BBCN Bancorp, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for BBCN Bancorp, Inc., not HOPE Bancorp, Inc. BBCN was formerly Nara Bancorp. The filing covers the quarter and nine months ended September 30, 2012; it was filed November 7, 2012. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless noted.
Business context and reporting period
BBCN is a bank holding company headquartered in Los Angeles, with BBCN Bank branches in California, the New York metropolitan area, New Jersey, Seattle and Chicago, plus loan production offices in several other markets. Its November 30, 2011 merger with Center Financial substantially expanded the company. As a result, 2012 results include Center while comparable 2011 periods generally do not, limiting year-over-year comparability.
Financial performance and condition
| Metric | Q3 2012 / September 30, 2012 | Comparable period / change |
|---|---|---|
| Net interest income | $58.2 million | Up 88% from $31.1 million in Q3 2011 |
| Net interest margin | 4.79% in Q3; 4.97% for nine months | 4.29% and 4.20%, respectively, in 2011; excluding acquisition accounting, 4.14% and 4.29% in 2012 |
| Net income | $18.4 million in Q3; $61.7 million for nine months | $9.8 million and $22.9 million in 2011 |
| Diluted earnings per share | $0.24 in Q3; $0.72 for nine months | $0.23 and $0.52 in 2011 |
| Non-interest income / expense | $7.7 million / $28.8 million in Q3 | $4.3 million / $16.8 million in Q3 2011 |
| Efficiency ratio | 43.66% in Q3; 43.38% for nine months | 47.63% and 47.67% in 2011 |
| Assets / net loans | $5.33 billion / $4.00 billion | Assets rose $165.4 million and net loans rose $326.7 million from December 31, 2011 |
| Deposits / FHLB borrowings | $4.05 billion / $460.8 million | Up $111.6 million / $116.4 million from December 31, 2011 |
| Allowance / nonperforming assets | $66.0 million / $78.1 million | Allowance was 1.62% of gross loans; nonperforming assets were 1.47% of total assets |
For the nine months, operating cash flow was $65.5 million, investing cash use was $231.1 million and financing cash provided was $95.2 million. Cash and cash equivalents declined $70.5 million to $229.6 million. Liquidity included $634.5 million of liquid assets, $836.7 million of unused FHLB capacity and $378 million of unused Federal Reserve borrowing capacity.
At September 30, the Bank’s regulatory capital ratios were 12.7% Tier 1 leverage, 14.8% Tier 1 risk-based and 16.0% total risk-based; regulators categorized it as well capitalized. The company reported a 12.23% tangible common equity ratio. Total stockholders’ equity fell to $734.5 million from $795.9 million, primarily reflecting redemption of $122 million of TARP preferred stock in June.
Material changes versus prior periods
- Q3 net income increased 87% year over year; nine-month net income increased 170%. Growth reflects the Center merger, greater average earning assets, lower funding costs and acquisition-accounting effects.
- Acquisition accounting contributed $6.8 million to pretax income in Q3 and $24.8 million for nine months, chiefly from accretion of acquired loan discounts. Reported margin therefore overstates underlying margin improvement: excluding acquisition accounting, Q3 margin declined year over year.
- Gross loans grew to $4.07 billion from $3.74 billion at year-end. Loan originations totaled $721.8 million for nine months, including $165.4 million of SBA originations.
- Nine-month provision for loan losses declined to $16.7 million from $18.8 million, and net charge-offs fell to $12.7 million from $21.1 million. However, Q3 provision rose to $6.9 million from $3.5 million, with management citing higher charge-offs, loan growth and commercial real estate concentration risk.
- Nonperforming assets were $78.1 million, up from $74.9 million at year-end; the ratio declined to 1.92% of gross loans plus OREO from 2.00%. Modified loans rose to $45.1 million from $32.8 million.
- In August, BBCN bought back a Treasury warrant for $2.2 million; it had not reached agreement to repurchase a separate warrant for 337,480 shares issued in connection with the Center merger.
Outlook, risks and unusual items
The filing provides no specific earnings or financial guidance. Management said liquidity sources were stable and adequate and believed the allowance for loan losses was adequate, while noting actual losses could exceed estimates. The company cited exposure to weaker local economic conditions, interest-rate and asset-liability risk, liquidity risk, credit losses and regulatory changes. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
BBCN announced an agreement to acquire Pacific International Bancorp in a stock transaction valued at approximately $8.2 million, with closing expected in the first quarter of 2013, subject to regulatory and shareholder approvals and other conditions. Pacific International’s $6.5 million TARP preferred stock is to be retired.
A material unresolved contingency is the SBA’s claim to a portion of FDIC loss-share payments related to covered SBA loans. BBCN disputed the claim; the SBA communications covered loans totaling $55 million at the inception of the loss-share agreements. The company said discussions were at an early stage and the probable outcome could not be determined. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the correct issuer: the filing identifies BBCN Bancorp, not HOPE Bancorp.
- Assess earnings quality and sustainability apart from Center acquisition accounting, especially acquired-loan discount accretion and the reported net interest margin.
- Track commercial real estate concentrations, criticized and delinquent loans, charge-offs, troubled debt restructurings and allowance adequacy.
- Review funding mix, reliance on FHLB advances and wholesale or public deposits, deposit maturities, and available liquidity capacity.
- Monitor the SBA/FDIC loss-share dispute, the outstanding Treasury warrant and the pending Pacific International transaction.
- Reconcile common-income figures: the income statement reports $18.4 million for Q3 and $56.1 million for nine months; MD&A also presents $18.6 million and $56.2 million after a $193,000 warrant-repurchase gain.