Business context and reporting period
BBCN Bancorp, Inc. (then listed as BBCN; Nasdaq: BBCN) filed this Form 10-K for the fiscal year ended December 31, 2013. The request identifies HOPE Bancorp, but the filing is for BBCN Bancorp; confirm the issuer identity. BBCN was a Los Angeles-based bank holding company serving small and midsize businesses and individuals, with 49 branches and six loan production offices. Its lending was concentrated in commercial real estate and other commercial loans.
Key financial metrics
Amounts are in millions of dollars unless otherwise noted. Year-over-year comparisons are with 2012; acquisitions completed during 2013 affect comparability.
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $283.1 | $267.9 |
| Net interest income | $253.1 | $238.2 |
| Net interest margin | 4.46% | 4.88% |
| Provision for loan losses | $20.0 | $19.1 |
| Noninterest income | $42.7 | $39.4 |
| Noninterest expense | $141.6 | $120.9 |
| Net income | $81.8 | $83.2 |
| Net income available to common stockholders | $81.8 | $77.6 |
| Diluted earnings per share | $1.03 | $0.99 |
| Return on average assets / equity | 1.35% / 10.37% | 1.59% / 10.73% |
| Assets at year-end | $6,475.2 | $5,640.7 |
| Loans, net of allowance | $5,006.9 | $4,229.3 |
| Deposits | $5,148.1 | $4,384.0 |
| Cash and cash equivalents | $316.7 | $312.9 |
| FHLB advances / subordinated debentures | $421.4 / $57.4 | $420.7 / $41.8 |
| Operating cash flow | $134.2 | $104.5 |
Material changes versus the prior year
- Net interest income rose 6%, mainly from growth in earning assets, while net interest margin fell 42 basis points. Lower loan yields and a greater fixed-rate loan mix weighed on returns; acquired-loan discount accretion contributed $27.5 million of loan interest income.
- Net income declined 2%, but income available to common shareholders increased 5%, largely because preferred-stock dividends and discount accretion were absent in 2013. Diluted EPS increased from $0.99 to $1.03.
- Noninterest expense increased 17%, including higher staffing and occupancy costs tied to acquisitions, and $5.2 million of merger and integration expense. Noninterest income rose 8%, including a 41% increase in SBA loan-sale gains to $11.5 million.
- Assets increased 15%, primarily through loan growth and acquisitions. BBCN acquired Pacific International Bancorp in February and Foster Bankshares in August 2013; the acquisitions added branches in Seattle, Illinois, and Virginia. PIB generated a $0.1 million bargain-purchase gain.
- Credit indicators weakened: nonperforming assets rose to $97.4 million from $62.2 million, and their ratio to assets increased to 1.50% from 1.10%. Net charge-offs rose to $19.6 million from $14.1 million; criticized loans increased to $355.9 million from $288.7 million. The allowance was $67.3 million, or 1.33% of gross loans, versus 1.56% a year earlier.
- Stockholders’ equity increased to $809.4 million. Common dividends declared were $0.25 per share, versus $0.05 in 2012. Accumulated other comprehensive income turned to a $10.2 million loss from $9.1 million of income, reflecting a $19.3 million after-tax securities-related loss in 2013.
Liquidity, outlook, risks and unusual items
- Management described liquidity sources as stable and adequate. Year-end cash and cash equivalents were $316.7 million; remaining FHLB borrowing capacity was $1.36 billion, and the average gross-loan-to-deposit ratio was 99%. Brokered deposits were $243.9 million, or 4.7% of deposits; California State Treasurer deposits were $300 million.
- Regulatory capital ratios remained above stated minimums. At year-end, the Bank’s total risk-based, Tier 1 risk-based, and leverage ratios were 14.70%, 13.46%, and 11.79%, respectively; the filing classified the Bank as well capitalized.
- No quantitative earnings guidance was provided. Management said it was not aware of trends or uncertainties reasonably likely to materially affect liquidity, and did not anticipate a material effect from existing off-balance-sheet activities.
- Key risks include the concentration of lending in real estate (77% of loans), geographic concentration in California and Los Angeles County, credit losses exceeding allowance estimates, interest-rate and funding risk, and dependence on wholesale and large time deposits. The company also cited competition, regulatory changes, acquisition integration, technology and operational risks, and potential natural disasters, including earthquakes.
- The available-for-sale securities portfolio had $17.7 million of net unrealized losses at year-end, compared with $15.4 million of net unrealized gains in 2012. Management considered losses temporary and reported no other-than-temporary impairment. Goodwill was $105.4 million; management reported no impairment following its annual qualitative assessment.
- Legal proceedings were described as routine and not expected to have a material adverse effect. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Confirm the issuer: this filing is BBCN Bancorp, not HOPE Bancorp.
- Assess whether rising nonperforming assets, criticized loans, charge-offs, and a lower allowance-to-loans ratio signal further credit deterioration, especially in commercial real estate.
- Separate organic performance from the effects of the PIB and Foster acquisitions, including acquired-loan discount accretion, integration costs, purchase accounting, and acquired problem assets.
- Review deposit concentration, time-deposit maturities, brokered funding, and available secured borrowing capacity against loan growth and commitments.
- Monitor net interest margin, fixed-versus-variable loan mix, securities valuation and accumulated other comprehensive loss, and the sustainability of dividends.