4,576,799
FHLB advances                             461,166            421,539          461,166            421,539
Subordinated debentures                    42,076             41,920           42,076             41,920
Stockholders' equity                      852,609            781,025          852,609            781,025


Table of Contents

                                     At or for the Three Months Ended     At or for the Six Months Ended
                                                 June 30,                            June 30,
                                          2014               2013             2014               2013
                                                            (Dollars in thousands)
Average Balance Sheet Data:
Assets                               $  6,821,827       $  5,878,377     $  6,674,506       $  5,802,413
Securities available for sale             721,270            705,479          710,163            698,769
Loans receivable and loans held for
sale                                    5,289,059          4,546,461        5,236,721          4,495,673
Deposits                                5,450,585          4,592,036        5,320,402          4,520,401
Stockholders' equity                      842,837            783,181          831,155            774,257
Selected Performance Ratios:
Return on average assets (1)                 1.31 %             1.54 %           1.33 %             1.38 %
Return on average stockholders'
equity (1)                                  10.59 %            11.58 %          10.71 %            10.37 %
Average stockholders' equity to
average assets                              12.36 %            13.32 %          12.45 %            13.34 %
Return on average tangible equity
(1) (9)                                     12.18 %            13.21 %          12.35 %            11.83 %
Dividend payout ratio (dividends per
share / earnings per share)                 26.79 %            17.24 %          26.79 %            19.61 %
Pre-Tax Pre-Provision income to
average assets (1)                           2.36 %             2.60 %           2.40 %             2.57 %
Efficiency ratio (2)                        48.39 %            47.34 %          48.05 %            47.55 %
Net interest spread                          3.95 %             4.25 %           4.00 %             4.25 %
Net interest margin (3)                      4.20 %             4.49 %           4.24 %             4.49 %
Regulatory Capital Ratios (4)
Leverage capital ratio (5)                  11.66 %            12.61 %          11.66 %            12.61 %
Tier 1 risk-based capital ratio             13.71 %            14.89 %          13.71 %            14.89 %
Total risk-based capital ratio              14.90 %            16.14 %          14.90 %            16.14 %
Tier 1 common risk-based capital
ratio (11)                                  12.99 %            14.05 %          12.99 %            14.05 %
Asset Quality Ratios:
Allowance for loan losses to loans           1.25 %             1.59 %
receivable                                                                       1.25 %             1.59 %
Allowance for loan losses to               156.78 %           159.32 %
nonaccrual loans                                                               156.78 %           159.32 %
Allowance for loan losses to
nonperforming loans(6)                      77.26 %            71.67 %          77.26 %            71.67 %
Allowance for loan losses to
nonperforming assets(7)                     62.40 %            65.40 %          62.40 %            65.40 %
Nonaccrual loans to loans receivable         0.80 %             1.00 %           0.80 %             1.00 %
Nonperforming loans to loans                 1.62 %             2.21 %
receivable (6)                                                                   1.62 %             2.21 %
Nonperforming assets to loans
receivable and OREO (7)                      2.00 %             2.42 %           2.00 %             2.42 %
Nonperforming assets to total assets         1.56 %             1.87 %
(7)                                                                              1.56 %             1.87 %

(1) Annualized.

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

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

(4) The ratios generally 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, Legacy Loans and APLs past due 90 days or more and still accruing interest, and accruing restructured loans.

(7) Nonperforming assets consist of nonperforming loans and OREO.

(8) Excludes TARP preferred stock related stock warrants of $378 thousand and $378 thousand at June 30, 2014 and 2013, respectively.

(9) Average tangible equity is calculated by subtracting average goodwill and average core deposit intangibles assets 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.


Table of Contents

                                       Three Months Ended June 30,          Six Months Ended June 30,
                                         2014               2013               2014              2013
                                                           (Dollars in thousands)
Net income                         $      22,312       $      22,671     $      44,508       $   40,132

Average stockholders' equity       $     842,837       $     783,181     $     831,155       $  774,257
Less: Average goodwill and core
deposit intangible assets, net          (110,138 )           (96,660 )        (110,299 )        (95,824 )
Average tangible equity            $     732,699       $     686,521     $     720,856       $  678,433

Net income (annualized) to
average tangible equity                    12.18 %             13.21 %           12.35 %          11.83 %

(10) Tangible book value per common share is calculated by subtracting goodwill and core deposit 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, 2014      June 30, 2013
                                                         (Dollars in thousands)
Total stockholders' equity                         $      852,609     $      781,025
Less: Common stock warrant                                   (378 )             (378 )
Goodwill and core deposit intangible assets, net         (109,936 )          (95,413 )
Tangible common equity                             $      742,295     $      685,234

Common shares outstanding                              79,493,732         79,205,840

Tangible book value per common share               $         9.34     $         8.65

(11) The Tier 1 common risk-based capital ratio is calculated by dividing 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 by total risk-weighted assets less the disallowed allowance for loan losses.

                                                        June 30, 2014       June 30, 2013
                                                              (Dollars in thousands)
Tier 1 capital                                         $      783,006      $      728,773
Less: Trust preferred securities less unamortized
acquisition discount                                          (40,651 )           (40,495 )
Tier 1 common risk-based capital                       $      742,355      $      688,278

Total risk weighted assets less disallowed allowance
for loan losses                                             5,713,242           4,900,260

Tier 1 common risk-based capital ratio                          12.99 %             14.05 %


Table of Contents

Results of Operations
Overview
Total assets increased $391.1 million from $6.48 billion at December 31, 2013 to $6.87 billion at June 30, 2014. The increase in total assets was primarily due to a $273.3 million increase in loans receivable, net of allowance for loan losses, from $5.01 billion at December 31, 2013 to $5.28 billion at June 30, 2014 and a $98.2 million increase in cash and cash equivalents, from $316.7 million at December 31, 2013 to $414.9 million at June 30, 2014. The increase in total assets was funded by a $322.3 million increase in deposits from $5.15 billion at December 31, 2013 to $5.47 billion at June 30, 2014 and net income of $44.5 million for the six months ended June 30, 2014.
Net income for the second quarter of 2014 was $22.3 million, or $0.28 per diluted common share, compared to $22.7 million, or $0.29 per diluted common share, for the same period of 2013, a decrease of $359 thousand, or 1.58%. Net income for the six months ended June 30, 2014 was $44.5 million, or $$0.56 per diluted common share, compared to $40.1 million, or $$0.51 per diluted common share, for the same period of 2013, an increase of $4.4 million, or 10.90%. Acquisitions impact the comparability of the operating results for the three and six months ended June 30, 2014 and 2013, because 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. In addition, the acquisitions of Pacific International Bancorp, Inc. ("PIB") and Foster Bankshares, Inc. ("Foster") resulted in increases in interest earning assets, interest bearing liabilities, employees and branch locations in 2013. The operating results for the three and six months ended June 30, 2014 and 2013 include the following pre-tax acquisition accounting adjustments and expenses related to acquisitions.
                                          Three Months Ended June 30,          Six Months Ended June 30,
                                            2014               2013             2014               2013
                                                              (Dollars in thousands)
Accretion of discounts on acquired
performing loans                       $      4,575       $      6,637     $      7,778       $     10,713
Accretion of discounts on acquired
credit impaired loans                         2,096              1,032            4,741              2,554
Amortization of premiums on assumed
FHLB advances                                    94                 92              186                183
Accretion of discounts on assumed
subordinated debt                               (40 )              (48 )           (131 )              (91 )
Amortization of premiums on assumed
time deposits                                   231                247              544                685
Amortization of core deposit
intangible assets                              (324 )             (268 )           (648 )             (496 )
Increase to pre-tax income             $      6,632       $      7,692     $     12,470       $     13,548

The annualized return on average assets was 1.31% for the second quarter of 2014, compared to 1.54% for the same period of 2013. The annualized return on average stockholders' equity was 10.59% for the second quarter of 2014, compared to 11.58% for the same period of 2013. The efficiency ratio was 48.39% for the second quarter of 2014, compared to 47.34% for the same period of 2013. The annualized return on average assets was 1.33% for the six months ended June 30, 2014, compared to 1.38% for the same period of 2013. The annualized return on average stockholders' equity was 10.71% for the six months ended June 30, 2014, compared to 10.37% for the same period of 2013. The efficiency ratio was 48.05% for the six months ended June 30, 2014, compared to 47.55% for the same period of 2013.

Net Interest Income and Net Interest Margin Net Interest Income
A principal component of our 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.


Table of Contents

Comparison of Three Months Ended June 30, 2014 with the Same Period of 2013 Net interest income before provision for loan losses was $67.5 million for the second quarter of 2014, an increase of $5.4 million, or 8.7%, compared to $62.1 million for the same period of 2013. The increase was principally attributable to the increase in interest earning assets. The increase was partially offset by the decline in yields and an increase in the cost of deposits.
Interest income for the second quarter of 2014 was $76.5 million, an increase of $7.1 million, or 10.2%, compared to $69.4 million for the same period of 2013. The increase resulted from a $10.6 million increase in interest income due to an increase in average interest earning assets, which was partially offset by a $3.5 million decrease in interest income due to a decrease in the yield on average interest earnings assets.

Comparison of Six Months Ended June 30, 2014 with the Same Period of 2013 Net interest income before provision for loan losses was $132.5 million for the six month ended June 30, 2014, an increase of $10.7 million, or 8.8%, compared to $121.8 million for the same period of 2013. 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 six month ended June 30, 2014 was $149.8 million, an increase of $13.7 million, or 10.1%, compared to $136.1 million for the same period of 2013. The increase resulted from an $20.6 million increase in interest income due to an increase in average interest earning assets, which was partially offset by a $6.9 million decrease in interest income due to a decrease in the yield on average interest earnings assets.


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Net Interest Margin

Our reported net interest margin is impacted by the weighted average rates we earn on interest earning assets and pay on interest bearing liabilities and the effect of acquisition accounting adjustments. The net interest margin for the second quarter of 2014 was 4.20%, a decrease of 29 basis points from 4.49% for the same period of 2013. Net interest margin for the six months ended June 30, 2014 was 4.24%, a decrease of 25 basis points from 4.49% for the same period of 2013. The change in the our reported net interest margin for the three and six months ended June 30, 2014 and 2013 is summarized in the table below.

                                                Three Months Ended June 30,        Six Months Ended June 30,
                                                   2014               2013           2014              2013
Net interest margin, excluding the effect
of acquisition accounting adjustments             3.72 %              3.86 %        3.77 %               3.91 %
Acquisition accounting adjustments(1)             0.48                0.63          0.47                 0.58
Reported net interest margin                      4.20 %              4.49 %        4.24 %               4.49 %


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

As noted in the table above, excluding the effect of the acquisition accounting adjustments, the net interest margin for the second quarter of 2014 decreased 14 basis points to 3.72% from 3.86% for the same period of 2013. Excluding the effect of acquisition accounting adjustments, the net interest margin for the six months ended June 30, 2014 decreased 14 basis points to 3.77% from 3.91% for the same period of 2013.

The decrease in the net interest margin was primarily due to a decline in the effect of acquisition accounting adjustments and a decline in the weighted average yield on the loan portfolio. The decrease in net interest margin was also caused by an increase in the cost of deposits. These decreases to the net interest margin was partially offset by an increase in yields from our investment securities.

The acquisition related adjustments that impact net interest declined by $1.0 million, totaling $7.0 million during the second quarter of 2014, compared to $8.0 million for the same period of 2013. The adjustments declined by $926 thousand when comparing the total adjustments of $13.1 million during the six months ended June 30, 2014 to a total of $14.0 million in adjustments for the same period in 2013.
The weighted average yield on loans decreased to 5.44% for the second quarter of 2014 from 5.78% for the second quarter of 2013 and decreased to 5.41% for the six months period ended June 30, 2014 from 5.76% for the same period in 2013. The change in the yield was due to continued pricing pressure on loan interest rates and an 18 basis point and 11 basis point decline in the effects of acquisition accounting adjustments for the respective periods, as summarized in the following table.

                                                Three Months Ended June 30,       Six Months Ended June 30,
                                                    2014             2013           2014             2013
The weighted average yield on loans,
excluding the effect of acquisition
accounting adjustments                            4.86 %             5.02 %       4.84 %               5.08 %
Acquisition accounting adjustments(1)             0.58               0.76         0.57                 0.68
Reported weighted average yield on loans          5.44 %             5.78 %       5.41 %               5.76 %


(1) Acquisition accounting adjustments are 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 2014 decreased 16 basis points to 4.86% from 5.02% for the same period of 2013. Excluding the effects of acquisition accounting adjustments, the weighted average yield on loans for the six months ended June 30, 2014 decreased 24 basis points to 4.84% from 5.08% for the same period of 2013. In addition to the continued pricing pressures, the declining loan yields were caused by a higher mix of lower yielding fixed rate loans particularly from the acquired loan portfolios and the high demand for fixed rate loans in the market. At June 30, 2014, fixed rate loans accounted for 50% of the loan portfolio, compared


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to 40% at June 30, 2013. The weighted average yield on the variable rate and fixed rate loan portfolios (excluding loan discount accretion) at June 30, 2014 was 4.29% and 4.85%, respectively, compared with 4.50% and 5.31% at June 30, 2013.

The weighted average yield on securities available for sale for the second quarter of 2014 was 2.26%, compared to 2.00% for the same period of 2013. The weighted average yield on securities available for sale for the six months ended June 30, 2014 was 2.30%, compared to 1.99% for the same period of 2013. The increase was primarily attributable to the reduction in the amortization of premiums on collateralized mortgage obligations and mortgage-backed securities as a result of slowing prepayment speeds.

The weighted average cost of deposits for the second quarter of 2014 was 0.54%, an increase of 5 basis points from 0.49% for the same period of 2013. The weighted average cost of deposits for the six months ended June 30, 2014 was 0.53%, an increase of 4 basis points from 0.49% for the same period of 2013. The amortization of the premium on time deposits assumed in the acquisitions positively affected the weighted average cost of deposits, as summarized in the following table.

                                                 Three Months Ended June 30,         Six Months Ended June 30,
                                                   2014               2013              2014             2013
The weighted average cost of deposits,
excluding effect of acquisition accounting
adjustments                                      0.55  %            0.51  %           0.55  %            0.52  %
Acquisition accounting adjustments(1)           (0.01 )            (0.02 )           (0.02 )            (0.03 )
Reported weighted average cost of deposits       0.54  %            0.49  %           0.53  %            0.49  %


(1) Acquisition accounting adjustments are 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 0.55% for the second quarter of 2014, compared to 0.51% for the same period of 2013 and 0.55% for the six months ended June 30, 2014, compared to 0.52% for the same period of 2013. The increase was due to an increase in retail deposits such as money market and time deposits assumed in acquisitions and increased deposit campaigns and promotions. The retail deposits had a yield of 0.82% at June 30, 2014 compared to 0.79% at June 30, 2013.

The weighted average cost of FHLB advances for the second quarter of 2014 was 1.18%, an increase of 2 basis points from 1.16% for the same period of 2013. For the six months ended June 30, 2014 and 2013, the weighted average cost of FHLB advances was 1.17%. The increase was attributable to increases in FHLB advance rates.

                                                Three Months Ended June 30,          Six Months Ended June 30,
                                                 2014                2013               2014             2013
The weighted average cost of FHLB
advances, excluding effect of
acquisition accounting adjustments              1.27  %             1.25  %           1.26  %            1.26  %
Acquisition accounting adjustments             (0.09 )             (0.09 )           (0.09 )            (0.09 )
Reported weighted average cost of FHLB
advances                                        1.18  %             1.16  %           1.17  %            1.17  %
. . .
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