Business context and reporting period
This summary covers BBCN Bancorp, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The filing identifies the registrant as BBCN Bancorp, not Hope Bancorp; BBCN was formed from the November 2011 merger of Nara Bancorp and Center Financial. Because 2011 results predate the merger, year-over-year comparisons include a substantially larger combined company in 2012.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $59.5m | $29.3m | $120.4m | $58.2m |
| Provision for loan losses | $7.2m | $10.0m | $9.8m | $15.3m |
| Non-interest income | $10.2m | $7.7m | $21.9m | $12.2m |
| Non-interest expense | $31.1m | $16.9m | $61.5m | $33.6m |
| Net income | $19.4m | $6.3m | $43.3m | $13.1m |
| Net income available to common shareholders | $15.6m | $5.2m | $37.7m | $10.9m |
| Diluted earnings per common share | $0.20 | $0.14 | $0.48 | $0.29 |
- Reported net interest margin was 5.02% for Q2 and 5.07% for the first half, compared with 4.16% and 4.15%. Management said acquisition-accounting adjustments contributed 0.87 and 0.97 percentage points, respectively; excluding those adjustments, margins were 4.15% and 4.10%.
- At June 30, total assets were $5.05bn, net loans $3.81bn, deposits $3.88bn, and shareholders’ equity $715.5m. Compared with December 31, 2011, gross loans increased about $135.7m while deposits declined $58m. Cash and equivalents were $179.6m, down from $300.1m, largely reflecting the $122m preferred-stock redemption.
- Six-month cash flows: operating activities provided $58.3m; investing activities used $15.1m; financing activities used $163.7m. Financing outflows included $122m to redeem TARP preferred shares and $10.4m to redeem subordinated debt, partly offset by net FHLB borrowing activity.
- FHLB borrowings were $371.1m; subordinated debentures were $41.8m. The company reported $837.7m of remaining FHLB borrowing capacity and $339m available at the Federal Reserve discount window. Liquid assets were reported at $519.1m.
- Bank regulatory capital remained above well-capitalized thresholds: total risk-based capital 16.2%, Tier 1 risk-based 15.0%, and Tier 1 leverage 12.5% at June 30. The Bank was categorized as well capitalized.
Material changes, credit quality, and unusual items
- Year-over-year earnings growth reflects the Center merger and larger average balances, as well as acquisition accounting. Q2 accretion of discounts on acquired loans added $7.7m to pretax income; first-half accretion was $17.3m. The filing’s reported margin and loan yields therefore include material purchase-accounting benefits.
- Credit indicators were mixed. Net charge-offs fell to $4.0m in Q2 and $6.2m in the first half, versus $13.7m and $17.9m in the comparable 2011 periods. However, nonperforming assets rose to $90.2m from $73.8m at year-end, and nonperforming assets to loans plus OREO increased to 2.32% from 1.97%. Impaired loans were $91.4m, up from $82.0m, primarily due to acquired loans placed on non-accrual.
- The allowance for loan losses was $65.5m, or 1.69% of gross loans; the filing reported coverage of nonperforming assets at 72.6%. Modified loans totaled $48.1m, up from $32.7m at year-end. Loans past due 90 days or more and still accruing were $20.7m, consisting of acquired loans that management continued to treat as accruing based on expected cash flows.
- Merger and integration expense was $1.3m in Q2 and $3.1m for the first half. Q2 other expense included a $461,000 loss on early retirement of a $10m trust preferred security. The company sold a trust preferred investment in the first half and recorded an $816,000 gain.
- On June 27, the company redeemed $67m and $55m of Series A and Series B TARP preferred stock. On August 8, 2012, it repurchased a Treasury warrant for 521,266 shares for $2.2m; agreement had not been reached to repurchase a separate warrant for 337,480 shares issued in connection with the Center merger.
Outlook, risks, and contingencies
The filing provides no specific earnings, revenue, or margin guidance. Management described liquidity sources as stable and adequate for day-to-day needs, but emphasized exposure to economic deterioration, interest-rate and asset-liability risks, liquidity conditions, credit losses, non-earning assets, and regulatory changes. The company’s interest-rate model showed estimated net-interest-income sensitivity of +3.69% for a 200-basis-point increase and -7.15% for a 200-basis-point decrease; management cautioned that model results are uncertain and exclude potential business responses and other effects.
A material unresolved legal matter concerns the SBA’s claim to a portion of FDIC loss-share payments associated with covered SBA loans. BBCN disputes the claim and said the outcome could not yet be determined. The filing also disclosed a New York City tax examination for 2007–2009, while management did not expect material adjustments. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this 2012 filing is for BBCN Bancorp, not a registrant named Hope Bancorp.
- Assess earnings excluding acquired-loan discount accretion and other acquisition-accounting effects, and distinguish organic performance from merger-driven scale changes.
- Track nonperforming assets, impaired and acquired loans, delinquencies, troubled debt restructurings, charge-offs, and allowance adequacy.
- Review deposit trends and mix, liquidity capacity, borrowing maturities, and the effect of preferred-stock and debt redemptions on capital.
- Monitor the SBA/FDIC loss-share dispute, remaining Treasury warrant, and any subsequent developments in the tax examination.